Distribution Centre Fee Erosion and a Cold-Store Change Order
Halden MEP Consulting holds a lump-sum fixed fee of $1,350,000 for full mechanical, electrical and plumbing design of a 42,000 m2 distribution centre, with a nine-month programme and a 10% holdback released at practical completion. The proposal was built on 9,000 hours at a blended charge rate of $150/hour; the firm's direct cost rate is $95/hour, inclusive of overhead absorption. At the end of month 6 the project manager reports 6,300 hours consumed and 55% of deliverables complete. Two weeks ago the client added a 1,800 m2 cold-storage annexe and asked for a priced proposal; the PM has offered 450 additional hours at $150/hour to keep the relationship smooth. Design coordination with the client's appointed contractor has also degraded: 14 RFIs are older than 10 days and two issued drawing packages have been reworked twice. The board requires a gross margin of at least 25% on all work and a cash-positive position by month 8.
1. Calculate the forecast hours and margin at completion for the base contract, determine whether it meets the board's 25% floor, and set out the corrective actions you would take now.
Read the worked answer
Hours at completion = 6,300 / 0.55 = 11,455 hours, against a 9,000-hour budget - an overrun of 2,455 hours (27%).
Cost at completion = 11,455 x $95 = $1,088,200.
Forecast gross margin = (1,350,000 - 1,088,200) / 1,350,000 = 19.4%.
To meet 25%, cost must not exceed $1,012,500, i.e. no more than 10,658 hours. The job is therefore roughly 800 hours past the margin floor before the annexe is even priced.
Challenge the 55%. Percentage of deliverables issued is a weak progress measure. If the remaining work is design-complete-but-not-issued it is relatively expensive; if it is construction support it is cheaper per point of completion. Get a bottom-up hours-to-complete from each discipline lead before you commit to any EAC.
Diagnose the 2,455 hours. Fourteen RFIs older than 10 days and two packages reworked twice point to interface data churn from the client's contractor rather than pure productivity loss. If that is the cause, it is a variation and delay event - issue a written notice now to preserve entitlement for the extra hours and the programme extension. Contractual notice periods of 14-28 days are unforgiving, and the entitlement evaporates if you stay silent.
Corrective actions: freeze scope changes; re-sequence to protect issue dates; stop discretionary enhancements. Do not cut checking, coordination or QA hours - those are exactly the hours that generate rework later. And do not present the annexe fee as a fix for the base contract, because it is not.
2. Evaluate the PM's 450-hour proposal for the cold-storage annexe. What commercial structure would you recommend, and how would you handle the RFI backlog?
Read the worked answer
Benchmark the 450 hours. Base design density = 9,000 / 42,000 = 0.21 h/m2. At the same density, 1,800 m2 would need about 386 hours. Cold storage is denser than ambient warehousing: insulated panel interfaces, vapour barriers, refrigeration, defrost drainage, condensation control, and connections into already-issued plant. A factor of 1.5-2.0 gives 580-770 design hours, plus 10-15% for rework of issued packages and coordination. The 450-hour offer is short by roughly 200-350 hours.
Why the 36.7% headline margin is misleading. At $150 revenue and $95 cost, 450 hours looks profitable in isolation. But it consumes the remaining float, extends the programme, delays the $135,000 holdback and the month-8 cash-positive milestone, and if it overruns at the base contract's 1.27 factor it becomes about 570 hours against 450 hours of fee - pushing that scope below the board floor as well.
Recommended structure:
- Re-measure the hours bottom-up and price at least 650.
- Formal contract amendment with a revised completion date, revised holdback release and liquidated-damages relief for the extended period.
- Not-to-exceed with a re-opener at 80% burn, and a defined change process for anything beyond.
- Explicit exclusions: fire engineering, structural, authority fees, refrigeration specialist procurement.
- Treat the annexe as a new instruction, not a favour. A '$30k relationship discount' costs more in precedent than it buys in goodwill.
RFI backlog: tie it to a client instruction. The client appointed the contractor and owns the coordination risk; issue a delay notice and a request for direction. Negotiate the base contract and the annexe together in one meeting - negotiating the annexe alone lets the base overrun go unchallenged.