PROJ 410 Week 2 DQ 1 Contract Pricing Options - Graded An A

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Assume that you have made the final payment on a one-acre residential lot that you purchased years ago to build your retirement home. You are now ready to build your dream home. This will be your ongo... ing project for the next couple of years. Which contract structure (fixed price, unit price, reimbursable) do you think that you would use to proceed with your project? Explain your choice. For building a house, there are different scenarios. 1. Fixed price: This is probably the easiest choice. This house = this cost 2. Unit price: This is is good for cost savings on nicer homes, especially if you have any home building skills yourself or if you have connections with material stores, appliance suppliers, etc. You can have the builder build a bigger home but not do a lot of the upgrades or landscaping, as you could do those yourself. For example, the woodwork or decking, 3. Reimbursable: This is risky. If the builder agrees to upcharge 10% on the supplies plus time, you don't know where he is buying the materials from and he may not be getting the best deal. In fixed price contract, the engineer and/or contractor agrees to do a described and specified project for a fixed price. A Fixed Fee is suitable if the scope and schedule of the project are sufficiently defined to estimate project costs. Unit Price Contract is based on estimated quantities of items included in the project and their unit prices. The final price of the project is dependent on the quantities needed to carry out the work. In general this contract is only suitable for construction and supplier projects where the different types of items, but not their numbers, can be accurately identified in the contract documents. Reimbursable Contract provides the initially negotiated fee to be adjusted later by a formula based on the relationship of total allowable costs to total target costs. This type of contract specifies a target cost, a target fee, minimum and maximum fees, and a fee adjustment formula. After project performance, the fee payable to the contractor is determined in accordance with the formula. With reimbursable contracts, contractors are paid for the work accomplished. Reimbursable contracts are effective when the scope of work is ill-defined. Under reimbursable contracts, uncertainty in project scope is born by the agency administering the contract. Reimbursable contracts are generally the most expensive to administer and offer relatively less incentive for contractors to be cost-efficient. On the other hand, cost-reimbursable contracts offer significant flexibility for responding to conditions that are unexpected. In this case, since I am planning to build a dream home, I might change the layout and basic architecture of the house as the project execution takes place. Since, I will be monitoring my home project on daily/weekly basis; it makes more sense for me to go for reimbursable project. I also want to build my home project at my own pace giving enough attention to minute details and so I will be personally supervising each and every aspect of this project. So, I would like to keep this project as much flexible as possible. For this reason, I think that keeping the contract structure "Reimbursable" would be beneficial for me. This study source was downloaded by 100000867552271 from CourseHero.com on 05-25-2023 14:28:37 GMT -05:00 What are the four basic contract pricing options? Basic Contract pricing options are: Fixed Price Contract Unit Price Contract Cost Plus Contract Reimbursement Contract Percentage of Construction Fee Contracts The four basic contract pricing options are: o Fixed Price – this is where the goods or services have a fixed price o Unit Price - this pricing is priced per unit and is adequately defined o Cost reimbursable - this is paid per cost and reimbursed accordingly and is not well defined. o Time and materials - this is paid for as labor and materials similar to a cost plus and unit plus contract respectively. I would say that the fixed rate contract would be the best structure. Once you have your home spec'd out and the bids in place, you can go to the bank and get a construction loan which is basically a fixed mortgage but the funds are distributed to vendors as work is completed. For example, if the total loan amount was $200,000 this money would be put in escrow. When the foundation was completed, you would pay the contractor's invoice out of the $200,000. This is how we did it because we had individual contractors. If you have one vendor who does the subcontracting then you would just pay the one vendor the deliverable amounts as part of the project are finished. What are five options of cost reimbursable contracts? The five are as follows... 1. Cost Plus Percentage Fee - Sellers actual cost plus percent of total project cost. 2. Cost plus Fixed Fee - Sellers cost plus fixed fee based project cost estimate This study source was downloaded by 100000867552271 from CourseHero.com on 05-25-2023 14:28:37 GMT -05:00 3. Cost Plus Incentive Fee - Sellers cost plus incentive fee if contractor meets bonus criteria 4. Cost plus Sharing Agreement - 5. Cost Plus Guaranteed Maximum - Same as above There are five types of Cost Reimbursable contracts. They are: Cost Contracts Cost-Sharing Contracts Cost-Plus-Incentive-Fee Contracts Cost-Plus-Award-Fee Contracts Cost-Plus-Fixed-Fee Contracts. Cost-reimbursement types of contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract. These contracts establish an estimate of total cost for the purpose of obligating funds and establishing a ceiling that the contractor may not exceed (except at its own risk) without the approval of the contracting officer. References: http://www.concompass.com/costreimbursable.htm In what situation a company is best to use a unit price contract? In what situation, a company is best to use cost-plus-percentage-fee contract? A unit price contract is one in which the contractor bills the customer by the unit of work he has done. Units could be hourly rate, square footage, or any physical quantity of anything agreed to. A company that is looking for the cheapest person to do an hourly job could use the unit price to easily decide on whom the cheapest will be or the cheapest they will pay. Or, if a company wants a large amount of anything removed in a certain amount of time that will be billed per unit they could benefit from unit price contract because contractors tend to do the job faster to complete as many units as possible for a greater pay. It allows the company to relate the cost of the project to tangible and measurable results. However the quality of the work may not be so good. Cost plus percentage fee reimburses for costs, and then adds a percentage of costs on top. This kind of contract to me personally is totally advantageous to the contractor because he is double dipping the contract. The more the contract cost, the more is his fee. It is almost impossible to keep the cost of any contract down in this manner except in fixed situations. This study source was downloaded by 100000867552271 from CourseHero.com on 05-25-2023 14:28:37 GMT -05:00 A company may best use cost plus percentage fee contract if their only or main concern is about the quality of the work being done or when the project involves a certain amount of strict specifications or accuracy and they want it being done right to the tee. When using the unit price contract, one situation that comes to mind is my company's situation where in a bank setting we have to supply branches with supplies. Every month we do not know how many supplies are needed because we cannot tell how many supplies are used. So the price contract with our vendors is the ideal contract due to the way we can purchase supplies as needed and only pay for what each branch needs thus we are not over paying or over ordering. The situation where a cost-plus contract would work would be were a company would need a marketing campaign for a new product and the outsourced company would be paid on the amount of materials and labor used during the duration of the campaign. On top of that the outsourced company would make a profit in the form of either a percentage of the actual costs or a flat fee at the end of the project. A company is best to use a unit price contract is when the probable quantity of units is known but the total quantities are uncertain. A company is best to use cost-plus-percentage-fee contract when the scope of the contract is not well defined. What are the differences among a fixed price contract, a time and materials contract, and a reimbursable contract in terms of how well defined a BPO contract needs to be relative to price, scope and schedule prior to the commencement of any work/services? The difference between fixed price, time and materials, and reimbursable contract with respect to BPO is that with BPO the outsourcing vendor assumes responsibility for, and manages the contract on an ongoing basis including all or part of a customer's business processes, along with the applicable scope, performance requirements, and compensation schedules. Whereas with fixed price, time and materials, and reimbursable, the full value of the contract is not known at the time the contract is awarded. Also with fixed price the purchaser pays the seller a fixed total amount; Time and material both parties agree to predetermined unit rates in advance; Reimbursable does not rely on the price or scope of the contract. Fixed price contracts, also known as a "Flat Price" contract, transfers all price risk and opportunity from the buyer to the seller on the date of the trade. The price is fixed and if the estimated costs were not correct, the seller will take a loss. For the fixed price contract, the scope and schedule need to be well defined and fully understood by the seller to get an accurate price. If the buyer requests any changes, the seller should not accept them without asking for additional funding and/or a schedule extension. The seller must deliver the services/products that were offered before he can quit the project. Example for fixed price contract - you ask a fellow to come to your house to put up a 6-foot chain link fence around 3 sides of the back yard, measuring a total of 450 feet. You agree on the price for this work. He puts up the fence and you pay him the fixed fee (just make sure there are no changes to the type of fence, the length of the area you will be fencing, etc.) This study source was downloaded by 100000867552271 from CourseHero.com on 05-25-2023 14:28:37 GMT -05:00 Time and materials can be a way of reimbursing jobs that aren't well defined. Most field service contracts are time and material contracts. The incentive for making such a contract is for the customer to lock in usually discounted labor and materials pricing. The incentive for the vendor is to have a captive customer. The challenge with time and materials is that the customer not only has to keep its eye on the deliverables, it also has to keep its eye on the vendor's costs. Example for time and materials contract - A company hire a painter to paint the building at $30 an hour. The company would buy the paint for the painter. The painter just need to come to the company, punch the time card, and paint the building. The company will pay the service fee when the job is done. Time and materials and reimbursable puts the risk on the buyer. The seller can stop once the ceiling is reached. Usually the contract requires a 75% or 85% letter to notify the buyer that the seller is close to the ceiling. The letter will state whether the project can be completed within the remaining ceiling. The scope needs to be understood by both parties to ensure the price and schedule is achievable. However, the seller can stop once the ceiling is reached and the buyer will have to come up with more money if all the product/ services were not delivered. Example for reimbursable contract - you hire a carpenter to create new cabinets in your kitchen. You know this guy is really good, and you want to be able to make changes as you go along. So the carpenter says that he will charge you for all materials and supplies at cost, and then you pay him $75 per hour for every hour he works. The risk: there is really no motivation on his part to work as fast as he can, BUT you have the flexibility to make any changes to the scope of the work as you go along. Class, do you feel the length of the contract also has some influence on the contract type you choose? Why or why not? Varying time frames would definitely provide the need for different types of contracts; realistically some contract type provides a different set of characteristics. Typically longer contract have much more complicated project management /contract management aspects, while those involving shorter time frames could be much more simple. The length of the contract does have influence on the contract type. If you have a well-defined scope, with a very long contract period, you can use a fixed fee contract. However, if you don't have a well-defined scope which means your contract could end up with a very long contract period, then you should probably use time and materials and reimbursable contracts that do not require well- defined scope of work and contract terms at the time of bidding. This study source was downloaded by 100000867552271 from CourseHero.com on 05-25-2023 14:28:37 GMT -05:00 What are the challenges for an owner in tracking a reimbursable contract? The biggest challenge would be tracking labor for the projects and the materials used. You will need to know who is doing what and how long it is taking in each project. Since you are paying for time, the longer it takes to complete the more it will cost he buyer, the same will apply to the materials purchased. You need to track if the correct amount is being purchased or is there too much material on hand. Some of the challenges in tracking reimbursable contract: • The cost of the contract are too uncertain and risky for the buyer • Seller is less motivated to keep the cost low • the buyer is able to change the scope easily • The contractor can legally stop the work when all the contract money is spent Gives the seller an advantage by protecting their profits The biggest challenge that the customer encountered is the validity of the expenses that are being billed for reimbursement. Some of the contracts have allowed for reimbursement all expenses for most staff members and that can range from breakfast at Burger King to dry cleaning. It makes you wonder how much of them are really project or work related. When does a contract manager prefer a fixed fee contract over a reimbursable contract (or vice versa)? Fixed fee contracts require greater detail to project scope and requirements. The budgeting is set so there are no real risks in overspending. On the other hand, in the reimbursable type contracts, you need to worry about both budget and controlling scope. The reimbursable contract is attractive because it is flexible. When a project scope is creeping, you don’t need to re-write a new contract. However, as a manager, you need to ensure you control the scope so that you are not paying for requirements that do not add value to the project. How many companies do you think go through outlining their business objectives, and then use these to guide the selection of a contract structure, rather than letting financial objectives and risk factors alone determine the decision? This study source was downloaded by 100000867552271 from CourseHero.com on 05-25-2023 14:28:37 GMT -05:00 A great company will thoroughly outline its business objectives and its business practices before outsourcing. A good company realizes that, by outsourcing, it can often increase the number of jobs it is hiring for domestically or locally. There was a great article in Business Week about when to outsource, when not, and the pros and cons of doing so. The trick is to know what you're outsourcing, why you're outsourcing it, and what you expect to gain from it. In many cases the savings in general labor and other production costs are high but still not what you should do if the hit to your customer service means lost or non-returning sales. If your company decided to make you a manager for your division, but began outsourcing all the personnel that work beneath you, which contract type would you recommend they implement? Time and materials contract and reimbursable contract would be better in this situation. Time and materials contract and reimbursable contract are the least defined and are set as a pay as you go type of contract. In these, the client can make changes as the project develops. This leaves more freedom for the client but can be a hassle for the vendor. The hassles the vendor could experience is the maintaining the proper manpower on the job site that have the necessary skills to perform the job on-hand. There are times when the vendor may have multiple jobs going on and have a specific skilled individual at another job site. In order to adhere to the client's changes in job scope, the vendor may have to pull that individual off of another job to suffice the client. This could turn the vendor against the client especially if there are many changes. What are the key contract issues? Pick one of them and elaborate on it. Pricing is one of the key contract issues. All business endeavors are centered on making the most profit for a product or service. Most of the time, contracts are awarded to the proposed lowest bidder. This does not necessarily save money if the lowest bidder has problems and need additional funds to complete a project or for fill the obligations of a contract. Measuring of performance is another key contract issue. This is how the customer ensures that the vendor is performing up to the contracted goals. Some of the key issues of measuring performance are: response times, delivery requirements, document requirements, customer satisfaction, performance improvement, cost control, etc. The fixed fee contract requires that you have a well-defined scope of work and detailed out contract terms prior to issuing the RFP, otherwise there is no basis for vendors/bidders to submit bids/proposals. The benefit of having a well defined scope and contract terms becomes evident as you are administering the contract. Typically, there are less stringent contract management requirements (I said less stringent, I did not say that it avoids the need for good contract management). Invoices are paid on a percent complete basis, and at the end of the day, the scope clearly states what needs to be delivered for the vendor/bidder to receive his/her full compensation. The time and materials and reimbursable contracts do not require scope of work and contract terms at the time of bidding. In addition, much greater flexibility relative to the fixed-fee structure is provided to the Owner should he/she want to adjust, revise, amend or create the scope of work as the project matures. In this type of contract, you pay the vendor for the goods and services he/she provides as they are provided. However, you as the Owner need to be abreast on what goods and This study source was downloaded by 100000867552271 from CourseHero.com on 05-25-2023 14:28:37 GMT -05:00 services he/she provides as they are provided, when, and how much of these were provided. You also need to verify that the cost being invoiced is adequate and reasonable. A lot of contract management oversight is required. This study source was downloaded by 100000867552271 from CourseHero.com on 05-25-2023 14:28:37 GMT -05:00 [Show More]

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