Using alternatives specified in the PMBOK® Guide, discuss what kind of contract pricing might be best for the following procurement situations. Arrange to select a topic “round-robin style” so that you select the next topic that has not already been discussed. Which of these topics are better served using one of these contract vehicles: Fixed Price, Cost Plus (Cost Reimbursable), or Time & Material contracts? Be sure to define each of these contracts before aligning a topic.
a.Adding a room to your home
b.Landscaping your company’s grounds
c.Developing a new software module
d.Purchasing new desktop computers
e.Conducting a survey of employee attitudes
f.To hire a general contractor to do the entire project
g.Purchasing a new car for a project
h.Leasing a new car for a project
i.Leasing an temporary office for the project team
j.Contracting for office supplies
k.to augment the project team with an additional administrative assistant
l.Contracting for a new roof for a home
m.Purchasing of a new cell phone and a service plan for the project team
n.Contracting for new windows for an office building
o.Contracting for new car insurance for the project vehicles
p.Purchasing a new air conditioner/heater (HVAC system) for a business
q.To hire consultants to consult on a key area of the project
r.To hire a product designer to improve the final design of the project
For which of these examples would incentives be a viable option?
As per the lecture, Fixed-price-with-incentive fee (FPIF) is the contract in which a set ceiling price is negotiated for the contract. But in order to synchronize the buyer’s priorities on the project to that of the seller, an incentive is added to the contract. This is financial incentive tied to the seller’s performance, such as cost, schedule, or quality. These incentives are set forth in the contract. In Cost-plus-incentive fee contract, the seller is typically incentivized to keep costs low. This is accomplished by the buyer providing an incentive to the seller tied to the project’s costs. Any cost overruns or cost under runs are split by a predetermined formula between the seller and the buyer.
According to me, Incentives would be viable for the following two examples:
- To hire a general contractor to do the entire project
- Contracting for a new roof for a home
The reason is because in both of these contracts, the contractor or the seller can be incentivized to keep the cost or ceiling price low. Also, financial incentive can be tied to other project parameters such as project quality and timely completion of the project.
When it comes to incentives, the buyer will provide an additional fee if the seller meets some cost, performance, or schedule objectives then incentives are designated to motivate the seller efforts. It’s like a bonus to the seller. The incentive can be for cost savings or for some level of performance, the seller gains profit from both actives. Incentives can be given for the following: a,b,c,d, j,l,n and r
Incentive can be used for a lot on the list. Speaking out of experience, I’m going to address the General Contractor completing a project. Flipping homes has turned into a very lucrative business since the market crash. People with experience and capital were able to go out and make great money with a quick turn. Because the speed of the housing market right now, investors are pulling in multiple projects and putting a contractor in charge to meet expectations quickly. Every day that goes by will cost the owners money to maintain, taxes, insurance, and potentially interest. So if a general contractor pulls off a remodel in 3 weeks when the investors were expecting 4, odds are they are going to keep that contractor happy so he comes back for more business in the future.
What contract type would you use for letter a?
For item a I would use a Fix price contact because I know exactly what I want and I want to know what the cost are up front. I would choose the Fixed-price- with-incentive fee and the incentive I would offer if they remain on schedule or ahead of schedule to use there services to other family members and friends. Fixed price would be better to choose in this case. But, If I can monitor the construction of room myself and have the required personnel to monitor the day to day progress, I might save some money with the Time and Material. One needs to remember that a time and materials contract will likely require more monitoring of the contractor. If the project manager does not have the time to monitor the work, then the project manager should consider other contract options.
Taking another perspective on incentive, in letter E, the incentive for conducting a survey of employee attitudes would be improving work processes, benefits and maintaining employee retention ( from an organizational perspective). Conducting surveys are a good way for an organization to gain the perspective of the employee(s). If the employee(s) are honest in taking the survey, it can identify problems areas in the organization. In letter R, hiring a product designer to improve the final design of the project could result in a better quality of product for an organization. As a organization, a high quality product equates to the satisfaction of customer(s). In addition, the increased quality of a product can be expressed through a competitive edge and/ or increased sales.
What amount of value would you think would make the incentive interesting and motivating?
An incentive contract generally pays a fixed fee plus some fraction of project costs. The higher the project value, the percentage amount would be lower as the value of the incentive would be larger for every % increase in the percentage incentive for large project. Also, the buyer would be motivated to save for the project in terms of cost, time or betterment of quality if the cost involved to do so is lower than the value of the incentive offered to the buyer from the seller. Also, for the seller, giving incentive would be justified if the resultant cost saving is larger than the incentive amount offered to the buyer.
In my opinion the new roof for a home may be fine with a FFP or FPIF type of contract however, a CPFF or CPIF type of contract may be better suited to a longer term project such as hiring a general contractor for a project or replacing office windows due to the longer time frames that these projects usually incur. This type of contract would allow the purchaser to pay as work is completed along agreed upon timelines and also allow the supplier to recoup money spent to conduct the project and receive some of the profits. Early completion may also warrant the awarding of incentives based on what is stipulated.