W12_AsmaF_Incentive /disincentive contracts


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 following factors are the criteria which will be considered when selecting the contract type:

  • The uncertainty of the scope of work needed
  • The party assuming the risk of unexpected cost increases
  • The importance of meeting the scheduled milestone dates
  • The need for predictable project costs

 

4. Selection Criteria

The contract should be able to maintain the targeted duration or even make the project finish earlier and % of known scope will be considered while selecting the best contract type for this case.

 

5. Analysis and Comparison of the alternative

In W10 [4] and W11 [5] we discussed the 2 first types and in this blog we will discuss and analyze the: Incentive /disincentive contract.

For this type the following parameters should be defined:

  • Target cost
  • Bonus cost
  • Penalty cost

From previous DCS installation on the company old plant, the planned vs. actual cost was 62%. This gives us an idea about the scope definition for this project from what called “LESSON LEARNED”.

As per the factors before (in point 3) the Incentive / disincentive are as following

 

Characteristic of Incentive-disincentive contract

Table 1 – Characteristic of Incentive /disincentive contract

 

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. Wiley, D. (2012). 9.5 Selecting the Type of Contract. Retrieved August 16, 2014, from http://pm4id.org/9/5/
  3. Giammalvo, P. D. (2012, 2013). PMI Certification Prep and Competency Development Course [Class Handout]. Takatuf.
  4. AlFadha, A. (2014, August 7). W10_AsmaF_Cost plus with Incentive contract | PMI-Oman 2014 [Web log post]. Retrieved from https://pmioman14.wordpress.com/2014/08/07/w10_asmaf_cost-plus-with-incentive-contract/
  5. AlFadha, A. (2014, August 16). W11_AsmaF_Firm fixed price with incentive contract for DCS system | PMI-Oman 2014 [Web log post]. Retrieved from https://pmioman14.wordpress.com/2014/08/16/w11_asmaf_firm-fixed-price-with-incentive-contract-for-dcs-system/

 

 

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2 thoughts on “W12_AsmaF_Incentive /disincentive contracts

  1. Looking good, Ms. Asma!!! You are headed in the right direction and look forward to your conclusion on this excellent case study……..

    Keep up the good work and your leadership by example is recognized and appreciated….

    BR,
    Dr. PDG, Jakarta

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

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