Assume that you have made the final payment on a one-acre residential lot that y
ID: 359288 • Letter: A
Question
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.
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Explanation / Answer
Lets us understand first what are the three available options that i have -:
A. Fixed Price Contract :
- Efficient if the scope and the schedule of your project is sufficiently defined.
- Contractor completes the project considering the price in mind. One of the easiest ways to complete your project.
- For example, if you have a bid price in mind, you can approach a bank for a mortgague and then use that money to pay the contractor in tranches based upon the completion of activities such as completion of the foundation of the house.
B. Unit Price Contract :
- In a Unit price contract, the vendor bills you by the unit of work he completes. A unit could be Square footage, hourly rate or any other phyical quantity unit agreed upon between both of you.
- Efficient if you want the contractor to just build a bigger home for you while you want yourself to focus on aspects such as interior decoration, landscaping and furniture work. Also, if you have good personal contacts with material/ appliance suppliers then you can go ahead with tis type of contract.
- Helps to save cost on building bigger home projects. For example, this contract structure gives you the luxury to identify the cheapest contractor for an hourly job. You can also use this contract if you want a bigger job to be competed in a specified time. In this case, the contractor will try to complete the job faster by completing more units of work in order to get a bigger pay. But quality can be an issue here.
- This type of contract structure is suitable when you are aware of what items you are going to use in the project but you are unaware of the quantities involved for those irems as they can't be acuurately estimated.
C. Reimbursable Contract :
- This type of contracts 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.
- Contractors are paid for the work accomplished. It is effective when the scope of work is ill-defined.
- These type of contracts are most difficult to administer and offers little incentive to the contractor to be cost-effective but still it is best suited when it comes to flexibility, sudden changes and unexpected conditions. For example, you hire an interior designer for your house andhe charges you a fixed hourly rate plus he charges you the cost price for the materials and supplies. The risk is that there is no motivation for the interior designer to work faster but you have the luxury to be flexible with your project and make any changes in the scope of work.