MBA Program

Project Management
Cairo – August 2021

Lectures Prepared by
Dr. Amr A. Elsharkawy
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Safety Moment

2
Project Contract
Management
Lecture 5

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Learning Objectives

 What is a Contract.

 Contract Obligations ( Client / Contractor ).

 Different Types of Contracts.

 Contract Samples .

 Administrating the Contract .

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 Understating Contracts

“ A Contract is a legally binding agreement

between the parties, that identifies:
All contractual administration
Rights and liabilities for each party
in the event of breach. “

A “breach” is when one party violates the

terms of the contract.
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 Understating Contracts
“Contract” means the Contract Agreement, the
Letter of Acceptance, the Letter of Tender,
any addenda referred to in the Contract
Agreement, these Conditions, the
Specification, the Drawings, the Schedules,
the Contractor’s Proposal, the JV
Undertaking (if applicable) and the further
documents (if any) which are listed in the
Contract Agreement or in the Letter of
Acceptance. ( FIDIC )

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Contract Models ( most common)

 FIDIC

 Sample Contract services

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 Understating Contracts
 Assume a project is required to engineer,
procure and construct ( any facility/ service )

 What obligations for “COMPANY / EMPLOYER”

to undertake ?

 What obligations for “CONTRACTOR” to

commit a contract ?

Amr Elsharkawy 8
 Client Obligations
Some examples of Client’s obligations:
Payments .

Access to Site .

Permits to Operate .

 Approvals .

Insurances ( variables !) .

Rely-upon Info .

Subsoil Conditions – obstacles ( variable ! )

Secrecy ( bidding)

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Contractor Obligations
Some examples of Contractor ’s obligations:
 HSSE ……. First till End
 Managing the Scope
 Guarantees
 Schedule .

 Budget /cost ??
 Care, protect the Facilities ( Rehabilitations )
 Patents copyright
 Secrecy 10
 Contractor Obligations
Deep water horizon crisis

What is the 1st submission after contract award ?

Sample HSSE
Amr Elsharkawy 11
Contract Models ( most common)

 Lump Sum / Fixed Price ( LSTK )

 Cost Reimbursable Contracts

 Unit Price Contract (TUR)

 BOT

 BOOT

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Contract Models
Project Budget (Cost ) = Direct + Indirect
 Direct costs $80,000
 Direct overhead #$20,000
 Total direct costs $100,000
 G&A overhead (20%) #$20,000
 Total costs $120,000
 Profit (20%) #$24,000
 Total bid $144,000

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Contract Models ( most common)
 Lump Sum ( LSTK )

This category of contract involves a fixed total

price for a well-defined product. To the extent
that the product is not well defined, both the
buyer and seller are at risk. The buyer may not
receive the desired product or the seller may
need to incur additional cost to supply it .
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Contract Models ( most common)
Greater risk on contractor.
 Lump Sum – Fixed Price
A contract not subject to escalation and
qualified with a validity period during which the
fixed price will remain unchanged .
Contractor maximum risk and full responsibility
for all costs and resulting profit.
Example : Contract = $1,100,000

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Contract Models ( most common)
 Lump Sum – Firm Price with
Economic Price Adjustment ( FPEPA)
A contract which sets forth a total cost related
to a defined point in time but with provisions
for adjustment of material and/or labor cost
in accordance with an agreed cost
escalation formula.
Example: Contract = $1,100,000 but a price
increase will be allowed in year 2 based on
, the US Consumer Price Index CPI Report
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for year 1.
Contract Models ( most common)
Or the contract price is $1,100,000 but a
price increase will be allowed in year 2 to
account for increases in specific material
costs.

 Fixed-Price Incentive Fee - FPIF

An FPIF contract specifies a target cost, a
target profit.
The FPIF contract provides a profit motive for
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Contract Models ( most common)

the contractor to perform efficiently from a

cost perspective. If the contractor completes
the contract while incurring less cost that
originally .
Example : Contract = $1,100,000 ( 950k +
150k) , profit is allowed If cost < = $950K
,otherwise an agreed % price increase will
be allowed.
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Contract Models ( most common)
 Cost Reimbursable Contracts

The seller's ( contractor ) costs are reimbursed

but the buyer ( client ) has the most cost risk
because the total cost are almost unknown.

This form of contract is often used when the

buyer can only describe what they need rather
than what is exactly required ( SOW ) . 19
Contract Models ( most common)
 Cost Reimbursable Contracts

- Scope / qty. are variable  MTO / BOQ

- Fees ( profit ) is fixed ( Value / percentage )

Sample Variable Scope ( MTO)

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Contract Models ( most common)
Cost-reimbursement contracts are most
suitable for CONTRACTOR use only when
uncertainties involved.

Example: R&D contracts.

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Contract Models ( most common)
 Cost Reimbursable – Plus Fixed Fee
“ Contractor’s fee element is fixed, except as provided for
any design changes and extra work being required by
Company “ .

 Cost Reimbursable – Plus Percentage Fee

“ Contractor's fee is set at a percentage of the total certified
costs charged to the contract “
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Contract Models ( most common)

 General setting for all CR contracts .

There must be careful check of the validity of the

scope , frequent audit of all contractor's expenditure
( 30% , 60% ,90% audit review ) .

Amr Elsharkawy 24
 Contract Models ( most common)
 TUR
Time / Material contracts are a type of contractual
arrangement that contains aspects of both cost-
reimbursable and fixed-price-type arrangements.

T&M contracts resemble cost-type arrangements

in that they are open ended, because the full
value of the arrangement is not defined at the
time of the award.
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 Contract Models ( most common)
example : when both parties agree on the
rates for the category of "senior engineers."
Or specific material ( i.e. Paints/m )

Amr Elsharkawy 26
 Contract Models ( most common)

 Build Operate Transfer, BOT

In the BOT approach, a private party retains a

concession for a fixed period from a public
party, called principal (client), for the
development and operation of a public facility.

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 Contract Models ( most common)

The development consists of the financing,

design and construction of the facility,
managing and maintaining the facility
adequately, and making it sufficiently profitable.
The contractor secures return of investment by
operating the facility and, during the concession
period, the contractor acts as owner. 28
 Contract Models ( most common)

At the end of the concession period, the

concessionaire/contractor transfers the
ownership of the facility free of Privileges to the
principal ( main client ) at no cost .

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 Contract Models ( most common)
 BOOT Build-Own-Operate-Transfer
Is a model of concession in which a public
authority makes an agreement with a private
company to Design Build, Own and Operate a
specific piece of an infrastructure such as
power, transport, water, and telecom industries,
within receiving the right to achieve income
from the facility under a period of time
(approximately 15-25 years), and later
transferring it back into public. 30
 Administrating The Contract

Project Manager role across Project

Phases :

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 Administrating The Contract

Bidding
Contractors' Clarifications
ITB/Contract
Scope , Pricing
Change management .
Dispute ( Arbitration)
Know the Players
Know the Technical Requirements
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Know the Players

1- Owner/Client ( JV )

2- Consortium Contractor

3- Subcontractors / Suppliers

4 - Other Stakeholders

5- Hand over sales to operation .

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Proper handover to operations
 Proposal Clarifications , Addendums

 Risk Register

 Contingency Analysis

 Escalation Analysis

 Letter of Intent , Addendum Letters

 As sold schedule

 As-Sold ( Signed ) Contract

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Amr Elsharkawy
Know the Contract – READ IT!
Three Fundamental Principles:

1- No work should be performed prior to Contract

signing

2- Use the Contract as the “Rule Book”

3- Manage risk (including changes) with

reference to the Contract
Amr Elsharkawy 38
Know the Contract – READ IT!
 Order of Precedence

 Deadlines
– Submission of schedules, quality plan, HSSE
plan, etc.

 Notice Requirements

Amr Elsharkawy 40
 Know the Contract – READ IT!
 Force Majeure
– Excuses from performance due to events
beyond its reasonable control as set out in the
Contract.
– Check whether the Contract allows for recovery
of time and costs.
 Client’s Non-payment

– Generally, contracts contain a right to suspend

and/or terminate in the event of non-payment by
the Client. Ensure that you are following the
contract terms exactly. 41
Case study
To: stan@SuperPolyCo.com
From: jrisk@CPX.com
10 – 06 - 09 , 06:38
Hey Stan,
Thanks for your voice message last night about the changes to the Plant FEED Gas Composition
data. We’ll go ahead and get started on those changes immediately. Don’t worry about any schedule
delays – am sure we can sort those out so we can still meet the completion date.
All the best, John

7 July 2009
CPX
The Woodlands, TX USA
Subject: Super Polymer X Project – CPX Delays
Dear Sirs,
It has recently come to our attention that CPX’s progress on the X Project is delayed due to rework
resulting from the revised data we provided last month and we instruct CPX to immediately take steps
to accelerate the progress of the Works at CPX’s cost so that CPX completes the Works by 1 August
2010.
Your friends at Super Poly Co.
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