(11) Project Contract

Question 1

Importance of Relationships (inv..7)

Answer 1

• Investment in relationship prior to the contract is important.
  - Research about the company.
  - Visiting contractor’s site.
  - Socialising with focus.

Question 2

Importance of Relationships (ong..7)

Answer 2

• Ongoing relationship between the parties.

Question 3

Importance of Relationships (proc..7)

Answer 3

Processes within the contract to nurture the relationship.
- Sitting on joint steering committees and other joint management
processes .
- E.g. sharing office space, regular meeting.

Question 4

Importance of Relationships (con..7)

Answer 4

Contract in the legal jurisdiction of the client.

- Contractor should comply with the legal jurisdiction of the client if possible.

Question 5

Importance of Relationships (acc..7)

Answer 5

Access to mutually agreed moderation or arbitration to avoid going to court.

Question 6

Importance of Relationships (cou..7)

Answer 6

Court action is a last resort action (expensive and slow).

Question 7

Importance of Relationships (ter..7)

Answer 7

Terms of contract.

Question 8

Tension between contractors and clients.

Answer 8

Contractors
- Maximum fair profit
- Minimum fair scope and quality
Clients
- Maximum scope and quality
- Minimum project cost

Question 9

Agreeing agendas between contractors and clients (con..)

Answer 9

Contractor

• Good referee
• Recurring business
• Be more cost effective

Question 10

Agreeing agendas between contractors and clients (cli..)

Answer 10

Client

• Less induction overhead for a known contractor
• Don’t waste time to search for contractors
• Confidence and Trust in the contractor
• Cost savings

Question 11

What is a contract?

Answer 11

A voluntary, deliberate, and legally binding agreement between two or more competent parties.

Question 12

Contracts are usually…

Answer 12

Written but may be spoken or implied, and generally have to do with employment, sale or lease, or tenancy.

Question 13

5 Conditions for Legal Contracts (1)

Answer 13

There must be an offer.

- Offer and acceptance are required.

Question 14

5 Conditions for Legal Contracts (2)

Answer 14

There must be consideration.

- An exchange is required (usually goods for money).

Question 15

5 Conditions for Legal Contracts (3)

Answer 15

• There must be legal capacity.

- Those entering the contract must be legally able to do so.

Question 16

5 Conditions for Legal Contracts (4)

Answer 16

• There must be legal purpose.

- The contract must be for something legal.

Question 17

5 Conditions for Legal Contracts (5)

Answer 17

• There must be intention.

- Both sides should know it’s legally binding.

Question 18

Typical Examples of Contract Breaches.

Answer 18

• Failure to provide services on time or in full.
  
  • Defective work or goods.
  • Non-payment.
  • Breaches of warranties.

Question 19

How to Prove a Breach of Contract?

Answer 19

Every legal argument
takes off from establishing a few things.
- You must verify:
- The contract existed.
- The contract was broken.
- You incurred losses.
- The person or business you’re challenging was responsible for these losses.

Question 20

Contract Types.

Answer 20

1. Fixed Price Contracts (lump sum contracts)

2. Cost Reimbursable Contracts.

Question 21

1. Fixed Price Contracts

Answer 21

• Firm fixed price (FFP).
• Fixed price incentive fee (FPIF).
• Fixed price economic price adjustment (FPEPA).
• Contractor bears risk.

Question 22

Why does contractor bear risk?

Answer 22

• Since the price is fixed, cost overruns may not be passed on to the client.

Question 23

Firm fixed price (FFP).

Answer 23

• One price is agreed upon for all the work.
  
  • Preferred by both clients and contractors when there is high level of certainty.
    
    • Contractor has incentives to reduce costs → client should have an effective monitoring and quality control system
    • Used in training programmes, producing parts to
      specification, etc.

Question 24

Fixed price incentive fee (FPIF).

Answer 24

• The price is fixed with an incentive for meeting a target specified in the contract.

Question 25

Fixed price economic price adjustment (FPEPA).

Answer 25

- Popular where fluctuations in the exchange or interest rate may impact the project.

Question 26

2. Cost Reimbursable Contracts.

Answer 26

- Cost plus fixed fee (CPFF). - Cost plus incentive fee (CPIF). - Time and materials (T&M) contracts.

Question 27

Cost plus fixed fee (CPFF).

Answer 27

- Cost plus fixed fee (CPFF). - The contractor passes the cost back to the client and receives an additional fee. - Used for development and test projects. - Level of effort is justified because of high technical and cost uncertainty.

Question 28

Client bears risk for CPFF.

Answer 28

- Since all the costs must be reimbursed to the contractor, the client bears the risk of cost overruns. - Client must exercise substantial external control over the contractor’s work. - Supplier's cost accounting system must be open to the customer.

Question 29

Cost plus incentive fee (CPIF).

Answer 29

- The contractor passes the cost back to the client and gets an incentive for meeting a target specified in the contract. - Client and contractor bears risk. - The client bears most of the risk here, but the incentive fee motivates the contractor to keep the costs down.

Question 30

Time and materials (T&M) contracts.

Answer 30

- Mostly used for small amounts of money and when the scope has not been clearly defined. - Client bears the risk? - The client pays the contractor for all the time and materials the contractor applies to the project.

Question 31

Point of Total Assumption (definition)

Answer 31

(PTA) is the point in the contract where a contractor assumes responsibility for all additional costs.

Question 32

Formula of PTA

Answer 32

PTA = target cost + (ceiling price - target price) / % of sharing cost overrun

Question 33

Project Partnering

Answer 33

Many projects will be undertaken with contractors.

Question 34

Partnering is about..

Answer 34

Turning contractual relationships into collaborative teams.

Question 35

Partnering requires...

Answer 35

Heavy up-front investments in terms of time and construction of a good working framework.

Question 36

What is vital and important about Project Partnering?

Answer 36

- Top management support. | - The selection of people and long-term commitment to the project.

Question 37

Difficulties of Clients and Contractors in Relationship (clients)

Answer 37

Clients. - Oppressively monitor contractor’s performance. - Challenging each and every request.

Question 38

Difficulties of Clients and Contractors in Relationship (contractors)

Answer 38

Contractors. - Exploit loopholes in the contract. - Manipulating information. - Taking advantage of owner ignorance.

Question 39

Partnering rejects...

Answer 39

- The adversarial zero-sum legal contract model which often results in legal action to resolve problems.

Question 40

How to conduct business with other organisation?

Answer 40

- Respect. - Trust. - Collaboration.

Question 41

Partnership Advantages.

Answer 41

- Improved efficiency. - Cost effectiveness. - Increased opportunity for innovation. - Continuous improvement. - Fluid communication.

Question 42

Why Partnerships Fail?

Answer 42

- Senior management give inadequate support or withdraws, for instance: - Fail to resolve an escalated decision. - Do not support lower manager decisions. - Differences in organisational culture. - Lack of partnering evaluation procedures. - Failure to exploit continuous improvement. - 50:50 split of *risk and reward* can help.