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Types of Contracts, Ownership, etc.

Module 05-03

Follows Halpin Chapter 5Updated: March 11, 2003

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RAT #05-03-1 Take out a sheet of paper, put you

name on it, and … … List the three types of ownership

and 1 advantage of each.

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Purpose: To introduce students to the

various types of construction and consulting contracts.

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Learning Objectives: Students should be able to list,

briefly describe, and state the advantages and disadvantages of each of the various types of construction and consulting contracts.

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Contract Environment Contract: A set of legally binding

promises. Contract Law: What are the

promises? Who made them? Are they fair to all parties? Are they Legal?

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Contracting/Purchasing Strategy

Low $$ - High TechNegotiate carefully for best technology.

High $$ - High Tech Negotiate carefully for best price and technology

Low $$ - Low TechCommodity purchase, like nails at Home Depot

High $$ - Low Tech Negotiate

carefully for best price.

Increasing Dollar Cost -- >>>

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Basic Types of Construction or Consulting Contracts

Lump Sum or Fixed Pricehigh reward, high risk

Time and Materials (T&M)high reward, low risk, low volume

CPFF with Unit Prices (cost plus fixed fee) low reward, low risk (unbalanced bids)

CPFF with Labor Rates (lots of variations) low reward, low risk

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Lump Sum or Fixed Price A fixed reward for a well specified

object or product. (40%-100% profit is common)

Used to contract for cars, existing houses, equipment, etc.

Risk is based upon the variation in specificity of the object or product.

A monopoly business can be a “license to print money.” (Microsoft, for example)

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Time and Materials Fixed rates for an unspecified

amount of labor and materials. Used for consulting, expert

witnesses, etc. Low volume, low risk, high profit %

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CPFF with Unit Prices for Physical Objects.

Most construction contracts are this type. Cost plus fixed (or % fee) based upon unit

prices for a specified quantity of units. Low risk, low reward, high volume. Risk is based upon variation in quantities,

design errors, and construction sequence. Unbalanced bids can lead to increased

profits.

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CPFF with Unit Rates for Labor and Other Direct

Costs Most consulting and or research

contracts are this type. Cost plus fixed (or percentage fee)

based upon unit prices for a specified quantity of units.

Most non-construction, government contracting falls into this pattern.

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Types of Purchase Arrangements in Texas

Negotiated Contracts – TXDoT Design and Other Consultants

Open Bidding – Best of Responsible – TXDoT construction, TAMU buildings

Restricted Bidding – Best of Pre-qualified – Federal $$’s pass-through contracts.

DIR Cooperative Contract – One contract, multiple buyers (agencies), single product.

GSC Catalog – Multiple contracts, multiple products, single source, multiple buyers.

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Negotiated Contracts, In General

May be any of the 4-basic types. Negotiated Design-Build contracts

are common practice in the Private Sector.

Negotiated Partnering is common in Private Sector “fast track” work. TXU Mining, Mobile/Oceaneering Project

Difficult in the Public Sector because of perceived conflicts of interest.

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Construction Management (CM) Contracts

Used to insulate Owner from “hassle” and risk.

If the Owner lacks construction experience and / or this is a 1-time venture, or there are multiple Owners, this is the preferred method.

They are normally, negotiated CPFF or restricted (short list) bid CPFF with a time limit of (normally) 6 to 8 years.

If products are fixed and $$’s are limited, this can be risky for the CM and Owner alike.

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PAT #5.3.2 Take out a sheet of paper, write

your name and team #. As individuals, list the basic

contract types as described above.

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Summary of Contracting Issues (from the Owner’s

Perspective) Take the work to be done and the general

situation: construction, consulting … Determine ownership structure:

proprietorship, partnership, or corporation or public sector.

Determine appropriate type of contract: CPFF, Fixed Price, T & M.

Determine contracting process: negotiated, open bid, or restricted bid.

(Reduce Risk and Cost to the extent possible.)

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Summary of Contracting Issues (from the Other

Perspective) You generally have to deal with what is

offered you but you can make counter offers. Offer a Fixed Price in lieu of CPFF.

You can restructure your organization to meet the challenge: A partnership of corporations?

You can structure your bid to your advantage.(Reduce risk and increase Profit to the extent

possible.)

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Assessment Take out a sheet of paper and

indicate the “muddiest” topic.