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Types of Contract

4 replies [Last post]
Mon, 2011-09-12 07:43
Donald Harrold
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I'd like to get some discussion going on the pros and cons of the different types of contracts that are available, e.g. Lump sum fixed price, remeasurement contracts, reimbursible contracts, cost plus contracts etc. What are the client drivers for selecting a particular contract type and what are the pitfalls and advantages for both the client and contractor? I am particularly interested in the owner/client perspective with respect to risk and reward split.
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Replies

Sat, 2011-10-08 00:27
#1
Patrick Weaver
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When clients pretend they can offload all risk to a contractor the job outcome is measurably worse for the client than when the client actively manages the risk allocation and the overall risk management processes.

This was the conclusion from a survey of major ($20 million plus) projects in Australia , see Scope for Improvement: http://mosaicprojects.wordpress.com/2011/07/30/scope-of-improvement/

As Confucius did not say “When you play at being an Ostrich and bury your head in the sand, your bum is in the air! Someone will kick it!!”

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Tue, 2011-09-13 14:20
#2
Geoffrey Boulton
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Mike is correct, the unrestrained want for Employers to offset or totally pass on as much risk as possible is the principal driver for determining the type of contract to be used.  From my own experience though I have found that this is changing. Employers are becoming more open to discussing the sharing of risks and reducing costs. It does take a proactive approach but it has been worth it.  
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Mon, 2011-09-12 08:43
#3
Donald Harrold
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Mike, I agree with you that the instinct and intent of owners/clients is to try to transfer as much risk as possible to contractors. I also think that competitive bidding curbs the application of sensible growth and contingency allowances in many circumstances, i.e. the contractor prices to win the job rather than to cover all the potential risks. This results in an inevitable imbalance in risk and reward towards the contractor. Exploiting loop holes is a possibility to improve the contractors financial position, although contracts do tend to be pretty mature and water tight these days. All of the above leads to a very adversarial relationship between the owner and contractor. Surely it's time to move to a more balanced and productive risk and reward model? Regards, D
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Mon, 2011-09-12 08:00
#4
Mike Testro
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Hi Donald

The usual driving force is for the Employer to pass on as much risk as possible to the Contractor.

This is done by ammending standard forms or writing a bespoke form.

The usual result is a high price when the risk contingencies are added.

A further risk to the Employer is that the revisions will result in loopholes so that an astute Contractor can use to generate claims.

Best Regards

Mike Testro

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