Contract in Project Management

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Contract in Project

Management

College of Engineering


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What inside ?!

Definition

Elements of valid contract

Issues related to contract in terms of

money (price and cost)

Types of contracts

What best type of contract?!


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Set the boundries

Contracts usually (in the market) include theagreements as well as the general

conditions; technical specifications (codes

and standards requirements); special

conditions; plans

But we will focus only on the agreement!

Inside this presentation we will use theterms of ( owner and contractor);

Owner may = buyer

Contractor may = seller, provider (vendor)


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Introduction

Construction projects involve anintegrated work of various partiessuch as;

-Owner (public or private)-Designer firm (orgnization)-Contractor (and its sub-contractors)-Project management team-etc.., (if there is heavy materials that

should be delivered,...)

-So there should be an Agreement ora special form that establish the basic

way of relationship of those parties.


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It is the

Contract


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Definition:

Contracts are the binding agreementbetween the parties to exchange somethingof value.

Contracts are generally written.

The contract helps to align the interests ofthe Owner and the contractor (provider).


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+

+ +Differing Interests

Contract

Owner/contractorRelationship


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Contract relationships

The most common contract relationshipscreated by modern construction projectsare:The owner and contractor(s)The owner and design professional

The contractor and sub-contractor(s)

If there is a construction managementteam is hired, then the relationship

between the owner and contractor will beindirect!.


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Elements of validContract

Competent parties

Offer and acceptance

Reasonable certainty of terms Proper subject matter

consideration


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Competent parties

Legal age

With appropriate authority

Mentally competent


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Offer and acceptance

Anything said or done that

shows a willingness to

exchange value.

Offers and acceptances maybe:

Written

Spoken (with limitations)

Demonstrated through action


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Both parties must receive

something:

Financial or non-financial

Directly or indirectly Also called Exchange of value

Consideration


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Since the issue that relateTo the contracts is the

pricing and cost

We will introduce this topicin detail


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price and cost are not the same:

- owners cost is contractors price- contractors price is not contractors cost

How do we end up in court?

Agree to an unreasonable priceWrong type of contract


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What is a Reasonable Price?

Sellers Estimate

Buyers Estimate

Reasonable

Price

Higher profit

Lower cost

??

??


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Ensuring aReasonable Price

Use independent, pre-bid estimates to

aid in evaluating proposals.

Use Value Engineering to reduce costwithout reducing functionality.

Reject bids that are too low:

Less than 80% of second lowest bid


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Types of Contracts

Contracts

Price-BasedContracts

Cost-BasedContracts

HybridContracts


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Price-based contracts

Firm fixed price:

Seller agrees to deliver thedefined scope for a set price

Also called lump sum

Unit price:

Set price per unit of product

or service

Widely used in construction

O i O i O i O iO i O i


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Firm-fixed contracts(lump sum contract(

Advantages:

Better budget control

Seller assumes most cost risk

Fewer staff needed to monitor andmanage

Disadvantages:

More effort needed to define scope

Changes can be expensive

Seller may compromise on quality

Owner-view Owner-view Owner-view Owner-vieww Owner-view Owner-view

t t i C t t i C t t i C t t i C t t i


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tractor-view.. Contractor-view.. Contractor-view.. Contractor-view.. Contractor-view..

Firm-fixed contracts(lump sum contract(

Advantages:

Higher profit potential

Limited day-to-day buyer oversight

Disadvantages:

Higher loss potential

Cost of proposal preparation


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Unit Price Contracts

Owner provides detailed list what

is needed:

Items

Quantities

Contractor provides unit price for

each item.

Quantities may vary, but usually

only within defined range.

tractor ie Contractor ie Contractor ie Contractor ie Contractor ie


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Unit Price Contracts


Advantages:

More insight into sellers pricing

Quantity variations easy to

process

Disadvantages:

Effort required to develop item

list and quantities

Missing items can generate

claims


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Cost-Based Contracts

The amount that the Owner pays isdriven by the actual costs incurred

by the contractor:

Used mostly in defense sector

Used when scope is difficult to

define

Three main types:

Cost plus fixed fee (CPFF)

Cost plus incentive fee (CPIF)

Fixed price incentive fee (FPIF)

tractor view Contractor view Contractor view Contractor view Contractor view


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Cost-Based Contracts

Advantages:

Less effort needed to define scope

More sellers likely to be interested

Easier to get changes accepted

Disadvantages:

Limited control over total cost

Can be difficult to agree on indirect

cost rates



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Hybrid Contracts

Time and materials (T&M): Labor charged at hourly rate(s)

Materials charged at cost plus a

percent for administrative overhead

Time and materials, not to exceed:

Seller stops work once limit has beenreached


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What best contract?!

Detailed requirements = price-based

Many able vendors = price-based

Urgent = hybrid

Complex requirements = cost-based

High value contract = cost-based


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conclusion

The contract should be preparedvery well to avoid problems, exactlyas the proverb say:

The cost of prevention is alwaysless than the cost of the cureto make everything between the owner andcontractor very clear.

Pay effort in the beginning and savemoney, relationship, and time later bthe establish of proper Contract!


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Questions ?!

Thank you

Documents

Contract in Project Management