Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

CERT IFIED
COLLEGE OF ENGINEERING CERTIFICATENUMBER
MECHANICAL ENGINEERING DEPARTMENT AJA18-0190

FACULY MARKED ASSIGNMENT NO. 8

MAIN CONTRACTS:
TYPES AND ASSOCIATED RISKS

Submitted by:
GROUP 2
Antonio, Renato Miguel D.
Aron, Vincezar C.
Burgos, John Adrian I.
Castillo, Zepheus M.
Cleofe, Isiah Jiego B.
Cruz, Vincent Kristoffer D.
Domingo, Ralph Francis L.
Granada, Joshua P.
Nabos, Fritz Gerald A.
Nevalga, Cian Michael R.
Paguagan, John Kenneth P.

BSME 3-1

PUP NDC Compound, Anonas Street, Sta. Mesa, Manila 1016 Direct Line: 716-6273
Website: www.pup.edu.ph | Email: ce@pup.edu.ph

THE COUNTRY’S 1st POLYTECHNICU

 Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
CERT IFIED
COLLEGE OF ENGINEERING CERTIFICATENUMBER
MECHANICAL ENGINEERING DEPARTMENT AJA18-0190

MAIN CONTRACTS:
TYPES AND ASSOCIATED RISKS

1. Fixed Price (FP)

The Buyer understands how much money he or she must pay the Seller at the
outset of the contract. The buyer's obligation is set in stone. As a result, the Buyer's Cost
Uncertainty is relatively low.

The Seller has no idea how much profit he will make at the beginning of the
contract. It's possible that the Seller will suffer a financial loss. If the task is done within
the Buyer's budget, the Seller earns a profit. If not, the Seller will lose money. As a result,
we may conclude that the Seller's likelihood of profit is substantial.

Risk is low for the Buyer while it is high for the Seller.

• Firm Fixed Price (FFP)

At the time of contract signing, the Buyer and Seller agree on a price.
The contract's scope is properly specified.
Only a proper change control method may affect the price and scope.
In this form of contract, the Sellers have more cost risk than the Buyers.

• Fixed Price with Economic Price Adjustment (FP/FPA)

At the time of the Contract's signature, the Buyer and Seller agree on a Fixed
Price.
The Buyer and Seller come to an agreement on certain criteria for adjusting the
final price.
The criteria are based on market and economic factors, which are beyond the
control of either the Buyer or the Seller.
The Contract's Scope is usually carefully specified.
These agreements are usually for a period of many years.
Typically, these contracts include several administrative challenges, but the
amount of money at stake surpasses the administrative challenges.

• Fixed Price Incentive Fee (FPIF)

Negative incentives can also be included in FPIF contracts. These are

sometimes referred to as penalties. If the Seller fails to achieve the stated
performance standards, fines will be imposed.
PUP NDC Compound, Anonas Street, Sta. Mesa, Manila 1016 Direct Line: 716-6273
Website: www.pup.edu.ph | Email: ce@pup.edu.ph

THE COUNTRY’S 1st POLYTECHNICU

 Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
CERT IFIED
COLLEGE OF ENGINEERING CERTIFICATENUMBER
MECHANICAL ENGINEERING DEPARTMENT AJA18-0190

The ultimate price of an FPIF Contract is decided only after the contracted job
is completed. The ultimate pricing may change depending on the Seller's
performance.
The performance criterion can be established by the Buyer and Seller using any
project parameter. Schedule, cost, quality, and technical performance are
examples of project parameters. Some examples of performance requirements
are shown below.

2. Cost Plus (CP) or Cost Reimbursable (CR)

The Buyer has no idea how much money he or she will have to pay the Seller at
the outset of the contract. In a pure CP Contract, the buyer has potentially limitless
responsibility. As a result, we may conclude that the Buyer has a high level of Cost
Uncertainty.

The Seller understands from the commencement of the Contract that the Buyer
will refund all justifiable expenditures. In addition, the Seller will be compensated for
agreed-upon fees. In a pure CP Contract, the Seller is almost certain to make a profit. As
a result, we may conclude that the Seller's probability of profit is minimal.

Risk is low for the Seller while it is high for the Buyer.

• Cost Plus Fixed Fee (CPFF)

Advantages:

Because the contractor is unlikely to “inflate” pricing to offset risks, the ultimate
cost may be cheaper than under a standard contract.
In addition, the contractor has less motivation to keep project expenditures under
control (in contrast to other types of contracts, such as a fixed-price contract)
They can typically deliver higher-quality results than traditional contracts.

Disadvantages:

The whole cost of the project may not be apparent at the start of discussions.
It may be necessary to add to the project's administration or oversight to guarantee
that the contractor is accounting for all of the costs.
In comparison to fixed-price contracts, there may be less motivation to complete
the job quickly.

• Cost Plus Incentive Fee (CPIF)

In this type of contract, incentives are negotiated and agreed upon ahead of time.
When the project's actual cost is less than the contract's originally agreed-upon cost, the
incentive fee kicks in. The following elements should be included in a cost plus incentive
fee contract:

PUP NDC Compound, Anonas Street, Sta. Mesa, Manila 1016 Direct Line: 716-6273
Website: www.pup.edu.ph | Email: ce@pup.edu.ph

THE COUNTRY’S 1st POLYTECHNICU

 Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
CERT IFIED
COLLEGE OF ENGINEERING CERTIFICATENUMBER
MECHANICAL ENGINEERING DEPARTMENT AJA18-0190

Target cost
Base pay for the contractor
A method to calculate incentive bonuses
Minimum contractor pay
Maximum contractor pay
Target fees
Minimum fees
Maximum fees
A method to calculate fee adjustments.

• Cost Plus Award Fee (CPAF)

The cost plus award fee (CPAF) is a contract that allows the seller to be
compensated for the costs of completing the job while also earning a bonus if the
work is performed well. The amount of this charge is decided by an assessment
based on contract conditions, and it is typically non-negotiable. If the performance
isn't up to par, the buyer will not be reimbursed for the money.

Its benefits include:

Providing a financial incentive for the contractor to perform better.

Providing a financial incentive for the contractor to provide higher-quality
items.
Because good performance will be recognized, there will be a better
relationship between the vendor and the customer, or client.
Because the incentive is closely connected to both performance and correct
appraisal of that performance, there should be better communication
between the contractor and the customer.

3. Time and Material (T&M)

T&M is a type of contract that is in the middle. It's a cross between FP and CP.
Contracts of this type are based on a fixed rate. Both the Buyer and the Seller are subject
to this fixed rate. In T&M Contracts, the uncertainty is shared by both the buyer and the
seller. There is no sub-type in this contract type.

The Buyer has no idea how long the Contract will last or how much
material/resources will be necessary to execute it at the start of the Contract. Due of these
unknowns, the Buyer's cost may increase. As a result, we may argue that the Buyer faces
some cost uncertainty.

The Seller has no idea how the cost of labor or material will change throughout the
course of the Contract's life cycle when the contract is signed. Over the course of the
Contract's life cycle, labor or material costs may rise. This might reduce the Seller's profit
per unit. If the Costs rise significantly, the Seller may potentially lose money. As a result,
we may conclude that the Seller faces some cost uncertainty.

Both the Buyer and the Seller share the Risk.

PUP NDC Compound, Anonas Street, Sta. Mesa, Manila 1016 Direct Line: 716-6273
Website: www.pup.edu.ph | Email: ce@pup.edu.ph

THE COUNTRY’S 1st POLYTECHNICU