Types of Contracts Ownership etc Module 05 -03

Types of Contracts, Ownership, etc. Module 05 -03 Follows Halpin Chapter 5 Updated: March 11, 2003 3/11/2003 CVEN 349 - Maxwell 1

RAT #05 -03 -1 n n Take out a sheet of paper, put you name on it, and … … List the three types of ownership and 1 advantage of each. 3/11/2003 CVEN 349 - Maxwell 2

Purpose: n To introduce students to the various types of construction and consulting contracts. 3/11/2003 CVEN 349 - Maxwell 3

Learning Objectives: n Students should be able to list, briefly describe, and state the advantages and disadvantages of each of the various types of construction and consulting contracts. 3/11/2003 CVEN 349 - Maxwell 4

Contract Environment n n Contract: A set of legally binding promises. Contract Law: What are the promises? Who made them? Are they fair to all parties? Are they Legal? 3/11/2003 CVEN 349 - Maxwell 5

Contracting/Purchasing Strategy Low $$ - High Tech High $$ - High Tech Negotiate carefully for best price and technology. Low $$ - Low Tech High $$ - Low Commodity purchase, like Tech Negotiate carefully nails at Home Depot for best price. Increasing Dollar Cost -- >>> 3/11/2003 CVEN 349 - Maxwell 6

Basic Types of Construction or Consulting Contracts n n Lump Sum or Fixed Price high reward, high risk Time and Materials (T&M) high reward, low risk, low volume CPFF with Unit Prices (cost plus fixed fee) low reward, low risk (unbalanced bids) CPFF with Labor Rates (lots of variations) low reward, low risk 3/11/2003 CVEN 349 - Maxwell 8

Lump Sum or Fixed Price n n A fixed reward for a well specified object or product. (40%-100% profit is common) Used to contract for cars, existing houses, equipment, etc. Risk is based upon the variation in specificity of the object or product. A monopoly business can be a “license to print money. ” (Microsoft, for example) 3/11/2003 CVEN 349 - Maxwell 9

Time and Materials n n n Fixed rates for an unspecified amount of labor and materials. Used for consulting, expert witnesses, etc. Low volume, low risk, high profit % 3/11/2003 CVEN 349 - Maxwell 10

CPFF with Unit Prices for Physical Objects. n n n Most construction contracts are this type. Cost plus fixed (or % fee) based upon unit prices for a specified quantity of units. Low risk, low reward, high volume. Risk is based upon variation in quantities, design errors, and construction sequence. Unbalanced bids can lead to increased profits. 3/11/2003 CVEN 349 - Maxwell 11

CPFF with Unit Rates for Labor and Other Direct Costs n n n Most consulting and or research contracts are this type. Cost plus fixed (or percentage fee) based upon unit prices for a specified quantity of units. Most non-construction, government contracting falls into this pattern. 3/11/2003 CVEN 349 - Maxwell 12

Types of Purchase Arrangements in Texas n n n Negotiated Contracts – TXDo. T Design and Other Consultants Open Bidding – Best of Responsible – TXDo. T construction, TAMU buildings Restricted Bidding – Best of Pre-qualified – Federal $$’s pass-through contracts. DIR Cooperative Contract – One contract, multiple buyers (agencies), single product. GSC Catalog – Multiple contracts, multiple products, single source, multiple buyers. 3/11/2003 CVEN 349 - Maxwell 13

Negotiated Contracts, In General n n May be any of the 4 -basic types. Negotiated Design-Build contracts are common practice in the Private Sector. Negotiated Partnering is common in Private Sector “fast track” work. TXU Mining, Mobile/Oceaneering Project Difficult in the Public Sector because of perceived conflicts of interest. 3/11/2003 CVEN 349 - Maxwell 14

Construction Management (CM) Contracts n n Used to insulate Owner from “hassle” and risk. If the Owner lacks construction experience and / or this is a 1 -time venture, or there are multiple Owners, this is the preferred method. They are normally, negotiated CPFF or restricted (short list) bid CPFF with a time limit of (normally) 6 to 8 years. If products are fixed and $$’s are limited, this can be risky for the CM and Owner alike. 3/11/2003 CVEN 349 - Maxwell 15

PAT #5. 3. 2 n n Take out a sheet of paper, write your name and team #. As individuals, list the basic contract types as described above. 3/11/2003 CVEN 349 - Maxwell 16

Summary of Contracting Issues (from the Owner’s Perspective) Take the work to be done and the general situation: construction, consulting … n Determine ownership structure: proprietorship, partnership, or corporation or public sector. n Determine appropriate type of contract: CPFF, Fixed Price, T & M. n Determine contracting process: negotiated, open bid, or restricted bid. (Reduce Risk and Cost to the extent possible. ) n 3/11/2003 CVEN 349 - Maxwell 17

Summary of Contracting Issues (from the Other Perspective) n You generally have to deal with what is offered you but you can make counter offers. Offer a Fixed Price in lieu of CPFF. n n You can restructure your organization to meet the challenge: A partnership of corporations? You can structure your bid to your advantage. (Reduce risk and increase Profit to the extent possible. ) 3/11/2003 CVEN 349 - Maxwell 18

Assessment n Take out a sheet of paper and indicate the “muddiest” topic. 3/11/2003 CVEN 349 - Maxwell 19