Project contracting

Shri Vaishnav Vidyapeeth Vishwavidyala
Shri Vaishnav School of Management
2018-2020
Project Contracting

What is Contract?
 A contract is a exchange of promises between two or
more parties to do, or refrain from doing an act, which
resulting contract is enforceable in a court of law
 In the project or program context, contracts typically
involve the exchange of money in return for goods or
services
 An agreement between two or more parties to
accomplish a certain goal in a certain way

 For example:- A project contract may take the form of
an agreement between a builder and a property owner
in which the builder agrees to build a house on the
property by a certain time in a certain way, and in
exchange, the property owner makes certain
remuneration.

Advantages of Contract
Room for Price and Service Negotiations
Linking Results with Price
 The Importance of Time Frame
Liability and Delegation
Contract is required to share and bear individual’s
responsibilities in completion of the project.
Effective and efficiency of work.

Why should we know types of contract?
 Whether you’re managing a small project or a large
complex program you need a basic understanding of
the different types of contract you’re likely to encounter
when buying from external organizations and 3rd
parties.

Types of Contracts
 There are three basic types of contract you’re likely to
come across in managing your projects and programs:
1) Fixed price or Lump sum Contracts
2) Cost reimbursable Contracts
3) Time and materials (T&M) contracts

1) Fixed Price Contracts
 In this type of contract the seller and the buyer agree
on a fixed price for the project.
 The seller often accepts a high level of risk in this type
of contract. The buyer is in the least risk category since
the price the seller agreed to is fixed.
 With this type of contract, sellers may try to cut the
scope to deliver the projects on time and within
budget.

 If the project is finished on time with the desired
quality, the project is over for that contract. However, if
the project is delayed and there are cost overruns, then
the seller will absorb all the extra costs.
Few types of Fixed Price Contracts:
• Fixed Price Incentive Fee (FPIF)
• Fixed Price Award Fee (FPAF)
•Fixed Price Economic Price Adjustment (FPEPA)

• Fixed Price Incentive Fee (FPIF)
Although the price is fixed, the seller is offered a
performance-based incentive. The incentive can be
dependent upon one or more project metrics such as
performance, Cost, or time.
Example: 10,000 USD will be paid to the contractor as an
incentives if he completes the work before two months.
• Fixed Price Award Fee (FPAF)
If the performance of the seller exceeds expectations, an
additional amount (i.e 10% of the total price) will be paid
to the seller.

 Fixed Price Economic Price Adjustment (FPEPA)
A fixed price economic price adjustment contract is
used if the contract is multi-year long. Here, you
include special provision in a clause which protect the
seller from inflation.
Example: About 3% of the cost of the project will be
increased after a certain time duration based on the
consumer price index.

2) Cost Reimbursable Contracts
 This type of contract is used when the project scope
is uncertain, or the project is high risk. The buyer
pays all costs, so the buyer bears all the risk.
 Under this type of contract, the seller works for
fixed time period and raises the bill after finishing
the work, where a fee that represents the profit for
the contract. The fee may be dependent on selected
project performance or other metrices.

 A major drawback of this type of contract is that the
seller can raise an unlimited or unknown amount which
the buyer is compelled to pay.
Kinds of Cost- reimbursable contracts:
There are three kinds of cost-reimbursable contracts you
should understand:
• Cost plus fee (CPF) or cost plus percentage of cost
(CPPC)
•Cost plus fixed fee (CPFF)
•Cost Plus Award Fee (CPAF)
•Cost plus incentive fee (CPIF)

• Cost Plus Fee (CPF) or Cost Plus Percentage of Costs
(CPPC)
The seller will get the total cost they incurred during the
project plus a percentage of the fee over cost: this is
always beneficial for the seller.
Example: Total cost plus 15% of cost as a fee to the
contractor.
• Cost Plus Fixed Fee (CPFF)
In this type of contract, the seller is paid for all incurred
costs plus a fixed fee (Which will not change), Regardless
of his performance. Here, the buyer bears the risk.
Example: Total cost plus 25,000 USD as a fee.

• Cost Plus Award Fee (CPAF)
The seller will get a bonus amount (the award fee) plus
the actual cost incurred on the projects: this type of
contract is very similar to a CPIF contract.
Example: if the seller completed the task meeting all
quality standards, based on his performance he may given
an award of upto 10,000 USD
• Cost Plus Incentive Fee (CPIF)
A performance-based incentive fee will be paid to the
seller over cost they have incurred on the projects. In
this type of contract, the incentive is a motivating factor
for the seller to meet or exceed the project’s
performance metrices.

The seller may get some incentives if he can complete
the work with less cost or before time.
Example: if the project is completed with under budget,
25% of the remaining fund will be given to the seller.

3) Time and Material Contracts
 Time and Material contracts also known as Unit Price
Contracts
Unit price contracts are what we usually call hourly
rate contracts.
This type of contract is hybrid of a cost-reimbursable
and fixed price contract.
For ex: If the seller spend 1200 hours on project at
$100 an hour, the seller will be paid $120,000 by the
buyer. This type of contract is common for freelancers.

 The main advantage of this contract type is that the
seller makes money for every hour spent working on the
project.

Mutually agreed upon total amount that a principal
(client or project owner) pays to a contractor on
completion of the contract, in accordance with contract
terms and conditions and their subsequent modifications
(if any). Also called contract sum.
 Common Contracts are for construction, landscaping,
leasing etc.
 Due to the fact that a contract is an agreement to
complete a certain type and amount of work, the
contract price is fully paid to a contractor when they have
completed the job which has been agreed upon
Contract Pricing

 Generally, contract price includes a down payment, may
include a few continuing payments, and ends with a final
amount paid to close the contract.
 A contract price is the price listed in the contract for the
good or services to be received in return.

Based on the resources and material required, the cost for
the construction is estimated.
Then, the client contracts a service provider and pays a
percentage of the cost of the project as the fee for the
service provider.
As an example, take the scenario of constructing a house.
Assume that the estimate comes up to $230,000.
When this project is contracted to a service provider, the
client may agree to pay 30% of the total cost as the
construction fee which comes up to $69,000.
Percentage of Construction Fee

Factors may Influence the Type of Contract
Selected:
Type and complexity of requirement
Extent of price competition
Cost and price analysis
Urgency of requirement or performance period
Frequency of expected changes

Contract Type Priorities (Least to Important)
CPFF Cost, Time, Performance
CPAF Cost, Time, Performance
CPIF Time, Performance, Cost
T& M Performance, Time, Cost
FPIF Time, Performance, Cost
FP Cost, Time, Performance

Contents of the Contract
The project contract should include all the things you
would normally expect in a project kick off document and
a few more:
 A clear objective and success criteria
A list of roles and responsibilities and who is going to
take these
Details of what resources are required

The project scope and constraints
Work Breakdown structure (which cover all the activities
that you need to do in order to complete the project
successfully)

Contracting Process
Step1: Selecting a Contract
Step2: Collecting the necessary information
Step3: Choosing a Negotiator
Step4: The contract Review Process
Step5: Contract Signing

Conclusion
Selecting the contract type is the most important step of
establishing a business agreement with another party,
This step determines the possible engagement risks.
Therefore, companies should get into contracts where
there is a minimum risk for their business. It is always a
good idea to engage in fixed bids (fixed priced) whenever
the project is short-termed and predictable.
If the project nature is exploratory, it is always best to
adopt retainer or cost plus contract types.

Project contracting

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