W10_MFO_Contract Type for EPC Project

  1. Problem Definition

Normally the company use lump sum or Firm Fixed Price (FFP) contract type. But, refer to some profiles of our project from my paper draft as seen as table 1 below, FFP contract type is not appropriate to use in our project because our “real” scope definition less than 85%. (70% – 84%). So, in this paper blog author try to analysis the contract type should be used for our project.

Table 1. Profiles of our project

  1. Identify the Possible Alternative

Based from Engineering tool box (www.engineeringtoolbox.com) there are 4 (four) common types of contracts which is used in the engineering and construction industry i.e:

  1. Lump Sum Contract
  2. Unit Price Contract
  3. Cost Plus Contract
  4. Incentive Contracts
  1. Development Of the Outcome For Alternative

a. The possibility outcomes if owner used Lump Sum Contract i.e.

Advantage:

  • Minimum Risk for the owner
  • Time involved for preparing the plans and specifications is considerably longer
  • Contract is based on agreed rates
  • Minimum Owner supervision related to quality and schedule.

Disadvantage :

  • Time involved for preparing the plans and specifications is considerably longer.
  • Because price determines who is awarded the contract, the quality of work will be poor.
  • Difficult to make changes

b. The possibility outcomes if owner used Unit Price Contract i.e.

Advantage:

  • Owner pays for only measured work
  • Scope and quantities easily adjustable

Disadvantage:

  • Negotiation of ‘unit’ rates can be very time consuming
  • Final cost not known at outset since bills of quantities at bit time are only estimates
  • Additional site staff needed to measure, control, and report on units completed

c. The possibility outcomes if owner used Cost Plus Fee Contract i.e.

Advantage:

  • Set a contract early with little negotiation.
  • Selection of supplier is based on rates.
  • Work definition is unimportant to contract.
  • Field work may be started before the plans and specifications are complete

Disadvantage:

  • Owner assumes all of the risk.
  • The contractor is encouraged to use inefficient (time wasting) labor and expensive materials.
  • Owner has to manage all coordination issues.
  • Owner carries cost of poor quality.
  • the contractor cannot afford delays that will keep the job going longer than expected.

d. The possibility outcomes if owner used Incentive Contracts i.e.

Advantage:

  • Used to Encourage More Effective Work From Contractors.
  • When Appropriately Applied, Contractors are Paid Based on Their Handling of Cost, Schedule, and Their Performance
  • Good Business Practice
  • Owner & Contractor share financial risk and have mutual incentive for possible saving

Disadvantage:

  • Opportunities are Given to Contractors to Receive Unearned Fees
  • Require complete auditing by owner’ staff
  1. Selection of criteria.

In order to determine what kind of contract should be used there are some criteria must be considered:

  • Flexibility for additional or reduction of scope
  • Quality of the services
  • Detail spec, volume and scope of work requirement
  • Owner financial risk
  • Owner supervision
  • Price negotiation
  1. Analysis and Comparison of Alternatives

Author analyze and compare the alternatives by using compensatory models. The attributes of the contract type as shown in table 2.

Table 2. Attributes of The Contract Types

Ranking attribute by using non-dimensional scaling as shown in Table 3.

Table 3. Non-dimensional scaling

After set relative rank for each attribute, further is to conduct additive weighting for all alternatives as shown in table 4.

Table 4. Additive weighting for all alternatives

  1. Select of the preferred alternative

Base from above calculation Incentive Contracts become the best alternatives to replace FFP contract type for our project.

  1. Performance Monitoring and Post Evaluation of Result

Management should consider to use incentive contract type as the best alternatives to replace FFP contract type to avoid over budget project and monitoring should be conducted during the project contract to ensure that all requirements are met.

References:

  1. Sullivan, W.G., Wicks, E. M., Koelling, C. P. (2014). Engineering Economy, Chapter 14, page 559 to 617. Pearson. Sixteenth Edition.
  2. W2_FELIX_Contract Type. Retrieved from http://aacemahakam.blogspot.co.id/search?q=contract
  3. W3_FELIX_Contract Type II. Retrieved from http://aacemahakam.blogspot.co.id/search?q=contract
  4. 10.3 – module 10-3 – managing change – the owner’s perceptive. Retrieved from http://www.planningplanet.com/guild/gpccar/managing-change-the-owners-perspective
  5. The Engineering Tool Box. Retrieved from http://www.engineeringtoolbox.com/contract-types-d_925.html
 

1 thought on “W10_MFO_Contract Type for EPC Project”

  1. Nicely done, Pak Fakhri!!!! For the future, I suggest you SUPPLEMENT your reference to the Engineering Tool Box by looking at the Guild’s Module 5- Managing Contracts.

    Still an excellent analysis and I hope your management will listen to your advice….

    BR,
    Dr. PDG, Lille, France

     

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