Project contracting

Project contracting
Fixed price or Lump sum Contracts
Cost reimbursable Contracts
Time and materials (T&M) contracts

1. Shri Vaishnav Vidyapeeth Vishwavidyala Shri Vaishnav School of Management 2018-2020 Project Contracting

2. What is Contract? A contract is a exchange of promises between two or more parties to do, or refrain from doing an act, which resulting contract is enforceable in a court of law In the project or program context, contracts typically involve the exchange of money in return for goods or services An agreement between two or more parties to accomplish a certain goal in a certain way

3. For example:- A project contract may take the form of an agreement between a builder and a property owner in which the builder agrees to build a house on the property by a certain time in a certain way, and in exchange, the property owner makes certain remuneration.

4. Advantages of Contract Room for Price and S ervice Negotiations Linking Results with Price The Importance of Time Frame Liability and Delegation Contract is required to share and bear individual’s responsibilities in completion of the project. Effective and efficiency of work.

5. Why should we know types of contract? Whether you’re managing a small project or a large complex program you need a basic understanding of the different types of contract you’re likely to encounter when buying from external organizations and 3 rd parties.

6. Types of Contracts There are three basic types of contract you’re likely to come across in managing your projects and programs: Fixed price or Lump sum Contracts Cost reimbursable Contracts Time and materials (T&M) contracts

7. 1 ) Fixed Price Contracts In this type of contract the seller and the buyer agree on a fixed price for the project. The seller often accepts a high level of risk in this type of contract. The buyer is in the least risk category since the price the seller agreed to is fixed. With this type of contract, sellers may try to cut the scope to deliver the projects on time and within budget.

8. If the project is finished on time with the desired quality, the project is over for that contract. However, if the project is delayed and there are cost overruns, then the seller will absorb all the extra costs. Few types of Fixed Price Contracts: Fixed Price Incentive Fee (FPIF) Fixed Price Award Fee (FPAF) Fixed Price Economic Price Adjustment (FPEPA)

9. Fixed Price Incentive Fee (FPIF) Although the price is fixed, the seller is offered a performance-based incentive. The incentive can be dependent upon one or more project metrics such as performance, Cost, or time. Example: 10,000 USD will be paid to the contractor as an incentives if he completes the work before two months. Fixed Price Award Fee (FPAF) If the performance of the seller exceeds expectations, an additional amount ( i.e 10% of the total price) will be paid to the seller.

10. Fixed Price Economic Price Adjustment (FPEPA) A fixed price economic price adjustment contract is used if the contract is multi-year long. Here, you include special provision in a clause which protect the seller from inflation . Example : About 3% of the cost of the project will be increased after a certain time duration based on the consumer price index.

11. 2 ) Cost Reimbursable Contracts This type of contract is used when the project scope is uncertain, or the project is high risk. The buyer pays all costs, so the buyer bears all the risk. Under this type of contract, the seller works for fixed time period and raises the bill after finishing the work, where a fee that represents the profit for the contract. The fee may be dependent on selected project performance or other metrices .

12. A major drawback of this type of contract is that the seller can raise an unlimited or unknown amount which the buyer is compelled to pay. Kinds of Cost- reimbursable contracts: There are three kinds of cost-reimbursable contracts you should understand: Cost plus fee (CPF) or cost plus percentage of cost (CPPC) Cost plus fixed fee (CPFF) Cost Plus Award Fee (CPAF) Cost plus incentive fee (CPIF)

13. Cost Plus Fee (CPF) or Cost Plus Percentage of Costs (CPPC) The seller will get the total cost they incurred during the project plus a percentage of the fee over cost: this is always beneficial for the seller. Example: Total cost plus 15% of cost as a fee to the contractor. Cost Plus Fixed Fee (CPFF) In this type of contract, the seller is paid for all incurred costs plus a fixed fee (Which will not change), Regardless of his performance. Here, the buyer bears the risk. Example: Total cost plus 25,000 USD as a fee.

14. Cost Plus Award Fee (CPAF) The seller will get a bonus amount (the award fee) plus the actual cost incurred on the projects: this type of contract is very similar to a CPIF contract. Example: if the seller completed the task meeting all quality standards, based on his performance he may given an award of upto 10,000 USD Cost Plus Incentive Fee (CPIF) A performance-based incentive fee will be paid to the seller over cost they have incurred on the projects. In this type of contract, the incentive is a motivating factor for the seller to meet or exceed the project’s performance metrices .

15. The seller may get some incentives if he can complete the work with less cost or before time. Example: if the project is completed with under budget, 25% of the remaining fund will be given to the seller.

16. 3) Time and Material Contracts Time and Material contracts also known as Unit Price Contracts Unit price contracts are what we usually call hourly rate contracts. This type of contract is hybrid of a cost-reimbursable and fixed price contract. For ex: If the seller spend 1200 hours on project at $100 an hour, the seller will be paid $120,000 by the buyer. This type of contract is common for freelancers.

17. The main advantage of this contract type is that the seller makes money for every hour spent working on the project.

18. Mutually agreed upon total amount that a principal (client or project owner) pays to a contractor on completion of the contract, in accordance with contract terms and conditions and their subsequent modifications (if any). Also called contract sum. Common Contracts are for construction, landscaping, leasing etc. Due to the fact that a contract is an agreement to complete a certain type and amount of work, the contract price is fully paid to a contractor when they have completed the job which has been agreed upon Contract Pricing

19. Generally, contract price includes a down payment, may include a few continuing payments, and ends with a final amount paid to close the contract. A contract price is the price listed in the contract for the good or services to be received in return.

20. Based on the resources and material required, the cost for the construction is estimated. Then, the client contracts a service provider and pays a percentage of the cost of the project as the fee for the service provider. As an example, take the scenario of constructing a house. Assume that the estimate comes up to $230,000. When this project is contracted to a service provider, the client may agree to pay 30% of the total cost as the construction fee which comes up to $69,000. Percentage of Construction Fee

21. Factors may Influence the Type of Contract Selected: Type and complexity of requirement Extent of price competition Cost and price analysis Urgency of requirement or performance period Frequency of expected changes

22. Contract Type Priorities (Least to Important) CPFF Cost, Time, Performance CPAF Cost, Time, Performance CPIF Time, Performance, Cost T& M Performance, Time, Cost FPIF Time, Performance, Cost FP Cost, Time, Performance

23. Contents of the Contract The project contract should include all the things you would normally expect in a project kick off document and a few more: A clear objective and success criteria A list of roles and responsibilities and who is going to take these Details of what resources are required

24. The project scope and constraints Work Breakdown structure (which cover all the activities that you need to do in order to complete the project successfully)

25. Contracting Process Step1: Selecting a Contract Step2: Collecting the necessary information Step3: Choosing a Negotiator Step4: The contract Review Process Step5: Contract Signing

26. Conclusion Selecting the contract type is the most important step of establishing a business agreement with another party, This step determines the possible engagement risks. Therefore, companies should get into contracts where there is a minimum risk for their business. It is always a good idea to engage in fixed bids (fixed priced) whenever the project is short-termed and predictable. If the project nature is exploratory, it is always best to adopt retainer or cost plus contract types.