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Key Topics
Requirement
Write a two- to four-page paper that describes an event in the past from either your personal or professional life in which you used a contract. Answer the following questions.
1. How did assumption of risk play a part in the type of contract used?
2. What type of contract was finally settled upon in this situation?
3. Was this type of contract appropriate for this situation or was there a better type that should have been used?
4. Did the type of contract impact the success of the project?
Solution
Introduction
The project that has been considered here for discussion is one where the reconstruction of my home was to be done and a suitable contractor were being searched.
The paper discusses the contracts that were formed in the earlier phase based on various risk assumptions and how the mutual discussions led to the final selection of the contract type. However, the contract was found to be inadequate which led to some major corrections and subsequent changes in the whole contract.
This paper also discusses the various types of contract and their impact on the project success.
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Risk Assumption and Type of Contract Used
Assumption of risks associated with any project plays great role in deciding over the type of contract that will be chosen (Muller and Turner, 2005). Assumptions of risks allow the owner to understand the various costs and timeline associated with the project success. Therefore, to reduce the impact of the project risks on the two important factors, namely, time and money, the owner tries to choose the most suitable contract type.
In the initial phase of the reconstruction phase, it was assumed that contractor might try to inflate the contract price and, therefore, decision on “firm fixed price contract” was considered from the owner’s side. Moreover, lag in the attitude of labor towards the work, increasing rate of materials, and likeliness of increase of transportation cost were sighted as some of the other risks. Therefore, it was decided that the firm fixed price contract would be the most suitable form of contract where the contractor cannot demand unnecessary amount from the owner.
Moreover, it secures the owner from any kind of price changes in the market or lack of orientation of the staffs towards the work. All headaches goes to the contractor.
Final Selection of Contract Type
However, the contractor did not agreed to the firm fixed price contract stating the fact that there exists with the project and there can be significant impact on the timeline and cost structure decided for the project. Therefore, the owner decided to change the playing field and instead of “firm fixed price contract”, the owner decided to use “Fixed price plus incentive fee (FPIF)” contract format. This type of contract allows the contractor to receive some incentive on behalf of completion of the project on stated timeline and within the defined cost structure.
However, it can be stated as monetary loss for the owner to some extent (Turner, 2004). As sighted by owner, completion of the project on time was more important than little give away of defined fund for the reconstruction of the house.
The contractor, looking at the lucrative offer, agreed to bear all the associated risks for the project and complete the project within the prior defined cost structure and timeline and receive incentives on the same.
Appropriate Contract
As the case here, the finally decided contract was FPIF, which cannot be defined as the most appropriate type of contract (Turner and Simister, 2001). The reason is that the prices of associated material with the construction are likely to fluctuate including other variables, which might have significant impact on the profit structure of the contractor. This way contractor will not be able to save right amount and he might try to cut costs at unnecessary points which might impact the quality of the overall contract.
For such situation, CPFF (Costs plus fixed fee) contract type will be the most suitable where the owner bears all the costs associated with the project progress in case there is change in the scope of the project or occurrence of any type of risks, and the contractor will be paid a fixed incentive after the project completion which apart from the costs bore by the owner.
This way, the contractor will focus what needs to be done without bothering much on saving the costs and thus a quality result can be ensured in the end.
Contract Type and Project Success
Type of contract impacts the project success. In the initial phase the contract decided for the project was found not suitable as there was the chance that the contractor may deviate from giving quality results after sighting shortage in the profit due to risk of inflating prices of material and other cost related elements and extension in the project timeline due to irresponsive labors. However, fixing the contract fee for contractor taking the whole burden of costs on the owner’s shoulder solved the issue.
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The paper discussed various types of associated risks with the construction of home and the way a proper contract can handle the situation. From the study it can be suggested that assumption of the risk and selection of proper contract is imperative for the success of the project.
References
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Müller, R., & Turner, J. R. (2005). The impact of principal–agent relationship and contract type on communication between project owner and manager. International Journal of Project Management, 23(5), 398-403.
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Turner, J. R. (2004). Farsighted project contract management: incomplete in its entirety. Construction Management and Economics, 22(1), 75-83.
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Turner, J. R., & Simister, S. J. (2001). Project contract management and a theory of organization. International journal of project management, 19(8), 457-464.
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