Charged for a referral fee, is this right?

NibblyPig

Hello, I have a question because I'm a bit alarmed about what I am seeing, but I want to check I am not overreacting and I wonder if you could help.

I hired a project manager to manage a building project for me, this person is an interior designer but offered to do the project management work as well for £40/hr.

I agreed. Part of this involved getting quotes for work. I mostly left her to it, she came back with a quote of 10k for one aspect of the work involving builders. This was to do job X Y Z. I asked for clarification because 10k seemed like a lot, does it include this and that, and she said yes it includes X Y and Z. So I said okay go ahead.

The project went ahead, the work was done and I made some staged payments. Finally this week, I was sent the last invoice by the building company directly. This showed the 10k, broken down into different jobs they had done, minus the 7.5k payments I had already made for a total of 2.5k.

However one of the items was 'referral fee £1000'. I thought this was strange. I requested the original estimate/quote that the builders had produced, which also had the £1000 referral fee on. She did not mention this at all. The fee is exactly 10% of the cost of the invoice.

So the items on the invoice are like 1.5k for X, 2k for Y etc and come to £9000, and the fee is £1000 (I've rounded the numbers but the fee is exactly 10% of the £9000) for a total of £10000 for me to pay. Like the fee is a line item on the invoice that I have been issued and forms part of the amount I need to pay.

I think not declaring that you're getting a referral fee is a bit unethical but in this case it seems like not only is the building company paying a referral fee, but they're also charging me for it, even though she is already paid per hour by me and has kept this hidden. I wonder if they put it on by mistake and it was meant to be secret.

When I asked why it was on the invoice, she said "The contractors pay me the money but they don't add it on as extra. They are finding that money but they need to show it". But it's on both invoices and makes up part of the 10k.

Anyway I spoke to some people and they said that this might actually be a normal way of conducting business. When I agreed to pay the original 10k I did not expect paying her 1k extra to be part of that and she did not mention it. So, I wonder if anyone knows what is going on here, is it legitimate or just one of those 'thats how its done' type affairs where I should just pay it, or is this not the standard thing to do at all?

NibblyPig

Also, unrelated to the above, the first item on the invoice is £2200, this was to add a drain to the rear of the house connected to the drain at the front. There was already a downpipe from the gutter going into the ground and towards the front of the house (under the porch). But they were not sure if it was sufficiently large to act as a drain at the back of the house for a new kitchen. So the idea was that they would dig the whole lot out, remove tiles in the porch, dig through the concrete and fit a bigger waste pipe etc.

What actually happened was they removed the slab under the downpipe and found the pipe going to the drain was plenty big enough so they didn't have to do any of the works they listed. They replaced the slab they removed with a drain grille and that was it. It cost £2200 for that. I thought that because I agreed to it upfront that it was a fixed price job and thus if it took more or less effort it would be the same cost regardless. Of course, the project manager negotiated all of this as I didn't talk to the builders myself.

But now I am wondering if they should have adjusted the quote or not charged for work they didn't do?

Section62

NibblyPig said:

I hired a project manager to manage a building project for me, this person is an interior designer but offered to do the project management work as well for £40/hr.

Ethically I'd have some concern over a professional you are paying for a service also collecting a referral fee from a contractor.  It is difficult to be sure you (as the client) are getting the best price for the job (and the PM is acting in your interests with issues such as the drain) if they are also getting paid by the contractor.

But then an "interior designer" is possibly not a professional PM, so there may be nothing you can do about it.  Was there any declaration by the interior designer that they would get a referral fee in addition to what you were paying (e.g. hidden away in the contract)?

NibblyPig

No, and I specifically asked what the 10k was for and they did not mention a referral fee as being part of it.

Also note that in this situation it does not appear they are just collecting a referral fee from the contractor - they are collecting it from me, indirectly.

Gavin83

You aren’t necessarily paying this referral fee. If you had gone directly to the builder then it’s entirely possible you’d have still paid £10k or even possibly more. Although it’s mentioned on the invoice it might well make no difference to what you’d have paid overall. It’s not exactly uncommon for businesses to operate like this.

For example we used a mortgage broker when taking on our mortgage. They actually secured a better deal than we’d have got directly but they were also paid a referral fee. This came out of the banks profits, it wasn’t an extra cost to me.

Regardless you agreed to pay the £10k and therefore should pay it. How it’s divided up is really none of your concern.

NibblyPig

It seems pointless to speculate though, if I had gone direct perhaps they would have said 9k, since without having to pay 1k for the business referral they would make exactly the same amount of money.

Yes, had the arrangement been as you describe with your mortgage, that would still have been unethical (since it wasn't declared - your broker will have declared up-front their fee, as mine did also). But had your mortgage broker added their referral fee onto your mortgage without telling you, surely you see that would be fraudulent? And me saying that well if you didn't use the broker you would probably have paid the extra anyway, does not do anything to justify it.

ThisIsWeird

Hi Nibbly.

How many hours of 'project managing' has this IntDec actually carried out? 

Regardless, she certainly doesn't seem to have successfully project-managed the drain issue, where you have seemingly been charged for a new drain that turned out to not be required, and was not installed.
If the situation with this drain is as you say, then I would ask her to 'project-manage' the correct discount for that part of the job - how about a reduction of £1.5k? - and sort that with her builder. Make her do what you are paying her for.

I would not pay £2.2k for money down a non-existent drain. And hopefully that will be an easier way to sort out this £1k referral fee conundrum.

(You can put the drain issue into any other building context if it helps. Say, a £2k quote for rewiring an extension, and the sparky discovers on site that it is not required, but just needs connecting to the CU. You'd still be expected to pay £2k?! Or, a £2k quote for replacing roof joists if found to be rotten. Oh, they aren't - they're fine. Still pay £2k? Nope x 3.)

£1k referral for a £10k job?! Blimey. No wonder the builder is hoping to keep the drain money. 
Once this is sorted, perhaps honest review(s)?

silvercar

NibblyPig said:

Also, unrelated to the above, the first item on the invoice is £2200, this was to add a drain to the rear of the house connected to the drain at the front. There was already a downpipe from the gutter going into the ground and towards the front of the house (under the porch). But they were not sure if it was sufficiently large to act as a drain at the back of the house for a new kitchen. So the idea was that they would dig the whole lot out, remove tiles in the porch, dig through the concrete and fit a bigger waste pipe etc.

What actually happened was they removed the slab under the downpipe and found the pipe going to the drain was plenty big enough so they didn't have to do any of the works they listed. They replaced the slab they removed with a drain grille and that was it. It cost £2200 for that. I thought that because I agreed to it upfront that it was a fixed price job and thus if it took more or less effort it would be the same cost regardless. Of course, the project manager negotiated all of this as I didn't talk to the builders myself.

But now I am wondering if they should have adjusted the quote or not charged for work they didn't do?

I’d be taking this up with your “project manager”. Let them negotiate the reasonable cost for this job as it turned out to be. 

I’d also be having a conversation about the £1k referral fee. Phrase it that you are puzzled, as you though you were paying an hourly rate, but it has appeared on the building invoice as a lump sum rather than from the PM billing you direct, so which is it. See what response you get.

ThisIsWeird

I suspect the 'referral fee' is 'legit', in that it's what a builder will commonly pay a PM or archi for being recommended for a job. I further suspect that it wasn't meant to 'appear' on Nibblys invoice.
This interior decorator is having it good from both directions... I'm not suggesting that this is 'wrong', but I'm also not sure it's ethical. 
Certainly, I suspect that if Nibbly had known that she'd be forking out an additional £1k over and above the £40ph, just for this person to 'find' a builder, she might have questioned this.
Put it this way, if the ID/PM had told Nibbly from the off that her charges were "£40 ph to PM, + £1k to find you a builder", what would Nibbly's likely reaction have been?
As it turns out, the much-reduced drain job might provide a simple get-out from this unpleasantness. But I'd be looking for more that a £1k discount, based on the info provided on the drain issue.
And I'd have few qualms about being quite tetchy about this - the builder (er, I mean the PM...) should have sorted this drain overpayment when it happened.
She didn't. The builder didn't. They are owed no concession.
And, afterwards, an honest review of her services could point out this lack of PMing, and the unexpected extra cost in sourcing a builder.

DullGreyGuy

NibblyPig said:

Also note that in this situation it does not appear they are just collecting a referral fee from the contractor - they are collecting it from me, indirectly.

But thats how referral fees will always work... the monies charged to customers has to cover all the costs of doing business which includes the obvious things like salaries and materials but also covers marketing, accountants, referral fees etc. 

What is odd is that they have called it out on the invoice... its normally just factored into the hourly rate or markup on materials etc 

Depending on what role you set the project manager to have... doing something as cheap as possible isn't always one of them... then such fees may create a conflict of interests. Working in an industry where conflicts of interest are a particularly hot topic at the moment I generally avoid them or be very open about them... I will recommend companies for which I'll receive payment when I am not on the panel for my client deciding if to appoint them or not. If I am on the panel then I will try and get off it if possible or at least call out my conflict. 

For me it's not too big a conflict... payments from suppliers are typically less than a days work and my contracts are normally around 9 months in duration so relatively token and clear where loyalties will lay. 

NibblyPig

Thanks for your replies, I posted this onto another forum as well and it had quite a lot of back and forth.

Essentially, it's a mess. The PM and the builder are in cahoots, making a referral fee even more ridiculous since they work together all of the time.

In short I think there's a conflict of interest, and I think there's fraud for not being open about the fee and charging it to me. If the builder said that's 10k's worth of work, so give me 10k and then gave her 1k from that, that would still not be OK but it would be more OK than that's 10k of work, so I'll charge you 11k so she can have 1k of it. While already being paid.

She refused to go back about 2600 of work that wasn't done and said she took it off but other work was done that added up to about the same, so she decided to just leave it.

I think it's all a load of cobblers and there isn't much point in discussing it further, so I am in the process of contacting my legal insurance and I hope they can sort it all out.