Contracts, preparation, pricing and implementation

8/7/2019 Contracts, preparation, pricing and implementation

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Contracts, preparation,implementation andpricing

Presented

ByEluchie Emeka.


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M EANING AND SCOPE.

AA contractcontract is an agreement thatis an agreement that

is enforceable by a court of lawis enforceable by a court of lawor equity.or equity.


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Contracts are the basis of manydaily activities.T hey provide the means for individuals and businesses tosell and otherwise transfer

property, services, and other rights.W ithout enforceable contracts,

commerce would collapse.


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Contracts are voluntarilyentered into by parties.

T he terms of the contractbecome private law betweenthe parties.


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ALSO CON TR AC T IS

A contract is an agreement thatcreates obligations/ legal ties(R ights and duties)Social agreement have no legalconsequences. T hey create

moral duties.


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A contract is

A promise or set of promises,the breach of which the courtswill provide a remedy for W hen the two parties agree to acontract, it creates a legally

recognized duty to performNot all agreements arerecognized as legally binding

A promise to make a gift is notbinding


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ELE M EN T S OF A

CON TR AC T

ELE M EN T S OF A

CONTR

ACT

ElementsElements

of aof aContract Contract

Agreement Agreement ConsiderationConsideration

ContractualContractualCapacityCapacityLawful Object Lawful Object


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AgreementT here must be agreementbetween the parties.T his requires an offer bythe offeror and anacceptance of the offer bythe offeree.T here must be mutualassent by the parties.


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ConsiderationT

he promise must besupported by a bargained-for consideration that is

legally sufficient.Gift promises and moralobligations are not

considered supported by


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Contractual Capacity

The parties to acontract must have

contractual capacity.

Certain parties, such aspersons adjudged to beinsane, do not have

contractual capacity


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Lawful Object

T he object of the

contract must belawful.Contracts toaccomplish illegalobjects or contracts

that are against public


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Formation of a contract

H ow is consensus /Agreement reached?

Parties must agree on whatrights and duties they wish tocreateBetween whom it will becreatedM ust intend to bind legallyM ust be aware of a reement


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R ules regarding the

offer

T he offer must be complete /with all rights / duties detailedOffer must be clear andunambiguousT here must be an intention tobe legally bound by it


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Call for tenders is invitation tosubmit offersAn advertisement is NO T acontractOffer can be made in manyways


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T he offer must becommunicated to offereeOffer must be addressed tothe person the offerer wishesto conclude a contractAn offer can lapse or berevoked


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Lapse of the offer

After offer lapse the offereecan not accept it any longer Offerer can revoke offer An offer can not be madeirrevocable


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An offer is irrevocable with

an option contractAn offer cannot remainvalid forever

An offer lapses if the offerer or offeree dies or becomeinsane before acceptance

If offeree rejects, it lapses


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T he agreement should

contain:

The names of contractingparties

A brief description of the work

A list of contract documents,including agreement, generalconditions, drawings, andspecifications.


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T he contract sum, or amount(lump-sum contract)T he procedures for paymentT he contract time, or datesfor start and completionT he signatures of contractingparties and witnesses


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Penalty clause

is a clause providing that aperson in breach of acontractual terms will beliable to pay a sum of moneyor to deliver/perform anything

for the benefit of the other party by way of a penalty or as liquidated damages

such clauses are valid and


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a person entitled to thepenalty cannot recover boththe penalty and damages, or damages in lieu of thepenalty unless the agreement

so providesCourts may reduce thepenalty if is out of proportion

to the prejudice


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DOCU M EN T AT ION


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T he basic obligation of a seller under a sales contract is totransfer and deliver conforminggoods, that is, goods that conformto the specifications of thecontract.T he basic obligation of a buyer isto accept and pay for conforminggoods in accordance with the

contract.


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CON TR AC T P R ICING

One of the most important tasksin procurement planning is theselection of the appropriatepricing strategies for major contracts. T his task should beaccomplished in the earlyphases of the project. T hepricing strategies selectedshould balance the risksbetween the contractin


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Project managers can useseveral pricing approaches for producing the goods andservices for a project. T heselection of an inappropriate

approach will have a negativeimpact on the quality, costs andschedule of the work performed.


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T ypes of Contract

Pricing

T he most common types of contractpricing are:Fixed price,Unit price,

T arget price,R eimbursable with incentive feesand,R eimbursable with fixed or percentage fees.


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Note,

T wo or more types of contractpricing approaches can becombined in a single contract.T his leads to a relatively largenumber of pricing combinations

that can be used for major project contracts.


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Fixed Price

In a fixed-price contract, theseller agrees to deliver theproducts or the services for oneagreed-upon cost. In this case,the buyer is responsible for

providing a complete definitionof what is required andschedule for delivery.


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T he price which is provided bythe seller is going to include anestimate of its costs and itsprofit. If the sellers costs areless than the costs included in

fixed price, the seller earnsadditional profit. If the sellerscosts are more than the costsincluded in its fixed price, theseller earns less rofit.


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If a project has long duration,the fixed price contract mightinclude an allowance for futurelabor and material escalationcosts. Escalation provisions for

labor and materials costs arefrequently tied to relevantindices that are published bythe federal government.


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Project managers need toconsider several factors whendeciding whether to use a fixed-price contract approach for aspecific contract.


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Before choosing this type of pricing structure, the project

must have:

Complete and accurate definition

of the scope of work.Explicitly defined technicalrequirements

Clearly stated managementrequirementsFixed schedule


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In a fixed-price contract, morethan any other type of contract,using a business analysisapproach is the key to asuccessful end result. Since the

technical preparation will takelonger than with other contracts, this preliminaryprocess should be include in theschedule of the ro ect.


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T he detailed preparation,however, will help in ensuringthat quality, schedule and costsobjectives of the project aremet.


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drawbacks

T he obvious drawback to thistype of fixed-price approach isthat it provides less incentivefor a contractor to minimizeschedule duration than is the

case for reimbursablecontracts.


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In addition, fixed-price suppliersand contractors often minimizequality management activitiesin order to reduce costs, whichcan result in quality problems.


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T herefore, the project manager needs to maintain close oversight

during the project.Also, renegotiations of the pricemight come into play since fixed-price contractors are reluctant toproceed with any work associatedwith a change request beforeresolving the cost of the change.T hese negotiations might have anegative impact on the schedule of


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If the scope of the contract iswell defined, the potential for significant changes is very low.W ithout the risk of significantchanges, the schedule for performing the work is unlikelyto change.


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In this case, a fixed-pricecontract is usually the bestapproach. M ost standardmaterials are procured using afixed-price contract approach

since the scope of work and theschedule objectives are easy todefine.


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If the design of engineeredmaterials can be finalized prior to the need of acquiring them,they can also be procured usinga fixed-price approach.

Engineering equipment couldalso be acquired using a fixed-price contract if it is possible toarticulate sufficient

erformance ob ectives for the


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Unit Price:In a unit-price contract, theseller commits to providingeach unit of work defined by abuyer for a fixed price per unit

of work. In this scenario, theseller carries the risk of thecost per unit, and the buyer assumes the risk of quantity


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Usually, in a unit-price contract,the units of work specified bythe buyer are larger in quantityand similar in nature. Since theunit prices are fixed, the buyer

specifies the scheduleobjectives or the time frameduring which the work will beperformed.


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Unit-price contracts areappropriate when the units of work can be well defined butthe total quantities areuncertain. Certain standard

materials that are procured inlarge quantities are providedunder unit-price contracts.


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Engineered materials are alsoprocured with unit-pricecontracts when the design isnot complete. Service contractscan use unit pricing provided

the scope of work lends itself tothe unit-price approach.


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As with fixed-price contracts,unit-price contracts require anaccurate description of thecomplexity of the work.H owever, unit-price contracts

also require an estimate of theprobable quantity of units.


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T his type of contracts alsorequires an accurate definitionof when units of work will bedelivered or installed, unlessthe contract contains an

escalation clause. Unit-pricecontractors are reluctant toincrease personnel, overtimeand shift work to accelerate theschedule of the work.


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W hen using unit-price contracts,managers should remember that:Unit-price and cost-reimbursable work should not

be included in the samecontractUnit-price contracts require an

accurate method of reporting


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T arget Price:

In target-price contract approach,the seller commits to providing

goods or services defined by a buyer for a target price. T he target price isnot fixed since the seller does notassume all of the risks associated

with performing the defined work for the target price.In this scenario, the buyer and theseller share both the cost savingsand cost overrun.


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T arget-price contracts are appropriatewhen there is high level of uncertaintyassociated with the scope of work to be

performed.Although target-price contracts do notneed as comprehensive and detailedspecification of the scope as the fixed-price approach, target-price contracts stillrequire some level of knowledge of thescope of work so that the estimator canestablish a target price.


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T o successfully manage atarget-price contract, the buyer must monitor the contractorscost performance in a manner similar to reimbursable

contracts.T

his will ensure thatthe final price of the contractcomes close to the target price.


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One of the drawbacks to thistype of contract is that target-

price contracts do not providestrong incentives for scheduleperformance. T herefore, target-price contracts are not

frequently used for procuringstandard materials, engineeredmaterials or equipment sincesubsequent work that must beperformed depends on the


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R eimbursable with

Incentive Fee:

In a reimbursable-withincentive-fee contractapproach, the seller commits toproviding goods and servicesspecified by the buyer for thesellers actual costs plus a feebased on performance. Ingeneral, performance incentivesare for schedule, cost and

ualit ob ectives. Incentive


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If the schedule of the project isa very high priority, incentive-type contracts are moreeffective than other contractpricing approaches. Incentive

contracts can be used tomotivate the seller to controlcosts and strive for outstandingtechnical or schedule

erformance.


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T hese types of contractsprovide the foundation on whichto build win-win outcomes for the buyer and the seller. Proper selection of the contract

vehicle and structuring of related incentives minimizescommon problems such as costoverruns, schedule delays andfailure to achieve ex ected


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Common schedule performanceobjectives can be developed for multiple project contractors.R eimbursable-with-incentive-feecontracts can be awarded more

quickly than fixed price or unitprice contracts and are mostfrequently used for servicecontract work.


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T hese types of contracts arenot commonly used for acquiring standard materials,engineered materials andequipment. T he performance

incentives used in reimbursable-with-incentive-fee contractsshould be balanced. T o ensuresuccess, incentive contractsshould be selected carefull ,


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R eimbursable with Fixedor Percentage Fee:

In a reimbursable with fixed- or percentage-fee contractapproach, the seller commits toproviding the products andservices requested by a buyer

for actual costs plus a fee. Afixed fee could be used, whichis based upon a rough estimateof the value of the goods andservices that ma be included in


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T his type of contract iscommonly used when it is

difficult to define the scope of work for a contract well enoughto support a fixed or unit price

contract approach.T

headvantages of this type of pricing is that it requires lesstime for the procurement

rocess activities that must be


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Several issues are associatedwith the reimbursable with fixed

or percentage fee contractapproach:It is one of the most difficult

contract to administer It requires extensiveinvolvement by the buyer in

controlling contract costs


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T here are cost limits thatshould be included in

reimbursable contractsChanges in conditions havelittle impact on reimbursable

contracts since the contractor is reimbursed for any additionalcosts that are incurred inimplementing a change


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T his approach is seldom usedfor procuring standard

materials, engineered materialsand equipmentT his approach is used for major

service contracts where thereis difficulty in defining thescope of the work in sufficientdetail


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T arget price contracts are frequentlyused for services contracts where

there is an element of uncertaintyassociated with the scope of work tobe performed. R eimbursable-with-percentage-fee contracts are used

for service contract work.R eimbursable with fixed-or percentage-fee contracts are usedfor major service contracts where

the buyer has difficulty in defining


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Choosing the correct contractapproach based product type

and preparation for the projectcan help to ensure quality,schedule and cost objectives

are met.

Documents

Contracts, preparation, pricing and implementation