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Contract Performance
Which condition of contract will have bigger influence on the contractor's performance? a) Bonus/Incentive b) Penalty/Liquidated Damages or c) Both.Please share your experience.
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Payment for penalties or liquidated damages is difficult and time consuming. However to motivate your contractor to perform I on time/at cost, I would suggest an incentive such as in an FFP incentive contract or FFP with award fee type contract. Certainly equitable adjustment terms typically found in CHANGES clauses are also standard so do not discount the opportunities for modifications during performance.
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1 reply by Chandrashekhar Thatte
Feb 02, 2017 5:11 AM
Chandrashekhar Thatte
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Michael,I appreciate your views but would like to share your experience with a concrete example on contract conditions which acted as a driving force to the Contractor to perform his obligations.Many thanks for response !
I speak in generalities however and without knowing the circumstances it is difficult to be dogmatic or provide advice.
In big EPC oil and gas projects, LD or penalty will not proactively protect the client's needs/interest. However, it act as a deterrent to some extent and EPC contractor always states liability will be limited and it is finally upto the client to ensure their interests are protected and organization realizes the "business value". This requires organization capability in terms of identifying the risks, data quality, capability of EPC contractor versus price charged by EPC contractor.
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1 reply by Chandrashekhar Thatte
Feb 07, 2017 1:50 AM
Chandrashekhar Thatte
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LD levied rightfully will serve client's business interest, as such, penalties will act as a deterrent and prevent the contractor from putting up an untenable claim.
In a contract, everything makes a difference so you have to strike a balance between protecting your company's interest and making sure you are being fair with the contractor.

Bonus Schemes goes both ways in big contracts (i.e. You share losses and share savings based on defined percentages) so it really depends on the situation.
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1 reply by Chandrashekhar Thatte
Feb 02, 2017 5:19 AM
Chandrashekhar Thatte
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Rami,will you please expand/elaborate with example on "Bonus Schemes goes both ways in big contracts (i.e. You share losses and share savings based on defined percentages) so it really depends on the situation ". I have not clearly understood the statement.
Feb 01, 2017 9:26 AM
Replying to Michael Ziyadeh
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Payment for penalties or liquidated damages is difficult and time consuming. However to motivate your contractor to perform I on time/at cost, I would suggest an incentive such as in an FFP incentive contract or FFP with award fee type contract. Certainly equitable adjustment terms typically found in CHANGES clauses are also standard so do not discount the opportunities for modifications during performance.
Michael,I appreciate your views but would like to share your experience with a concrete example on contract conditions which acted as a driving force to the Contractor to perform his obligations.Many thanks for response !
Feb 01, 2017 1:30 PM
Replying to Rami Kaibni
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In a contract, everything makes a difference so you have to strike a balance between protecting your company's interest and making sure you are being fair with the contractor.

Bonus Schemes goes both ways in big contracts (i.e. You share losses and share savings based on defined percentages) so it really depends on the situation.
Rami,will you please expand/elaborate with example on "Bonus Schemes goes both ways in big contracts (i.e. You share losses and share savings based on defined percentages) so it really depends on the situation ". I have not clearly understood the statement.
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1 reply by Rami Kaibni
Feb 02, 2017 12:19 PM
Rami Kaibni
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We usually add an addendum to the contract when the contract is Cost Plus to make it Cost Plus Incentive Fee which means:

1- We define a ceiling price.
2- If the contractor goes below this price then the savings are shared between the client and them based on an agreed percentage like 30:70 or 40:60.
3- If they go above the ceiling price then the losses are also shared based on the same percentages.

This is a two way street.

In some cases, we do not include no. 3 in case we have prior successful business relationship with the GC or Construction Manager.

Hope this helps.
Feb 02, 2017 5:19 AM
Replying to Chandrashekhar Thatte
...
Rami,will you please expand/elaborate with example on "Bonus Schemes goes both ways in big contracts (i.e. You share losses and share savings based on defined percentages) so it really depends on the situation ". I have not clearly understood the statement.
We usually add an addendum to the contract when the contract is Cost Plus to make it Cost Plus Incentive Fee which means:

1- We define a ceiling price.
2- If the contractor goes below this price then the savings are shared between the client and them based on an agreed percentage like 30:70 or 40:60.
3- If they go above the ceiling price then the losses are also shared based on the same percentages.

This is a two way street.

In some cases, we do not include no. 3 in case we have prior successful business relationship with the GC or Construction Manager.

Hope this helps.
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1 reply by Chandrashekhar Thatte
Feb 03, 2017 6:24 AM
Chandrashekhar Thatte
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I have not executed Cost Plus contract since in India it is predominantly Item Rate /BOQ contract .Some Public sector contracts,in India,do operate on Cost Plus basis but without such addendum to contract.However, this seems to be a better option on contracting and a win win situation to both the parties.Under such contract, there will be enhanced chances of collaborative behaviour through sharing of risk and responsibility .The chances of claims also get diminished under such contracts.
Feb 02, 2017 12:19 PM
Replying to Rami Kaibni
...
We usually add an addendum to the contract when the contract is Cost Plus to make it Cost Plus Incentive Fee which means:

1- We define a ceiling price.
2- If the contractor goes below this price then the savings are shared between the client and them based on an agreed percentage like 30:70 or 40:60.
3- If they go above the ceiling price then the losses are also shared based on the same percentages.

This is a two way street.

In some cases, we do not include no. 3 in case we have prior successful business relationship with the GC or Construction Manager.

Hope this helps.
I have not executed Cost Plus contract since in India it is predominantly Item Rate /BOQ contract .Some Public sector contracts,in India,do operate on Cost Plus basis but without such addendum to contract.However, this seems to be a better option on contracting and a win win situation to both the parties.Under such contract, there will be enhanced chances of collaborative behaviour through sharing of risk and responsibility .The chances of claims also get diminished under such contracts.
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1 reply by Rami Kaibni
Feb 03, 2017 1:33 PM
Rami Kaibni
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It is a win-win situation in most cases and give a reason to motivate the GC.
Feb 03, 2017 6:24 AM
Replying to Chandrashekhar Thatte
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I have not executed Cost Plus contract since in India it is predominantly Item Rate /BOQ contract .Some Public sector contracts,in India,do operate on Cost Plus basis but without such addendum to contract.However, this seems to be a better option on contracting and a win win situation to both the parties.Under such contract, there will be enhanced chances of collaborative behaviour through sharing of risk and responsibility .The chances of claims also get diminished under such contracts.
It is a win-win situation in most cases and give a reason to motivate the GC.
I ever advocate for a win-win situation. But it will depends on the organization culture.
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1 reply by Chandrashekhar Thatte
Feb 04, 2017 12:54 AM
Chandrashekhar Thatte
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Quite true Sergio,the Organization culture is projected by the project team with whom the Construction Manager has to deal with day in and day out.There are bound to be clashes of views/opinions and disagreements on many trivial or major issues/concerns and an honest intention of collaborative effort from both the parties will only result in a win-win situation becoming a catalyst to realise project objective gainfully.
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