:AACE CERTIFICATION 2009-2010:

I’m working on contract scope development for Engineering Service On Call contract while I’m writing this 2nd week blog report. The main scopes of the contract are the Engineering Consultant to provide engineering services to support the company requirement according to the work scope and specification provided by the client. The services provided is engineering design work at the most where the cost of services mainly in the labor cost.

I have the existing contract as a reference to write down the contract document and I found some interesting stuff in the existing contract compare with what I have learned into AACE course and informal discussion with program members.

1. Labor classifications
Labor classification in the existing contract is only divided into 2 categories, the engineers (direct labor) and administration labor (indirect labor). When I look at Skills & Knowledge of Cost Engineering Chapter 4 page 4.1, I found that labor classification was divided into 3 categories: direct labor, indirect labor and overhead labor. Overhead labor is the labor portion of costs inherent in the performing tasks such as engineering which cannot be charged to or identified with a part of the work. These costs mainly for the corporate support i.e. human resources, computer support, accounting support, business development etc. How did the current engineering consultant calculate an overhead labor cost into the selling price? I am pretty sure that in the existing contract, overhead labor cost has been put all in together to the percentage of direct cost which is the engineer basis rate. This is lesson learned to me and I will change the labor classification in the contract document into those 3 categories.

2. Billing rate
This is the most interesting part of this contract. What I see so far that the current engineering service contracts billing us is only for the employee base wage or base salary working which is the direct amount that each of employee will earn and be paid for each hour that they work. Where is the overhead cost? It should all in the base wage of the employee already but how do they calculate the base working salary? Where is the number come from? As the owner I have to know and understand what the consultant price going to cost me include direct, indirect and overhead so I can make a fair justification for utilizing the internal resources or contracting out the job to the consultant. When I open Skills & Knowledge of Cost Engineering Chapter 4 page 4.2, its give me a very clear direction on how to develop labor billing rate include all factors have to be considered as price adders to the base salary working i.e. Paid Time Off (PTO), retirement contribution, medical and life insurance, overhead, profit etc. I’m now working on it to change the current contract schedule of price to include all of those factors into the calculation.

3. Schedule of Payment
Existing contract clause didn’t mention clearly on how the consultant submit the invoice and what is the basis of the company to pay the claim. Current practice is the consultant submits the invoice base on the total man-hours spending for certain period of time for the specific scope of work. The consultant will bill the company for whatever numbers of hours the employees spending on that period as long as the hours spending still within the approved limit, despite the physical progress of the work. I just realize that this is totally wrong practice, the company must pay the consultant for the previously agreed to price for the work completed. The service they provided must physically completed, substantial conformance to the scope & specification and meet the contract term & condition. The company shall pay base on these physical progress completion, what we got for what we paid.
Now I’m working to add earned value theory into the contract general term & condition to change the progress payment current practice.

I’m continuing to work on the contract document and still far away to complete. Meanwhile I need some references on how to write a proper contract document for the engineering service type of contract. Dr Paul, can you help me on this? I believe you have lots sources that I can refer to.



Sorowako, October 16th, 2009



Muhammad Asril