- In general, what types of project contracts exist? What are differences among them? As a project manager, what would be your most favorite contract to manage? Why?
Fixed Price Contract:
Legal agreement between the project organization and an entity (person or company) to provide goods or services to the project at an agreed-on price. The contract usually details the quality of the goods or services, the timing needed to support the project, and the price for delivering goods or services.
Fixed Total Contract:
Contractor assumes the risks for unexpected increases in labor and materials that are needed to provide the service or materials and in the quantity of time and materials needed.
Fixed Price Contract with Price Adjustment:
Used for unusually long projects that span years. The most common use of this type of contract is the inflation-adjusted price. In some countries, the value of its local currency can vary greatly in a few months, which affects the cost of local materials and labor. In periods of high inflation, the client assumes risk of higher costs due to inflation, and the contract price is adjusted based on an inflation index.
Fixed Price with Incentive Fee Contract:
Contract type that provides an incentive for performing on the project above the established baseline in the contract. The contract might include an incentive for completing the work on an important milestone for the project. Often contracts have a penalty clause if the work is not performed according to the contract.
Fixed Unit Price Contract:
Project team assumes the responsibility of estimating the number of units used. If the estimate is not accurate, the contract does not need to be changed, but the project will exceed the budgeted cost.
Cost Reimbursable Contracts:
Organization agrees to pay the contractor for the cost of performing the service or providing the goods. Cost reimbursable contracts are also known as cost plus contracts. Cost reimbursable contracts are most often used when the scope of work or the costs for performing the work are not well known.
Cost Reimbursable Contract with Fixed Fee:
Provides the contractor with a fee or profit amount that is determined at the beginning of the contract and does not change.
Cost Reimbursable Contract with a Percentage Fee:
Pays the contractor for costs plus a percentage of the costs, such as 5 percent of total allowable costs. The contractor is reimbursed for allowable costs and is paid a fee.
Cost Reimbursable Contract with an Incentive Fee:
Used to encourage performance in areas critical to the project. Often the contract attempts to motivate contractors to save or reduce project costs. The use of the cost reimbursable contract with an incentive fee is one way to motivate cost reduction behaviors.
Cost Plus Contract with Award Fee:
Award fee reimburses the contractor for all allowable costs plus a fee that is based on performance criteria. The fee is typically based on goals or objectives that are more subjective. An amount of money is set aside for the contractor to earn through excellent performance, and the decision on how much to pay the contractor is left to the judgment of the project team.
Time and Materials Contracts:
Time is usually contracted on an hourly rate basis and the contractor usually submits time sheets and receipts for items purchased on the project. The project reimburses the contractor for the time spent based on an agreed-on rate and the actual cost of the materials. The fee is typically a percent of the total cost.
ANSWER: As a project manager my favorite contract would be the Cost Reimbursable Contract with an Incentive Fee because it motives the contract to met milestone with an incentive, save/reduce cost on the project and some of the risk is share for both of us.
- How can you handle changes requested by your clients after the project deliverables have been officially accepted?
ANSWER: We would respond to the client’s request is by preparing a new contract or amendment to the old contract.
- Assume you are assigned to an international project, what kind of potential issues or challenges do you need to be aware of when you start to plan the project?
ANSWER: Inflation with local economy, Political relations and relations with local labor force & Any environmental issues for the area we are working in.