contract in project management
TRANSCRIPT
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Contract in Project
Management
College of Engineering
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What inside ?!
Definition
Elements of valid contract
Issues related to contract in terms of
money (price and cost)
Types of contracts
What best type of contract?!
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Set the boundries
Contracts usually (in the market) include theagreements as well as the general
conditions; technical specifications (codes
and standards requirements); special
conditions; plans
But we will focus only on the agreement!
Inside this presentation we will use theterms of ( owner and contractor);
Owner may = buyer
Contractor may = seller, provider (vendor)
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Introduction
Construction projects involve anintegrated work of various partiessuch as;
-Owner (public or private)-Designer firm (orgnization)-Contractor (and its sub-contractors)-Project management team-etc.., (if there is heavy materials that
should be delivered,...)
-So there should be an Agreement ora special form that establish the basic
way of relationship of those parties.
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It is the
Contract
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Definition:
Contracts are the binding agreementbetween the parties to exchange somethingof value.
Contracts are generally written.
The contract helps to align the interests ofthe Owner and the contractor (provider).
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+
+ +Differing Interests
Contract
Owner/contractorRelationship
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Contract relationships
The most common contract relationshipscreated by modern construction projectsare:The owner and contractor(s)The owner and design professional
The contractor and sub-contractor(s)
If there is a construction managementteam is hired, then the relationship
between the owner and contractor will beindirect!.
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Elements of validContract
Competent parties
Offer and acceptance
Reasonable certainty of terms Proper subject matter
consideration
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Competent parties
Legal age
With appropriate authority
Mentally competent
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Offer and acceptance
Anything said or done that
shows a willingness to
exchange value.
Offers and acceptances maybe:
Written
Spoken (with limitations)
Demonstrated through action
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Both parties must receive
something:
Financial or non-financial
Directly or indirectly Also called Exchange of value
Consideration
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Since the issue that relateTo the contracts is the
pricing and cost
We will introduce this topicin detail
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price and cost are not the same:
- owners cost is contractors price- contractors price is not contractors cost
How do we end up in court?
Agree to an unreasonable priceWrong type of contract
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What is a Reasonable Price?
Sellers Estimate
Buyers Estimate
Reasonable
Price
Higher profit
Lower cost
??
??
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Ensuring aReasonable Price
Use independent, pre-bid estimates to
aid in evaluating proposals.
Use Value Engineering to reduce costwithout reducing functionality.
Reject bids that are too low:
Less than 80% of second lowest bid
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Types of Contracts
Contracts
Price-BasedContracts
Cost-BasedContracts
HybridContracts
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Price-based contracts
Firm fixed price:
Seller agrees to deliver thedefined scope for a set price
Also called lump sum
Unit price:
Set price per unit of product
or service
Widely used in construction
O i O i O i O iO i O i
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Firm-fixed contracts(lump sum contract(
Advantages:
Better budget control
Seller assumes most cost risk
Fewer staff needed to monitor andmanage
Disadvantages:
More effort needed to define scope
Changes can be expensive
Seller may compromise on quality
Owner-view Owner-view Owner-view Owner-vieww Owner-view Owner-view
t t i C t t i C t t i C t t i C t t i
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tractor-view.. Contractor-view.. Contractor-view.. Contractor-view.. Contractor-view..
Firm-fixed contracts(lump sum contract(
Advantages:
Higher profit potential
Limited day-to-day buyer oversight
Disadvantages:
Higher loss potential
Cost of proposal preparation
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Unit Price Contracts
Owner provides detailed list what
is needed:
Items
Quantities
Contractor provides unit price for
each item.
Quantities may vary, but usually
only within defined range.
tractor ie Contractor ie Contractor ie Contractor ie Contractor ie
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Unit Price Contracts
tractor-view.. Contractor-view.. Contractor-view.. Contractor-view.. Contractor-view..
Advantages:
More insight into sellers pricing
Quantity variations easy to
process
Disadvantages:
Effort required to develop item
list and quantities
Missing items can generate
claims
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Cost-Based Contracts
The amount that the Owner pays isdriven by the actual costs incurred
by the contractor:
Used mostly in defense sector
Used when scope is difficult to
define
Three main types:
Cost plus fixed fee (CPFF)
Cost plus incentive fee (CPIF)
Fixed price incentive fee (FPIF)
tractor view Contractor view Contractor view Contractor view Contractor view
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Cost-Based Contracts
Advantages:
Less effort needed to define scope
More sellers likely to be interested
Easier to get changes accepted
Disadvantages:
Limited control over total cost
Can be difficult to agree on indirect
cost rates
tractor-view.. Contractor-view.. Contractor-view.. Contractor-view.. Contractor-view..
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Hybrid Contracts
Time and materials (T&M): Labor charged at hourly rate(s)
Materials charged at cost plus a
percent for administrative overhead
Time and materials, not to exceed:
Seller stops work once limit has beenreached
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What best contract?!
Detailed requirements = price-based
Many able vendors = price-based
Urgent = hybrid
Complex requirements = cost-based
High value contract = cost-based
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conclusion
The contract should be preparedvery well to avoid problems, exactlyas the proverb say:
The cost of prevention is alwaysless than the cost of the cureto make everything between the owner andcontractor very clear.
Pay effort in the beginning and savemoney, relationship, and time later bthe establish of proper Contract!
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Questions ?!
Thank you