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Client wants a performance guarantee

Client wants a performance guarantee

Client wants a performance guarantee

I work as a consultant engineer. Our client has a problem with their building and we have proposed a solution. Detailed design & engineering will cost about $200K.  The client wants a financial and letter guarantee i.e. that our solution will be effective or we don't get paid (either at all, or until it's fixed).  Obviously we are confident but unless detailed engineering is done, we can't know for sure.  In addition, our design will be a retro-fit into a building so again, there's unknowns.

This is a large scale project for us i.e. we can't afford the risk of failure, but then again, won't go forward without the guarantee.

What's others experience with this?  

I don't want to over-design such that there's so much safety factor that I can't help but succeed since that'll be a poor design.  My associate is thinking of a double or nothing approach i.e. the client pays 0 if it doesn't work but double the costs (400K) if it's successful.

I'm wondering if there's an option to get some kind of insurance rider that'll protect us, but I have no idea bout this.

Thanks for any feedback.

RE: Client wants a performance guarantee

I'd find a new client.

RE: Client wants a performance guarantee

I like your associate's solution, but I don't think you should seriously propose that to your Client.  I seen performance guarantees before, and have put them in building specifications for a system that is design/build.  I don't think the penalty was ever zero, though.  

Personally I would not do it, but if truly in a desperate situation needing the job, spell out what constitutes an effective solution in the agreement.  Anything above and beyond what is in the agreement cannot be used as reason for non-payment.

Take each 'problem', define it, describe analysis, and proposed solution and what outcome can be realistically expected.  I'd also add language such as, "this is an exiting building where without exhaustive investigation, analysis, and financially prohibitive costs, all conditions and effects of the new system cannot be known until installed and tested in situ.  Client agrees that some modification with an additional financial impact may be necessary to fine-tune the mechanical system.  This shall not be construed as an ineffective design solution."

I think you should give the wording a try, and then take it to an attorney for a once-over.


"Gorgeous hair is the best revenge."  Ivana Trump

RE: Client wants a performance guarantee

OMG, the ghetto I live in is rubbing off.  Change that to "I have seen..."

"Gorgeous hair is the best revenge."  Ivana Trump

RE: Client wants a performance guarantee

To elaborate, medical doctors don't offer a performance guarantee (take this drug and it will make you healthy, or it's free).

Car mechanics don't typically offer performance guarantees. (We need to replace the oxygen sensor to fix your engine light. If it doesn't, we'll refund 100% of your money.)

Lawyers generally charge by the hour with no refund, unless they are working on a case with a potential of a large settlement. In that case, they only do the work if they have confidence they'll prevail. Otherwise they do it on a time and materials estimate.

I don't think what your client is asking is reasonable, and frankly, hits me as being a cheap client. I'd look for clients more willing to pay your rates than the one  you have now.  

RE: Client wants a performance guarantee

Personally, I't talk tro your lawyer about this.  Sounds like it could be deemed a one sided contract to me and may not even be enforceable as the client proposes.

If so, that opens up a different can of worms and possibilities.

Mike McCann
MMC Engineering
Motto:  KISS
Motivation:  Don't ask

RE: Client wants a performance guarantee

No!No! Hell no!  Do not EVER guarantee performance of something you design.  Your professional liability carrier is currently having a heart attack...and no, they will not give you a policy rider on this!

This is a bad contract provision and one you should walk away from.

Do you realize how little control you will have over the outcome?  Can you guarantee the contractor will perform PERFECTLY?  Can you guarantee that your design won't be subject to maintenance needs that probably won't be performed properly?

Double or nothing could be a drop in the bucket of your liability.  

This is nuts.

RE: Client wants a performance guarantee

Without wishing to be contrary, from the clients point of view:  you want me to spend $200k, and you won't even guarantee it will work?

No pay at all if it doesn't work would seem rather over the top, but in the process industry licensed designs often come with a performance guarantee.  Build one of our plants to our spec and we guarantee X tonnes at Y purity and Z utility consumption.

I could see a staged payment with final payment withheld until a set of performance criteria in the contract are met.  As always, though, ask the lawyers!


RE: Client wants a performance guarantee

mbt22...process designs are a bit more predictable and controllable than construction and you often have enough money in the project to do prototypes and develop bench testing...not the case in construction, particularly when dealing with remediation or retrofit.  It is definitely not worth the risk.

RE: Client wants a performance guarantee

the contracts the company I use to work for had a base price with a modifier base upon performance.  If performance exceed contract there was addtional payment, if performance was less then price reduction.  I can't recall the details, but there were some lawyer words we were suppose to use when discussing since there was something like a contract could not include a bonus, but a negative discount.

then there was how to define and who would determine the performance

RE: Client wants a performance guarantee

Did you have anything to do with the "problem"?  If not, then you really don't know what the actual conditions of construction were.  You may open up the can of worms and find that the structural elements that were in the plans didn't get installed, or got downsized after the fact without documentation.  Signing a contract like you've described would not only be bad business, but it would be seriously stupid.

On the other hand, if you designed the broken project then you know what was in it and fixing it should be a quantifiable package of work.  Then it is just bad business.


RE: Client wants a performance guarantee

Sounds like the client wants a perfect solution with absolutely no risk, at minimal cost too.

In the usual scheme of things, taking on the risk means taking a larger share of the reward as compensation.

As others have alluded to, such a setup is not a sensible thing to tie yourself into as a business.

Find a new client.


RE: Client wants a performance guarantee

Am I misunderstanding something, or is your client asking for all the upside (i.e. a solved problem at a price no higher than any other client would pay) with no downside?

I guess it never hurts to ask!

You need to properly assess the risk cost to your firm in order to determine a fair price for this work, and that fair price will DEFINITELY be higher than the value of the man-hours charged for the development of the successful solution!


RE: Client wants a performance guarantee

Thanks for the feedback, they echo what I feel.  
To answer some questions:
1) We weren't involved in the original issue whatsoever
2) Determining if the project is "successful" is pretty straight-forward as we've already specified a quantitative test to determine this.

The client is also more concerned that the project is successful i.e. he's concerned about paying that much and it not working, as opposed to avoiding paying.  

After some talking, we're leaning with guaranteeing the performance of our retro-fit, but at no monetary penalty i.e. we get paid (staged) but final payment is made on successful test.  And if test is unsuccessful, we do what is necessary to get it up to snuff.


RE: Client wants a performance guarantee

SylvestreW...BE CAREFUL WITH GUARANTEES of any type.  Your professional liability insuror will likely not cover a guarantee...check with them!

You say that you have a quantitative test for performance.  That's great.  What if it fails?  Do you have to pay to contractor to re-do?  Does the contractor guarantee performance of his work?

I hope you know what you're getting into.
Good luck.

RE: Client wants a performance guarantee

Ditto what Ron said.

Also be sure the client knows that you doing "whatever it takes to make it right" is limited to your time and design effort, and that remedial measures or value added additions to the work will be paid for by the client, and not taken out of your pocket.

Consulting fees are generally less than the PROFIT the contractor expects. You will get only a small percentage of the job cost for yourself if all goes according to plan. That makes putting yourself on the front line for ponying up remedial costs very dangerous.


RE: Client wants a performance guarantee

You absolutely cannot enter this agreement in any rational business practice.

Don't be too sympathetic to the client.  If they are indeed even asking for this, then it shows a lack of sophistication on their part.  Remember that they make a lot more money from the outcome of this than you do from doing it - basic ROI.  Their option is to not do the project and have certainty of not making the money.  There is a level of assumed risk in all business practice.

RE: Client wants a performance guarantee

A lot of contracts are performance contracts, but I've usually only seen this for energy savings.

Otherwise, it sounds like the client wants to sell off all risk. As above, if the risk is worth $200,000, charge another $200,000.

RE: Client wants a performance guarantee

I'll start out by saying that I agree with what everyone has said, have never offered a garauntee, and can't imangine a situation where I would.  Having said that, I'd like to throw this out there...can you have the client pay you to do enough initial investigation and preliminary design to make you much more comfortable that your plan will work?  At that point, can you make the garauntee based on the remainder of your design fees?  Can you also get yourself in a position to control and/or observe enough of the work so you really do see enough of what the contractor does that you can make sure your design is installed the way you intended?  Can you then define very specifically what success will mean?

So let's say you need $50k for the thorough investigation and then another $200k for the design and more detailed field services during construction.  You get paid the $50k no matter what and the $200k becomes part of the garauntee.  Now, you are taking a bigger risk than you would on any other similar project so I think it would be completely reasonable to ask for a higher fee to justify that risk maybe 50% more or $300k?

From a business perspective this MIGHT make sense because you get paid more for the higher risk.  Also, in a normal situation if your design doesn't work you might get sued and have to pay out more than your fee anyway.  So can you get the client to agree that his ONLY recourse is not to pay you the $300k if it doesn't work and that he cannot sue you?

Just some thoughts.  You're insurance company will hate it and probably won't cover you for the project and you would definately need to involve a good lawyer to get the terms right.

Pete Madson

RE: Client wants a performance guarantee

How about you get paid for your engineering with no mark-up and there's a pot of money, a "Perfomance Bond" deposited into a bank or held by a bonding company. If your design works, the performance bond is yours after five or whatever years.  If it doesn't, the performance bond is used for corrective actions.  

RE: Client wants a performance guarantee

If it was me, if I had enough work I would walk away

If I needed the work, I wouldn't want my pay tied up in a bond for however long as I am struggling a bit anyway and I would do exactly what you are doing, some pay now, some pay at the completion of the project based on quantifiable tests first done internally but with an independent judge chosen to bring in if there are any disagreements or problems with the test.

Basically just lawyers galore though, every step of the way.

RE: Client wants a performance guarantee


What you are describing has been put into use for decades, and is a growing business. Energy savings performance contracts (ESPC's)allow for paydown of intial fee, or use of A-E services in identifying and evaluating energy conservation measures. Payment is based on measurement and verification of energy/dollar savings. Some contracting offices prefer having a third party A-E identify and evaluate ECM's, then go to the ESPC contractor. Other offices prefer to pay for a baseline energy evaluation from the ESPC and then make an offering on an ESPC contract. I am not a big fan of ESPC, as it requires twice the paperwork, and conditions always change. M&V can be a real bear.

Another variation is the firm fixed price plus incentive (FFP PI). A basic fee is negotiated, an incentive is earned based on the evaluation factors put in the contract. I was a big fan of the FFP PI.

Not being a resource manager or contracting officer, I don't get to select the contract vehicle.

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