Project Management

Chapter 9
Contract Management
Risk Management
Dr. Asif Mahmood
 • Art and science of managing a contractual
agreement throughout the contracting process
• The two most common contract forms are
completion contracts and term contracts
• Completion contract:
• The contractor is required to deliver a
definitive end product.
Contract • Term contract:
Management • The contract is required to deliver a specific
"level of effort," not an end product

• Letter contract or letter of intent: The letter

contract is a preliminary written instrument
authorizing the contractor to begin immediately
the manufacture of supplies or the performance
of services. The definitive contract must still be
negotiated.
 Types of Contracts
• These contracts provide for varying degrees of cost responsibility and profit
depending on the level of performance
• There are generally five types of contracts to consider:
• Fixed-Price (FP) or Lump sum
• If the estimated target cost was low, the total profit is reduced and may even
vanish
• It provides maximum protection to the owner for the ultimate cost of the project
• Changes requested by the owner after award of a contract lead to extra cost
 Contract Management
• Cost -Plus-Fixed-Fee (CPFF), Or Cost-Plus-Percentage-Fee (CPPF)
• This contract is employed when it is believed that accurate pricing could not be
achieved any other way
• Low risk, low return
• The cost may vary (tendency to increase) but the fee remains firm
• It requires that the company books be audited
• Guaranteed Maximum-Share Savings (GMSS)
• The contractor is paid a fixed fee for his profit and reimbursed for the actual cost of
engineering, materials, construction labor, and all other job costs, but only up to the
ceiling figure established as the "guaranteed maximum“
• Savings below the guaranteed maximum are shared between owner and contractor,
whereas contractor assumes the responsibility for any overrun beyond the guaranteed
maximum price
 Contract Management
• Fixed-Price-Incentive-Fee (FPIF)
• Same as fixed-price contracts except that they have a provision for adjustment of the
total profit by a formula that depends on the final total cost at completion of the
project and that has been agreed to in advance by both the owner and the contractor
• It provides an incentive to the contractor to reduce costs and therefore increase profit
• Cost-Plus-Incentive-Fee (CPIF)
• Cost-plus-incentive-fee contracts are the same as cost plus contracts except that they
have a provision for adjustment of the fee as determined by a formula that compares
the total project costs to the target cost
 Other Types

• A turnkey, a turnkey project, or a turnkey operation is a type of

project that is constructed so that it can be sold to any buyer as a
completed product.
• In real estate, turnkey is a fully functional, needs no upgrading or repairs
• Build–operate–transfer (BOT) or build–own–operate–transfer (BOOT) is a
form of project delivery method, usually for large-scale infrastructure
projects, wherein a private entity receives a concession from the public
sector to finance, design, construct, own, and operate a facility stated
in the concession contract.
• Lahore Ring Road Project (Southern Loop), Karachi - Hyderabad Motorway (M-9),
Lahore Sialkot Motorway Project, Swat Expressway Project
 Risk Management

• Risk is a measure of the probability and consequence

of not achieving a defined project goal.
• Risk has two primary components for a given event:
• A probability of occurrence of that event
• Impact (or consequence) of the event occurring
(amount at stake)

Risk = f (probability, consequence)

• Typically, future events (or outcomes) that are
favorable are called opportunities, whereas Overall risk is a function of its components
unfavorable events are called risks.
 Risk Preference and the Utility Function

Y axis— Utility (U), is defined as the amount of satisfaction or pleasure that the individual receives
from a payoff

X axis— The amount of money ($) at stake

Utility rises at a decreasing, constant and increasing rates for risker averter, neutral and seeker,
respectively.
Definition of Risk Management

Risk management is the act or practice of dealing with risk.

It includes planning for risk, identifying risks, analyzing risks,

developing risk response strategies, and monitoring and
controlling risks to determine how they have changed.
 RISK MANAG EMENT PROCESS
Risk management includes: planning, identification, analysis, response (handling),
and monitoring and control.
• Plan risk management is the process of developing and documenting an
organized, comprehensive, and interactive strategy and methods for identifying
and analyzing risks.
• Identify risks is the process of examining the program areas and each critical
technical process to identify and document the associated risk.
• Perform risk analysis is the process of examining each identified risk to estimate
the probability and the impact(s) on the project. It includes both qualitative risk
analysis and quantitative risk analysis.
 RISK MANAG EMENT PROCESS

• Plan risk response is the process that identifies, evaluates, selects,

and implements one or more strategies in order to reduce risk to an
acceptable level given program constraints and objectives.
• Response options: Acceptance, Avoidance, Mitigation (also known as Control),
and Transfer.
• Monitor and control risks is the process that systematically tracks and
evaluates the performance of risk response actions against established
metrics throughout the acquisition process and provides inputs to
updating risk response strategies, as appropriate.
 Risk Matrix

Response Options