College of Engineering

Contract in Project Management

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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 the agreements 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 the terms of ( owner and contractor); Owner may = buyer Contractor may = seller, provider (vendor)
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Introduction
Construction projects involve an integrated work of various parties such 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 or a 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 agreement between the parties to exchange something of value.

Contracts are generally written. The contract helps to align the interests of the Owner and the contractor (provider).

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Owner/contractor Relationship

+ +
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Differing Interests

Contract

Contract relationships
The most common contract relationships created by modern construction projects are: The owner and contractor(s) The owner and design professional The contractor and sub-contractor(s)
If there is a construction management team is hired, then the relationship between the owner and contractor will be indirect!.

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Elements of valid Contract

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 may be:
Written Spoken (with limitations) Demonstrated through action

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Consideration
Both parties must receive something:
Financial or non-financial Directly or indirectly

Also called Exchange of value

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Since the issue that relate To the contracts is the pricing and cost We will introduce this topic in 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 price Wrong type of contract

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What is a Reasonable Price?

Lower cost
Buyers Estimate Reasonable Price ??

??

Sellers Estimate

Higher profit
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Ensuring a Reasonable Price

Use independent, pre-bid estimates to aid in evaluating proposals. Use Value Engineering to reduce cost without reducing functionality. Reject bids that are too low:
Less than 80% of second lowest bid

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Types of Contracts
Contracts

Price-Based Contracts

Cost-Based Contracts

Hybrid Contracts
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Price-based contracts
Firm fixed price:
Seller agrees to deliver the defined scope for a set price Also called lump sum

Unit price:
Set price per unit of product or service Widely used in construction
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ew Owner-view Owner-view Owner-view Owner-view Owner-view Owner-view

Firm-fixed contracts (lump sum contract(

Advantages:
Better budget control Seller assumes most cost risk Fewer staff needed to monitor and manage

Disadvantages:
More effort needed to define scope Changes can be expensive Seller may compromise on quality
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ntractor-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.
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ntractor-view.. Contractor-view.. Contractor-view.. Contractor-view.. Contractor-view..

Unit Price Contracts

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 Page 22

Cost-Based Contracts
The amount that the Owner pays is driven 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)
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ntractor-view.. Contractor-view.. Contractor-view.. Contractor-view.. Contractor-view..

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

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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 been reached

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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 prepared very well to avoid problems, exactly as the proverb say: The cost of prevention is always

less than the cost of the cure

to make everything between the owner and contractor very clear.

Pay effort in the beginning and save money, relationship, and time later by the establish of proper Contract!
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Questions ?!
Thank you

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