Kyambogo university

Bachelor of Engineering in Electrical Engineering (BEE)

Year 4 , SEMESTER I, 2023

TEEE4107: PROJECT PLANNING AN DMANAGEMENT

LECTURE 8: Engineering Contracts, Contract

Management and Contract Administration
• JULIUS PLUCKER
• 0705666065
• [email protected]
 Common contract forms

• Completion contract: The contractor is

required to deliver a definitive end
product.
– Upon delivery and formal acceptance by
the customer, the contract is considered
complete, and final payment can be
made.
 Common contract forms

• Completion contract: The contractor is

required to deliver a definitive end
product.
– Upon delivery and formal acceptance by
the customer, the contract is considered
complete, and final payment can be
made.
 Common contract forms
• Term contract: The contract is required to
deliver a specific “level of effort,” not an
end product.
– The effort is expressed in woman/man-days
(months or years) over a specific period of
time using specified personnel skill levels and
facilities.
– When the contracted effort is performed, the
contractor is under no further obligation.
– Final payment is made, irrespective of what is
actually accomplished technically.
 Definitive Contract
• Follows normal contracting procedures such
as the negotiation of all contractual terms,
conditions, cost, and schedule prior to
initiation of performance.
• If the customer needs the work to begin
immediately or if long-lead procurement is
necessary, then the customer may provide
the contractor with a letter contract or letter
of intent.
Factors based on to select type of
contract
The type of contract selected is based upon
the following:
• Overall degree of cost and schedule risk.
• Type and complexity of requirement
(technical risk).
• Extent of price competition.
• Cost/price analysis.
• Urgency of the requirements.
Factors based on to select type of contract

The type of contract selected is based upon the

following:
• Contractor’s responsibility (and risk)
• Contractor’s accounting system (is it capable
of earned value reporting?)
• Concurrent contracts (will my contract take a
back seat to existing work?)
• Extent of subcontracting (how much work will
the contractor outsource?)
 CONTRACTS
• A contract is a mutually binding agreement
that obligates the seller to provide the
specified products for services - obligating the
buyer to pay for them. Different types of
contracts are suited to particular
circumstances.
• Contracts should clarify responsibilities and
define key deliverables.
• Contracts are used because they are legally
binding, there is more accountability!
• There is a trend to outsource work!
 Contract terminology
• The target cost or estimated cost is the level
of cost that the contractor will most likely
obtain under normal performance
conditions.
– The target cost serves as a basis for
measuring the true cost at the end of
production or development.
• Target or expected profit is the profit value
that is negotiated for, and set forth, in the
contract.
 Contract terminology

• Profit ceiling and profit floor are the

maximum and minimum values,
respectively, of the total profit.
• Price ceiling or ceiling price is the
amount of money for which the
government is responsible.
– It is usually measured as a given
percentage of the target cost, and is
generally greater than the target cost.
 Contract terminology

• Maximum and minimum fees are

percentages of the target cost and
establish the outside limits of the
contractor’s profit.
 Contract terminology
• The sharing arrangement or formula gives the
cost responsibility of the customer to the cost
responsibility of the contractor for each dollar
spent.
– Whether that dollar is an overrun or an underrun
dollar, the sharing arrangement has the same impact
on the contractor.
– This sharing arrangement may vary depending on
whether the contractor is operating above or below
target costs.
– The production point is usually that level of
production above which the sharing arrangement
commences.
 Types of engineering contractual
arrangements
• Cost-plus percentage fee
• Cost-plus fixed fee
• Cost-plus guaranteed maximum
• Cost-plus guaranteed maximum and
shared savings
• Cost-plus incentive (award fee)
• Cost and cost sharing
• Fixed price or lump sum
• Fixed price with redetermination
Types of contractual arrangements
• Fixed price incentive fee
• Fixed price with economic price adjustment
• Fixed price incentive with successive targets
• Fixed price for services, material, and labor at
cost (purchase orders, blanket agreements)
• Time and material/labor hours only
• Bonus-penalty
• Combinations
• Joint venture
Types of contractual arrangements
• Cost reimbursable or cost plus contracts involve
payment to the seller for direct and indirect actual costs.
These contracts are often used for projects that include
the provision of goods and services associated with new
technologies.
• The buyer absorbs more risk with the type of contract,
which has the following forms : There are generally five
types of contracts to consider:
1. Fixed-price (FP),
2. Cost-plus fixed-fee (CPFF), or cost-plus-percentage-fee
(CPPF),
3. Guaranteed maximum-shared savings (GMSS),
4. Fixed-price-incentive-fee (FPIF),
5. Cost-plus-incentive-fee (CPIF).
Fixed-price or lump-sum contract

• Contractor carefully “Estimate Target Cost”.

• Contractor required to perform work at
negotiated contract value.
• If “Estimated target cost” is low then “Total
Profit reduced” and may vanish.
• Contractor may not be able to “underbid
competitors” so contractor assumes a large
risk.
Cost-plus-fixed-fee contract, CPFF
• Traditionally, the cost-plus-fixed-fee contract has been
employed when it was believed that accurate pricing
could not be achieved any other way.

• In the CPFF contract, the cost may vary but the fee remains
firm.

• In a cost-plus contract, the contractor agrees only to use his

best efforts to perform the work; good performance and
poor performance are, in effect, rewarded equally.

• The total $ profit tends to produce low rates of return,

reflecting the small amount of risk that the contractor
assumes.

• The fixed fee is usually a small percentage of the total or

true cost.
 Guaranteed maximum-share
savings (GMSS) contract
• Under GMSS, the contractor is paid a fixed
fee for his profit and reimbursed for the
actual cost of engineering, materials,
construction labor, and all other job costs,
but only up to the ceiling figure established
as the “guaranteed maximum.”
• Savings below the guaranteed maximum are
shared between owner and contractor,
whereas contractor assumes the responsibility
for any overrun beyond the guaranteed
maximum price.
 Guaranteed maximum-share
savings (GMSS) contract
• This contract form essentially combines the advantages
as well as a few of the disadvantages of both lump sum
and cost-plus contracts.

• This is the best form for a negotiated contract because

it establishes a maximum price at the earliest possible
date and protects the owner against being
overcharged, even though the contract is awarded
without competitive tenders.

• The guaranteed maximum-share savings contract is

unique in that the owner and contractor share the
financial risk and both have a real incentive to
complete the project at lowest possible cost.
Fixed-Price-Incentive-fee Contracts
• These are same as “Fixed-Price contracts”
except have some “Provision for adjustment”
of the “Total Profit” by a formula.
• This formula depends on “Final Total Cost” at
Completion of Project.

• Formula “Agreed to” in advance by “Owner

and Contractor”.

• To use this both “Project or Contract”

Requirements Must be firmly established
 Fixed-price-incentive-fee contracts
(FPIF)
• Fixed-price-incentive-fee contracts are the same as
fixed-price contracts except, that they have a
provision for adjustment of the total profit by a
formula that depends on the final total cost at
completion of the project and that has been agreed
to in advance by both the owner and the
contractor.
• To use this type of contract, the project or contract
requirements must be firmly established.
• This contract provides an incentive to the contractor
to reduce costs and therefore increase profit.
• Both the owner and contractor share in the risk and
savings.
 Cost-plus-incentive-fee
• Cost-plus-incentive-fee contracts are the
same as cost-plus contracts except that they
have a provision for adjustment of the fee as
determined by a formula that compares the
total project costs to the target cost.
• This formula is agreed to in advance by both
the owner and contractor.
• This contract is usually used for long duration or
R&D-type projects.
• The company places more risk on the
contractor and forces him to plan ahead
carefully and strive to keep costs down.
Contract Type Versus Risk
 Contract Administration and Condition
Of Contracts
• The conditions of contract are the terms that collectively
describe the rights and obligations of contracting parties
(i.e. the employer and the contractor) and the agreed
procedures for the administration of their contract.
Contract conditions determine the allocation of risk and
consequently, price. Typically these conditions address
the following:
a) The parties’ main responsibilities e.g., the employer
established in the contract.
b) The timing of the works, e.g. start date, time for
completion, period for defects liability, etc.
c) Testing and remedying of defects.
d) Payment, e.g. manner in which the works are to be
assessed and certified, time for payment and interest
on overdue amounts.
 Contract Administration and Condition
Of Contracts
e) Variations and claims, e.g. the manner in which
variations to the contract are to be evaluated and paid for
and how the costs which result from employer liabilities are
assessed and paid for.
f) Title (ownership) to objects, materials within the site, etc.
g) Risks and insurances, e.g. what are the employer’s and
contractor’s risk and what insurances each party will take
outh) Termination, e.g. the reasons for termination, the
procedures for termination and the payment to be made
upon termination.
i) The resolution of disputes, e.g. by adjudication,
mediation, arbitration, litigation (court of law) or a
combination thereof.
Conditions of contract can be standardized so that the same
conditions of contract can be used on different projects, in which
case they are referred to as standard forms of contract.
 Contract Administration Cycle

• The contract administrator is responsible for

compliance by the contractor to the
contract’s terms and conditions, and for
making sure that the final product is fit for
use.

• Contract Administration establish processes

to ensure that all the procedures and
documentation relating to the PPP(Project
Portfolio Process ) Agreement are effectively
managed.
Contract Administration Cycle
• The functions of the contract administrator
include:
– Change management
– Specification interpretation
– Adherence to quality
– Warranties
– Subcontractor management
– Production surveillance
– Waivers
– Contract breach
– Resolution of disputes
– Project termination
– Payment schedules
– Project closeout
 Contract Administration
• The larger the contract, the greater the need for the
contract administrator to resolve ambiguity in the contract.
• Sometimes, large contracts that are prepared by teams of
attorneys contain an order of precedence clause.
• The order of precedence specifies that any inconsistency in
the solicitation of the contract shall be resolved in a given
order of procedure such as:
a)Specifications (first priority)
b)Other instructions (second priority)
c)Other documents, such as exhibits, attachments,
appendices, SOW, contract data requirements list (CDRL),
etc. (third priority)
d)Contract clauses (fourth priority)
e)The schedule (fifth priority)
 Contract Administration
• Administrative change: A unilateral contractual
change, in writing, that does not affect the
substantive rights of the parties (i.e., a change in the
paying office or the appropriation funding).

• Change order: A written order, signed by the

contracting officer, directing the contractor to make
a change.

• Contract modification: Any written change in the

terms of the contract.

• Un-definitized contractual action: Any contractual

action that authorizes the commencement of work
prior to the establishment of a final definitive price.
 Contract Administration
• Supplemental agreement: A contract
modification that is accompanied by the
mutual action of both parties.
• Constructive change: Any effective change to
the contract caused by the actions or inaction
of personnel in authority, or by circumstances
that cause a contractor to perform work
differently than required by written contract.
– The contractor may file a claim for equitable
adjustment in the contract.
 Notes
• Contract contents – all pertinent deliverables,
timing, deadlines, results-oriented reporting and
expected outcomes, with measurable indicators

• Contract management – monitoring and

supervision is crucial

• Contract execution – procurement is complete

only when contracted product of satisfactory
quality is delivered at appointed time

31
 Five Stages of Contract
Management
Monitoring & Control of performance

Change Management

Dispute Resolution

Financial Management & Payment

Contract Administration
Monitoring and Control of Contract
Performance
Key Indicators

Consulting ➢ Timely delivery of key outputs

Services ➢ Responsiveness to reasonable requests
➢ The quality services of services provided

Goods ➢ The timeliness of delivery

➢ Quantity delivered
➢ Compliance with specifications

Works ➢ Timeliness of each stage of the works

➢ Compliance with the bill of works
➢ The quality of the works
Monitoring and Control of Contract
Performance

Tips
✓ indicate actual delivery date of
goods/works/services (or agreed milestones)

✓ written reminders to contractors/consultants

where there is a default (including penalties)

✓ file response from contractors/consultants

✓ record agreed changes in delivery dates &
penalties exacted
 Acceptance

Services written confirmation that the required services

have been delivered on time & of an acceptable
quality

completion of the Receipt and Inspection Report

Goods (RIR). It may be necessary for the supply of goods
to ensure that suitably qualified staff or
consultants are involved in the RIR

Works Engineer’s report that timely construction

of acceptable standard has been
completed
 Change Management

• Includes avoiding unnecessary changes as

well as incorporating necessary changes
into contract
• It is important is ensure necessary prior
approval is obtained including a no
objection from owner if the value of
cumulative change exceeds 15% of
contract value.
 Remedies
Termination

➢seek legal advice

➢determine if liquidated damages
should apply in accordance with
contract

Dispute Resolution
➢negotiation
➢arbitration
Typical causes of constructive changes

• Defective specification with impossibility of performance

• Erroneous interpretation of contract

• Over inspection of work

• Failure to disclose superior knowledge

• Acceleration of performance

• Late or unsuitable owner or customer furnished property

• Failure to cooperate

• Improperly exercised options

• Misusing proprietary data

 Reasons for termination for
convenience of the customer

• Elimination of the requirement

• Technological advances in the state-of-the-
art
• Budgetary changes
• Related requirements and/or procurements
• Anticipating profits not allowed
Reasons for termination for default
due to contractor’s actions
• Contractor fails to make delivery on
scheduled date.
• Contractor fails to make progress so as
to endanger performance of the
contract and its terms.
• Contractor fails to perform any other
provisions of the contract.
 Administer Procurements
Tools & Techniques
• Procurement ➢ Contract change control
Documents system
• Project ➢ Procurement • Procurement
Management Plan performance review Documentation
Inputs Outputs
• Contract ➢ Inspections and audits • Organizational
Process Assets
• Performance ➢ Performance reporting Updates
Reports
➢ Payment systems • Change
• Approved Change
➢ Claims administration Requests
Requests
➢ Records management • Project
• Work Performance
system Management
Information
Plan Updates

Plan Conduct Administer Close

Procurements Procurements Procurements Procurements
 Contract Completion
Procurement Staff with necessary technical support should verify:
• All products/ services have been provided.
• Documentation in the contract file shows receipt and formal
acceptance of all contract terms.
• There are no claims or investigations pending.
• Any property provided by the Project is returned and
discrepancies resolved.
• All actions regarding contract amendments have been attended
to.
• All sub-contracting issues have been attended to.
• Warranty matters are resolved and defect period elapsed.
• Any necessary audit has been satisfactorily finalised.
• The final invoice has been submitted and paid.
 Contract Closure
Inputs Tools & Techniques Outputs
Project ❑ Procurement audits Closed
Management Procurements
Plan ❑ Negotiated Settlements
Procurement ❑ Records management Organizational
Documentation system Process Assets
Updates

Plan Conduct Administer Close

Procurements Procurements Procurements Procurements
 Contract administration

END OF PRESENTATION

THANK YOU FOR LISTENING ATTENTIVELY