Assessment Details: Design of Project Delivery System influences the success or failure of the implementation phase of projects and programs. It is not just about selecting a contact model; it...

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Answer To: Assessment Details: Design of Project Delivery System influences the success or failure of the...

Tanmoy answered on Apr 24 2021
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Review & Evaluation of Cost Plus Incentive Fee Contract Project Delivery Method
Review & Evaluation of Cost Plus Incentive Fee Contract Project Delivery Method
Industry - Construction
Srikanth
Cost Plus Incentive Fee Contract Method – Building Construction Industry
Cost plus Incentive Fee Contract Method
Cost plus incentive fee contract method is a type of fixed priced contract which provides additional financial incentive to the contractors for executing and maintai
ning cost of the project at a low cost. In this contract the contractors get awards in the form of incentives on meeting the demands of client’s criteria as per the contract agreement.
Cost plus incentive fees are kind of a reimbursement method and are also modified as fixed price agreements. The best example is of the cost plus incentive fee contract. The client pays a certain amount of incentive to the contractor on maintaining the cost of the project under the budgeted threshold. Hence, the cost plus incentive contract method is a form of savings where the contractor earns an incentive on completion of the contracted work ahead of the schedule. The incentive procedures in this type of contract is pre-agreed and negotiated between the client and the contractor. The concept of incentive in cost plus incentive fee scheme comes into play when the actual cost of project achieved is lower than the projected or originally agreed cost of contract. A cost plus incentive fees should include in itself the below components:
1. Target Cost of the project
2. Base pay for the contractor
3. A method to calculate the bonus and incentive
4. Minimum payment to be made to the contractor
5. The maximum amount that should be paid to the contractor
Additional components that must be included in the contract are as follows:
1. Target price
2. Minimum price
3. Maximum price
4. Fee or price adjustments methodology
The calculation of fees to be paid to the contractors should be based on the above methods built for the contracts and must be paid only once the project is fully completed. The financial risk of the project is shared mutually among the contractor and the client during the cost plus incentive fees contract.
Hence, cost plus incentive fees contract is considered as hybrid contract as it a combination of cost plus contracts and firm fixed price. The cost plus incentive contract utilizes special types of contracts and the contractor and the client of the business determines the techniques to divide the risk associated with the project. This is based on either of the parties associated with the business. ((UpCounsel; Cost plus incentive fee contract: Everything you need to know; 2020)
Both the parties in the contract have the opportunity to discuss on the viewpoint of the business and reach an agreement that is beneficial for both from the business and project point of view. The incentive fees can increase more than the target fees potentially with justified reasons. This is only possible only when the actual cost realized is below the target cost. But, if the actual cost is more than the target cost, then the target fees will decrease. This is as per the policy of the cost plus incentive contract. These potential variations are built in the treaty as a method of providing the contractor with the bonus incentives to administer the project efficiently and economically.
If the actual total cost of the project realized is higher or lower than the target cost as decided in the contract, the contractor will be paid the total allowable cost with one of the two probable amendments which are as below:
1. Minimum incentive fees will be paid if the total actual costs incurred during the tenure of the project is more than the total target cost.
2. The contractor will receive maximum incentive fees if the total actual cost recognized after the completion of the project is less than the total target cost.
Construction project management with cost plus incentive contract method
The construction project is mission based and is considered to be completed only when the structure is fully finished. While project management deals with the life cycle of the project through various methodologies and techniques which helps to control the time, cost, quality and goals of the project. Project management in construction industry deals with different disciplines in the lifetime of the project which includes from architectural to engineering and from public works to city planning and management.
The different types of construction projects are:
1. Residential building and reconstruction projects
2. Construction of heavy industrial equipments
3. Commercial and institutional constructions
4. Heavy engineering constructions
Hence, the...
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