What are the best practices for selecting and negotiating contracts in project cost estimation?

1 Contract types and their implications

The first step in selecting and negotiating contracts is to understand the different types of contracts available, and how they affect the project cost estimation and control. Generally, contracts can be classified into two categories: fixed-price contracts and cost-reimbursable contracts. Fixed-price contracts are agreements where the contractor agrees to perform the work for a predetermined price, regardless of the actual costs incurred. Cost-reimbursable contracts are agreements where the contractor is paid for the actual costs of the work, plus a fee or a percentage of the costs. Each type of contract has its advantages and disadvantages, depending on the project characteristics, such as complexity, uncertainty, duration, and scope. For example, fixed-price contracts are suitable for projects with well-defined requirements and low risks, as they provide certainty and stability for both parties, and incentivize the contractor to complete the work efficiently and effectively. However, fixed-price contracts also have some drawbacks, such as the difficulty of accommodating changes, the potential for disputes, and the higher initial price to cover the contractor's risks. On the other hand, cost-reimbursable contracts are suitable for projects with high uncertainty and variability, as they allow flexibility and adaptability for both parties, and enable the contractor to cover the actual costs of the work. However, cost-reimbursable contracts also have some challenges, such as the lack of cost control, the need for extensive monitoring and auditing, and the lower motivation for the contractor to minimize costs.

2 Contract selection criteria and methods

The second step in selecting and negotiating contracts is to evaluate the different contract options based on criteria and methods that can help you make the best decision for your project. You should consider project objectives, risks, resources, and contractor capabilities when making your decision. Weighted scoring, a decision matrix, and a decision tree are all common methods you can use to compare and select contracts. When using weighted scoring, assign weights to each criterion based on its importance, and then score each contract option based on how well it meets each criterion. With a decision matrix, create a table that lists the contract options in the rows, and the criteria in the columns. Mark each cell with a plus, minus, or zero depending on whether the contract option satisfies, dissatisfies, or has no impact on the criterion. Lastly, with a decision tree draw a diagram that shows the possible outcomes and consequences of each contract option, assigning probabilities and values to each outcome. This will help you determine which contract has the highest expected value and is thus the best option.

3 Contract negotiation strategies and techniques

When selecting and negotiating contracts, the third step is to prepare and conduct the negotiation process with the contractor, striving for a mutually beneficial agreement. To negotiate effectively, you should plan and research the contractor's background, expectations, and preferences. Furthermore, it is important to communicate and listen to understand their perspective, concerns, and motivations. Additionally, you should collaborate and cooperate with the contractor to find solutions that create value. Lastly, document and confirm the terms and conditions of the contract before signing it. By following these best practices for selecting and negotiating contracts in project cost estimation, you can increase your chances of successful project outcomes that meet your requirements.

4 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?