W13_AsmaF_Time plus Cost method


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], W11 [5] and W12 [6] we discussed the 2 first types and in this blog we will discuss and analyze the: Time + Cost method.

For this type the following parameters should be defined:

  • Estimated Project costs
  • Estimated duration
  • Daily user value

The total estimated bid formula is:

Estimated Project costs + (Estimated duration * Daily user value)

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 Time + Cost method are as following

Characteristic of Time + Cost method

Table 1 – Characteristic of Time + Cost method

6. Selection of the Preferred Alternative

We have gone through 4 types of incentive contracts in this series in order to explore and select the best type suits implementing DCS system for new plant.

Characteristic of incentive contract types

Table 2 – Characteristic of incentive contract types

From the table above, Cost plus with Incentive contract is the best one as 62% of scope is known and it’s highly to meet the milestone dates which is very important in this project.

7. Performance Monitoring and the Post Evaluation of Result

More lesson learnt document need to document at the end of similar projects. The risk is also need to be monitored by the owner and PTA to be calculated. Budget needs to be checked to not get overrun budget.

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/
  6. AlFadha, A. (2014, August 18). W12_AsmaF_Incentive /disincentive contracts | PMI-Oman 2014 [Web log post]. Retrieved from https://pmioman14.wordpress.com/2014/08/18/w12_asmaf_incentive-disincentive-contracts/
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3 thoughts on “W13_AsmaF_Time plus Cost method

  1. Nice work, Asma…..!! What you need to understand about time+cost method is in order to make that work, the OWNER/BUYER MUST have a good picture of WHAT it is you want as an end product but want to encourage your contractors to be innovative and imaginative in HOW they go about delivering it. So unless you have a very good picture of what it is you want with NO CHANGES, then Time + Cost probably won’t work for you.

    But I do fully agree with you that with only 62% scope definition, then it sounds like Cost Plus Incentive it the “best” or “most appropriate” contracting approach.

    Well done and good luck in convincing your bosses to run with that idea….

    BR,
    Dr. PDG, Jakarta, Indonesia

  2. Pingback: W13.1_Hassan Albarrami_ SELECTION OF CONTRACT | PMI-Oman 2014

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