Contract for the Manufacturing of 2000 Pencils
The desired product, in this case, is well defined and common in the market. As such, it is possible for a client to determine the market prices for the product. From the client’s perspective, it is necessary to incorporate such knowledge in the negotiation of the contract. The most appropriate contract between a client and the manufacture of pencils for the delivery of 2000 pencils is a fixed price contract. Given the variants of fixed price contracts, the specific contract type is the firm fixed price contract.
Heldman & Mangano (2009) hold that in firm fixed price contracts, the manufacturing company and the client agree on a specific price for which the manufacturer will deliver the product. The agreement also requires that the product is defined in specific terms. This contract is appropriate for this project because it absolves the client of considerable risks, which in this case are borne by the manufacturer. Such risks include shifts in the price of raw material that would lead to a more costly production process. This further implies that the manufacturer would be responsible for reduced profit margins or any losses (Heldman & Mangano, 2009).
Contract for the Construction of a 300-Meter Bridge
The construction of a bridge is a large project with numerous activities and huge capital requirement. Such projects can be victims of delayed deliveries because of the many terminal activities that comprise the project. However, the significance of the project to the economies of the local communities and the capital investment requires that such projects are delivered promptly. There is also the element of the quality of the deliverable. A fixed price plus incentive contract is appropriate in ensuring that the significance of these elements is reflected in the deliverable. Even though Kelleher & Abernathy (2010) finds that the fixed price plus incentive contracts are not habitually used in construction projects, the ability of this contract type to deliver the desired results using positive and negative incentives makes is worth considering on construction projects.
The client and the contractor negotiate a price for which the entire project will be delivered. This is a multi-factorial process in which various market factors are considered. In addition to the fixed price, the contract also features incentives to be given after the satisfaction of various criteria. For instance, the early completion of the project can be used as criteria to incentivize the contractor to use effective project management techniques in order to complete the bridge promptly or before the scheduled completion date (Heldman & Mangano, 2009). The incentive criteria should also include the quality and technical aspects to ensure that the contractor does not complete the project early at the expense of quality. The negative incentives entail penalties for the contractor for delays in the delivery of the project.
Contract for the Design of a New Circuit Board
The objective behind the design of the new circuit board is the delivery of a product with state-of-the-art capabilities. Expectedly, such a design process would be cost incentive. Nonetheless, there is a need to ensure efficiency in the utilization of resources such as time and money. Based on these considerations, the best contract type is the cost plus incentive fee contract. Kelleher & Abernathy (2010) find that this contract type combines the elements of both cost type and incentive type contracts to great effect in projects where even if the prospects are cost intensive, there is still need for conservation of resources. Under this contract type, a target cost which must not be exceeded in the design of the circuit board will be established.
Additionally, the reference fee for the contractor for the design of the circuit board is determined. A formula that will be applied when determining the amount of incentive bonus that the contractor will be given is then determined and agreed (Kelleher & Abernathy 2010). This contract type is appropriate for this project because it offers the contractor sufficient motivations to employ purchasing practices that reduce the cost for the client while also pursuing the timely or early completion of the project as these are some of the variables in the determination of his incentive fee.
Contract for the Operation of a Small Factory
The operations of a factory have an element of cost. Costs of production have a direct relationship on the profit margins. Increased costs of production result in lower profit margins. In the same respect, a reduction in the cost of production will result in an increase in the profit margins. This means that any other entity that is contracted to run the operations of the factory should be incentivized to apply efficiency techniques in order to minimize the costs of production. The incentives will motivate them to source for the raw materials diligently, avoid wastages, and also employ other measures of efficiency in order to achieve higher profit margins by reducing the cost of production among other ways.
The contract that best achieves this is the cost plus incentive fee contract. In this contract, the client pays the contractor incentive fees in addition to reimbursing him the costs of running the factory. As discussed earlier, the incentives are given after the achievement of a given criteria (Kelleher & Abernathy, 2010). The amount in incentives can vary based on the level of delivery so that there an even bigger motivation to achieve more profits with fewer production costs. Other elements that can be used in determining the amount of incentives include the maintenance of the equipment in the factory.
Benefits and Weaknesses of a Cost Plus Incentive Fee Contract (CPIF) versus Cost Plus Award Fee Contract (CPAF)
The two types of contracts have advantages and disadvantages that make them appropriate for different situations. The table below summarizes the benefits and weaknesses of each of the contract types.
References
Costello, A. (2008). Getting results: The six disciplines for performance-based project management. Riverwoods, Ill: CCH.
Heldman, K., & Mangano, V. (2009). PMP: Project management professional exam review guide. Indianapolis. Wiley Publishers.
Kelleher, T. J., & Abernathy, T. E. (2010). Smith, Currie & Hancock's Federal government construction contracts: A practical guide for the industry professional. Hoboken, N.J: John Wiley & Sons.
