Contract Pricing Options (graded)
Assume that you have made the final payment on a one-acre residential lot that you purchased
years ago to build your retirement home. You are now ready to build your dream home. This will
be your ongoing project for the next couple of years. Which contract structure (fixed price, unit
price, reimbursable) do you think that you would use to proceed with your project? Explain your
choice.
For building a house, there are different scenarios.
1. Fixed price: This is probably the easiest choice. This house = this cost
2. Unit price: This is is good for cost savings on nicer homes, especially if you have any home
building skills yourself or if you have connections with material stores, appliance suppliers, etc.
You can have the builder build a bigger home but not do a lot of the upgrades or landscaping, as
you could do those yourself. For example, the woodwork or decking,
3. Reimbursable: This is risky. If the builder agrees to upcharge 10% on the supplies plus time,
you don't know where he is buying the materials from and he may not be getting the best deal.
In fixed price contract, the engineer and/or contractor agrees to do a described and specified project
for a fixed price. A Fixed Fee is suitable if the scope and schedule of the project are sufficiently
defined to estimate project costs. Unit Price Contract is based on estimated quantities of items
included in the project and their unit prices. The final price of the project is dependent on the
quantities needed to carry out the work. In general this contract is only suitable for construction and
supplier projects where the different types of items, but not their numbers, can be accurately
identified in the contract documents. Reimbursable Contract provides the initially negotiated fee to
be adjusted later by a formula based on the relationship of total allowable costs to total target costs.
This type of contract specifies a target cost, a target fee, minimum and maximum fees, and a fee
adjustment formula. After project performance, the fee payable to the contractor is determined in
accordance with the formula. With reimbursable contracts, contractors are paid for the work
accomplished. Reimbursable contracts are effective when the scope of work is ill-defined. Under
reimbursable contracts, uncertainty in project scope is born by the agency administering the
contract. Reimbursable contracts are generally the most expensive to administer and offer relatively
less incentive for contractors to be cost-efficient. On the other hand, cost-reimbursable contracts
offer significant flexibility for responding to conditions that are unexpected.
In this case, since I am planning to build a dream home, I might change the layout and basic
architecture of the house as the project execution takes place. Since, I will be monitoring my home
project on daily/weekly basis; it makes more sense for me to go for reimbursable project. I also want
to build my home project at my own pace giving enough attention to minute details and so I will be
personally supervising each and every aspect of this project. So, I would like to keep this project as
much flexible as possible. For this reason, I think that keeping the contract structure
"Reimbursable" would be beneficial for me.
This study source was downloaded by 100000861168648 from CourseHero.com on 03-04-2023 06:36:04 GMT -06:00
https://www.coursehero.com/file/15223629/PROJ-410-Week-2-Contract-Pricing-Options-Discussion-Questions-1-complete-answer-502600/
, What are the four basic contract pricing options?
Basic Contract pricing options are:
Fixed Price Contract
Unit Price Contract
Cost Plus Contract
Reimbursement Contract
Percentage of Construction Fee Contracts
The four basic contract pricing options
are:
Fixed Price – this is where the goods or services have a fixed price
Unit Price - this pricing is priced per unit and is adequately defined
Cost reimbursable - this is paid per cost and reimbursed accordingly and is not well defined.
Time and materials - this is paid for as labor and materials similar to a cost plus and unit plus contract
respectively.
I would say that the fixed rate contract would be the best structure. Once you have your home
spec'd out and the bids in place, you can go to the bank and get a construction loan which is basically
a fixed mortgage but the funds are distributed to vendors as work is completed. For example, if the
total loan amount was $200,000 this money would be put in escrow. When the foundation was
completed, you would pay the contractor's invoice out of the $200,000. This is how we did it
because we had individual contractors. If you have one vendor who does the subcontracting then
you would just pay the one vendor the deliverable amounts as part of the project are finished.
What are five options of cost reimbursable contracts?
The five are as follows...
1. Cost Plus Percentage Fee - Sellers actual cost plus percent of total project cost.
2. Cost plus Fixed Fee - Sellers cost plus fixed fee based project cost estimate
https://www.coursehero.com/file/15223629/PROJ-410-Week-2-Contract-Pricing-Options-Discussion-Questions-1-complete-answer-502600/
Assume that you have made the final payment on a one-acre residential lot that you purchased
years ago to build your retirement home. You are now ready to build your dream home. This will
be your ongoing project for the next couple of years. Which contract structure (fixed price, unit
price, reimbursable) do you think that you would use to proceed with your project? Explain your
choice.
For building a house, there are different scenarios.
1. Fixed price: This is probably the easiest choice. This house = this cost
2. Unit price: This is is good for cost savings on nicer homes, especially if you have any home
building skills yourself or if you have connections with material stores, appliance suppliers, etc.
You can have the builder build a bigger home but not do a lot of the upgrades or landscaping, as
you could do those yourself. For example, the woodwork or decking,
3. Reimbursable: This is risky. If the builder agrees to upcharge 10% on the supplies plus time,
you don't know where he is buying the materials from and he may not be getting the best deal.
In fixed price contract, the engineer and/or contractor agrees to do a described and specified project
for a fixed price. A Fixed Fee is suitable if the scope and schedule of the project are sufficiently
defined to estimate project costs. Unit Price Contract is based on estimated quantities of items
included in the project and their unit prices. The final price of the project is dependent on the
quantities needed to carry out the work. In general this contract is only suitable for construction and
supplier projects where the different types of items, but not their numbers, can be accurately
identified in the contract documents. Reimbursable Contract provides the initially negotiated fee to
be adjusted later by a formula based on the relationship of total allowable costs to total target costs.
This type of contract specifies a target cost, a target fee, minimum and maximum fees, and a fee
adjustment formula. After project performance, the fee payable to the contractor is determined in
accordance with the formula. With reimbursable contracts, contractors are paid for the work
accomplished. Reimbursable contracts are effective when the scope of work is ill-defined. Under
reimbursable contracts, uncertainty in project scope is born by the agency administering the
contract. Reimbursable contracts are generally the most expensive to administer and offer relatively
less incentive for contractors to be cost-efficient. On the other hand, cost-reimbursable contracts
offer significant flexibility for responding to conditions that are unexpected.
In this case, since I am planning to build a dream home, I might change the layout and basic
architecture of the house as the project execution takes place. Since, I will be monitoring my home
project on daily/weekly basis; it makes more sense for me to go for reimbursable project. I also want
to build my home project at my own pace giving enough attention to minute details and so I will be
personally supervising each and every aspect of this project. So, I would like to keep this project as
much flexible as possible. For this reason, I think that keeping the contract structure
"Reimbursable" would be beneficial for me.
This study source was downloaded by 100000861168648 from CourseHero.com on 03-04-2023 06:36:04 GMT -06:00
https://www.coursehero.com/file/15223629/PROJ-410-Week-2-Contract-Pricing-Options-Discussion-Questions-1-complete-answer-502600/
, What are the four basic contract pricing options?
Basic Contract pricing options are:
Fixed Price Contract
Unit Price Contract
Cost Plus Contract
Reimbursement Contract
Percentage of Construction Fee Contracts
The four basic contract pricing options
are:
Fixed Price – this is where the goods or services have a fixed price
Unit Price - this pricing is priced per unit and is adequately defined
Cost reimbursable - this is paid per cost and reimbursed accordingly and is not well defined.
Time and materials - this is paid for as labor and materials similar to a cost plus and unit plus contract
respectively.
I would say that the fixed rate contract would be the best structure. Once you have your home
spec'd out and the bids in place, you can go to the bank and get a construction loan which is basically
a fixed mortgage but the funds are distributed to vendors as work is completed. For example, if the
total loan amount was $200,000 this money would be put in escrow. When the foundation was
completed, you would pay the contractor's invoice out of the $200,000. This is how we did it
because we had individual contractors. If you have one vendor who does the subcontracting then
you would just pay the one vendor the deliverable amounts as part of the project are finished.
What are five options of cost reimbursable contracts?
The five are as follows...
1. Cost Plus Percentage Fee - Sellers actual cost plus percent of total project cost.
2. Cost plus Fixed Fee - Sellers cost plus fixed fee based project cost estimate
https://www.coursehero.com/file/15223629/PROJ-410-Week-2-Contract-Pricing-Options-Discussion-Questions-1-complete-answer-502600/
