5 image by mit opencourseware macomber 1989 cost plus

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Unformatted text preview: ible with turnkey delivery type! Terrible Applicability Applicability Requires sophisticated owner to manage Requires Uses if the pricing could not be performed in Uses any other way and if it is urgent Emergencies (civil, military) Emergencies Ill-defined, risky scope Ill defined, e.g. historic building renovation with unknown cond. e.g. Unknown technologies Unknown Either scope or construction method unknown Either Confidential projects (limit public knowledge) Confidential Cost Plus Fixed Fee (“Fixed Fee”) Cost Cost may vary but the fee remains firm Cost The fee is independent of the duration of the The project Like Cost + fixed % except some shared risk Like Less time risk: High incentive to finish early Less Less risk of contractor growing size of project Less Unit Price Contract Unit Agreement on the price charged per unit Agreement per between the contractor and the owner Interesting example of risk sharing Interesting Owner: risk for uncertainty in quantity Owner: Contractor: risk for unit price (efficiency, procur) Contractor: Contractor overhead must be integrated in Contractor the units price Necessity of an owner presence on site to Necessity measure the actual quantities Typically renegotiate if quantity 20% off Typically Quantity influences price b/c economies of scale Quantity Unit Price Contract Unit Highly dependent on the accuracy of the Highly estimation of the quantities given by the Owner/Designer Risk of unbalanced bidding Risk If contractor believes actual quantity will differ, case If increase and/or decrease the unit price Contractor can make profit because payment is based Contractor on actual quantities but he can also lose money in the same way A contractor can be excluded if its bid is very contractor unbalanced The total cost for the owner can be greater than The planned Example: Pile Driving Example: Too risky to just charge fixed price Too Geotechnical uncertainties make length of piles Geotechnical uncertain Piles can be highly expensive Piles Risk allocation Risk Price risk more under contractor control (efficiency, Price crew and equipment selection): to contractor Length out of contractor control: to owner Length Owner must precisely monitor length used Owner Cost Versus Price for GMP Cost Guaranted-Maximum-Price Contract (Price = cost of work plus fixed fee of $500 with a maximum price of $10,500) }c } }a $10,500 $10,000 $10,000 b $9,500 Final Price $10,500 Final Cost a = If final cost is $9,500, contractor profit is $500 (5.26%) b = If final cost is $10,000, contractor profit is $500 (5%) c = If final cost is $10,500, contractor loss is $0 (0%) Image by MIT OpenCourseWare. Macomber, 1989 Guaranteed Maximum Price or GMP Guaranteed Variation of the Cost Plus a Fee but GMP Variation can be a cap on direct costs direct After a certain point, the “floor” or “ceiling”, After the contractor assumes any additional costs Often start in cost plus fixed fee and then Often start impose GMP at e.g. 90% design Best: GM Shared Savings: Below Guaranteed Best: Maximum, savings shared (60-40% or sliding) Very good for turnkey, well-defined scope Very GMP: Advantages GMP: Permits easier financing Permits Can fast-track Can Owner keeps savings below GMP Owner Often can get started quickly on construction Often Particularly if contractor already involved w/design Particularly Contract may be higher than for fixed price b/c Contract design often not complete when contract set GMP: Disadvantages GMP: Contractors may still spend lots Contractors Owner must monitor contractor spending Owner Can be fights over what is direct vs. indirect cost Can i.e. what must fall below GMP i.e. Bad if unclear scope after GMP agreed to (must Bad renegotiate) Just as for CPFF, quality may be sacrificed Just whereas without GMP, cost and/or schedule would have increased Relative Costs of Construction Contracts Relative E= contractor's original estimate of the direct job cost at the time of contract E= award M = amount of markup by the contractor in the contract amount B = estimated construction price at the time of signing contract estimated A = contractor's actual cost for the original scope of work in the contract contractor's U = underestimate of the cost of work in the original estimate (with negative underestimate value of U denoting an overestimate) C = additional cost of work due to change orders additional P = actual payment to contractor by the owner actual F = contractor's gross profit contractor's R = basic percentage markup above the original estimate for fixed fee contract basic Rii = premium percentage markup for contract type i such that the total R percentage markup is (R + Ri), e.g. (R + R1) for a lump sum contract, (R + R2) for a unit price contract, and (R + R3) for a guaranteed maximum cost contract N = a factor in the target estimate for sharing the savings in cost as agreed upon factor by the owner and the contractor, with 0 N 1. Chris Hendrickson, 2000 Original Estimated Contract Prices Original Type of Contract Markup Contract Price B = (1 + R + Lump sum M = (R +R1)E R1)E B = (1 + R + Unit price M = (R + R2)E R2)E Cost plus fixed % M = RA = RE B = (1 + R)E Cost plus fixed fee M = RE B = (1 + R)E B = (1 + R + Guaranteed max cost M = (R + R3)E R3)E Adapted from Chris Hendrickson, 2000 Owner’s Actual Payment with Owner Actual Different Contract Provisions Different Type of Contract Change Order Payment Owner's Payment Lump sum C(1 + R + R1) P = B + C(1 + R + R1)...
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