Pros and Cons of Contracts

8/2/2019 Pros and Cons of Contracts

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ATTACHMENT 1TYPES OF CONTRACTS

ContractorOptions Advantages Disadvantages Relationships Comments

I. COST REIMBURSABLE (AND CONVERTIBLE

)

A. Cost Reim. +% Fee

Maximum contractingflexibility

Can fast track easier

Best for development/changing scope

Easier to insertproprietary needs

Required financialcontrols

Requires highest ownerstaffing

Many interfaces tomanage

Limited incentive bycontractor to containcost

Owner assumes allrisks

Rework is profitable forcontractor

Collaborative

Owner can substantiallyinfluence contractordecisions; assumesmore responsibility forresults

Use where marketplace is saturated withwork

Use with poorly definedscope

Use with known, trustedcontractor resources

B. Cost Reim. +

Fixed Fee

As above, but with

market place morecompetitive

Rework provides noprofit

Limited contractor

profits may invite lessstaffing (quality orquantity)

As above Use when market place

supports somecompetitive pressure

C. Cost Reim. +Incentive Fee

As above, but relatesfee to performance andprovides contractor withincentives to control

cost and schedule Allows alignment of

Owner and contractorgoals

Difficult to establishincentive goals thatdifferentiate outstandingperformance from good/

normal performance Scope changes impact

on incentives requiresmanagement andcontrol

More record keepingrequired

Contractor will pushback on item affectingtheir fee

Can results be achievedw/o incentives?

Good negotiating skillsrequired

Incentive must relate tokey project objective(never to both budgetand schedule, forexample)

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D. Cost Reim.

W/GuaranteedMaximum

Knowing top side costrisk in advance

Required scope to bemore than 80% defined

Changes must bedocumented and costnegotiated

Maintaining profitmargin will be primeobjective of contractor

Adversarial on changes Rarely of value

E. ConvertibleContract (start costreim., then convertto fixed price)

Reduces owners costrisk to definition phase.Allows opportunity tonegotiate or bidsubsequent phases

Provides time to reduceuncertainties

Can lengthen schedule

Requires skillful ownernegotiation

Engineering contractorproviding definition canbe at a disadvantage indesign bidding. (Theywill bid high on knownuncertainties)

Use becoming morefrequent

F. Unit Price w/Adjustments

Use when scope isclear except forquantities

Cost risk reduced toquantity impact ormaterial price changes

Scope & quality must becontrolled, much recordkeeping

Owner takes price risk

Collaborative Used mainly forconstruction. Can beused for equipment



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II. FIXED PRICE

A. Lump Sum Contractor assumescost risk

Less ownermanagement required

Allows competitivebidding on total scope

Incentive for contractorto furnish bestresources

Can test unknowncontractors withminimum risk

Quality and schedulerisk increased

Changes will cost morethan cost reimbursable

Complete definitionrequired up front

Bidding process willlengthen total schedule

Adversarial, contractorsprofit at risk

Good for knowntechnology projects

Difficult to definesufficiently fordevelopment activities

Early/preliminary can bedone reimbursable toprotect schedule

B. Multiple Lump Sum Shorter contract period

More accurate pricing

Contract interfacesmust be clear

Project completiondependent on slowestcontractor

Good, completeengineering packagerequired

Owner has overallproject accountability

Good choice wherelabor unknown, unions

are militant and cost ahigh priority

C. Fixed Price w/Incentives

Further reduce costwhere scope is

susceptible to lowercost option/methods

Requires changingcontract documents and

negotiating new price

Contractor will pushback on items

negatively impactingincentive amount

Best done after contractaward w/successful

bidder

D. Fixed Price w/Escalation

Contractor does nothave to provide largecontingencies to outguess inflation

Owner carries inflationrisk

Used where inflation ishigh or project startuncertain



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E. Design/Construct

Multiple Entities Contracting flexibility

More flexibility inalternate studies

More technical control

Reduced owner staffing

Owner involved ininterface management

Lose advantage ofsingle pointaccountability

Longer schedule

Construction contractornot accountable forengineering errors norengineering contractorfor construction errors

Not applicable in highchange situation

Best with high level ofproprietary work

Owner can purchaseequipment and assign

F. Design/Construct

Single Entity Single interface mgt.

Faster completion

Single contractoraccountability

Able to buy contractorsspecial knowledge

Less owner staffing

More technical relianceon contractor

Quality may be lowerthan expected

Must know constructionsite labor situation

Arms length; contractorresponsible for errors

Reduced capital cost isthe major driving force

Excellent for specialwork

Owner can purchaseequipment and assign

G. Design/Construct/Start (Turnkey)

Contractor assumes allcost and performancerisk

Provides opportunity fornew state-of-the-arttechnology

Least owner projectstaffing

Must acceptcontractors technicalsolution

Difficult to pre-specifyall performance criteria(operating cost,maintenance, cleandesign)

Loss schedule control

Owner must trustcontractor for end result

Mfg. must acceptinstallation as is ifperforming

No timely recourse ifcontractor fails

Recognize finishedinstallation might notmeet all expectation

Industry standardresult is normal

Contractor shouldprocure everything

Performance guaranteeby contractor haslimitations


Documents

Pros and Cons of Contracts