Payment Mechanisms

Question 1

What are the three main payment mechanisms?

Answer 1

Measurement,
Cost plus (e.g. target cost, GMP),
Lump sum.

Question 2

What is a measurement contract?

Answer 2

• Work is based on unit prices.
• Work is remeasured when payment needed to check value.
• Useful for when scope is uncertain/ variable.

Question 3

What are the client responsibilities in a measurement contract?

Answer 3

• Calculate payments based on the work actually done.
• Provide drawings and schedules (quality depends)
• Pay for all the work done.

Question 4

What are the contractor responsibilities in a measurement contract?

Answer 4

• Calculate rates based on drawings and schedule.
• Complete the works as described in the contract.
• Final sum is finalised after completion - remeasurement of everything.

Question 5

Pros to Measurement Contracts

Answer 5

• Clients can avoid designing everything (reduction in design costs).
• Easy for client to make changes.
• Bids are competitive in unit rates.
• Risk to contractor is low as you’re paid for what you do.

Question 6

Cons to Measurement Contracts

Answer 6

• Lots of administration needed by client to address claims.
• Budgeting is hard for client.
• Contractor can have cash flow issues as there is lots of scope for change.
• Cost is uncertain for client.

Question 7

What is a lump sum contract?

Answer 7

• A single lump sum price is agreed before work begins.
• Project is well defined at the start.
• Good for simple projects.

Question 8

What are the client responsibilities in a Lump Sum contract

Answer 8

• Provide scope info including end date.
• State the budget.
• Detail contractor’s responsibilities.

Question 9

What are the contractor’s responsibilities in a Lump Sum contract?

Answer 9

• Confirm the agreement with client.

Question 10

What are the pros of a Lump Sum contract?

Answer 10

• Low financial risk to client as there is a fixed budget.
• steady cash flow for contractor as there are regular payments.
• less paperwork for contractors

Question 11

What are the cons of a Lump Sum contract?

Answer 11

• There is little room for the client to make changes.
• Unforeseen issues can be expensive to sort.
• Contractors are responsible if they go over budget (high risk).
• Assumptions made during tendering can be costly.

Question 12

What is a Cost Reimbursable Contract?

Answer 12

• Where a contractor is paid the defined cost plus over heads and a fee.
• Good for emergency works/ undefined works.
• Costs are calculated based on contractor’s accounts.

Question 13

What are the pros of a Cost + contract?

Answer 13

• High quality.
• Flexibility for contractor.
• Low risk to contractor.
• Stable cash flow.

Question 14

What are the cons of a Cost + contract?

Answer 14

• Reduced transparency of costs for client.
• Conflicting incentives.
• Contractor has to spend time justifying costs.
• Contractor has to manage indirect costs.

Question 15

Describe a Target Cost Contract (Cost +).

Answer 15

• Cost + contract with a target price.
• Pain or gain is shared between the 2 parties.
  -Incentivises contractor to work better.
• Initial budget is based on past experience and industry norms.
• Risk premium is added to make gain share more likely.

Question 16

Describe a Guaranteed Maximum Price Contract (Cost +)

Answer 16

• The maximum price a client will pay.
• Pushes the contractor to work efficiently.
• Puts contractor at the risk of going under.

Question 17

What is a Project Alliance?

Answer 17

• A pain/ gain share fund is created which is split between parties depending on their individual contributions to the outcome.
• e.g. joint ventures.