Outsourced FM contract? Common ways we see clients overcharged

“Unknown unknowns”

Most of the time you will get a warm feeling by placing reliance on a trusted FM specialist to provide you a good service and charge you the right amount per the contract. And if that feeling is more tepid than warm, you may use your own team to carry out checks, to tell you that you’re being charged the right amount.

At this point it’s probably worth quoting Donald Rumsfeld’s infamous speech from 2002 (guaranteed to make you smile, I know you’ll read it twice):

‘’Reports that say that something hasn’t happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tend to be the difficult ones’’.

It’s not really important which category overspends fall into; whether they’re ‘known knowns’, ‘known unknowns’ or ‘unknown unknowns’.   The fact is that you may not be aware that you are being overcharged; and more worrying is that your supplier and your own team may not be aware!

COMMON WAYS CLIENTS CAN BE OVERCHARGED:

We’ve worked on numerous FM contracts on behalf of clients, and have identified a common pattern in the way that clients are overcharged, and contractors increase their margin:

  • The majority of cost is labour-related; and we see hourly rates used that can be as much as 50% higher than the actual cost to employ. There is no ‘actualisation’ of labour costs to compare the rate charged to actual cost to employ
  • Hours charged may be greater than actual hours worked per clocking-in systems.
  • Role inflation creeps in; where more junior staff are charged at a higher rate associated with a more experienced / technical role.
  • The proportion of Staff costs charged is greater than the time actually spent on the contract.
  • Fee-on-fee is charged but the level of overcharge is unclear; due to self-delivery through internal divisions.
  • Competitive quotes are not obtained for reactive maintenance work – you don’t get value for money.
  • Supplier rebates are paid to the contractor, based on the volume of consumables purchased, but this reduction in cost is not passed on to you as the client. You pay for the gross cost and the contractor takes the benefit of the rebate.
  • You are charged for costs such as insurance and training that are meant to be covered by the overhead / fee; in effect paying twice.
  • Reactive maintenance charges are higher than expected caused by the planned maintenance works either not being completed or completed to a poor standard. The contractor reports very low levels of defects rectified at their own cost.
  • The contractor may work on other clients’ contracts nearby, sharing what is meant to be dedicated labour, equipment, and consumables; but charging both clients with 100% of the cost.
  • The contractor’s Application for Payment does not give sufficient detail to allow you to challenge whether costs are appropriate and should be paid.

CONCLUSION

Overcharging by contractors is a direct result of the low-margin environment that they operate in. Often the contractor will ‘buy the contract’ by pricing the work at wafer-thin margins, expecting to be able to claw-back additional margin as above.  Other overcharges can be genuine misinterpretation of the contract or weakness in controls, but the net effect for you as the client is the same – a contract that does not deliver value for money.