Payment Mechanisms

Question 1

Payment Mechanisms

Answer 1

-Measurement
-Cost Plus (Cost Reimbursable)
-Lump Sum

Question 2

Measurement Mechanism

Answer 2

-Remeasurement Contract- Original Rates * Actual Work
-Work based on unit prices
-Monthly valuations of work are completed
-Useful for when scope of work is uncertain or varies. Where scope can be described in detail, but the quantities can’t

Question 3

Measurement Mechanism- Client Responsibilities

Answer 3

 Payments are determined based on amount of work actually done
 Provide drawings, schedules
 Pay for all work done

Question 4

Measurement Mechanism- Contractor Responsibilities

Answer 4

 Rates for work types based on drawings and approximate schedules
 Where the contract sum is finalised only after completion based on remeasurement to a previously agreed basis
 Complete the work as described

Question 5

Advantages of Measurement Mechanism

Answer 5

 Allows for an early start, can avoid designing everything- generally better for more simple projects
 Reduction in design costs
 Reactive- make changes
 Increased possibility of value engineering
 Competitive unit rates
 For contractor the risk is low

Question 6

Disadvantages of Measurement Mechanism

Answer 6

 More administration assessing claims
 Budgeting is hard
 Contractors may have cashflow issues if contractor work output is low
 Client has no assurance of final cost of project
 Clients risk is comparatively high

Question 7

Cost Plus Mechanism

Answer 7

o Where a contractor is reimbursed their prime cost incurred plus a fee to cover overheads and profits
 Prime Cost: actual cost of labour, plant, materials and sub-contractors
 Overheads: Head office and central Functions
 Profit
o Used where the scope isn’t properly defined
o Where risks are high-needs addressing quickly
o Emergency work where speed is critical
o Costs are calculated based on accounts- ‘open book’ for checking

Question 8

Advantages of Cost Plus

Answer 8

 Higher quality work for the client
 Contractors like this as it is lower risk, has higher flexibility, stable budgeting and increased profits
 Work can start immediately with no time spent on agreeing a price beforehand

Question 9

Disadvantages of Cost Plus

Answer 9

 Clients don’t like this as there is reduced transparency, longer timelines and conflicting incentives
 High risk for client
 Contractors need to be able to justify expenses and track and manage these
 Also managing indirect costs
 Productivity can be low as there is often no monetary incentive for the contractor to finish ahead of schedule

Question 10

Sub-Categories within Cost Plus

Answer 10

-Target Cost- split pain gain share. This encourages the contractor and client to work collaboratively as they both share the same financial incentive. Contractor is motivated to work productively and to find innovative ways to complete the project. However contractors may try to use products that are cheaper in order to maximise profit

-Guaranteed Maximum Price- contractor must meet this max price. Better for clients

-Project Alliance- Client, contractor and sub-contractor work cooperatively to reduce the cost. Get share of profits. Gain/pain share fund is created

Question 11

Characteristics of Lump Sum

Answer 11

Fixed priced contract, where contract undertakes work for a stated total sum of money
-Price agreed before work begins
-Doesn’t mean price is unchangeable, however variations are limited
-Projects need to have a detailed design in place to maximise value under this contract

Question 12

Lump Sum- Client Responsibilities

Answer 12

 Provide scope
 Create modification controls
 State price
 Detail responsibilities
 Estimated completion date

Question 13

Lump Sum- Contractor responsibilities

Answer 13

 Confirm agreement with terms
 Costs outside of agreed terms

Question 14

Advantages of Lump Sum

Answer 14

 Fixed budget- low financial risk for client
 Client doesn’t need to track costs
 Contractors have better cashflow, as more regular payments
 Less paperwork for contractors as the disclosure of price breakdown isn’t required
 Tendering process is more transparent

Question 15

Disadvantages of Lump Sum

Answer 15

 Inflexible for clients as there is little room for change
 Unforeseen circumstances can be expensive
 Contractors responsible if over budget
 Higher financial risk for contractors – meaning they’ll likely charge a higher fee
 Assumptions can be costly- if the design is incomplete or contains ambiguities then disputes are likely
 Design often needs to be complete before tendering
 Procurement times are often elongated