Research06

Mod 6 DQ - 2

This portion of the Week 12 PowerPoint presentation, slide 14, discusses three important contract types, fixed-price, cost-reimbursable, and time and materials (T&M). Review the descriptions for each type below. Then explain why fixed-price contracts favor the buyer while cost-reimbursable and T&M contracts favor the seller. Why do you think sellers engage in fixed-price projects? Why do you think buyers engage in T&M projects? Does this seem rational to you? Why?

1

In the aspect of project contracts there are things we have to consider the deliverable which are goods or services, labor and materials, time frame and budget before entering into an agreement. The contracts are used to protect the seller and the buyer’s interests because it is an agreement or a commitment that is intended to be enforceable.

To understand fully the concept why the Fixed Price Contract favors the buyer and the two other contracts which are Cost-Reimbursable, and Time & Materials (T&M) favor the seller, I can share our experience as a contractor. We own a family construction business, when the client (buyer) accepts the estimate and signs the contract whatever is in the contract regardless whether we (contractor) miss out to put in the estimate materials or additional labor to finish the work, the contractor is obligated to execute the work and responsible to provide the materials to complete the job stated in the contract. This highly favored the buyer because when the contractor (seller) discovers that there are additional labor and materials that were not included in the contract, the contractor (seller) is obligated to finish the work. We usually have less profit when there is an increase of prices against the estimated amount of materials under the contract and this favors the buyer. Once the project is done, we (contractor) make sure that the project is approved by the building inspector and most importantly the client (buyer) is satisfied.

On the other hand, Time & Materials (T&M) Contract favors the seller (contractor) because the buyer is obligated to pay whatever labor and materials will be used to the project until it is completely done. There is more flexibility in the work packages in this area for the seller. Also, if the scope of the project has to change significantly during the process of the project, the seller (contractor) can order materials that has been approved by the client (buyer) which are listed in the contract. The client (buyer) will pay additional hours for the labor or services rendered as well as additional materials used. The Cost-Reimbursable Contract also favors the seller because the actual costs will be reimbursed upon carrying out the job plus any additional fee and work aside from the project as long that the documents, receipts and approved building inspection are intact to be shown to the client. In my example, the seller (contractor) engages in the fixed-price because the usual intention of sellers are they want to “get in the door” to prove to the clients (buyers) what they can offer and the quality of job they render to their customers. As a result, we usually don’t spend money for advertisement because our clients will recommend us to their friends and we have ”repeat customers” or regular clients.

Buyers engage in the Time & Materials Contract because they want to make sure that the project is not done in a rush and sloppy way. Quality of the project is important and the client (buyer) chooses the materials they prefer especially if it is custom made cabinets, tiles, flooring and vanity.

I think it is logical that both the buyers and the sellers engage in Time and Materials Contract and Fixed-Price Contract respectively because of the benefit they receive from it.

2

Fixed-price contracts create an established price point within a project regardless of the investment of resources utilized for the project’s completion. This may include establishing a pre-determined price for a product, specialized service or pledged result. Thus a fixed-price contract is advantageous to the buyer because regardless of the resources invested, whether additional resources must be outsourced, or if further reinforcement may be called in to deliver within the means of the agreed upon contract, the buyer is still committed to the agreed upon price to be paid. In most cased this is far more favorable to the buyer. For example of a preset pricing and scheduling are agreed upon between the buyer and seller prior to the commencement of a project; yet as time progresses the PM determines that not only is the project slated to miss integral deadlines, but additional resources must be acquired to ensure successful completion, the fixed-price contract favors the buyer. Regardless of the additional resources and time invested, the set price will be paid.

T&M contracts provide miscegenation between fixed price and cost-reimbursable contracts in the event that a thorough assessment proves to be inconclusive in developing a set price segment for the work to be involved. This is model is advantageous to sellers because it provides more flexibility within the budget, in addition to providing PM’s with creative control. I think of T&M contracts with regard to home improvement projects. During the initial onset of the project the homeowner(s) conduct their research and assess their finances to understand what their budget entails. At which point a contractor is enlisted to survey their property. Due to the fact that the contractor is only able to provide a cost estimate based on the initial overview of the project to be completed. Based on the initial assessment both parties agree to a T&M contract. Once the project begins, the contract discovers that the property has underlying issues that cause the price of the project to increase. Having been in this predicament I can understand why buyers agree to engage in T&M projects. Commitment to a project with as much of an emotional connection as home improvement can cause buyers to engage in T&M projects.