Assignment For: Project Management Submitted To: ABC Submitted By: XYZ On Dated: 15-Jan-13 Class:

FUUAST
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Project Management Contracts

Type of contracts:
When one outsources, one should pick up a suitable type of contract, some of which are listed below:

Lump Sum Contract Unit Price Contract Cost Plus Contract Incentive Contracts Percentage of Construction Fee Contracts

To cut short, there two major type of contracts: (i) Lump Sum Contract (Fixed Cost) and (ii) Cost Plus % returns. In the latter, there is a danger of conflict of interest. If the contractor tries to be honest and efficient, it would reduce cost and thereby its returns. On the contrary, over-costing would lead to fat returns. If the contract is modified as cost plus a fixed fee, the drawback would be eliminated. Advantages and dis-advantages of both are given below:

NATURE OF CONTRACTS

FIXED ADVANTAGES Assurance of ultimate Cost Minimum Owner's follow-up Maximum incentives for quick completion

COST-PLUS ADVANTAGES Provides maximum flexibility to owners Minimize Contractors Risk & Returns Minimizes negotiations Permits quick start and early finish

FIXED DIS-ADVANTAGES Long Negotiations Quality may not be assured May prove costly due to built-in contingencies

COST-PLUS DIS-ADVANTAGES No assurance of final cost. No incentives to minimize Time and Cost Conflict of Interest of Contractor Frequent changes suggested by the owner or staff may lead to high cost and scope change.

As part of your project or program, you will chose one type of contract over another based on multiple factors specific to your project. Lets go through each of the contract types in turn, to give you a working knowledge of each. Fixed Price or Lump Sum Contracts In this type of contract a specific price is agreed for the good or service being sold. In project terms, the buyer and seller will agree on a well-defined deliverable for a specific price. In this type of contract the bigger risk is borne by the seller. They must make sure they make a profit even given some unknowns such as increasing costs or delays in creation of the deliverable. When using this type of contract its important to have a well defined deliverable. Fixed price contracts can be catastrophic for both buyer and seller if there isnt a well defined deliverable. Firstly, often the sellers profit is eroded as they compromise to meet the buyers demands, secondly, the buyer may have to pay more for change requests when the supplier is no longer willing to compromise around what, in their eyes, appear to be changing requirements. Another type of contract you might encounter is the fixed-price plus incentive contract. Here the contract includes an incentive or bonus, typically for the early or on-time completion of the deliverable. Lump Sum Contract Basics A lump sum contract or a stipulated sum contract will require that the supplier agree to provide specified services for a stipulated or fixed price. In a lump sum contract, the owner has essentially assigned all the risk to the contractor, who in turn can be expected to ask for a higher

markup in order to take care of unforeseen contingencies. A supplier being contracted under a lump sum agreement will be responsible for the proper job execution and will provide its own means and methods to complete the work. This type of contract usually is developed by estimating labor costs, material costs, and adding a specific amount that will cover contractors overhead and profit margin. Firm-fixed-price contracts. Description. A firm-fixed-price contract provides for a price that is not subject to any adjustment on the basis of the contractors cost experience in performing the contract. This contract type places upon the contractor maximum risk and full responsibility for all costs and resulting profit or loss. It provides maximum incentive for the contractor to control costs and perform effectively and imposes a minimum administrative burden upon the contracting parties. The contracting officer may use a firm-fixed-price contract in conjunction with an award-fee incentive (see 16.404) and performance or delivery incentives (see 16.402-2 and 16.402-3) when the award fee or incentive is based solely on factors other than cost. The contract type remains firm-fixed-price when used with these incentives. Application. A firm-fixed-price contract is suitable for acquiring commercial items (see Parts 2 and 12) or for acquiring other supplies or services on the basis of reasonably definite functional or detailed specifications (see Part 11) when the contracting officer can establish fair and reasonable prices at the outset, such as when (a) There is adequate price competition; (b) There are reasonable price comparisons with prior purchases of the same or similar supplies or services made on a competitive basis or supported by valid cost or pricing data; (c) Available cost or pricing information permits realistic estimates of the probable costs of performance; or (d) Performance uncertainties can be identified and reasonable estimates of their cost impact can be made, and the contractor is willing to accept a firm fixed price representing assumption of the risks involved. Fixed Price With Redetermination Fixed-Price with Prospective Price Redetermination A fixed-price contract with prospective price redetermination provides for a firm fixed price for an initial period of contract deliveries or performance and prospective redetermination, at a stated time or times during performance, of the price for subsequent periods of performance. This type may be used in acquisitions of quantity production or services for which it is possible to negotiate a fair and reasonable firm fixed price for an initial period, but not for subsequent periods of contract performance. The

initial period should be the longest period for which it is possible to negotiate a fair and reasonable firm fixed price. Each subsequent pricing period should be at least 12 months.

Cost-Reimbursable Contracts In this type of contract all the costs that the seller incurs during the project are charged back to the buyer, and thus the seller is reimbursed costs. The costs which are allowable will be defined in the contract. In this type of contract more risk is carried by the buyer as the final cost us uncertain. If problems arise during the execution of the project then the buyer will have to spend more. The advantage of this type of contract to the buyer is that obviously scope changes can be easily made to the work being done. One problem with this type of contract is that the seller has very little incentive to be efficient and productive and complete the work quickly. It should come as no surprise that this type of contract is most often used when there is a lot of uncertainty associated with the final deliverable. There are three kinds of cost-reimbursable contracts you should understand:

Cost plus fee (CPF) or cost plus percentage of cost (CPPC): here the seller is reimbursed for allowable costs plus a fee thats calculated as a percentage of costs. Obviously, there is no incentive for the seller to complete the work quickly with this type of contract. Cost plus fixed fee (CPFF): here all allowable expenses are charged back plus a fixed fee at the end of the contract. The fixed fee is how the seller makes their profit. The aim of the fixed fee is to encourage the seller to complete the work as quickly as possible. Cost plus incentive fee (CPIF): here all allowable expenses are charged back and in addition an incentive fee for exceeding the performance criteria specified in the contract. The incentive fee is designed to encourage increased cost performance by the seller. There is the potential of both buyer and seller saving if the performance criteria is exceeded.

Time and Material (T&M) Contracts This type of contract is a cross between fixed-price and cost-reimbursable contracts. They can resemble cost-reimbursable contracts as the full cost of completing the deliverable is not know at the outset. They can resemble fixed-price contracts when unit rates are used, for example, you might pay $200 per hour for a software architect and $5000 per month for hardware. Time-and-materials (T&M) contracts are a hybrid of fixed-price and cost-reimbursement contracts. They present the highest risk to the government and lowest risk to the contractor, and

thus are the least desirable contract type for the government. T&M contracts provides for acquiring supplies or services on the basis of: * Direct labor hours at specified fixed hourly rates that include wages, overhead, general and administrative expenses, and profit * Actual cost for materials A T&M contract may be used only when it is not possible to accurately estimate the extent or duration of the work or to anticipate costs with any reasonable degree of confidence. Agencies that use this contract type include: * Defense Information Systems Agency (DISA) * Federal Transit Administration (FTA) * U.S. Department of Defense (DOD) * Other federal agencies Since DISA began using time-and-materials contracts in 1991, the agency has awarded 18 contracts with T&M provisions with an estimated total value of $1.18 billion, approximately 45 percent of the estimated value of all DISA contract awards. Labor Hour Contract.The labor hour contract is a type of T&M contract that excludes materials supplied by the contractor.

Joint Venture:
A joint venture is a contractual business undertaking between two or more parties. It is similar to a business partnership, with one key difference: a partnership generally involves an ongoing, long-term business relationship, whereas a joint venture is based on a single business transaction. Individuals or companies choose to enter joint ventures in order to share strengths, minimize risks, and increase competitive advantages in the marketplace. Joint ventures can be distinct business units (a new business entity may be created for the joint venture) or collaborations between businesses. In a collaboration, for example, a high-technology firm may contract with a manufacturer to bring its idea for a product to market; the former provides the know-how, the latter the means. All joint ventures are initiated by the parties' entering a contract or an agreement that specifies their mutual responsibilities and goals. The contract is crucial for avoiding trouble later; the parties must be specific about the intent of their joint venture as well as aware of its limitations. All joint ventures also involve certain rights and duties. The parties have a mutual right to control the enterprise, a right to share in the profits, and a duty to share in any losses incurred. Each joint venturer has a fiduciary responsibility, owes a standard of care to the other members, and has the duty to act in Good Faith in matters that concern the common interest or the

enterprise. A fiduciary responsibility is a duty to act for someone else's benefit while subordinating one's personal interests to those of the other person. A joint venture can terminate at a time specified in the contract, upon the accomplishment of its purpose, upon the death of an active member, or if a court decides that serious disagreements between the members make its continuation impractical. Example Of Joint Venture : Sony-Ericsson is a joint venture by the Japanese consumer electronics company Sony Corporation and the Swedish telecommunications company Ericsson to make mobile phones. The stated reason for this venture is to combine Sony's consumer electronics expertise with Ericsson's technological leadership in the communications sector. Both companies have stopped making their own mobile phones The Advantages & Disadvantages of Joint Ventures or Partnership Relationships A partnership is a business owned and operated by two or more partners. A joint venture is a type of partnership that has many of the same advantages and disadvantages of a general partnership. Owning and operating a partnership presents a number of advantages, such as ease of formation and the ability to collaborate with other owners. A joint venture or a partnership has a number of disadvantages in terms of potential conflicts amongst partners and lack of personal asset protection.

References: http://hafeezrm.hubpages.com/hub/Project-Management---Contracts--Outsourcing http://www.expertprogrammanagement.com/2010/02/an-introduction-to-contract-types/ http://www.allbusiness.com/glossaries/cost-plus-percentage contract/49610401.html#axzz2HwVwYeRf. http://www.legalmatch.com/law-library/article/cost-plus-fixed-fee-contracts.html http://project-management-knowledge.com/definitions/c/cost-plus-fixed-fee-cpff-contract/