W5_Doyin_Benchmarking the best Alternatives in Incentive Contracting against a baseline.

W5_Doyin_Benchmarking the best Alternatives in Incentive Contracting against a baseline.

1.       Problem Recognition, Definition and Evaluation:

       This is to choose the best three alternatives in Incentive Contracting and benchmarking them against a baseline EPCC (Engineering, Procurement, Construct and Commission) a contract type used in the oil and Gas Industry.

2.       Development of Feasible Alternatives: From Week 4 blog the top three alternatives

·         Cost-plus-incentive-fee contracts (C+I)

·         Cost-plus-award-fee contracts (C+A)

·         Cost/Time plus Incentive/Disincentive (A+B)

      Adding

      . Lane Rental Approach (LRA)

      . Pure Incentive/ Disincentive (PI/D)

      . Indefinite Time/ Indefinite Quantity (IT/IQ)

3.       Development of the outcomes and cash flows for each alternative: These alternatives will be      considered based on the following attributes

·         Scope Definition: 

·         Risk

·         Cost

·         Time

·         Technical Performance

·         Contract Improvement

·         Gains

·         Loss

4.       Selection of Criteria

Table 1. Alternatives

Attribute	C+I	C+A	A+B	LRA	PI/D	IT/IQ
Scope Definition	Very Good	Poor	Excellent	Good	Good	Poor
Risk Exposure	Significant	Minimal	Minimal	Significant	Significant	Average
Cost	Satisfactory Reduction	Increment	Stable	Increment	Satisfactory Reduction	Save 15% of Actual Cost
Time	20% reduction	10% reduction	32% reduction	5% reduction	15% Reduction	40% Reduction
Technical Performance	High	Low	Very  High	Low	High	Low
Contract Improvement	Significant	Insignificant	Significant	Significant	Fair	Significant
Gains	5%	5%	50%	10%	5%	10%
Losses	2%	3%	0%	2%	3%	0%

The most important attribute is Time and Cost reduction which is the bane of Project Management.

5.       Analysis and comparison of the alternatives: This is done by using the non-compensatory model called Disjunctive Resolution (which is the model employed earlier for all other alternative methods) to evaluate each alternative on the best value achieved for any attribute.

Table 2- Feasible Range.

Attribute	Minimum	Maximum
Scope Definition	50%	100%
Risk Exposure	1%	5%
Cost	10%Reduction	20% Reduction
Time	10% Reduction	40% Reduction
Gains	10%	Unlimited
Losses	0	10% 0f Profit
Technical Performance	5%	10%
Contract Improvement	2%	7%

Comparing table 1 with the acceptable Standard, Cost Time plus (A+B) and Indefinite Time/ Indefinite Quantity (IT/IQ) are the two most feasible alternatives.

The Additive Weighty Technique of Compensatory model is also being used for this analysis in 

Table 3 - Additive Weighty Technique

Attribute	Step 1	Step2:	(B)	C+I	C+A	A+B	LR	PI/D	IT/IQ
	Relative Ranking	Normalized Weight (A)
Scope Definition	6	6/36=0.17	0.5	0.085	0	0.085	0.043	0.043	0
Risk Exposure	1	1/36=0.03	1	0.03	0	0	0.03	0.03	0.01
Cost	7	7/36=0.19	0.75	0.143	0.38	0.048	0.38	0.143	0.19
Time	8	8/36=0.22	0.43	0.095	0.031	0.17	0	0.064	0.22
Technical Performance	5	5/36=0.14	0.4	0.056	0	0.14	0	0.056	0
Contract Improvement	4	4/36=0.11	1	0.11	0	0.11	0.11	0.044	0.11
Gains	3	3/36=0.08	0	0	0	0.08	0.008	0	0.008
Losses	2	2/36=0.06	60%	0.036	0.06	0	0.036	0.06	0.06
Sum	36	1		0.555 2nd choice	0.471	0.633 Best Choice	0.607	0.481 3rd Choice	0.598

                                                                                                                          

6.       Selection of the preferred alternative

The best Alternatives are

·         Cost /Time Method (A+B)

·         Lane Rental

·         Indefinite Quantity/Indefinite Time

In my studies and Analysis, LA are usually for Project that includes Lane rental in the bidding eg road construction that is its application is limited.

IT/IQ ‘s application is limited to  small projects like maintenance etc.

Therefore they will not be applicable in EPCC Projects. The applicable Alternatives are

1.       A+B

2.       C+I

3.       PI/D 

7.       Performance Monitoring.

·          Time of Completion against the Scheduled time

·         Actual Project cost against the Budgeted Project Cost.

8.       References

1. Sullivan,W.G, Wicks,E.M, & Koelling, C.P (2012). Engineering Economy (15^th edition.)(Chapter 14) New Jersey, NJ. Pearson Higher Education, Inc.

2. Giammalvo, P.D (2012, October 22). Integrated portfolio (asset), program (operations) and project management methodology course (Power Point slides) (An AACE methodology course). Day 5 (pp 73-91) Lagos.  Nigeria.

3. Ellis R, Pyeon J, Herbsman Z, Minchin E, Molenaar K.(July 2007)Evaluation of Alternate Contracting Techniques on FDOT Construction Projects . Retrieved from: http://www.dot.state.fl.us/researchcenter/Completed_Proj/Summary_CN/FDOT_BDC51_rpt.pdf

4. The Gordian Group (2009) making facility owners more successful .Retrieved from:  http://www.jobordercontract.com/why-joc.php?id=57.