W3_Doyin_Incentive Contracting

W3_Doyin_Contracting Incentives.

1. Problem Recognition, Definition and Evaluation:

‘’Incentive Contracting and Project Management in the Oil and Gas Industry of Nigeria, the Contractors Perspective’’

The Objective of the Oil and Gas Companies in Nigeria is to create a cooperative environment. Contract awards and execution of Projects are methodologies that are employed by these companies to achieve their development objectives.  The objective of Contracts should be producing a cooperative organization, aligning the contractors' objectives with the owners.

In the Nigerian oil and gas industry, there are lots of cost overruns due to non compliant with the scheduled date of completion in all of the executed projects .This impacts negatively on the Contractor. For a well defined work activity break down structured project, the longer a project takes the thinner the profit margin and the more resources will be employed by the Contractor.

More also, Nigeria been a developing Nation, Financial resources are scarce for project execution. Contractors access funds at very high interest rates which impacts negatively on the profit margins and overall delivery of the contractor.

2. Development of Feasible Alternatives.

In Project Management, Incentive Contracting is basically divided into two .

·         The Cost  plus Incentive Contract.

·         The Fixed Price Incentive Contract.

3. Development of the outcomes and cash flows for each alternatives.

Using Force Field Analysis,

A

Forces for Change 1.Fee is tied to the manner in which the contractor performs as measured against one or more target 2. The Contractor will be motivated to do those things needed to improve contract performance. 3.Reduction in Cost of the Project 4. Reduction in Completion Time. The Contractor’s risk is very minimal TOTAL

Score 5 3 5 5 2 20

Change Proposal The Cost Plus Incentive

Forces Against Change. 1.High Cost Overruns 2. Delay in the completion time. TOTAL

Score 5 5 10

B

Force for Change 1 .Features a fixed ceiling cost. 2.Contractor must take full responsibility    Of the cost overruns. Total

Score 5 5 10

Change Proposal The fixed Price Incentive

Forces Against Change Projects completions are delayed. Total

Score 5 5

4. Selection of Criteria.

 In Force Field Analysis the total forces for change in the Cost plus Incentive is the highest which is 20. Therefore coming from the Contractor’s Perspective, the Cost plus Incentive Contracting will be selected.

5.  Analysis and comparison of the alternatives.

·         In the Cost + Incentive  the Contractor’s Risk is very minimal

·         The Contractor can earn a considerably larger fee than would otherwise be the case in C +I

·         Reduction on cost overruns for the contractor.

Whereas in the Fixed Price Incentive, the Contractor

·         The Contractor assumes full responsibility of the overruns.

·         The Share of the cost reduction is usually based on 80% Customer, 20% Contractor.

6.   Performance Monitoring.

·          Time of Completion against the Scheduled time

·         Actual Project cost against the Budgeted Project Cost.

7. References 

1. W. A. Meinhart & Leon M. Delionback (Dec., 1968), The Academy of Management Journal
Vol. 11(No. 4) Retrieved from http://www.jstor.org/stable/254891

 2. James Manktelow & Amy Carlson (2006) How to use Force Field Analysis, Decision making skills from MindTool.com   Retrieved from http://www.mindtools.com/newTED

 

3.  J. Rodney Turner (2004) Construction Management and Economies Volume 22(Issue 1) Retrieved from http://wwwtandfonline.com/doi/abs