Vendor WA4, Essay Example

1. Discuss risk factors in contract pricing, including the effects of bad decisions on the project being managed.

There are risks involved any business decision made. Contract risks are very important to consider when creating a contract for a project. Each project varies and risk assessment should be managed effectively in order to maintain profits.

The first type of contract to consider is cost-plus-incentive fee contracts. These contracts allow overrun or under run sharing of costs through a predetermined formula for fee adjustments that apply to incentives for cost category contracts. The risk involved with this type of contract is that the formula for fee adjustments is predetermined. This means that it outlined in the contract and even if this is not actual calculation of costs, it cannot be changed at a later date. This type of contract is less risky in that there is some formula calculation that can offset costs. However, if the target cost is exceeded, the sellers profit decreases due to this predetermined formula.

A bad decision based on the project manager would be a decision adding additional costs after the contract is created or having not considered some costs. In this event, the sellers profit will decrease based on additional costs, though there is some room for this determined by the formula set place within the contract. The seller still suffers some loss in this event.

The next type of contract is fixed price incentive contracts. In this type of contract a sellers profit is linked to aspects of the project such as cost, schedule, quality, or a combination of the three. Often used in complex new projects, it can be difficult to determine and agree on labor and material costs due to a lack of production experience. The prices quoted within the contract can sometimes be well exceeded. Because the contract determines exactly what the seller will be paid, the seller will suffer greatly if the planned costs are less than actual costs, sometimes so n much so that the project cannot be finished. This is a very risky type of contract.

Bad decisions on the project manager are not considering all labor necessary, not considering all materials necessary, not recognizing the actual costs included, formulating a hypothesis of costs rather than getting actual estimates, or not considering the amount of time the project will take effectively. Any of these mistakes will increase overall cost of the project. When the cost is increased, the sellers profit decreases. There is no formula allowing for these types of mistakes within the contract, sometimes leading to a complete loss.

Cost plus award fee contracts contain subjective incentives in which the sellers profit is based the subjective desires of the buyer. This type of contract is used to motivate sellers to achieve exceptional performance. The risk involved with this type of contract is dependent on how well the seller can satisfy the buyer. The contract is not as concise and there is room for interpretation based on what the buyer specifically wants. It the seller fails to perform, the profit will be reduced based on the criteria that a buyer sets forth.

In this type of contract, the project manager may misunderstand the desires of the buyer. Because of the type of contract, a misunderstanding can lead to underperforming on the project which would lead to a loss of profit on the part of the seller. Misunderstanding can include a specific time schedule, specific building materials, way of completing the project, or implementation of the project. It is important to fully understand the desires implied within the contract to perform to the standards of the buyer.

2. Compose a defense for choosing one of the objective incentives and one of the subjective discussed in your textbook. Apply each incentive to an appropriate real-world situation.

Often times in a basic contract, basic problems arise such as deficient statements of work, poor contract administration, performance delays and quality shortcomings. It is important to offer incentives based on quality performance when entering into a contract. Quality is one of the most important aspects of any product or project. If quality is lacking, it seems as if the contract was not fulfilled, leaving the buyer dissatisfied. A dissatisfied buyer can result in no further work opportunities, negative word-of-mouth advertising, and poor profits. A quality performance incentive motivates the project manager and team to perform on a quality level, and not simply get the job done. The project team will also gain a sense of accomplishment with this type of incentive increasing performance levels presently and in the future. Recognition of a job well done is important to a team of laborers.

This type of incentive is often used in industry. One example is the manufacturing of vehicles. A performance based incentive would cause a team to pay attention to detail in every step of the project, from the actual design to manufacturing. Offering a quality performance incentive could lead to an outstanding product free from defects. There would be a chance of less risk of a recall on an aspect of the vehicle. The buyer would feel safer with the purchase of the final product based on higher quality and safety overall.

A subjective incentive that could be useful within a contract is an award fee plan. In this plan, the parties negotiate an estimated cost and then also place certain amounts of money into an award fee pool. The money within the pool will be allocated at certain points within the project based on how much work has been accomplished.

This is a type of performance based measure that can ensure that the project follows a certain schedule. When dealing with a contract, it is important to have the final project delivered on time. A late finish to a project can cost both the buyer and seller significant amounts of money. With this type of incentive available, project managers must pay attention to the time schedule and the amount of work being accomplished in order to receive the incentive.

This can be an important incentive in a contract that is entailing the design of a new video game system that must be ready in time for the holiday season. If the product is not ready in time to be sold to the consumer during this period, the buyer could lose significant amounts of money. Not only would money be lost due to the significant expenditures of the consumer at this time of year, the advertising costs of a product such as this in this time frame can be astronomical.

If a subjective incentive that offers an award based on the project being completed in a timely manner will motivate the seller to follow a specific time line that allows for the work to be accomplished at necessary periods throughout the project. The project will be completed on time and possible earlier, with most bugs worked out of the system before final sale.