Contracting for Fee Services

In 2013, I wrote an article looking at the big picture of contracting. I felt it made sense to contract if your agency was too small to hire staff with expertise that is infrequently needed.

Over the years, I have seen various approaches to contracting for fee services where the California Constitution requires that “revenues not exceed the cost of providing the service.”

Aggregate Method

When there are a lot of small services provided by the contractor, such as building and safety services, then the aggregate method works well because it takes advantage of the Law of Large Numbers. In this method, the agency compares the total revenues for all of the “small” services for a representative period, such as a calendar or fiscal year, with the total billings for services for the same period. The fees for all of the “small” services would then be raised or lowered by the same percentage to bring the consolidated revenues into balance with their costs. The agency should remember to add their costs in support of the contractor/consultant to the total costs before calculating the percentage to adjust fees.

Link to Contractor Billings

If the contractor provides frequent billings that identify costs for specific applications/services, the Agency can state that the service fee is the “actual cost of the contracted service.” To implement this approach, RCS would compile all of the City costs in support of the fee and add that amount as a fixed fee in addition to the “actual cost of the contracted services.” The recommended fee might be worded: “$xxx plus actual consultant cost.” As it is always a good idea to provide services on the applicant’s dollar instead of the Agency’s dollar, the above fee might have appended “…charged against an initial deposit as determined by ‘agency representative’.” Note that the wording uses “initial” to give the agency the option to add an additional deposit, if necessary.

Deposit Issue. The cost of receiving, tracking and possibly refunding a deposit should be included in the service fee. This provides resources for the department or the agency’s accounting staff to adequately staff for this work.

Percent of Revenue Goes to Contractor

The agency pays the contractor/consultant X% of the revenue and keeps the balance as the agency’s reimbursement for staff and support costs. 65% has been frequently used as the contractor’s share with the agency retaining 35% for its costs. This percentage relationship is only valid at a specific service volume. Counter-intuitively, when the volume increases, the agency should get a lesser percentage. It’s been my experience that agencies give the contractor/consultant a lesser percentage even though that approach is mathematically wrong.

Few Services with No Link to Contractor Billings

This is the worst-case scenario. The service units are too few to look at the big picture as the Law of Large Numbers would suggest. The contractor/consultant bills the agency with little to no indication of what the charge is related to. This is actually quite common. The only remedy is for the agency to mandate a linkage to the service. It may require cancelling an existing contract for services and renegotiating to get the necessary information. If the agency does nothing, then it’s only a guess what fees should be charged.