W13.1_Hassan Albarrami_ SELECTION OF CONTRACT
- Problem Definition
Every year we are tackling around 15 -20 projects (CAPEX) and this to enhance productivity and reliability of the plant, unfortunately some of those projects are completed over budget. The reason behind that is either wrong estimation or due to contractor. In this blog we are going to explore how to select the right contract type which provides the optimum value for your time and money, and protects your project from any risks. The contract type is determined primarily by scope definition, and here are some real projects in which the “real” or “true” scope definition can be calculated  as shown in the table below.
||Project Description||Estimated Budget||Real Budget||Percentage of budget Cost/ Actual [%]||scope definition range %|
Table.1 projects “real” or “true” scope definition range
- Identify the feasible alternatives
The following are the different type of contracts:
Fixed Price Contract (If the scope of work is definite and fixed)
- Firm Fixed Price Contract (FFP)
- Fixed Price Incentive Fee Contract (FPIF)
- Fixed Price with Economic Price Adjustment Contracts (FP/EPA)
Cost Reimbursable Contract (if the project scope is not fixed and is exploratory)
- Cost Plus Fixed Fee Contract (CPFF)
- Cost Plus Incentive Fee Contract (CPIF)
- Cost Plus Award Fee (CPAF)
- Cost Plus Percentage of Cost (CPPC)
Time and Materials Contract (In case you require only expert opinions or some sorts of consultancy service or outside support)
- Development of the outcome for alternative
The following factors are the criteria which needed to 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
The table below is showing the contract types suitable for ranges of scope definition and risk.
|contract type||% scope||owner/contractor risk|
Table.2 contract types suitable for ranges of scope definition and risk.
- Selection Criteria
The contract will be selected based on the real scope definition and the risk range
- Analysis and Comparison of the alternative
We can determine the contract type for our list of projects from Table.1 and Table.2. The results are showing below in Table.3
||Project Description||Estimated Budget||Real Budget||Percentage of budget Cost/ Actual [%]||scope definition range %||contract type|
Table .3 – contract type based on scope definition range
- Selection of the Preferred Alternative
From table.3 we can see the project and its optimum contract type based on scope definition and risk range. Project (B) and (C) have two options (CPFF, CPAF), but CPFF will put more risk on the owner comparing to CPAF so I would argue to take CPAF to ensure the quality of the job.
- Performance Monitoring and the Post Evaluation of Result
Selecting the contract type is a very important decision for a project manager. It determines your relationship with the seller and mitigates the risks.
The company should select a contract which provides the optimum value for time and money, and protects the project from any risks.
If the scope of work is definite and fixed, it should go for the Fixed Price Contract.
However, if the project scope is not fixed and is exploratory, it should choose the Cost Reimbursable Contract.
In case expert opinions or some sorts of consultancy service or outside support are required, then it should go for the Time and Materials type of contract
- PM study circle , Types of Procurement Contracts used in Project Management. (2012). Retrieved August 20, 2014, from http://www.emea.rockwellautomation.com/process/en/docs/DCS_migration_strategy_and_implementation.pdf
- PMI-Oman 2014 ,W13_AsmaF_Time plus Cost method, Retrieved August 20, 2014, from https://pmioman14.wordpress.com/2014/08/19/w13_asmaf_time-plus-cost-method/
- Giammalvo, P. D. (2012, 2013). PMI Certification Prep and Competency Development Course [Class Handout]. Takatuf.