MMK226783 - Evaluating Fixed Price and Cost Plus Contracts for LGA

This report provides a comparative analysis of fixed price and cost plus contracts within the context of a school construction project for the LGA in England. It delves into the benefits, limitations, and suitability of each contract type, considering factors such as cost certainty, risk allocation, and project flexibility. The report assesses the advantages and disadvantages of fixed price contracts, where the contractor agrees to complete the project for a predetermined sum, and cost plus contracts, where the contractor is reimbursed for actual costs plus a fee. Ultimately, the report offers a recommendation on the most appropriate contract type for the school project, considering the project's specific requirements and potential dispute management strategies. The analysis also incorporates considerations for enhancing project practices and ensuring successful project execution. Desklib is a platform where students can find solved assignments and study resources.

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Module: Construction Contracts & Dispute Management (MMK226783)
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Contents
INTRODUCTION...........................................................................................................................4
MAIN BODY..................................................................................................................................4
Fixed price contract.....................................................................................................................4
Cost Plus Contract.......................................................................................................................7
Recommendation.......................................................................................................................10
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................13

INTRODUCTION
Construction contract is an agreement which is being prepared for the work that is have to
be done for the competition of the respective project and the parties that are involves in this have
to agree on all the terms and conditions. It is essential for all the parties to follow the protocol
laid down in the document related to the construction contract. These types of contract are based
on the efficiency of doing the work. There are various forms of disagreements that may arise
while performing and conducting practises, and all of these issues must be resolved appropriately
in order for the practises to run successfully. The two type of contract are prepared in this report
such as cost plus contract and fixed price contract. The fixed price contract is committed when
the contractor commits that these will be a certain project that needs to be completed at the
particular specified price. It indicates that when the amounts of the money will be exchanged.
The another term is cost plus contract in which the commission is given to the contractor on the
basis of total cost that will be incurred in the project (Ahmad and et.al., 2019). The report is
made on the basis of the contract of constructing the school project in which two type of
agreements are selected. A critical analysis is made considering the negative and positive points
of the contract and then one of the selected contract are recommended to the party and discuss
the suitability of the project for further procedures. So, the disputes management is also
processes along with the type of agreement. Apart from this different recommendation for
enhancing and improving project practices has been determined in this report. Aside from that,
this study contains a number of recommendations for increasing and refining project processes.
MAIN BODY
Fixed price contract
In this type of contract, the contractor decides a price that is to be paid by the Client in
advance. The amount is estimated by the contractor keeping in mind the requirements of the
clients. This amount includes cost incurred and profit to be charged from the project. In these
types of contracts, the contractor must have experience of these types of projects otherwise
proper estimation of price would not be possible. If contractor founds any uncertainty in deal
with the client, then ultimately, they quote a price above the estimation to cover the extra
expense that may incur in the future so that the profits can be derived from the project (Zeng and

et.al., 2018) (Wei and et.al., 2021). In the following every variable needs to consider in preparing
quotation price.
These are the basic requirement for the Fixed contracts:
 Before entering into contract both the client as well as the contractor needs to mention the
specified task requirement and cost estimate regarding the work.
 Both the parties should agree on the terms of delivery and pricing.
 Before final confirmation, the contractor has to offer bid or an estimate.
The project that has to be started in of the manufacturing of the school by LGA in England.
This project is to be developed accordingly for the implementation of next phase by the LGA
committee. For this, the contract has to be signed by the client and the contractor. In this the
agreement that will be made is on the fixed price and the completion of the project has to be
done within the estimated budget (Zhang, 2020). It is prepared again the certain cost for the
agreement. Regardless of the cost which is incurred by the agreement, the maximum price which
will be taken for completing the project is conveyed to the client and accordingly the contract is
made. In this type of contract, the determination of expenses will be evaluated on the basis of the
materials, the lane expenses, making charges, labour charges all will be counted in this. These
are the situations that would make the whole agreement apparent and allow the club to
circumvent the agreement requirement. Special conditions are in principle not related to the
contract, but become part of the contract due to the necessity and requirement of the contract.
Special circumstances can arise in the case of a contract that is based solely on the contractor and
client. The situation could be related to the certification cycle, payment terms, percentage of
completion of the agreement and other factors. A nominee can also be included in the agreement,
making the agreement even easier for the parties to understand.
Benefits of Fixed price contracts:
These contracts help in determining the actual circumstances and actuation of cost that
will incurred in the completion of the project. Client are concerned of the fact that the cost of the
project does not increase with when the project is about to end. As the actual estimation of cost
can be predicted in this type of contract (Shannon, 2019). The risk of uncertainty shifts towards
the contractors as if at last there is anything that has left uncovered or unfinished then contractor
will be responsible for such type of risk.

1. It gives clarity of the costs which will be borne by the client. It is a pro for the clients
so that the stability in the contract can be maintained. The LGA committee will be
beneficial because the price of the goods will be limited and the maximum price that
can be spent will be pre decided.
2. The cost incurred can be more, but as per the contract already the cost is pre -
determined so the contract’s extra expenditures will be met by the contractor in case
of any obligations happening during the process.
3. In this the deadline about the project is set and has a clear pan and the structure about
the activities.
Limitations of Fixed Price Contracts:
1. It mostly generates a higher price for the project because in such project when the
manufacturing cost and the amount of material that will be used in making of lanes and
schools will be uncertain so it is a risk for the contractor which will incur more fluid
pricing.
2. The project which are rigid in nature demand the shift and time consuming process. It
requires additional cots which is not possible in these type of agreements to manage it
(Huang, Xiong and Zhou, 2020).
Suitability of the contract: It is not suitable for the contract because it does not have an
efficiency to manage the contract for the long – term. Until, the LGA approves the agreement the
project cannot be proceeded.
The identification of the costs that the client must pay once the agreement is completed is a
necessary prerequisite in this form of agreement. This is a fundamental agreement condition or
general provision. This is the whole circumstance described in the agreement that would obligate
the corporation to participate into the agreement, which would involve a significant and high-
value agreement selection. The consumer and the professional organisation may be able to pay
the complete value in instalments within the terms of the agreement. Another criterion related to
the type of contract is the ability for the contractor and principal to designate the length of time
the portion will be paid after the contract is completed. The identification of the costs that the
client must pay once the agreement is completed is a necessary prerequisite in this form of
agreement. This is a fundamental agreement condition or general provision (Brunette, Klaaren
and Nqaba, 2019). This is the whole circumstance described in the agreement that would obligate

the corporation to participate into the agreement, which would involve a significant and high-
value agreement selection. The consumer and the professional organisation may be able to pay
the complete value in instalments within the terms of the agreement. Another criterion related to
the type of contract is the ability for the contractor and principal to designate the length of time
the portion will be paid after the contract is completed. A scheduling of valuations is a
contractual term that specifies the portion of the transaction the actual client is accountable for,
as a share of the total agreement value. This will support the payment flow in the pact dependent
on the fraction of the full agreement coming to fruition (Ogolo and et.al., 2020). The work
schedule is usually influenced by the agreement's building timeline. The consumer must pay the
amount based on the proportion of completion led by the contractor.
Cost Plus Contract
The price paid in these types of contract is determined by the cost incurred by the client.
This type of construction contract is considered as safe as profits are charged on the cost
incurred. A percentage of profit is fixed at the starting by the client and contractor which means
the same for the whole contract. The burden of profit is shifted to the customer as the profit
earned by the contractor is determined by the amount of material used by the contractor in
performing the task specified. This type of contracts may be preferred by those whom does not
have much experience in the field. In this type of contract, the risk is beard by the Client.
The following concept includes:
 Guaranteed price: The customer has to pay a fixed amount of payment to the contractor
irrespective of cost incurred in the project.
 Cost plus fixed charges: Client have to a fixed amount of fee to the contractor in order to
perform a specified task.
 Cost plus performance incentive: Time taken to complete these projects is comparatively
low as the contractor will receive the maximum amount of benefit when the work will be
completed in a short span of time.
The most favourable contract is Cost plus contract the risk of uncertainty shifts towards the
customer. A contractor may prefer to work with Fixed price contract when it understands the risk
and have ability to derive profits from these types of contract (McPherson and Tahseen, 2018).
Benefits of Cost Plus Contract:

This type of contracts provides flexibility to the contractor to perform task according to
the project as they will get sufficient amount of money at the end of the day. The risk of the
contractor minimizes and it will be more beneficial if the final amount of cost incurred is less in
completion of the project because the quotation states more cost have incurred. These contracts
focus on the quality of the project irrespective of the overall cost of the project.
 This contract is preferable when the budget is comparatively low because the amount to
be paid can be ascertained at any point of time and if the client does not have significant
amount of money then the project can be postponed or it helps in determining the final
work that could be completed with the existing amount. In case of construction of new
school, government wants to complete their project in the best possible price (Li and
et.al., 2018). The School needs to be completed within a specific period of time because
there are already schools are going on this will affect the efficiency of the organisation.
 When it is unclear to ascertain the cost of project then this type of contract is used to
determine the cost to be incurred to complete the task. The project is vast as it includes
next phase which includes new schools and the path for cycle lanes.
 In these types of contract, the actual cost incurred is mostly less as compared to the cost
estimated at the beginning of the project. This project is very huge thus this type of
contract will be useful as at any point of time the actual cost incurred remains the same.
 These contracts are also helpful in the contracts which requires something different than
usual or have to try something for the first time. In the following case the organization is
already running school and intended to increase the number of schools.
 Cost plus contract provides quality of work rather the overall cost of the project. In
accordance with the following case, the work of the expansions will be completed well
before the time and with the less amount as it was quoted at the time of estimation.
Disadvantages of Cost plus contract:
In these types of project total cost of the project cannot be ascertained because the final
amount is determined when the all the cost incurred is added with the share charged by the
contractor. These types of project may take longer to complete as the client may change the
requirement or add specifications to the projects. Meanwhile, calculating the final price of
the contract, the contractor or client may have issues regarding the actual cost of the project.

 Documentation work is one of the hectic procedure as the amount that the contractor will
receive will be calculated on the basis of rate decided before entering into the contract
(Shukla and et.al., 2020). In context of the firm it can be seen that the project is quite big
thus a long documentation process will lead to delay in completion of the project.
 It becomes difficult for the contractor to decide, realize or estimate actual cost the project.
In the following case, the project is quite huge thus it would be quite difficult to manage
the projects at a single point of time.
 It is a difficult to manage the finance for the contractor as the final settlement will be at
the time of project completion. In reference to the above, it will be difficult for the
organization to manage its operations (Kozlova and Aleksandrina, 2020).
Suitability
In the following case, LGA is already involved in this type of activities thus it will be
beneficial for the organization to open new schools and provides advance facilities to the
students as well. In Cost Plus Contract, the organisation will get more benefit as the work will be
completed well before the time which means the contractor will take less time than usual which
will be beneficial as the organization already deals in such tasks thus the efficiency will be
decreased, to maintain the same pace the organization needs to complete to as soon as possible.
So that the efficiency of the organisation is not compromised. LGA gets benefit from the
approval of this is expansion plan as they want to sum up the task as quick as possible and with
the minimal cost. The cost incurred in the process is also verified by the dispute management
team that will allow the bills and cost incurred in the project. This team manages disputes
regarding the cash and payments and also manages the cash flow of the management. It can be
evaluated that by taking this measure, the company saves money that can be used to enhance
project outcomes. Furthermore, if indeed the contractor acts recklessly in this scenario, the
provisions of the contracts will be rectified by a superior one. To make claims for harm, the
client must do so at your its own discretion. It has been observed that the right sort transmission
medium is critical for communicating messages and ideas among providers and contractures.
Because the price of the arrangement should not be delivered to a contracting company
immediately, the contract ought to have sufficient assets to fulfil the contracts (Lizana and et.al.,
2018). A sufficient amount of financial arrangements with contracting company should be in

place. Furthermore, the working group must ensure that proper bookkeeping, examining, and
other records are maintained in accordance with the agreement and are sustainable.
Types of cost that will incur in the project:
 Material: The organisation has incurred a huge sum of money in purchasing material for
the purpose of project. It requires different type of material that needs to be used in
building the premises and other facilities as well (Pinninti and Bhanuprakash, 2021).
 Labour: It is one of the significant part of cost incurred in the process which involves
labour charges to complete the task.
 Furniture and Fixtures: It also forms a significant part of the cost to be incurred in the
completion of the project.
Recommendation
In order to properly carry out duties and activities in any business segment, the
organisation must use effective strategies, techniques, and suitable contracts to ensure that all
activities are well-defined and effective. In the case of LGA, it is critical that the company
properly use an efficient contract in order to complete the project cost-effectively. LGA is
strongly encouraged to get into a suitable contract, as this will assist the organisation in bringing
in a systems organisation to formulate the new school in a cost-effective manner. It is critical for
an organisation to conduct its operations at a low cost while maintaining high quality, as this will
help LGA achieve overall market success while assuring long-term viability (Huo, 2020). In
accumulation to this, cost plus Contract Development is frequently recommended for completing
all actions and works in a contract in a fair amount of time. It's critical to make sure that now the
activities are completed on time. Nevertheless, it has been discovered that the parties have agreed
on a particular percentage of the profit. In addition, the LGA provides a set amount to the
contractor, allowing the organisation to ensure that the job is completed in a timely and efficient
manner while keeping quality. Furthermore, it has been discovered that the cost plus profit
contract mostly comprises overall expenses such as direct cause, which contains the charges that
are necessary LGA event to material costs and labour, as well as hiring costs. Furthermore, it has
been stated that it will include overhead costs such as insurance, travel expenditures, and office
rent.

The LGA should choose a cost plus contract since it will provide a variety of benefits to the
organisation. If a fixed amount is paid to the contractor, the fees will also be fixed. There will be
no additional burden in terms of cost overruns in this case (Zhang, Liu and Niu 2020) (Stein,
2018). As a result, the risk passed to the contract will be reduced. Along with this it has been
underlined that in this organisation will also undertake advantage of not accomplishment of
project activities on time. In this contract, the loser will be held liable for the compensation. This
will aid the organisation in ensuring that their expenditures are not wasted. However, it has
already been determined that the project's quality will not be jeopardised in any way. Setting
budgets on a priority basis and allocating a particular percentage of the budget to the contractor
will assist the organisation maintain contract quality (Bannor and Gyekye, 2022). This will
greatly assist the company in attaining optimal accomplishment through a well and efficient
manner. Furthermore, both contracting parties will be aware of the project's budget, which will
serve as evidence of the work's entire cost. It is suggested that if the company saves itself from
additional expenses that can improve its overall project performance. In addition, it was noted
that in this case, if the contractor acts irresponsibly, the terms of this contract will be resolved by
a better one. This is at reasonable discretion to make a claim for loss and damage. In addition, it
was found that the other advantage in the event of a loss in the reduction of labour and raw
materials is that the total damage is duly transferred to the contractor and the latter is held
responsible for its total costs (Kamboj, Khare and Pal, 2021). In addition, the organization can
easily overcome the problem associated with bidding as this contract attracts more bidding and
offers them a percentage of the work in the estimated time. Therefore, when the LGA company
uses this contract, it saves the organization additional costs.
However, if the contractor engages in mischief, the terms in this contract will be resolved by
an adductor. It found that by adopting this recommended action, the company saves it from
additional expenses that can improve its overall project performance. In addition, it was noted
that in this case, if the contractor acts irresponsibly, the terms of this contract will be resolved by
a better one (Mishra, Rezitis and Tsionas, 2020). To make an assertion for loss and damage, it
must do so at its own discretion. Furthermore, it was discovered that in the event of a loss in the
reduction of labour and raw materials, the overall harm is duly transmitted to the contractor, and
the latter is held liable for the entire cost. Furthermore, because this contract attracts more bids

and pays them a percentage of the job in the projected period, the organisation may easily solve
the difficulty of bidding.
CONCLUSION
It has been determined from the aforementioned study that contracts can be separated into
several segments, which is important for obtaining proper and accurate contract information. It is
divided into two sections: cost plus contracts and fixed price contracts. Both of these contracts
are effective and important for the contract project's seamless and successful operation. The cost
plus contract type of contract can be defined as a contract that is primarily concerned with the
cost of completing the contract for a construction project. This cost has been calculated to be
included in the profits in particular areas of the project, assisting in the generation of earnings
above and beyond the total cost. The contractual parties agree on this, and it aids in the simple
and successful execution of construction operations. This contract, according to the analysis, is
about guaranteeing the benefit value in comparison to the contract. This is a sort of contact that
allows customers to specify a price for the agreement. It was discovered that strategic
preparation must be included in the contract to ensure that all works are carried out in a very well
efficient manner. LGA is dedicated to engaging into a cost-plus fixed contract since it will
provide the organisation with a variety of advantages. The benefit of an adequate contract is that
it enables an organisation to include system organisation in the formation of a new school in a
cost-effective manner. It is critical for a company to ensure that its operations are carried out at a
low cost while retaining high quality.

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