W15_OAN_Contract Type for EPC Project

1. Problem Definition

Normally the company use lump sum or Firm Fixed Price (FFP) contract type. Using EPC Contract History from last 5 projects, scope accuracy less than 80%.

Table 1: Project Profile

2. Development of Feasible Alternatives

there are 4 (four) common types of contracts which is used in the engineering and construction industry:

1. Lump Sum Contract
2. Unit Price Contract
3. Cost Plus Contract
4. Incentive Contract

 

3. Possible Solution

Lump Sum Contract

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

Unit Price Contract

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

Cost Plus Contract

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.

Incentive Contract

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

 

4. Selection 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

 

5. Analysis and Comparison of the Alternatives

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

Table 2: Attribute of Contract Type

Ranking attribute by using non-dimensional scaling as shown in

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: Weighting for Alternatives

6. Selection and Preferred Alternatives

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

7. Performance Monitoring and the 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

Refrences

1. Sullivan, W.G., Wicks, E. M., Koelling, C. P. (2014). Engineering Economy, Chapter 14, page 559 to 617. Pearson. Sixteenth Edition.Benefits & Disadvantages of Functional Organizational Structure.
2. The Engineering Tool Box.
   Retrieved from: http://www.engineeringtoolbox.com/contract-types-d_925.html#
3. Giammalvo, Paul D. AACE Certification Preparation Course Day 5. Page 75 to 95.
4. Module 05-1: Introduction to Managing Contract.
   Retrieved from : http://www.planningplanet.com/guild/gpccar/introduction-to-managing-contracts
5. W40_MFO_Contract Type for EPC Project
   Retrieved from https://emeraldaace2017.com/2017/10/13/w10_mfo_contract-type-for-epc-project/