A satisfaction fee differs from a performance-based bonus in that it is a percentage of the construction manager’s overall compensation that is held until project completion. It is earned along with other fees for completing the project. Used successfully by contractors to offset the desire for cost cutting in a design-build or construction management contract, the satisfaction fee has proven to enhance communication and collaboration throughout the design and construction process.
A satisfaction fee is an incentive an owner can invoke to encourage open communication and collaboration on the part of the architect and contractor. A satisfaction fee is based on three core concepts. When viewed separately, these concepts work in opposition, but when performed together, they can add to the success of a project.
Shared Savings Clause—A shared savings clause found in most design-build contracts is simply a way for a construction company to reduce quality while increasing profit. This type of fee is a negative incentive to the architects who work hard to design a building that is on budget or to a program. Owners, out of a desire to save money, are then easily persuaded to change the design to a less-expensive and usually lower-quality item to save money. Because the contractor proposed the savings, he shares in the savings (60 percent owner, 40 percent contractor, nothing to the architect) and increases his profits. This process develops distrust for the contractor in the mind of the architect and increases greed in the contractor, who presents changes to an uneducated owner to boost profits. And, in the long run the owner will be dissatisfied in both the architect and the contractor, who built a lower-quality building.
Communications—Typically the owner, contractor, and architect only communicate at weekly job-site meetings. After these meetings, all go their own way. The other choice is written communication, which all parties use to protect themselves from the possibility of litigation. Because communication is not as open as it once was, the situation is ripe for misunderstandings and disputes. The contractor is focused on building the project. The architect has other projects to complete, and construction administration is typically not his or her highest priority. The owner is focused on the project and wants to get it done. Poor communication combined with differing priorities creates anxiety.
The contractor can get frustrated with the architect who is busy working on other things and falling behind on the contractor’s needs. The architect can get frustrated because of changes, proposed by the contractor and accepted by the owner, that have lowered the quality of the project. The owner can become frustrated with change orders and schedule changes and may not understand why the project has decreased in importance for the involved parties. This scenario often results in increased written communication where positions are taken, resulting in poor communication, anxiety, and possible litigation.
Collaboration—To achieve true collaboration all parties must have a stake in what everyone else is doing. They must want to see the other person succeed because they understand that they themselves will only achieve success through that of others. Because feelings are reciprocal, we tend to give what we get, and get what we give. True collaboration rarely takes place in the construction industry. This lack of collaboration begins with the negotiation of the contract and the discussion of remedies, the usual result being lawsuits and arguments. Things have reached the point that on most projects it is no longer a question of if the project will go to court, rather when the contractor files the lawsuit. This attitude fosters an environment of protectionism and fear by all parties. No one is free to act with complete integrity since all must worry about the penalty that may be imposed.
Although having these three elements in any contract does not necessarily foster success when they are viewed separately, when viewed together as a model satisfaction fee, success is possible.
The concept of a satisfaction fee grew from the desire to have a highly collaborative team from start to finish.
To accomplish this goal, a special environment must be created to allow all parties to feel comfortable speaking openly and honestly. Communication is critical from the very beginning. A culture of open, constructive communication needs to be formed early in the project and should not be implemented during the heat of the battle. There must be a specific time and place where all team members can focus on the big picture (30,000-foot elevation view) of the project. Although a seemingly easy concept, putting theory to practice is more difficult. The question is how to make it happen and happen in intervals that are productive to the project.
It is critical during contract negotiations to remove where possible any and all clauses that foster a lack of trust or create anxiety in team members. The shared saving clause is immediately identified as one that fosters a lack of trust among the architect, contractor, and the owners. In discussing this problem, it became evident that money is too great a motivator. Rather than rewarding negative behavior, which results in lower quality, the desire was to find a solution that would motivate the right type of action (communication and collaboration). At first the team explored the idea of a bonus; however, a bonus implies a penalty for non-performance. It also is a negative because it introduces a reward for doing what they had all ready agreed to do for a fee. A fee on the other hand, has to be earned and the money set-aside for this intended use. If it is not earned, then there is no payment. Not a penalty or argument. The final decision was to identify how this fee should be earned.
The satisfaction fee then became a part of the compensation package for the architect and/or the contractor.
A satisfaction fee remains a new idea for construction companies and architects. We recognize that education and training are required to understand and embrace the concept. Once educated, contractor and architect need to become comfortable with the idea that the owner has the right of judgment based on his or her satisfaction with how the project progresses. That concept, based on the owner’s satisfaction, determined how much is to be awarded to each. For a satisfaction fee to work, the owner must have a desire for collaboration and communication, which is the first step; there could be no collaboration if this arrangement were dictated. Thus the implementation became a part of the contractual negotiations to which each party ultimately agreed.How did you determine the method below? You say it is a new process that people are getting used to and then below is the break down of fees, how were the fees determined? Did you speak to architects, survey people, compromise…?
To begin the negotiations we asked the following questions of the contractors and architects:
How much of your fee would you put at risk?
To start we recommended the contractor determine what he or she would have made in shared savings. For the architects we discussed an amount they would feel good about earning or losing from their fee. Ultimately, we found out that the amounts were not large. The amount did not matter. They needed to be enough to bring each of them to the table and that is all. For estimating purposes the range should be between 0.5 percent and 1 percent of the contract amount.
How would you like to be judged?
All agreed quickly on five basic elements:
· Budget and recovery
· Schedule and recovery
· Owner satisfaction
These elements were then ranked by most important to least important. A scoring breakdown was developed that totaled 100. For example, budget and schedule were determined to be most important and received 30 points each, quality was allotted 20 points, safety was given 10 points, and owner satisfaction was agreed to be worth 10 points as well.
The standard breakdown for payment is as follows:
91 to 100 points = full payment
81 to 90 points = 90% payment
71 to 80 points = 80% payment
61 to 70 points = 70% payment
51 to 60 points = 60% payment
below 50 points = no payment
If the architect or the contractor lost a payment or portion of payment for poor performance or unsatisfactory activities, they have one period to solve the problem and earn it back. In all cases owner judgment is final.
How often should reviews be conducted?
Through our negotiations it was decided that quarterly reviews were work best. Quarterly reviews allow enough time to notice trends, to correct problems, and to have meaningful discussions. Thus the fee is divided by the number of quarters with in the project and the result is the amount for distribution each quarter.
What is the environment that works the best?
All agreed that it would not be done on the construction site, in an office, or at lunch. Ultimately all agreed to hold individual meetings and then meet as a group over lunch (where we all took turns buying each other lunch) and discussed the review.
What if the owner decides not to participate?
If the owner fails to attend or does not participate fully in the process, the fee should still be awarded to the architect and the contractor without discussion.
The results, which have been remarkable, include the fact that the team
· Collaborated fully—there was no fear of acting with full integrity and speaking openly and admitting fault or asking for support from the other team member
· Worked together as one unit to help each other succeed; no one was greater than the project
· Communicated in an open, honest, and forthright way
· Completed a very complex project without litigation, on budget, and on schedule
Currently we are working to complete a $200 million renovation, and similar results are being achieved; the entire fee has been awarded.