W10_AsmaF_Cost plus with Incentive contract


1. Problem Definition

The company has gone through bad experiences in performing some of the critical projects because of contractors. One of the main reasons behind these fails is the contractor. Either the contractors delay the work or go ahead of schedule there’s neither penalty nor advantages. Now the company is about to release a new project for a DSC system (software) for a new petrochemical plant. The DCS system (Distributed Control System) has to ready and running up once the plant is established and start. No delay is acceptable and an early finish is much much much preferred. Target is 180 days.

2. Identify the feasible alternatives

The company needs to determine a different contract type for this critical project to suit the requirements and overcome the issues. In fact the company is considering incentive contracts and the options are:

  • Cost plus with Incentive contract
  • Firm fixed price with incentive contract
  • Incentive /disincentive
  • Time + Cost method

Incentive contracts are being used in Oman mainly in hotels sector. However no information if it’s used in other sectors.

3. Development of the outcome for alternative

The outcome will be the most suitable contract type for the DCS system to be implemented.

4. Selection Criteria

The contract should be able to maintain the targeted duration or even make the project finish earlier.

5. Analysis and Comparison of the alternative

In this blog we will discuss and analyze the: Cost Plus with incentive contracts.

The cost plus incentive motivate the contractor to perform excellent in the project. This can help the company to evaluate the actual performance against the achievement conditions. This type of contract caps the cost of the project and provides an incentive for the contractor to control costs. For this type the following are defined:

  • Target cost
  • Base contractor pay
  • Formula for the incentive bonus / fees
  • Minimum / maximum limits

The contractor can be ahead of schedule in the Realization phase of the system and testing.

Possible reduce time

Table 1 – Possible reduce time

6. Selection of the Preferred Alternative

At the end of this posts series

7. Performance Monitoring and the Post Evaluation of Result

At the end of this posts series

8. References

  1. DCS Migration Strategy and Implementation. (2012). Retrieved August 7, 2014, from http://www.emea.rockwellautomation.com/process/en/docs/DCS_migration_strategy_and_implementation.pdf
  2. Duff, V. (n.d.). A Cost Plus Incentive Fee Vs. a Fixed Priced Contract | Chron.com. Retrieved August 7, 2014, from http://smallbusiness.chron.com/cost-plus-incentive-fee-vs-fixed-priced-contract-11291.html
  3. Rifai, P. (2012, April 17). W13_Rifai_Shared Saving Contract | Casablanca Q1-2012 AACE [Web log post]. Retrieved from http://aacecasablanca.wordpress.com/2012/04/17/w13_rifai_shared-saving-contract/
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4 thoughts on “W10_AsmaF_Cost plus with Incentive contract

  1. Excellent, Asma!!! Nice work and you WILL see questions on incentive contracting on your PMP Exam, so this effort is a good investment.

    Having said that BEFORE you get too far into your analysis, the FIRST thing you need to do is review my handouts from Day 5, slides #41-#44. Until or unless you know what your REAL or TRUE scope definition is, simply putting an incentive contract in place MAY NOT work.

    So step #1 is to take comparable projects and divide the APPROVED or PLANNED cost by the ACTUAL COST of the project, X 100 and that will give you the “real” or “true” scope definition.

    Then based on that analysis, THEN you can start to decided (from Slides #43 and #44) which contract is best suited to your real situation.

    I have a SUSPICION based on our own first hand experience with IT projects, because the scope is generally NOT well defined, you will need to use some of the “Cost Plus Incentive” contacts.

    Here are some references to help you get smart on what is a VERY interesting and important topic:
    http://info.aia.org/SiteObjects/files/IPD_Guide_2007.pdf

    https://opimweb.wharton.upenn.edu/linkservid/339312A6-EC97-FF90-FCFCF7173AC9CC86/showMeta/0/

    http://pm4id.org/9/5/

    Looking forward to seeing some really great posts on this very real and very important topic.

    BR,
    Dr. PDG, Jakarta

  2. Pingback: W11_AsmaF_Firm fixed price with incentive contract for DCS system | PMI-Oman 2014

  3. Pingback: W12_AsmaF_Incentive /disincentive contracts | PMI-Oman 2014

  4. Pingback: W13_AsmaF_Time plus Cost method | PMI-Oman 2014

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