(2, 1) – Contract forms and pricing mechanisms for major programmes and projects

Question 1

What is a model form of contract? Why are they useful?

Answer 1

A model form of contract is a template of contractual clauses for the execution of a project. They are useful as they avoid the need for the parties to create a bespoke agreement.

Question 2

What are the Benefits and Caveats of model forms of contracts?

Answer 2

+ Reduce timescales and costs associated with bespoke agreements
- Model form of contracts might not be suitable for projects with unique features or where needs of any parties are different from normal expectations.

Question 3

What is NEC? What are the different types of NEC 3 contracts?

Answer 3

The new engineering contract is a model contract created by the institution of civil engineers (ICE). It is designed to avoid adversarial / claim and litigate approach to project working.

• ECC (Engineering and Construction Contract)
• ECSC (Engineering and Short Construction Contract)
• PSC (Professional Services Contract)

Question 4

NEC 3 contracts adopt a three-tier structure, what are these?

Answer 4

1. Core Clauses – 9 generic clauses which apply to all projects which are the contractors responsibility, time, testing and defects, payment, compensation events, title, risks, insurance and termination
2. Main Option Clauses – 6 main option clauses (pricing options) which are priced contract with activity schedule, priced contract with bills of quantities (lump sum), target costs with activity schedule, target cost with bills of quantities (financial risk sharing), cost reimbursable and management contract.
3. Secondary Option Clauses – these are in addition to pricing clauses such as price adjustment for inflation, changes in law, multiple currencies, bonus for early completion, delay damages, partnering performance bond, advanced payment to contractors, limits to contractor’s liability.

Question 5

What is the FIDIC model form of contract?

Answer 5

It is one of the most widely used model forms of contracts used in over 88 countries. It is written by the International federation of consulting engineers and comprises standard terms and conditions used in construction, plant and design industries.

Question 6

What is the JCT model form of contract?

Answer 6

The joint contracts tribunal is a limited company whose board comprises all the industries it represents which are in the building sector. The JCT contracts are suitable for both minor and major projects and are generally let on a fixed lump sum price with progress payments for completion of works. They encourage retention monies and up-front agreement of liquidated damages.

Question 7

What factors might influence if you go for a fixed price model or a flexible price model?

Answer 7

Risk
Value
Power
Relationship
Custom
External

Question 8

What are the benefits of a fixed pricing model to the buyer?

Answer 8

Risk Management
Cash flow management
Supplier Motivation
Reduced administration

Question 9

What is activity schedule pricing?

Answer 9

The payment is directly linked to the activities which are required. When you are able to clearly define each of the activities a supplier can completed it allows the supplier to quote with a high degree of certainty.

Question 10

What is a BOQ? What information will an estimator need to produce one?

Answer 10

A bill of quantities is commonly used in the construction industry. When tendering suppliers are expected to quote specific rates for each item stated in the BOQ. This allows you to see the underlying cost drivers. As estimator will require the following info to produce one:

• Plans / Drawings
• Materials / Labour
• Costs

Question 11

What is a target costing method?

Answer 11

Target costs = selling price – profit, this works as an incentivised pricing mechanism. This is done by setting a ceiling level above the target cost which is a maximum price. Any costs above or below this will be split between the parties.
Target costing with a maximum price achieves the same thing as a fixed price with incentivisation.

Question 12

What is a cost-plus approach to pricing?

Answer 12

The buyer agrees to cover the supplier’s costs and a % uplift for profit. These often include a cap on the price or a limitation clause to protect the buyer.

Question 13

What are common approaches to cost-plus buying?

Answer 13

• Cost plus fixed fee (actual costs + pre-determined fixed fee for profit)
• Cost plus incentive fee (actual costs + fee for meeting or exceeding cost targets / objectives)
• Cost plus award fee (actual costs + bonus based on performance)
• Cost without fee (actual costs paid)
• Cost sharing (shared costs where work will be mutually beneficial)
• Time and Materials (fixed rate for the labour + materials costs)