W13.1_Hassan Albarrami_ SELECTION OF CONTRACT


W13.1_Hassan Albarrami_ SELECTION OF CONTRACT

 

  1. 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 [3] as shown in the table below.

  1. No.
Project Description Estimated Budget Real Budget Percentage of budget Cost/ Actual [%] scope definition range %
1 Project A 6889 2007 0.29 <50
2 Project B 1111 637 0.57 57
3 Project C 1778 1012 0.57 57
4 Project D 1889 1871 0.99 <85
5 Project F 889 1077 1.21 79.00
6 Project H 444 174 0.39 <50
7 Project I 44 34 0.77 77
8 Project J 889 318 0.36 <50

 

Table.1 projects “real” or “true” scope definition range

  1. 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)

  1. 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
FFP >85 0-100
FPIF 65-75 30-70
FP/EPA 70-85 20-80
CPFF 50-60 90-10
CPIF 60-70 80-20
CPAF 55-65 85-15
CPPC <50 100-0

Table.2 contract types suitable for ranges of scope definition and risk.

 

  1. Selection Criteria

The contract will be selected based on the real scope definition and the risk range

  1. 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

  1. No.
Project Description Estimated Budget Real Budget Percentage of budget Cost/ Actual [%] scope definition range % contract type
1 Project A 6889 2007 0.29 <50 CPPC
2 Project B 1111 637 0.57 57 CPFF,CPAF
3 Project C 1778 1012 0.57 57 CPFF,CPAF
4 Project D 1889 1871 0.99 <85 FFP
5 Project F 889 1077 1.21 79.00 FP/EPA
6 Project H 444 174 0.39 <50 CPPC
7 Project I 44 34 0.77 77 FP/EPA
8 Project J 889 318 0.36 <50 CPPC

Table .3 – contract type based on scope definition range

  1. 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.

  1. 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

  1. References

 

  1. 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
  2. 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/
  3. Giammalvo, P. D. (2012, 2013). PMI Certification Prep and Competency Development Course [Class Handout]. Takatuf.

 

 

Advertisements

One thought on “W13.1_Hassan Albarrami_ SELECTION OF CONTRACT

  1. Excellent, Hassan…..!!!!

    My only suggestion to you would be to calculate the Mean, Mode and Median and use that as the basis for your recommendation to your management:
    Mean 64%
    Mode 57%
    Median 57%

    The numbers are not lying to you- This is the REALITY………… Which gives you these options:
    #1) IF you think the Mode and Median values are more accurate then increase your scope definition by a minimum of 3%- which given the conclusions from your paper could be done by IMPROVING YOUR FEL PROCESS.

    #2) Increasing your scope definition by at least another 3% (=>60% scope definition) and moving to a Cost Plus Incentive Contracting strategy.

    #3) IF you think the AVERAGE is more indicative of the truth, then you already are within the acceptable range to use a Cost Plus Incentive strategy.

    If I were in your shoes, I would recommend that you start with #1 first (as that is the “low hanging fruit”) to see if over a period of 1 year, by improving your FEL process you could get that scope definition to AVERAGE 65-75% then you could move to a Fixed Price Incentive method, otherwise your AVERAGE looks to me like a solid candidate for Cost Plus Incentive right now?

    Ideally, before you make a presentation to your management, I would get as many projects as you possibly can (more than just 8) and do the comparison, but FIRST be sure to do a statistical process control analysis to remove any outliers. (I suspect that 121% is an outlier) Once you have removed any outiers, THEN prepare your report to management……..

    Good luck and looking forward to meeting up with you again next week….

    BR,
    Dr. PDG, Jakarta

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s