The risk sharing between buyer and seller is determined by the type of contract. Usually the type of contract selected and the specific contract terms and conditions determine the level of risk that both parties take on.
Contract classification by item payment method:
(1) Total price contract
A total price contract, also known as a fixed price contract, refers to a contract in which the total price of a completed project is determined in the contract, and the contractor completes the entire contract content of the project accordingly.
This type of contract can make it easy for the construction unit to determine the contractor with the lowest quotation when evaluating the bid, and it is easy to calculate the payment. It is suitable for projects that are not too large and can be calculated accurately, with short construction period, less complex technology, and less risk. At the same time, the developer is required to prepare detailed and comprehensive design drawings and various descriptions, so that the contractor can accurately calculate the project quantity.
The lump sum contract may also provide for financial incentive terms for meeting or exceeding project objectives (such as schedule delivery dates, cost and technical performance, or other quantifiable, measurable objectives). In addition, it is also allowed to make final adjustments to the contract price in a predetermined manner based on changes in conditions (such as inflation, increases or decreases in the cost of certain special commodities).
(1.1) Fixed Price Contract (FFP). FFP is the most commonly used contract type. Most buyers prefer this type of contract because the price of the purchase is fixed at the outset and cannot be changed (unless the scope of work changes). The seller is obligated to complete the work and is responsible for any increased costs due to poor performance. Under an FFP contract, the buyer should precisely define the products and services to be procured, and any changes to the procurement specification will increase the buyer's costs.
(1.2) Total Price Plus Incentive Fee Contract (FPIF). Such lump-sum contracts offer buyers and sellers some flexibility, allow for certain performance deviations, and give financial incentives to achieve set goals. Financial incentives are usually related to the seller's cost, schedule or technical performance. Performance targets are set at the outset, and the final contract price is determined based on seller performance after all work is completed. In an FPIF contract, to set a price cap, the seller must complete the work and bear the full cost above the cap.
(1.3) Total Price Plus Economic Price Adjustment Contract (FP-EPA). This contract type should be used if the seller's performance period will span a substantial period of time (several years). It facilitates the maintenance of multiple long-term relationships between buyers and sellers. It is a special lump-sum contract that allows final adjustments to the contract price in a pre-determined manner based on changes in conditions (such as inflation, increases or decreases in the cost of certain special commodities). EPA provisions must provide for reliable financial indices used to accurately adjust final prices. FP-EPA contracts attempt to protect buyers and sellers from outside circumstances beyond their control.
(2) Cost compensation contract
In this type of contract, the Employer pays the Contractor all legal actual costs (reimbursable costs) incurred in completing the work, and in a pre-agreed manner, plus a fee as the Seller's profit. Cost reimbursement contracts may also provide for financial incentive clauses for contractors to exceed or fall short of predetermined goals, such as cost, schedule, or technical performance targets.
In this type of contract, the developer must bear all the costs actually incurred by the project, and therefore also bear all the risks of the project. Contractors tend to be paid less because they are risk-free. The disadvantage of this type of contract is that it is not easy for the developer to control the project cost, and the contractor often does not pay attention to reducing the project cost.
This type of contract is mainly applicable to the following projects: projects that require immediate work, projects whose content and technical and economic indicators have not been determined, and projects with high risks.
(2.1) Cost Plus Fixed Fee Contract (CPFF). Reimburse the seller for all encumberable costs incurred in performing the contract work and pay the seller a fixed fee calculated as a percentage of the project's initial cost estimate. Fees are payable only for work completed and do not vary based on the seller's performance. Fee amounts remain the same unless the scope of the project changes.
(2.2) Cost Plus Incentive Fee Contract (CPIF). Reimbursement of sellers for all chargeable costs incurred in performing contract work, and payment of pre-determined incentive fees to sellers when sellers meet contractual performance targets. In a CPIF contract, if the final cost is lower or higher than the original estimated cost, the buyer and seller are required to share the savings or the excess according to a pre-agreed cost-sharing ratio. For example, share (share) over (under) the target cost on an 80/20 basis based on the seller's actual cost.
(2.3) Cost Plus Incentive Fee Contract (CPAF). Reimburse sellers for all legal costs, but pay sellers most of the costs only if sellers meet certain general and subjective performance standards specified in the contract. Incentive fees are determined entirely by the buyer based on their own subjective judgment of the seller's performance, and appeals are generally not permitted.
(3) Quantity contract
Quantity contract, also known as time and material contract (T+M contract), is a hybrid contract with some features of cost compensation contract and total price contract. Quantity contracts are often used to increase staffing, hire specialists and seek other outside support when an accurate statement of work cannot be written quickly. These types of contracts are similar to cost-recovery contracts in that they are open-ended contracts where the contract price varies as the cost increases. At the time of awarding the contract, the buyer may not have determined the total value of the contract and the exact quantity to be purchased. Therefore, like a cost compensation contract, the contract value of a quantity contract can increase. Many organizations require maximum value and time limits in quantity contracts to prevent costs from escalating indefinitely. In addition, a quantity contract is similar to a fixed unit price contract due to some parameters determined in the contract. When the buyer and the seller reach an agreement on the price of a specific resource (such as the hourly rate of a senior engineer or the unit rate of a certain material), the buyer and seller also pre-set the unit labor or material rate (including the seller's profit). ).
The scope of application of this type of contract is relatively wide, the risks can be reasonably allocated, and the contractor can be encouraged to increase profits from cost savings by improving work efficiency and other means. The issue that needs attention in the performance of this type of contract is the determination of the actual workload by both parties.
Contract classification by scope:
(1) General contract
The general contract is also known as a "turnkey contract". The developer will contract all the tasks of the information system engineering construction from project initiation, demonstration, design, procurement, construction to completion to a qualified contractor.
This contracting method is conducive to giving full play to the professional advantages of large contractors with strong technical force, rich experience and organizational management ability in engineering construction, ensuring the quality and progress of the project, and improving investment efficiency. The general contracting method is adopted for contracting, and the developer and the contractor must sign a general contracting contract. This general contract can be signed either in the form of a general contract or in the form of several contracts.
(2) Single project contract
The developer assigns different tasks of the information system engineering construction to different contractors.
The single project contracting method is conducive to attracting more contractors to participate in the bidding competition, so that the contract developer has a greater choice; it is also conducive to the contract developer to implement direct supervision and management of each link and stage of the construction project. The disadvantage is that the coordination and connection of individual projects in terms of technical standards, scope of work, progress, and resources are prone to problems.
This contracting method is more suitable for those who have strong management capabilities for project construction.
(3) Subcontract
The general contractor will subcontract some of the projects it has contracted to sub-contractors.
It means that after the general contractor of the project has contracted the construction project, he will contract a certain part or some parts of the project, and then contract it to other contractors, and sign a subcontract under the contract with them.
To sign a subcontracting contract, two conditions should be met at the same time: First, the contractor can only subcontract the non-critical and non-main parts of the project contracted by himself to subcontractors with corresponding qualifications, and cannot conduct secondary subcontracting; Second, the subcontracting project must be approved by the developer.
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