Client wants a cap on total fees — how to structure it fairly

Large hotel chain based in Tulsa with PSO and OG&E accounts. Total spend around $120K/month. They like the contingency model but want to cap my total fee at $50,000 regardless of how much I find. Their finance director says they need to budget for the cost. At 40% contingency I'd hit that cap at $125K in total recovery. On a portfolio this size the recovery could easily exceed that. Do I accept the cap?

A cap defeats the whole purpose of contingency for large portfolios. Counter with a tiered approach instead — 40% on the first $100K recovered, 30% on the next $100K, 20% above that. The client gets a declining marginal rate that effectively limits their total fee exposure while you still participate in any upside. On a $250K total recovery your fee would be $70K under the tier structure vs $50K with the cap. The client still pays less per dollar recovered as the number gets bigger.

Art's tiered approach is the right counter to a fee cap request. Caps create a perverse incentive — once you hit the cap, you have no financial motivation to keep looking for errors. The client loses because you stop working. A declining tier keeps you incentivized while giving the client the cost predictability they want. If the client insists on a hard cap, make sure the cap applies only to the first year of the engagement and resets annually if the relationship continues.

Proposed the tiered structure. Finance director accepted 40/30/20 tiers with breakpoints at $75K and $150K. Found $187,000 in combined recovery across the portfolio. My total fee worked out to about $56,000 — slightly above the original cap they wanted but nobody complained because the client saved $131K net. Everyone won.