The engagement problem seems intractable to many professionals.

The client often has no idea of how to scope and detail the services required. The client accordingly wants the professional service provider to tell them what the professional service can do for them before giving out the job.

The problem is that simply describing what the service provider can do is usually not enough. It leads on the request for some ‘ideas' or ‘concepts' about how the professional service provider will do the work.
This approach is often accepted as ‘reasonable'. It is not.

The potential client should be able to specify what services are required. As often the client cannot, the client turns to the professional and effectively asks "show us your stuff".

This approach leads to free-pitching by the service providers that compete for the work.

Free pitches are:

• Costly;
• Unfair;
• Hard to control in scope; and
• Often abused by potential clients who give the ideas provided by one professional service provider to others.

Whether consciously or unconsciously, with free pitching the client succeeds in ensuring that the points of difference are reduced between the professionals.

The process of selection is then not expertise or capability driven, but becomes one of price comparison only.
This paper is about why that approach is not reasonable and how to offer alternatives to the client that reduce the free-pitching element.

This paper is about not having hard work in ideas and concepts stolen.

This paper provides a professional framework for working with potential clients that has been successfully adopted overseas and is extensively used by consultants in the computer industry.

This paper uses a spatial design industry example to illustrate the points made.

Methodology

Scoping

The first step in changing engagement practice is to focus on the scope of the project.

The question is: has the client scoped the project?

If the client has not, the answer will come from the client, "that is what the professional service provider should do". This at first glance is a reasonable answer.

The client knows nothing or little about the area of expertise being employed. The client however should know its business requirement.

That requirement may be:

• New premises
• New graphics for the brand
• A new model of power tool
• A new accounting system
• A new manufacturing line.

In each case, there will be reasons behind this requirement.

• With new premises it may be because a lease is expiring
• With new graphics for the brand it may be because sales are slipping
• With a new model of power tool it may be because some new application for a power tool has been conceived
• With a new accounting system it may be because the old system failed
• With a new manufacturing line it may be because sales are increasing.

Each reason behind the business requirement is a driver for the strategy that will go along with meeting the requirement.

• With new premises the strategy may be, because a lease is expiring, that the client wants to reduce costs.
• With new graphics for the brand the strategy may be, because sales are slipping, that the graphics are part of a product relaunch.
• With a new model of power tool the strategy may be, because some new application for a power tool has been conceived, that the inventiveness of the new application is to be evident in the design.
• With a new accounting system the strategy may be, because the old system failed, a very conservative strategy designed to eliminate risk.
• With a new manufacturing line the strategy may be, because sales are increasing, that the new line be deployed very quickly to capitalise on sales or avoid loss of market share.

With each case the reasons for and business strategy associated with the client's business requirement are integral to understanding how the service professional can service the client.

The first task then, if the client has not already done so, is to have the client scope the project.
If the client has not scoped the project, the true professional should not launch into a sales pitch for the project services.

Instead, the true professional works with the client until the project is defined to a point that the project work can be described in the formal documents required. Those formal documents will differ depending on both the size and complexity of the project.

Scoping Studies

Scoping studies have one objective, to develop the basis for the project documentation.

Scoping studies can be multi-phased. Generally, the scoping study should capture the following:

• Affirmation or development of vision and strategy.
• Validation of strategy at the practical level by exception case testing
• Completion of strategy and issue of the design brief. In some professions, this may be referred to as the Statement of Work although the documents are not always the same thing.

Project Documents

Once scoping has been completed, the project documents should be developed.

The project documents should consist of at least:

• The Contract Documents
• The Project Charter
• The Project Management Plan
• The Project Budget.

The Project Management Plan will consist of all or some of the following (depending on complexity and size of the project):

• Project Office
• Project Control Book
• Work Breakdown Structure ("WBS")
• Project Plan
• Resource Plan
• Quality Plan
• Issues management process and log
• Risk management plan and log
• Change management plan and log.

The Project Plan will consist of all or some of the following:

• Programmes for sampling;
• Programmes for ordering;
• Programmes for shop drawings;
• Programmes for installations;
• Programmes for subcontractors, special trades;
• Programmes for liaison with separate contractors;
• Programmes for project meetings; and
• Programmes for certificates.

 

Methodology Applied

Simply, client expectations of professionals are constantly growing.

The professional that embarks on an unscoped project is running the risk of more than just a destructive free-pitching frenzy.

Such a professional runs the risk of being shut out of the job by the true professional. The true professional will with a few questions establish to the client that embarking on an unscoped project is neither good for the client nor the professional.

The true professional knows this because the free-pitch does not deliver what the client wants but an unscoped view of what is thought is saleable to the client.

For the client why unscoped projects are not good, may not be so obvious. The client generally wants to just leave to the person paid to do the job.

The issue is if the job is unscoped what is the job? How can the client be sure of being satisfied with the outcome?

But most important:

• The unscoped project cannot be expected to run to budget.
• The unscoped project may not deliver the business requirements.
• The unscoped project can expose the client executive responsible for the project (the Project Sponsor) to career failure.

Clients that can give a design brief are entitled to ask the professional to prove their credentials by pitching a ‘concept' against the brief. The true professional that has helped the client with documenting vision, strategy and the resulting design brief will have already established their credentials.

The only issue is who is going to pay the true professional to do this work. The answer is the client. The final cry from the free-pitcher is that if the client owns the brief the client might choose at brief stage to put the project out for competitive quote. The true professional is not concerned. If the contact in the scoping phase has not satisfied the client that there is a good working relationship, based on a difference, then the relationship is not likely to succeed or be profitable in the project.

Fees

Having established the phases of work, the question of fees still needs to be considered.

The following suggestions are made:

Phase Timesheet Upper Level Estimate Fixed Quote % on the Cost of the Project KPI's
Scoping Best for professional but client will be concerned about cost run-on Usual. Professional needs to specify work maximum. E.g.¨ total hours¨ total number of meetings¨ total number of documents and drafts¨ number of hours per day/week with max number of days Risky unless work very clearly defined and professional has completed several previous similar engagements Not appropriate. Client will be concerned that scoping will inflate budget if the professional has an incentive to create a high budget project Difficult to define at this stage
In Project Very rarely acceptable to the client No incentive for professional to keep hours down. Better to use KPI approach Preferred by client. Professional needs to be very clear about and willing to process variation claims for unscoped attendances. Usual method for construction projects. Not used widely but if the KPI's can be worked out can provide a win-win solution.Examples of KPI's:¨ milestone achievement on time on budget¨ cost savings¨ project execution e.g. the state of the Project Office, lengths of PCG meetings¨ number of variations

Standard Terms of Engagement

Terms of trade approach

This approach to contracting is accepted by us in trading with others.

"Terms of trade" is a term for selling services or goods on terms that are printed and fixed, normally this is done on the back of an order or invoice.

When we buy a ticket, whether to a concert or for an airline flight we expect to see conditions printed on the document you receive. When we buy software, we accept the terms of the licence.

We normally do not give a moment's thought to whether these conditions are reasonable. We know if we want that service, we will have to accept the terms.

The professional is often reluctant to use this approach because the timing of delivery of the terms is seen as an obstacle in selling to the client.

This difficulty can be simply overcome by call the terms of trade something more professional. The common term is for a professional service-providers term of trade is Conditions of Engagement.

Conditions of Engagement can be delivered as part of the information delivered to the client on an introductory visit or scoping proposal.

If the professional adopts this approach:

• Certainty of terms is established. If the professional is subsequently engaged unless there is an agreement to vary the terms, the terms in the Conditions of Engagement apply;
• It is easy to prove that the client has received the terms; and
• If the professional is asked to provide a quote, the quote can simply refer to the Conditions of Engagement:

"This quote is supplied on our usual Conditions of Engagement as previously supplied to you."

An example of professional services Conditions of Engagement for visual artists that are members of the Designers' Institute are set out in the form published by that Institute.

A copy of the form is attached.

Some key points to note in that document are:

(i) Commencement

Paragraph 1 stops the problem of not knowing when the chargeable work started by turning the problem around. If the work is not marked as "no-fee preliminary services" the services are chargeable.

Paragraph 1 also deals with the problem of free pitching to the client who has a number of design professionals putting in time and effort on the job. Often this is the client that then decides not to proceed and does not understand why the design professionals get upset.

(ii) Secret commission protection

The final sentence in paragraph 5 protects the design professional from allegations that the design professional is taking a secret commission.

(iii) Romalpa

A basic Romalpa clause is included in paragraph 7. If the design professional supplies furniture, printed material etc. this is most important.

(iv) Copyright

The copyright clause ensures that the design professional not only keeps the ownership of the copyright but limits its use to one work. This is important if for the design professional when working for a multi-site retailer or that is preparing graphic work for one project that could be scavenged for another without the design professional's input.

(v) Negligence

The terms contain a number of clauses which together are designed to reasonably control the design professional's liability for negligence.

(vi) Arbitration

The terms provides for arbitration if the design professional ends up in a dispute with a client. The client can be required to mediate. This is less expensive than having a dispute determined by a court.

(vii) Access to projects

The client has to give the design professional access to the finished project for publicity purposes unless otherwise agreed.

This form is now widely used by members and has had good acceptance from clients.

Specific Issues on the Professional Engagement

When the contract commences

This aspect is the most common cause of disputes. The answer is project scoping as set out above.

However, if prior to engagement the professional is asked to provide concepts, the Conditions of Engagement will offer some protection against the work being taken by the client.

Variations

Variations are almost inevitable on some projects.

A properly recorded variation will entitle the professional to further remuneration for the extra work done.

Good contracts administration with proper time keeping is required to support claims for variations in services.

The use of contract forms can provide vital evidence through the business practise rule of evidence.

This enables the party relying on the form to say:
" this is the way I record meetings ( telephone calls etc.) involving variations. I always record these matters this way."

A methodical person who makes a contemporaneous record of this type of event will have her/his evidence preferred by a Judge if there is conflict in the accounts of what happened.

Best practise is of course to ensure the client is always informed of variations as the variations arise.

Indemnities

The professional working for a client as an agent is entitled to have the client indemnify the professional for the consequences of the work the professional is doing on the client's behalf.

If the professional hires contractors, the professional should try to ensure they are indemnified by that contractor against the consequences of their actions.

This is simply good risk management.

Professional negligence and contracting out

Some professionals have to insure for professional negligence.

If Professional Indemnity Insurance is not required the professional can "contract out" provided the work is undertaken in a business-to-business transaction. Contracting out again is just "risk management". With contracting out of liability for negligence the professional is asking the client to take the risk of poor professional services. This is rarely acceptable to the client except where the project is very large and the client is directly managing the project or the project is of an experimental nature.

The Consumer Guarantees Act does not permit contracting out where services are supplied to ‘consumers'.

To try to contract out of the mandatory obligations under the Consumers' Guarantees Act is illegal.
The most common forms of contracting out are the rejections of responsibility statements found on many plans and in many specifications.

Familiar statements are:

• "...All measurements taken from plans supplied by owner" (passes responsibility back to owner) or
• "...All measurements should be checked by subcontractor" (passes responsibility to subcontractor).
• "Fabrics on display board(s) have been inspected by client and are the clients choice for purposes of client in use as directed by client on acceptance of design"
• "Test paint panels approved by client shall be deemed to have met standards in specification as to preparation of the surface including any plaster work and the like, consistency of colour, quality and durability of paint product and after approval shall constitute the specification. The original written specification shall be deemed to have been amended and thereafter be read accordingly".

Professional negligence and insurance

There are obvious limitations to contracting out.

It does not engender confidence in the client and it can be time consuming in negotiations.

Risk management is often easiest achieved by professional indemnity insurance.

Professional Indemnity Insurance policies are not standard and must be evaluated according to the language of the specific policy but are typically written on a ‘claims-made' basis.

Claims-made means you must have reported the claim BEFORE the policy expires.

A standard claims-made policy covers notifications of claims or potential claims made:

(a) During the year the policy is in force;
(b) For incidents that occur within that year.

Claims-made policies need to be distinguished from "Occurrence" policies which cover claims based on incidents that occur when the policy is in force, regardless of when the claim is filed or reported. Occurrence policies are not commonly offered by Insurers.

The time for filing a claim policy is critical under a "claims-made" but is important for all Professional
Indemnity Insurance policies.

Most claims-made policies also require that an insured party reports to the Insurance Company "circumstances that may give rise to a claim".

Failure to report such "circumstances" in a notification of a potential claim may bar coverage for that claim.

Maintaining effective Professional Indemnity insurance therefore requires the frequent evaluation of potential claims and the timely reporting of claims in order to preserve coverage and effectively manage risk.

Best Practice adopted by many professional firms is to, PRIOR to the expiry of the policy, circulate a memo to all staff with a questionnaire designed to determine if there have been any customer complaints. If there are known complaints then each should be investigated internally to ensure that there are either:

(a) Absolutely no circumstances that might give rise to a claim - in which case the investigation and conclusion can be used to justify not notifying the insurance company if subsequently a claim is made. You will want to do this as notifications can result in:

(i) The Insurer instructing lawyers to investigate the notification. You should be aware that the lawyer's costs will be billed to you to the amount of your ‘deductible'. Just because the Insurance Company appoints lawyers does not mean you do not have to contribute the deductible; and

(ii) A notification can increase your premium or renewal.

(b) If there are ‘circumstances' that might give rise to a claim, then the notification should set out, with all supporting documents, those ‘circumstances'. Large professional firms often seek their own legal advice on preparing such notifications. This is done because:

(i) The firm is likely to have to pay lawyers costs anyway if the Insurance Company requires a lawyer's report on the notification; and

(ii) A well-prepared notification ensures that the best arguments are put forward and that can save costs in policy renewals.

There are many more issues in insurance which cannot be fully addressed in this paper but the following 8 point plan will help you develop those issues which are specific to your organisation.

1. Implement a risk management plan;
2. Implement a ‘best-practice' survey;
3. Make sure you notify all properly notifiable ‘circumstances' as soon as possible and in any event BEFORE your policy expires each year;
4. Consider getting legal advice on your policy wordings and your notifications;
5. Always present your organisation to your broker setting out your risk management plan. Presentations can result in better premiums because premiums are based on the insurance company's assessment of your organisations specific risks;
6. Take special care in your answers in the proposal. Insurance law requires you to answer fully and honestly. Understating income, not disclosing previous claims, not disclosing overseas work and similar ‘issues' may save premiums but can result in the Insurance Company refusing a claim.
7. Train your people on which complaints must be reported. If your employees do not know the reasons why customer complaints can result in loss of your insurance then they may not report a problem hoping that it will ‘go away'.
8. Review your contracting practices to ensure that you are only taking on liability that you can control. If you cannot control the liability you are guaranteeing someone else's risk. It is their risk not yours - make them bear it because your insurance company is only insuring your risks and again on a claim may look to deny cover in such circumstances.

Disclaimer

This Background Paper by its nature cannot be comprehensive and cannot be relied on by any client as advice.

This Background Paper is provided to assist clients to identify legal issues on which they should seek legal advice.

The maintenance of Company Records and Registers is subject to change by new legislation, interpretation by the courts and by additional Best Practice.

James Carnie
Principal
Clendons
PO Box 1305
Auckland
New Zealand
Phone: +64 9 306 8000
DDI: +64 9 306 8002
Fax: +64 9 306 8009
Email: james.carnie@clendons.co.nz