W10_Afra_Contract Type for Project

1.      Problem Recognition

There are many diverse types of contracts that exist to support and protect business dealings. Contracts are defined as a written agreement between two or more parties specifying the conditions of which the agreement is based on. The need for contracts are essential to protecting business transactions, since the conditions of the contract can be sustained in the court of law. All contracts outline the promises of each party along with specific remedies that would take place if a contract is breached.

Usually, the company use lump sum or Firm Fixed Price (FFP) contract type. Using Contract History from last 5 projects (assumption), scope accuracy less than 80%.

No	Project	Estimated Cost ($)	Actual Cost ($)	Actual Cost vs Estimated Cost (%)	Accuracy (%)
1	Project A	28,000,000,00	31,520,000,00	112%	-12%
2	Project B	22,000,000,15	28,630,000,00	130%	-30%
3	Project C	15,000,000,00	19,000,000,00	127%	-27%
4	Project D	87,250,000,00	90,000,000,00	103%	-3%
5	Project E	83,000,000,00	150,000,000,00	181%	-81%

Table 1: Project Profile

(Note: The Actual Cost vs Estimated Cost (%) and Accuracy (%) are rounded to first decimal point)

The purpose of this blog is to identify the best contract type that will enhance the accuracy and efficiency of the projects.

2.      Feasible alternatives

There are four common types of contracts which is used in the engineering and construction industry:

1.       Lump Sum Contract

2.       Unit Price Contract

3.       Cost Plus Contract

4.       Incentive Contract

Figure 1: Types of Contracts

3.      Development of the outcome of Alternative

In this section, will have a comparison between the four types of contracts in their advantage and disadvantage. Table 2 shows the comparison.

Type	Advantage	Disadvantage
Lump Sum Contract	§ Minimum Risk for the    owner. § Time involved for preparing the plans and specifications is considerably longer. § Contract is based on agreed rates. § Minimum Owner supervision related to quality and schedule. § Contractor will assign best personal. § Contractor selection is easy.	§ Time involved for preparing the plans and specifications is considerably longer. § Because price determines who is awarded the contract, the quality of work will be poor. § Difficult to make changes. § Pose greater risk to contractor § The overall construction completion could take longer than other contractual alternatives.
Unit Price Contract	§ Owner pays for only measured work § Scope and quantities easily adjustable. § Contractor selection easier. § It increases the speed of the project as the contractor wants to finish as many units of work ASAP.	§ Negotiation of ‘unit’ rates can be very time consuming § Final cost not known at outset since bills of quantities at bit time are only estimates § Additional site staff needed to measure, control, and report on units completed
Cost Plus Contract	§ Set a contract early with little negotiation. § Selection of supplier is based on rates. § Work definition is unimportant to contract. § Field work may be started before the plans and specifications are complete	§ Owner assumes all of the risk. § The contractor is encouraged to use inefficient (time wasting) labor and expensive materials. § Owner has to manage all coordination issues. § Owner carries cost of poor quality. § the contractor cannot afford delays that will keep the job going longer than expected.
Incentive Contract	§ Used to Encourage More Effective Work from Contractors. § When Appropriately Applied, Contractors are Paid Based on Their Handling of Cost, Schedule, and Their Performance § Good Business Practice § Owner & Contractor share financial risk and have mutual incentive for possible saving	§ Opportunities are Given to Contractors to Receive Unearned Fees § Require complete auditing by owner’ staff. § More supervision required

Table 2: Comparison between contracts types

4.      Selection Criteria

In order to determine what kind of contract should be used there are some criteria must be considered:

·         Flexibility for additional or reduction of scope

·         Quality of the services

·         Detail spec, volume and scope of work requirement

·         Owner financial risk

·         Owner supervision

·         Price negotiation

5.      Analysis and comparison of the Alternative

In this blog, I will analyze and compare the alternatives by using compensatory models. The attributes of the contract type as shown in table 3 below.

Attribute	Lump Sum	Unit Price	Cost Plus	Incentive
Flexibility for additional or reduction of scope	Difficult	Easy	Easy	Easy
Quality of the services	Poor	Fair	Fair	Fair
Detail spec, volume and scope of work requirement	High	Low	Low	Low
Owner financial risk	Minimum	Maximum	Maximum	Share
Owner supervision	Minimum	Maximum	Maximum	Share
Price negotiation	Harder	Harder	Easy	Easy

Table 3: Attribute of Contract Type

The data in the table above are driven from advantage and disadvantage matrix. 

Next step is to rank the attribute using non-dimensional scaling. Table 4 below shows the ranking clearly.

Attribute	Value	Relative Rank	Dimensional value
Flexibility for additional or reduction of scope	Difficult	1	0.00
	Easy	2	1.00
Quality of the services	Good	3	1.00
	Fair	2	0.50
	Poor	1	0.00
Detail spec, volume and scope of work requirement	High	1	1.00
	Low	2	1.00
Owner financial risk	Minimum	3	1.00
	Share	2	0.50
	Maximum	1	0.00
Owner supervision	Minimum	3	1.00
	Share	2	0.50
	Maximum	1	0.00
Price negotiation	Harder	1	0.00
	Easy	2	1.00

Table 4: Non-Dimensional Scaling

After setting relative rank for each attribute, further is to conduct additive weighting for all alternatives as shown in table 3.

Attribute	Relative Rank	Normalized Weight (a)	Lump Sum		Unit Price		Cost Plus		Incentive
			b	a*b	b	a*b	b	a*b	b	a*b
Flexibility for additional or reduction of scope	6	0.29	0	0	0.5	0.145	0.5	0.145	1	0.29
Quality of the services	5	0.24	0	0	1	0.24	1	0.24	1	0.24
Detail spec, volume and scope of work requirement	4	0.19	1	0.19	0	0	0	0	0	0
Owner financial risk	3	0.14	1	0.14	0	0	0	0	0	0
Owner supervision	2	0.10	0	0	1	0.1	1	0.1	1	0.1
Price negotiation	1	0.04	0	0	0	0	1	0.4	1	0.04
		1.00		0.33		0.49		0.53		0.67

Table 5: Weighting for Alternatives

6.      Selection of the preferred Alternative

Base from above calculation Incentive Contracts become the best alternatives to replace FFP contract type for our project.

7.      Performance Monitoring and the Post Evaluation of result

Management should consider using incentive contract type as the best alternatives to replace FFP contract type to avoid over budget project and monitoring should be conducted during the project contract to ensure that all requirements are met.

References: 

1.       Types Of Contracts - Paralegal | Laws.com. (2018). Paralegal.laws.com. Retrieved 4 January 2018, from https://paralegal.laws.com/contract-law-assistance/types-of-contracts

2.       Lump Sum Construction Contract - Advantages and Disadvantages. (2018). The Constructor. Retrieved 4 January 2018, from https://theconstructor.org/construction/lump-sum-construction-contract-advantages-disadvantages/14956/

3.       Unit price contract advantages - Project Management Questions. (2018). Projectmanagementquestions.com. Retrieved 4 January 2018, from http://www.projectmanagementquestions.com/2951/unit-price-contract-advantages

4.       Cost-Plus Contract: Advantages, Disadvantages and Calculations. (2018). Your Article Library. Retrieved 4 January 2018, from http://www.yourarticlelibrary.com/cost-accounting/contract-costing/cost-plus-contract-advantages-disadvantages-and-calculations/58170

5.       W2_Afra_Best Alternative using AHP. (2018). Pmpopwp.blogspot.com. Retrieved 4 January 2018, from http://pmpopwp.blogspot.com/2017/11/w2afrabest-alternative-using-ahp.html