Mechanical engineering section as other section relies highly on the procurement and contract strategies to achieve the effectiveness of the service delivery. Like in other fields, the choice of procurement contract is important in delivery of the specific parts of the contract. In mechanical different contract can be applied (Contract Formation and Administration for Optimum Supplier Performance 2015). This paper will look at two of the contracts and the way they are applied in mechanical engineering. In addition, this paper will look at the factors which influence the selection of the different procuring contracts and also the merits and demerits of each contract.
Two of the major procuring contracts used in mechanical engineering include the Fixed Price Contract and Time and Materials Contract. The Fixed Price Contract is also known as lump-sum contract (Aboriginal Human Resource Council (Canada), & Electricity Sector Council (Canada) 2012). In mechanical and other sections, this contract is implemented when there is no uncertainty in the scope of work. In addition, when the contract is signed, the contractor or seller bears the full risks to complete the works under the specified amount. Once signed, the contract is legally bound and the contractor is required to complete the specific parts of the contract under the stated amount and within the allocated time given (Extension of Time under JCT Standard form Contracts 2011). Another key element is that both parties in this contract are able to understand the scope of work involved and total cost of the works even before the commencement of the works. This type of contract helps to control the costs involved in the different works in mechanical sections (Masterman 2002 and Manuel & Library of Congress 2012). When signed, the contractor will be unable to elevate or change the costs which the contract was signed upon. Under this contract, the details of the scope of work are crucial to ensure that different issues are not raised while work is under progress.
Time and Materials Contract is another key contract which is used in mechanical engineering section. This is usually a hybrid of both Fixed Price and Cost Reimbursable Contract. Under this contract, both the client and the contractor are able to share the risks which are involved in the works delivery. Moreover, “labor hours” are the main deliverable which is used when executing this type of contract (Walker & Hampson 2011). The payments are done for the work done according to the hours worked. Both parties have different roles to play while executing the works in this type of contract. For instance, the project manager or the contracting organization can be able to provide the qualified staff and expertise needed while the contractor provides the staffs. In addition, the client is able to specify the different rates which will be paid to the experts per hourly rate. Under the specification, the client provides the limit under which the labor be provided with “not-to-exceed” limit.
There are different factors which influence the type of contract to be adopted in the mechanical engineering sections. Some of the factors are able to favor some contract types which they are unable to favor others. When choosing a contract for mechanical works, one of the key parameter to consider in the selection is the requirement statement in the scope of work. For one to choose the contract for mechanical works, the scope of work should either be clearly stipulated or not. Under those situations, one will be forced to choose different contracts for the works. The definition of the scope of works includes what need to be done, their costs and the time durations to implement the specific parts (Walker & Hampson 2011). The parts of the works need to be assessed and determine which contract will be applicable. The specification on the works will be important in the assessment on which one of these methods will be applied on the execution of the mechanical engineering works. The contract will analyze the details of the contract provided by the client and determine on the applicability of fixed price contract in such situations. Through the analysis, the contractor will agree on the contract considering that it will be impossible to change the details even when market variations occur. When the cope is fully define, the contractor can therefore be able to agree on signing contracts such as fixed price contracts to execute the mechanical works specified.
According to US Office of Defense, another assessment criterion that influences the selection of the type of contract is the budget present. The flexibility of the budget types is able to determine the type of contract which will be adopted. Some budgets for the works are fixed and therefore able to suit the fixed price contract type for the execution of the works (Hampson & Walker2008). The time and materials contract is able to suit the flexible budget for the works. Therefore during the choice of the contract to be offered, the client will consider the type of budgets they have at hand and therefore analyze the contracts which will suit them. Another criterion which influences the selection of the contract type is the type and complexity of the works requirements (Sund & Hausken 2012). The requirements are key indicators on the risks involved in the works. The more complex the requirements are the more the risks are involved in the works. The type of contracts adopted is tailored to suit the complexity of the works involved. In addition, the complexities of the requirements are key indicators of the uncertainties involved and likelihood of changes. The presence of complex requirements means that the method is more prone to changes and therefore the fixed contract will be unsuitable for such works.
In addition, combining different contracts types is another key criterion which can be used while selecting the contract type to be adopted. Some of the contract allows the accommodation of other contractors within the same scope of work. On the other hand, there are other contracts which limit such that other contract types will not be used within the execution of the same works. While assessing the contract type to adopt, the client will look at different points when the works may require a different contract to deliver quality. This is where the contractor may fall short of expertise required in some fields and therefore lead to contracting of another firm to deliver the specific parts (Howes 2016). For instance, the fixed price contract type may be restricting on addition other contracts to the initial one. Therefore the flexibility of the initial contract to accommodate others will influence the choice of contract chosen. Therefore the contracting firm will be able to consider the options to have different contracts on different parts of the mechanical works. This will ensure that quality on works is achieved.
Moreover, another selection criterion which can be adopted in selecting contract type is the urgency of requirement implementation. The urgency in implementation of the works is a primary factor in contracts. Some contract methods have long processes and therefore able to take long before the commencement of works (Clough & Sears 2009). Contracts have to ensure that timely completion of the works is adhered and therefore the selection of the right contract type is key. Therefore, this makes the urgency of requirement of implementation an important criterion to use when selecting the contract types (Time 2011). Most important, the costs in contracts are important and can be used in the selection of the contracts to be implemented within a scope of work. Therefore the cost effects are criteria which can be used. Some contract methods are able to yield high costs for works than others and therefore costs effects can be used by contracting firms to select the appropriate contract types for mechanical works.
As the name suggests, the contractor upon signing is responsible for completing the mechanical works stipulated on the set budget and within the stipulated timeline (Mele & Obayashi 2015). One of the key advant6age of implementing the Fixed Price Contract for the mechanical works is the ease of management of the contract. This contract requires all the details and requirement to be set out before the start of implementation. This helps to enhance easy management of the contractor and other stakeholders in the contract (Special Requirements for the Legal Framework of an Agile Fixed-Price Contract 2013). In addition, another merit of this contract is the predictability. The contract has every requirement specified and this helps to limit owner’s exposure and liability during the implementation of the project (Fabozzi & Mann 2012). This ensures that the project is unable to change and the defined parameters are met. Another key advantage of this contract is defined scope of work. The contract and work requirements are well defined. A well defined scope of work helps to protect the client to ensure that the deliverables are met. In addition this contract allows high degree of collaboration (Sund & Hausken 2012). The contractor under this agreement is able to protect his or her margin through the tight project management communication with the client in order to ensure scope compliance (Powers 2012). The contractor has specific parts which they play while the client has their parts. Their collaboration and enhancing their parts helps to enhance implementation of the different parts of the contract.
Lack of flexibility is one of the crucial con of the Fixed Price Contract. The client is unable to change any aspect of the contract once it is signed (Garrett & Wolters Kluwer (Firm) 2016). The client must therefore be able to define all the requirements of the work in the initial stages before the signing of this contract. Ant changes which happen and are beyond the contractor control are subjected to the client (Sund & Hausken 2012). The market is prone to changes and therefore either the client or the contractor will be able to bear the risks involved in the contract since it cannot change. In addition, this type of contract is usually a closed book arrangement. The contractor is not required to provide a detailed cost breakdown of the labor and materials (Tech Republic 2010 and Matthew 2009). Therefore the contractor must be careful when quoting the lump-sum amount in the contract. In addition, due to the nature of the contract, the contractor may produce poor quality of material and mechanical works (Contract Strategy 2013 and Hazell, Cowan & Turner 2008). The contract works on a fixed price and since the contractor works to maximize the profit, they may provide substandard materials or be tempted to skimp the subcontractors. If the details of the quality of the materials are missing, the contractor will therefore make the choice considering the owners cannot make any additional changes to the contract.
Scope clarity is one of the major advantages of the time and Material contract. Under this contract, the client is able to define more details which he or she might have missed in the initial stages of defining the scope of work (Segel 2016). This ensures the client is able to get the mechanical work is well delivered to the required quality which will make the client contented. Another key advant6age of this method is flexibility (Time 2011). Fast tracking projects usually use this method since the owner can be able to miss some details in the scope definition process and therefore require them to add the details during implementation. This contract allows the owners to provide new changes on scope, design and materials when necessary. Moreover, the mechanical works can start without full details and then provide the additional details later (VSE Corporation 2009). This is a major advantage of this contract. The contract also offers better timing to have projects working. The T & M contract is able to evade the fixed-price bidding process and therefore saves time to help start of mechanical works.
One of the major disadvantages of T & M contract is the low budgeting control. This means that the overall cost of the mechanical works can be higher than when other contracting methods are used (Latham 2014 and Li 2008). Since all contracts have set budget, it’s unadvisable to surpass the limit which is a major disadvantage. Moreover, another major disadvantage is that the method requires deep involvement (National Joint Apprenticeship and Training Committee for the Electrical Industry. 2014). The method requires that the team be monitored to ensure that they are delivering towards the approved scope and also within the correct amount of hours.
References
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Clough, R.H. & Sears, G.A. (2009) Construction contracting, sixth edition. New York: John Wiley & Sons, Inc.
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Fabozzi, F. J., & Mann, S. V. (2012) The handbook of fixed income securities. New York: McGraw-Hill.
Garrett, G. A., & Wolters Kluwer (Firm). (2016) Managing Contract Changes. MacMillan
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Masterman, J.W.E. (2002) An introduction to building procurement systems, secondedition. London: Spon Press.
Matthew, W., (Feb 17, 2009) Fixed-price contracts required by stimulus law. Chichester: John Wiley & Sons.
Mele, A., & Obayashi, Y. (2015) The price of fixed income market volatility. Library of Congress
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Sund, K. A., & Hausken, K. (2012) Fixed price contract versus incentive-based contract in the oil and gas industry. International Journal of Global Energy Issues, 35(5), 371. doi:10.1504/ijgei.2012.046727
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