May 8, 2015

PM0018 [Contracts Management in Projects] Set2 Q3

Q 3. List and describe in brief the four types of consultancy contract. 

Ans: 

Types of Consultancy Contracts

General considerations
The following considerations determine the type of contract to be adopted:
  • The nature of the assignment. 
  • The distribution of risks between the client and consultant. 
  • The level of capacity of the client in contract management and consultant supervision.
We discussed the general consideration for a contract now we will study in detail the types of contracts. 

Lump sum contract

Under Lump sum contracts you pay to the consultant a fixed sum of money for the services given such as study report, project design and so on to be delivered within a specified period. The risks of cost overruns are borne by the consultant.
Where best suited

This contract is best suited for assignments where the content and duration of the services and the expected output of the consultants are clearly defined such as: 
  • Planning and feasibility studies 
  • Environmental studies 
  • Detailed design of infrastructure 
  • Cases of sophisticated and clear-cut assignments of short duration in which external factors generally are not expected to influence (delay or substantial change) the outcome. 

Time based contract 

The lump sum contracts are beneficial when the scope is well defined. Under the time based contract, the consultant provides services on a timed basis according to quality specifications, and the consultant’s remuneration is based on: 
  • Agreed staff month remuneration rate multiplied by the actual time of deployment of staff on the assignment. 
  • Reimbursable expenses using actual expenses or agreed unit rates. 
  • Cost risk which will be transferred to you. Hence the consulting firm would be keen to deploy staff for more periods.
Where best suited
Time based contracts are usually adopted for the following type of assignments: 
  • The nature and scope of the services cannot be precisely incorporated in the TOR, since the assignments are complex for example management of complex institutions or studies of new approaches. 
  • The duration and quantity of resources depend on variables that are beyond the control of consultants. 
  • The output required of the consultants is difficult to assess in advance (example, technical assistance, organisation development and others). 
  • Capacity building program forms part of the assignment.
Examples of this type of contract are preparation and compilation of data, complex studies, supervision of contract, training, advisory services and so on. 


Percentage contract 

The time based contract is beneficial for complex projects. In the percentage type of contract, consultants receive an agreed percentage of the actual project cost as their fees for their services.

Where best used
  • It is mostly used for architectural services and engineering services. The drawback of this type of contract is that there is no incentive to lower the cost of the project as the higher the cost more will be the consultant fees. It may encourage the consultants to adopt more expensive design solutions to increase their fees. 
Indefinite delivery contract
The percentage contracts are best suited for architectural and engineering services.


Indefinite delivery contract is used for procuring the services of individual consultants or a consulting firm to provide the services over a specified long period of time, say three to five years at mutually agreed rates to undertake the tasks as and when needed.

Examples of the services for which this type of contract is appropriate are for on-call services of advisors for complex projects.

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