Project Control (graded)

What are the diferences among a fxed-price contract, a time-and-

materials contract, and a reimbursable contract in terms of how well
defned a contract needs to be relatie to price, scope, and schedule
prior to the commencement of an! wor"# $ow much control oer the
project scope, price, and schedule should the contractor hae under
each contract t!pe#
Fixed Price Contract - the amount of payment does not depend on the amount
of resources or time expended.
Time and Materials Contract - Hybrid of fxed price and cost-reimbursement
contracts is paid on the basis:
1 !ctual cost of direct labor" usually at specifed hourly rates
# !ctual cost materials and e$uipment usa%e
& !%reed upon fxed add-on to co'er the contracts o'erheads ( proft
)eimbursement Contract - contract under *hich allo*able ( reasonable costs
incurred by a contractor in the performance of a contract are reimbursed in
accordance *ith the terms of the contract.
$ow di%cult is it to handle out-of-scope wor" with the & contract t!pes
(fxed price, time and materials, reimbursable) after an agreement has
been executed#
Fixed price contracts ha'e a ne%otiated price that remains the same o'er the life
of the contract. ! Fixed Fee or +ump ,um Contract is suitable if the scope and
schedule of the pro-ect are su.ciently defned to allo* the consultin% en%ineer
to estimate pro-ect costs. Contractor has the maximum control o'er pro-ect
scope" price" and schedule in the Fixed Price contract.
Time ( Materials - Time ( Materials contracts ha'e rates ne%otiated before
contract a*ard for the cost by labor cate%ory and materials. !s *or/ is
completed the contractor bills a%ainst the rates a%reed to in the contract
re%ardless of the actual cost. )ates for labor and materials do not chan%e o'er
the contract but are billed as incurred. Time and materials contracts can ha'e
annual escalation rates incorporated in them to re0ect increasin% costs.
Cost reimbursable contracts in'ol'e the %o'ernment payin% for the actual cost to
complete the *or/. Cost reimbursable contracts ha'e a 'ariety of schemes for
pro'idin% a fee or proft to the contractor. 1ne of them is the cost plus contract.
This is a contract a%reement *herein the purchaser a%rees to pay the cost of all
labor and materials plus an amount for contractor o'erhead and proft usually as
a percenta%e of the labor and material cost.
1ut of scope *or/ can best be handled by the Time and materials contract as
this *ill be billed by the rates already ne%otiated and the added $uantity of *or/
%oes as an addendum in the ori%inal contract a%reement.
2ith a fxed price" out of scope *or/ is more di.cult to decide *ho pays the bill.
The customer could claim that because of somethin% the contractor has done
has caused the out of scope to surface. 1n the other hand the contractor could
claim that because of the proposal made by the customer is the reason *hy the
out of scope has occurred. 1ut of scope" e'en thou%h hard to plan" should be
discussed before the pro-ect starts.
2ith time and materials" out of scope should not be as di.cult" because time
and materials ha'e already been established. Time and materials are already
priced. Ho*e'er" e'en thou%h this is the most ris/ free" it should as *ell be
discussed at the be%innin% of the pro-ect.
)eimbursable should not be di.cult because e'erythin% is reimbursable. The
problem *ith this contract is that the contractor may not be moti'ated to control
the price. Ho*e'er" this also needs to be discussed at the be%innin% of the
pro-ect.
Fixed Price contracts are contracts re$uirin% a thorou%h /no*led%e of the exact
scope of *or/. 3t is desi%ned to encompass the *hole pro-ect. 2ith that reality
unli/ely" it means that a 4P1 contract *ill ha'e conditions set for additions and
un/no*n scenarios.
Time and materials contract is pretty open on the detail. 2hile one still needs to
/no* the specifcs on *hat is bein% done" the exact units are not there. The
reimbursement is set on the units of time by materials and labor. Thus" the
expansion of tas/s only adds cost" not ne* ne%otiations.
)eimbursable is li/ely the most di.cult. The contract is more open and each
item is %ettin% added indi'idually and tallied as they %o. Thus the contract is not
set on scope or on price.
What do !ou see as the more common mista"es made b!
customers'clients or their procurement representaties as it relates to
project planning and contract formulation#
3 *ould say in my experience is that the scope is not accurate or all the costs are
not accounted for. 2hen you are in a contract and you need to start addin% costs
that *ere not ori%inally apart of the bid the chan%es tend to eat money $uic/ly
a5ectin% the total cost. This does cut both *ays as the contractors can ma/e a
mista/e readin% the scope or underestimatin% the costs of completin% certain
tas/s.
6 Failin% to try the product or %et a free demonstration before purchasin%
6 +ittle or no research before purchasin%
6 Poor plannin%
6 7ot ac$uirin% ade$uate or competiti'e biddin%
!ll re$uired information not submitted *ith purchase re$uest
7ot clearly defnin% the terms in a contract
(ow that !ou "now the diferences among a fxed price contract, a time
and materials contract, and a reimbursable contract, let)s discuss some
of the fner points to consider* +o !ou thin" a fxed price contract
re,uires less management attention than a reimbursable contract# Wh!
or wh! not#
Fixed Price: is a contract in *hich one party pays another party the full sum of
money" in return for %oods and ser'ices.
)eimbursable Contract: )eimbursable contracts typically fall *ithin similar
constraints" they all in'ol'e the process in *hich one party sells a product for its
actual than they recei'e a fee this basically this fee is the proft.
Time-and Materials Contract: This particular type of contract is 'ery complex
and in'ol'es one party purchasin% labor and material from a seller" the labor and
materials associated *ithin these contracts are typically fxed in prices.
3 can only assume that more attention *ould ha'e to be %i'en to a reimbursable
contract" mainly due to the fact that you ha'e to pay attention to *hat fee *ould
be added at the end of the contract.
3n most of the cases a fxed price contract does re$uire less mana%ement
attention. !s lon% as you ha'e a *ell defned pro-ect scope and specifcation for
deli'erables" you only pay for the *or/ is *ell done. Ho*e'er" there are some
complex pro-ects that uncertainty is a ma-or issue" contractor *ould only *or/ on
the pro-ect on the bases of time ad material contract. For example" a 8,
construction contractor *ould only ta/e a time and material contract from
%o'ernment to build a communication to*er in 3ra$.
Fixed price performance based contracts reduce the amount of resources and
time de'oted to contract administration. Firm Fixed Price contracts ha'e detailed
re$uirements and a price for the *or/. The Contractor carries total responsibility
for proper performance of the *or/ althou%h appro'al of desi%n" dra*in%s" and
the placement of purchase orders and subcontracts can be monitored by the
1*ner to ensure compliance *ith the specifcation. The *or/ to be performed
must be closely defned. ,ince the contractor *ill not carry out any *or/ not
contained in the specifcation *ithout re$uirin% additional payment" a fully
de'eloped specifcation is 'itally important. The *or/ has to be performed *ithin
a specifed period of time" and status9pro%ress can be monitored by the
mana%ement to ensure that completion meets the contractual re$uirements. The
lump sum9fxed price contract presents a lo* fnancial ris/ to the mana%ement"
and the re$uired in'estment le'el can be established at an early date.
)eferences:
http:99***.pro-ectmana%ement.#:m.com9custom;.html
We t!picall! hear of clients loo"ing for the lowest price, and rarel!
does the term alue come into the picture# -s it assumed that the alue
is there and is that a fair assumption most of the time#
7ot exactly sure about the $uestion bein% as/ed in re%ards to 'alue. My
interpretation *ould be that 'alue e$uals the $uality *hen compared to the price
of the product.
3n that case" 3 do not thin/ that the assumption of 'alue is appropriate" thou%h 3
do belie'e it is assumed most of the time. 2hen loo/in% for the lo*est price" the
buyer usually assumes that the 'alue *ill be relati'e but in some instances this
is not true. <ou may %et the same product *ith di5erent labelin% for a lo*er
price. 1r you may assume the $uality of one product" based on the price" but in
turn the $uality is not to par.
=ood obser'ations" >incent. ?ust about e'ery company *ants the cost of the
cheapest bidder" but they *ant the 'alue of the hi%hest bidder. 2e cannot
assume anythin% here" especially that the 'alue *ill still be there e'en *ith one
of the lo*est bidders. 2e also can@t assume that the hi%hest bidder o5ered that
much more 'alue than the lo*est bidder. <ou must do an excellent -ob in
narro*in% do*n your feld of bidders. Ao not ma/e assumption. !fter all" 'alue
is the best for the dollar not the cheapest or the hi%hest in price.
3 ha'e some experience *ith contractors. My husband and 3 ha'e a facility@s
mana%ement business and *e ha'e to outsource se'eral of our ser'ice 'ery
often" mostly because licensin% purposes. 2e ha'e my husband@s experience
and relationship *ith se'eral contractors around the area on our side. He has
*or/ed in pro-ect m%mt for o'er a decade. The *orse part is ha'in% to ma/e a
decision on *ho *ould %et the contract" *ithout ha'in% experience or an idea of
ho* thin%s *or/. Contractin% can be 'ery costly if you don@t ha'e an idea of the
'endor@s prior *or/ and some idea of *hat they are doin% throu%h often
super'ision. !t the end the customer@s satisfaction is in the line and this
*ouldn@t a5ect the contractor but my company. 3f the *or/ is done incorrectly"
3@d ha'e to hire someone else to fx it and *ould lose money in the processB it has
happened.
$ow do !ou diferentiate a project plan from the project defnition#
! pro-ect plan is an appro'ed document bet*een a pro-ect mana%er and the
customer. 3t is used to %uide and control the pro-ect. 3t explains in details ho*
the pro-ect *ill be implemented" includin% the resources" milestones" tas/"
deli'erables" and *or/ brea/do*n structure C24," scope" ris/ etc.
The pro-ect defnition is used to set clear %oals of the pro-ect. 3t %i'es
specifcations in terms of scope" schedule and bud%et. The pro-ect defnition
could also be used to defne the pro-ect plan. The pro-ect defnition is sometimes
referred to as a Pro-ect Charter.
Pro-ect defnition refers to the pro-ect scope - 2H!T needs to be accomplished. 3t
usually defnes the scope" inclusions" the boundaries of the pro-ect" and its
associated products and ser'ices. 3t includes pro-ect constraints and assumptions
and an initial 24," to name a fe*.
The pro-ect plan includes the actions necessary to defne" inte%rate" and
coordinate all subsidiary plans into a pro-ect mana%ement plan. The pro-ect plan
defnes H12 the pro-ect is executed" monitored and controlled" and closed.
The lon% and short of it" the pro-ect defnition sho*s the 2H!T of the pro-ect
*hile the pro-ect mana%ement plan sho*s the H12.
.o continue with the releance of the project defnition and project plan
(schedule) to contracts/ what components of the project defnition and
schedule hae a role in the contract aspects#
The contract *ill ha'e the details of the pro-ect" includin% end dates and the
deli'erables.
The pro-ect@s scope" timeline and bud%et are /ey roles in the content of the
contract.
$ow man! companies toda! do !ou feel ta"e on projects (or business
operations) without frst deeloping a comprehensie and detailed
project plan# +o !ou thin" this will change as the new generation of
middle managers (man! of which hae 0123s or other post-graduate
management degrees) are promoted into project management
positions# What are some industries that !ou feel could continue to
operate without much project'business planning and what are some
industries that will become increasingl! more dependent on this aspect
of business management in order to be successful#
3 *ill say most companies includin% some lar%e companies *ill ta/e on a pro-ect
*ith little or no pro-ect plan. The reason is because a lot of pro-ect mana%ers" to
put it blunt" do not ha'e the education or ha'e not ta/en the courses needed to
be a pro-ect mana%er. These mana%ers are so ine.cient that they are unable to
e'en communicate *ith their employees humanly *ithout stressin% them out or
to strate%ically plan anythin%. 3 a%ree that this is short-li'e because as ne*
%eneration of post %raduate and M4!Ds as you ha'e stated mer%e into
mana%ement positions the strai%ht line *ill %radually cur'e to include pro-ect
plans and clear scopes.
The industries that could operate *ithout much pro-ect plannin% are smaller
mom ( pops businesses or small businesses. +ar%er corporations especially in
manufacturin% and 3T" because of their hi%h outsourcin% rate" *ill become more
dependent on pro-ect plans in order to do *ell.


! pro-ect plan is a document used to coordinate the entire pro-ect plannin%
documents and helps %uide a pro-ectDs execution and control. 3t should be
0exible and sub-ect to chan%e *hen the en'ironment or pro-ect chan%es. 3t
assists the pro-ect mana%er in leadin% the pro-ect team and helps *ith the
assessment of the pro-ectDs status. 2or/in% *ith a bi% or%aniEation such as
=o'ernment you need to ha'e a *ell defned pro-ect plan. This type of industry
needs to ha'e a pro-ect plan to be able to successfully execute the pro-ect and
monitor the pro-ect throu%h completion. Most of the pro-ects are o'er se'eral
years and re$uire detailed plannin% for schedules" resources" and identifyin% the
ris/s that could occur. 8sin% the plannin% approach *ill prepare the pro-ect team
to deal *ith the ris/s that could be encountered.
my experience has been that it is usually the lar%er companies that fail to
implement pro-ect plannin% practices. They ha'e the structure in place" but for
some reason they fail to follo* throu%h *ith it more often than not. 2hat has
been your experienceF
The lar%e company *ouldnDt thin/ of implementin% a pro-ect *ithout a formal
plan. They are also 'ery adamant about follo*in% throu%h *ith the outlines steps
and re$uire *ee/ly meetin%s and status reports to ma/e sure that e'erythin% is
%oin% on schedule and as planned. Ho*e'er" an ine5ecti'e mana%er *ould be
more of the problem in implementin% pro-ect pannin%. 8nfortunately" at a lar%e
company" %ettin% rid of a mana%er ta/es time. 1n the contrast" a small company
is more a%ile. ! de'iation from the pro-ect plannin% *ould be spotted $uic/ly
and correcti'e action *ould be ta/en more e5ecti'ely to brin% bac/ the course.
Pro-ect defnition is defnin% the pro-ect re$uirements. Pro-ect defnition contains
important pro-ect information to ensure that the pro-ect team addresses" and
a%rees upon" /ey pro-ect elements. ,uch elements include bac/%round and
summary" %oals and /ey deli'erables" milestones" assumptions" ris/s" cost
estimates" le%al issues" or other rele'ant information.
Pro-ect Plan is defned as a formal" appro'ed document" in summariEed or
detailed form" used to %uide both pro-ect execution and control. Aocuments
plannin% assumptions and decisions" facilitates communication amon%
sta/eholders" and documents appro'ed scope" cost" and schedule baselines.
1ften the parties *ill a%ree to the de'elopment of t*o pro-ect plans-the initial
pro-ect plan re0ectin% the customer@s %eneral business re$uirements Cusually
done at an early sta%e in the pro-ect de'elopment and at a later" or fnal" pro-ect
plan de'eloped after 'endor due dili%ence to *hich the 'endor *ill commit to
specifc deli'erables and deadlines.