Hiring a consultant? Don't get caught in these common pitfalls

By David Donaldson

July 12, 2016


Public servants often joke that a consultant is someone who borrows your watch and then charges a fee to tell you the time.

But the relationship cuts both ways: when pressed, consultants often express concern about public service clients “who have not entirely thought through their requirements for a job, or who leave things until the last minute and then expect a high quality proposal or solution to a problem overnight”, argues an updated guide to using consultants for public servants.

Ensuring you know why you’re hiring a consultant is a vital and often overlooked first step in finding external assistance, notes ANU Crawford School Adjunct Associate Professor Leo Dobes — while some government managers will want to avoid spending substantial time working out key parameters at the start so they can get to work, good preparation can save time and money down the track.

“It would be difficult to over-emphasise the point that clarity of purpose is essential to a successful consultancy project,” Dobes writes in Managing consultants: a practical guide for busy public sector managers.

The guide has been updated from its original publication in 2006 thanks to continuing strong interest, he says.

A good test of whether you’re properly prepared is to ask whether you could defend your justification for having hired a consultant in front of a Senate committee or an auditor.

Unclear goals can lead to lower quality outputs and higher costs. When combined with a fixed fee contract — the most common type — a lack of clarity at the beginning can lead to subpar outcomes, as the consultant may be unwilling to take on further unexpected costs without renegotiation.

Dobes warns that a lack of clarity “may lead the successful tenderer to seek profitable variations once the contract has been signed and the client begins to specify ‘additional’ needs.”

And although there’s a stereotype that a consultant will be able to be found no matter how messy the job, good consultants will likely have multiple project offers and avoid entanglement in half-baked proposals when possible.

“Failure by clients to clarify their needs and requirements in a business case can therefore limit the choice of consultants available to them, and may result in lower quality output,” he says.

Keep it simple

Don’t get carried away by specifying unnecessary evaluation criteria. It eats up time for both the consultants tendering and the officials assessing the application.

Too many evaluation criteria can also dissuade consultants from bidding. In one case, an agency listed over 30 selection criteria, many of them partially repetitive. Although the job was a six-figure one, a large firm decided not to bid because it was not confident that it could recover the estimated four weeks of work involved in preparing a proposal.

Framing an appropriate number of evaluation criteria in a logical order, with minimum duplication, assists tenderers to present better submissions, Dobes argues. It also makes it easier for you in the selection process stage. “So don’t skimp on time spent drawing up the evaluation criteria,” he notes.

Budgets and transparency

When preparing a tender, should you make the likely budget for the consultancy available to the bidders?

There’s no hard and fast rule, Dobes says.

The upside of making more information available is that you’ll probably be able to assess bids better — if one tenderer estimates the total project to be worth $40,000 and another $500,000, their proposals will be hard to compare. On the other hand, providing the likely budget will often mean choosing between several bids at around the same price.

A pitfall to avoid is under- or over-estimating the likely cost of the project, given that the consultant will often be in a better position to know the real amount of work needed.

One apocryphal anecdote recounts an instance where the value of a project was grossly underestimated. After the project had been expanded to many times its original value, the client finally began to suspect that the consultant (who was relatively far more experienced in the field) had known all along what the value would eventually be, but had put in a very low initial bid to win the contract because of his strong expectation of an increase in scope after commencement.

One compromise, he thinks, is to provide a budget range (between $50,000 and $80,000, for example) to allow for price competition and ensure bidders are on the same page as the agency — though the less information provided means more potential for divergent expectations.

Fees and expenses

There’s no “magic formula” for deciding fees, argues Dobes, which is why competitive bidding is important — it helps establish a market price.

There are also trade-offs between large and small firms. Large firms will often be more expensive, but better able to absorb risk; smaller ones may be more responsive, but may struggle to fill the gap as easily if someone leaves. Finding the cheapest quote and getting the best value for money are not the same thing.

Payment arrangements, which create different incentives for the consultant, are important and varied. The book offers a brief guide to help you consider which is the most appropriate:

  • Daily or hourly fee: there is little incentive for the consultant to minimise the time spent on the job and the client bears all the risk.
  • Fixed-price fee: the consultant bears the risk and is likely to have allowed a contingency margin in the bid, although it is unlikely to be apparent to the client. In an arrangement of this kind, it is important to have well-defined outputs.
  • Fixed fee plus expenses: the most common form of contract used in the Australian Public Service. While the consultant bears the risk for the fixed fee, the client bears the risk of expenses unless the contract specifies that expenditure for expenses is subject to prior approval.
  • Fixed-price plus incentive: if a special condition is met (for example, early delivery) an additional pre-specified fee may be paid to the consultant. An alternative form is to base the fee on an estimate by the consultant, for example $50,000, with a capped fixed price of $70,000. It can be agreed that any costs above the $50,000 threshold (but not exceeding $20,000) will be borne by the client at a rate such as 75%, and the remainder by the consultant. This approach provides an incentive to the consultant to minimise costs above $50,000, but without necessarily compromising the quality or extent of the contract outputs.
  • Graduated incentive fee: if the consultant estimates that the contract will require $50,000 of work, a range of $20,000 can be set on either side. The consultant may be required, for example, to bear 25% of costs above $50,000 up to a maximum of $70,000. Similarly, the consultant may receive 50% of any savings below the estimated project cost of $50,000.
  • Fixed-price with re-determination: Where the scope and nature of the work is very vague, the parties may agree to proceed for a fixed fee to a defined milestone, by when the requirements will have been better defined and a fixed fee for the remainder of the work can be agreed.
  • Cost contract: where the consultant will acquire technology or knowledge which can be used to earn profits elsewhere, it may be possible for the client to agree to pay some portion of the consultant’s costs, but no fee (to reflect the revenue potential of the technology). This approach may be suitable for dealing with intellectual property.
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