W2_Mervyn Ajimmy_Selecting a Contracting Strategy

1.      Problem Recognition, Definition and Evaluation

This week, I thought about analysing the contracting strategy that needs to be adopted for a running contract that requires an early replacement. An early replacement was considered due to performance issues with the contractor.

The present pricing structure is purely unit rates; the expectation is to come up with a contracting strategy that will stimulate improved and continuous performance.

The contract will also aim to provide financial support to the contractor in meeting the Nigerian Content Development (NCD) target and to also increase local resources and in-country capabilities.

2.      Alternatives of the contract type

There are basically 5 (five) major types of contracts which are used in the industry may be with some variants:

1.                  Unit Price Contract

2.                  Cost Plus Fee Contract

3.                  Lump Sum Contract

4.                  Incentive Contracts

3.      The outcomes for each contract type

 a.    The possibility outcomes if Unit Price Contract is adopted;

Advantage: Owner pays for only measured work and Scope (Pay as you go), better cost management and easier benchmarking.

Disadvantage: Delay in delivery, final cost not known at outset since bills of quantities at it time are only estimates and additional site staff needed to measure, control, and report on units completed.

 b.     The possibility outcomes if Cost Plus Fee Contract is adopted;

Advantage: Set a contract early with little negotiation. Selection of supplier is based on rates.

Work definition is unimportant to contract. Field work may be started before the plans and specifications are complete

Disadvantage: Owner assumes all of the risk. The contractor is encouraged to use inefficient (time wasting) labor and expensive materials. Owner has to manage all coordination issues.

Owner carries cost of poor quality. The contractor cannot afford delays that will keep the job going longer than expected.

c.     The possibility outcomes if Lump Sum Contract is adopted;

Advantage: Minimum Risk for the owner. Time involved for preparing the plans and specifications is considerably longer, Contract is based on agreed rates and Minimum Owner supervision related to quality and schedule.

Disadvantage: Time involved for preparing the plans and specifications is considerably longer.

Because price determines who is awarded the contract, the quality of work will be poor. Difficult to make changes            

 d.    The possibility outcomes if Incentive Contracts is adopted;

Advantage: Used to Encourage More Effective Work From Contractors. When Appropriately Applied, Contractors are Paid Based on Their Handling of Cost, Schedule, and Their Performance. Good Business Practice. Owner & Contractor share financial risk and have mutual incentive for possible saving

Disadvantage: Opportunities are given to Contractors to Receive unearned Fees, Require complete auditing by owner’ staff

4.      Selection of criteria.

Selecting the contract type

In order to determine what kind of contract should be used there are some criteria must be considered: Planning, Cost Mgt, Payment, Quality Control, Cost Recovery, Supervision, Resourcing, Training and Meet NCD in relation to Production impact, Cost Exposure and constant changing priorities.

5.      Analysis for the alternatives

By using Nondimensional scaling from Chapter 14. Decision Making Considering Multiattributes; Engineering Economy Book:

Attribute	Unit Price	Lump Sum	Cost Plus	Incentive Contract
Planning	Bad	Good	Good	Good
Cost Mgt	Average	Average	Average	Good
Payment	Good	Average	Good	Good
Quality Control	Average	Average	Average	Good
Cost Recovery	Good	Bad	Average	Average
Supervision	Average	Bad	Average	Good
Resourcing	Bad	Bad	Average	Good
Training	Bad	Bad	Average	Good
Meet NCD	Bad	Bad	Average	Good

  

6.      Select the preferred alternative

Base from the above, Incentive Contract becomes best choice for this replacement contract. However, the incentive contract to be adopted will come with some variant, which would be further analyzed. The variant could in the form of Incentive with Fixed Fee or Guaranteed Minimum work.

7.      Performance Monitoring & Post Evaluation of Result

The new contract will make provision for the inclusion of incentive on performance based system, especially on the major attributes outlined above.

Reference:

Project Contract Types

http://www.tutorialspoint.com/management_concepts/project_contract_types.htm 

AACE International Education Board. (2006). Investment decision making. In J.K.Hollmann (Ed), Total cost management framework – A process for applying the skills & knowledge of cost engineering (1st ed) (chapter 3.3.1.1) (pp.55-56). Morgantown, West Virginia: AACE International

The Engineering Tool Box:

http://www.engineeringtoolbox.com/contract-types-d_925.html

Engineering Economy

William G. Sullivan, Engineering Economy, Fifteenth Edition, 2012

Factors in Selecting Contract Types

http://nawctsd.navair.navy.mil/Resources/Library/Acqguide/selecting-contract-types.htm