Contracts, preparation,

implementation and
pricing
Presented
By
Eluchie Emeka.
MEANING AND SCOPE.

A contract is an agreement that

is enforceable by a court of law
or equity.
• Contracts are the basis of many
daily activities.
• They provide the means for
individuals and businesses to sell
and otherwise transfer property,
services, and other rights.
• Without enforceable contracts,
commerce would collapse.
• Contracts are voluntarily
entered into by parties.

• The terms of the contract

become private law between
the parties.
ALSO CONTRACT IS…

• A contract is an agreement that

creates obligations/ legal ties
(Rights and duties)
• Social agreement have no legal
consequences. They create
moral duties.
A contract is
• A promise or set of promises, the
breach of which the courts will
provide a remedy for
• When the two parties agree to a
contract, it creates a legally
recognized duty to perform
• Not all agreements are recognized as
legally binding
• A promise to make a gift is not binding
ELEMENTS
ELEMENTSOF
OFA A
CONTRACT
CONTRACT
Agreement Consideration

Elements of a Contractual
Lawful Object Contract Capacity
• Agreement
• There must be agreement
between the parties.
• This requires an offer by the
offeror and an acceptance of
the offer by the offeree.
• There must be mutual assent
by the parties.
• Consideration
• The promise must be supported
by a bargained-for consideration
that is legally sufficient.
• Gift promises and moral
obligations are not considered
supported by valid
consideration.
Contractual Capacity

•The parties to a contract

must have contractual
capacity.
•Certain parties, such as
persons adjudged to be
insane, do not have
contractual capacity
Lawful Object

•The object of the contract

must be lawful.
•Contracts to accomplish
illegal objects or
contracts that are against
public policy are void.
Formation of a contract

• How is consensus / Agreement

reached?
• Parties must agree on what rights
and duties they wish to create
• Between whom it will be created
• Must intend to bind legally
• Must be aware of agreement
Rules regarding the
offer

• The offer must be complete /

with all rights / duties detailed
• Offer must be clear and
unambiguous
• There must be an intention to
be legally bound by it
• Call for tenders is invitation to
submit offers
• An advertisement is NOT a
contract
• Offer can be made in many
ways
• The offer must be
communicated to offeree
• Offer must be addressed to
the person the offerer wishes
to conclude a contract
• An offer can lapse or be
revoked
Lapse of the offer

• After offer lapse the offeree

can not accept it any longer
• Offerer can revoke offer
• An offer can not be made
irrevocable
• An offer is irrevocable with an
option contract
• An offer cannot remain valid
forever
• An offer lapses if the offerer or
offeree dies or become insane
before acceptance
• If offeree rejects, it lapses
The agreement should
contain:

• The names of contracting parties

• A brief description of the work
• A list of contract documents,
including agreement, general
conditions, drawings, and
specifications.
• The contract sum, or amount
(lump-sum contract)
• The procedures for payment
• The contract time, or dates
for start and completion
• The signatures of contracting
parties and witnesses
Penalty clause
• is a clause providing that a person
in breach of a contractual terms
will be liable to pay a sum of
money or to deliver/perform
anything for the benefit of the
other party by way of a penalty or
as liquidated damages
• such clauses are valid and
enforceable
• a person entitled to the penalty
cannot recover both the penalty
and damages, or damages in
lieu of the penalty unless the
agreement so provides
• Courts may reduce the penalty
if is out of proportion to the
prejudice
DOCUMENTATION
DUTIES AND OBLIGATION
OF CONTRACTING
PARTIES
• Obligation is legal tie or band
between two persons
• Obligation creates right of
performance – creditor
• Obligation places a duty to
perform on the other party – debtor
• In most contracts a person is a
creditor and a debtor
• The basic obligation of a seller under
a sales contract is to transfer and
deliver conforming goods, that is,
goods that conform to the
specifications of the contract.
• The basic obligation of a buyer is to
accept and pay for conforming goods
in accordance with the contract.
CONTRACT PRICING

• One of the most important tasks in

procurement planning is the selection
of the appropriate pricing strategies
for major contracts. This task should
be accomplished in the early phases
of the project. The pricing strategies
selected should balance the risks
between the contracting parties.
• These strategies will have a
considerable impact upon the
organization and management
of control systems required for
a project. This impact is going
to increase as more work is
being performed by outside
service providers.
• Project managers can use
several pricing approaches for
producing the goods and
services for a project. The
selection of an inappropriate
approach will have a negative
impact on the quality, costs and
schedule of the work performed.
Types of Contract
Pricing

• The most common types of contract

pricing are:
• Fixed price,
• Unit price,
• Target price,
• Reimbursable with incentive fees and,
• Reimbursable with fixed or percentage
fees.
Note,

• Two or more types of contract

pricing approaches can be
combined in a single contract.
• This leads to a relatively large
number of pricing combinations
that can be used for major
project contracts.
Fixed Price

• In a fixed-price contract, the

seller agrees to deliver the
products or the services for one
agreed-upon cost. In this case,
the buyer is responsible for
providing a complete definition
of what is required and
schedule for delivery.
• The price which is provided by the
seller is going to include an
estimate of its costs and its profit.
If the seller’s costs are less than
the costs included in fixed price,
the seller earns additional profit. If
the seller’s costs are more than the
costs included in its fixed price, the
seller earns less profit.
• If a project has long duration, the
fixed price contract might include
an allowance for future labor and
material escalation costs.
Escalation provisions for labor and
materials costs are frequently tied
to relevant indices that are
published by the federal
government.
• Project managers need to
consider several factors when
deciding whether to use a fixed-
price contract approach for a
specific contract.
Before choosing this type of
pricing structure, the project
must have:

• Complete and accurate definition

of the scope of work.
• Explicitly defined technical
requirements
• Clearly stated management
requirements
• Fixed schedule
• In a fixed-price contract, more than
any other type of contract, using a
business analysis approach is the
key to a successful end result.
Since the technical preparation will
take longer than with other
contracts, this preliminary process
should be include in the schedule of
the project.
• The detailed preparation,
however, will help in ensuring
that quality, schedule and costs
objectives of the project are
met.
drawbacks

• The obvious drawback to this

type of fixed-price approach is
that it provides less incentive
for a contractor to minimize
schedule duration than is the
case for reimbursable
contracts.
• In addition, fixed-price suppliers
and contractors often minimize
quality management activities
in order to reduce costs, which
can result in quality problems.
• Therefore, the project manager needs to
maintain close oversight during the project.
• Also, renegotiations of the price might
come into play since fixed-price
contractors are reluctant to proceed with
any work associated with a change request
before resolving the cost of the change.
These negotiations might have a negative
impact on the schedule of the project.
• If the scope of the contract is
well defined, the potential for
significant changes is very low.
Without the risk of significant
changes, the schedule for
performing the work is unlikely
to change.
• In this case, a fixed-price
contract is usually the best
approach. Most standard
materials are procured using a
fixed-price contract approach
since the scope of work and the
schedule objectives are easy to
define.
• If the design of engineered materials
can be finalized prior to the need of
acquiring them, they can also be
procured using a fixed-price
approach. Engineering equipment
could also be acquired using a fixed-
price contract if it is possible to
articulate sufficient performance
objectives for the project.
• Unit Price:
• In a unit-price contract, the seller
commits to providing each unit of
work defined by a buyer for a fixed
price per unit of work. In this
scenario, the seller carries the risk
of the cost per unit, and the buyer
assumes the risk of quantity growth
in the number of units.
• Usually, in a unit-price contract,
the units of work specified by the
buyer are larger in quantity and
similar in nature. Since the unit
prices are fixed, the buyer
specifies the schedule objectives
or the time frame during which
the work will be performed.
• Unit-price contracts are
appropriate when the units of
work can be well defined but
the total quantities are
uncertain. Certain standard
materials that are procured in
large quantities are provided
under unit-price contracts.
• Engineered materials are also
procured with unit-price
contracts when the design is
not complete. Service contracts
can use unit pricing provided
the scope of work lends itself to
the unit-price approach.
• As with fixed-price contracts,
unit-price contracts require an
accurate description of the
complexity of the work.
However, unit-price contracts
also require an estimate of the
probable quantity of units.
• This type of contracts also requires
an accurate definition of when units
of work will be delivered or
installed, unless the contract
contains an escalation clause. Unit-
price contractors are reluctant to
increase personnel, overtime and
shift work to accelerate the
schedule of the work.
• When using unit-price contracts,
managers should remember that:
• Unit-price and cost-reimbursable
work should not be included in
the same contract
• Unit-price contracts require an
accurate method of reporting
complete work units
Target Price:

• In target-price contract approach, the

seller commits to providing goods or
services defined by a buyer for a target
price. The target price is not fixed since
the seller does not assume all of the
risks associated with performing the
defined work for the target price.
• In this scenario, the buyer and the seller
share both the cost savings and cost
overrun.
• Target-price contracts are appropriate
when there is high level of uncertainty
associated with the scope of work to be
performed.
• Although target-price contracts do not
need as comprehensive and detailed
specification of the scope as the fixed-
price approach, target-price contracts still
require some level of knowledge of the
scope of work so that the estimator can
establish a target price.
• To successfully manage a
target-price contract, the buyer
must monitor the contractor’s
cost performance in a manner
similar to reimbursable
contracts. This will ensure that
the final price of the contract
comes close to the target price.
• One of the drawbacks to this type of
contract is that target-price contracts
do not provide strong incentives for
schedule performance. Therefore,
target-price contracts are not
frequently used for procuring standard
materials, engineered materials or
equipment since subsequent work that
must be performed depends on the
timely delivery of these types of
products.
Reimbursable with
Incentive Fee:

• In a reimbursable-with incentive-fee
contract approach, the seller commits
to providing goods and services
specified by the buyer for the seller’s
actual costs plus a fee based on
performance. In general, performance
incentives are for schedule, cost and
quality objectives. Incentive fees can
also be combined with fixed fees.
• If the schedule of the project is a
very high priority, incentive-type
contracts are more effective than
other contract pricing approaches.
Incentive contracts can be used to
motivate the seller to control costs
and strive for outstanding
technical or schedule performance.
• These types of contracts provide
the foundation on which to build
win-win outcomes for the buyer and
the seller. Proper selection of the
contract vehicle and structuring of
related incentives minimizes
common problems such as cost
overruns, schedule delays and
failure to achieve expected results.
• Common schedule performance
objectives can be developed for
multiple project contractors.
Reimbursable-with-incentive-fee
contracts can be awarded more
quickly than fixed price or unit
price contracts and are most
frequently used for service
contract work.
• These types of contracts are not
commonly used for acquiring standard
materials, engineered materials and
equipment. The performance incentives
used in reimbursable-with-incentive-fee
contracts should be balanced. To
ensure success, incentive contracts
should be selected carefully, structured
well and administered effectively.
Reimbursable with Fixed
or Percentage Fee:

• In a reimbursable with fixed- or

percentage-fee contract approach,
the seller commits to providing the
products and services requested by
a buyer for actual costs plus a fee.
A fixed fee could be used, which is
based upon a rough estimate of the
value of the goods and services that
may be included in the contract.
• This type of contract is commonly
used when it is difficult to define the
scope of work for a contract well
enough to support a fixed or unit price
contract approach. The advantages of
this type of pricing is that it requires
less time for the procurement process
activities that must be completed prior
to signing a contract
• Several issues are associated with
the reimbursable with fixed or
percentage fee contract approach:
• It is one of the most difficult
contract to administer
• It requires extensive involvement
by the buyer in controlling
contract costs
• There are cost limits that should
be included in reimbursable
contracts
• Changes in conditions have little
impact on reimbursable contracts
since the contractor is reimbursed
for any additional costs that are
incurred in implementing a change
• This approach is seldom used
for procuring standard
materials, engineered materials
and equipment
• This approach is used for major
service contracts where there is
difficulty in defining the scope of
the work in sufficient detail
Choosing the Right
Contract Type to Ensure
Project Success:
• If the scope of contract is well
defined, stable, and the schedule
for performing the work is unlikely
to change, a fixed-price contract is
the best approach. If the units of
work can be well defined, but the
total quantities are uncertain, a
unit-price contract is the best
approach.
• Target price contracts are frequently used for
services contracts where there is an element
of uncertainty associated with the scope of
work to be performed. Reimbursable-with-
percentage-fee contracts are used for service
contract work. Reimbursable with fixed-or
percentage-fee contracts are used for major
service contracts where the buyer has
difficulty in defining the scope of work in
sufficient detail for a fixed-or unit-price
contract approach.
• Choosing the correct contract
approach based product type
and preparation for the project
can help to ensure quality,
schedule and cost objectives
are met.