Review Quiz 1 Contractor compensation Flashcards
what are the three types of contractor compensation?
- lump sum
- unit price
- negotiated
what kind of projects is lump sum good for and some advantages?
- projects where scope is well defined (building construction)
advantages: - owner has price certainty
- owner knows what the end of the project will be
- contractor and realize profit if completes project below fixed price
- contractor receives monthly progress payments based on estimated % of job completion
what are some disadvantages to lump sum?
- flexibility to incorporate design changes is limited, deviation from original plan must be dealt with through change orders/directives, can be expensive and lead to adversarial relationship
- complete set of plans and specification required before bidding and construction can begin
- can be risky to contractors
what kind of projects is unit price good for?
- well defied project scopes but uncertainty in material quantities (excavations)
- project can be predominantly broken into work items that can be characterized by units
- almost always used on heavy and highway construction contracts where earthwork and foundation work predominate
what are some advantages and disadvantages to unit price?
advantages:
- allows some flexibility in meeting variations in the quantity of work encountered during construction
- contractors dont need to be precise in their quantity takeoffs - generally roughly verify owners bid quantity
disadvantages:
- owner does not have a precise overall cost for the work until it is complete
- measured field quantities are pay quantities - owners quantity measurement teams must be more careful and precise
- can be manipulated by contractors - unbalancing the bid
what happens if a small or large quantity is specified for unit price?
unit price will be higher to offset mob in and de mob costs (small)
larger quantities lead to economies of scale - reducing price per unit
what is the percentage of deviation in unit price contract that results in renegotiation?
if the deviation exceeds 15% (CCDC -4) then unit price is normally renegotiated
- if deviation is on the high side +15%, owner will request unit price reduction on basis of economies of scale
- if deviation is on low side -15% the contractor will request that unit price be increased so they can recover mob in/de mob costs based on smaller quantity
what is negotiated contractor compensation?
- owner has flexibility to select the contractor on basis other than low bid
- owner invites selected contractors to review project documents available at time of negotiation
how does a negotiated contract work?
- based on documentation provided the contractor is invited to present their qualification to perform the work and to indicate his projected cost and fee for completing the work
- depending on level of documentation provided to the contractors the cost projections will vary widely
- in addition to considering cost, the owner will evaluate experience, reputation, facilities, staff available, charge rates, and fee structure to narrow down field to 1, 2, 3 contractors with whom they will negotiate the actual contract form and method of reimbursement
- most cases the design documents are incomplete, most common form of compensation is cost + fee
- contractor reimbursed for expenses incurred in construction
- contract describes in detail the nature of the expenses that are reimbursable
- normally all direct expenses from labour, equipment, and material as well as overhead to properly manage the project are reimbursable
- in addition, contractor receives a fee for his expertise and use of his plant in support of the job
- both parties must agree and clearly define the items that are reimbursable and must agree on the accounting procedures to be used
- particular attention must be paid to what home office overhead charges will be reimbursed
- the level of the fee in addition to the charge schedule to be used in reimbursement are major items of discussion during negotiation
what are the four common fee structures to negotiated contracts?
- cost + percentage of cost
- cost + fixed fee
- cost + fixed fee plus profit-sharing clause
- cost + sliding fee
what are some advantages and disadvantages to cost + percentage of cost
- most lucrative to contractor but subject to abuse
- little incentive to be efficient and economical
what are some advantages and disadvantages to cost + fixed fee
- fee usually set percentage of previously estimated total cost
- contractor has incentive to recover their fee over the shortest time frame
- drawback - contractor may use expensive reimbursable materials and methods to expedite the completion of the project
what are some advantages and disadvantages to cost + fixed fee + profit sharing clause
- rewards contractor who controls costs, keeping them to a minimum
- target price for contract is agreed upon
- if contractor brings job in under target price, the owner shares the savings ( commonly 25%) with the contractor
- if the contractor exceeds the target price, no savings to be shared
what is a GMP for negotiated contract
in some case the target is used to define a Guaranteed Maximum Price (GMP), a price the contractor guarantees will not be exceeded
- if the GMP is exceeded, the contractor must absorb the overrun
- for a contractor to agree to a GMP, the plans and concept drawings must be sufficiently detailed to allow determination of a reasonable target
Advantages of a GMP
- with GMP, incentive exists to save money below target
- owner is also more likely to accept the project as complete if it is under target
- each additional dollar paid for work on the punch lust costs the contractor 25 cents but costs the owner 75 cents
- this reduces the amount of quibbling over the punch list
