Risk Paper 2
Vimari Pagan Diaz
Prof. Hiegel
PM 595
A contract is defined as: "an agreement made between two or more parties which is enforceable by law to provide something in return for something else from a second party". I never thought I will have to understand the different types of contract that exist but, after getting married my husband and I decide to buy an old house since this one was situated where we wanted. We did not know that buying an old house will bring us so many problems. Finding a contractor that agrees to do and add as the project runs what we want, how we wanted and in a reasonable time frame were very difficult. Building a house is not just draw and buy the materials, building a house is more than that, decide what we want inside?, how we wanted?, the colors?, what we need to change?, what need an updated?, do we need more rooms?, less rooms? They were so many questions and doubts that we knew that we need a contract where we can change and plan as we see the results of the initial project.
In the construction industry, it is not a question of whether or not to have a written contract: one of the real issues is how many contracts can or will be involved in the project. We did not want to be writing diverse contract for the project, for the different steps and changes we may have to do in the scope and plans. We integrated our search for different s contractor and companies, and all of them use different type of contract. Most of the contractor wanted to do a contract based on provide us a service for a set price and we have to pay the price upon competition, the risk on this type of contract; called Lump-Sum. The Lump-Sum contract is a contract where the contractor takes the risk of loss if there were any unexpected expenses and in other hand, a gain if the service comes under budget. We analyzed the situation and we make a list with the pro and cons;
Pros
* Not too much risk * The cost will be anticipated * If there any extra expenses we will not pay for it * Limited flexibility for design changes
Cons
* High risk to contractor * If there’s any change, it can be very expensive * Usage of low-grade materials to be able to save costs and increase the profit.
We also find contractors that they want contract where they will breakdown the project into parts and each of the part will have a price set; called Unit Price. The Unit Price contract is contract that is based on the estimation of the quantity of items that will be included in the project and their unit prices. The final value of the project will depend on the quantity needed to be able carry out the work. As we did before we analyzed the contract and we found the pro and cons on the Unit Price;
Pros
* Flexibility to changes
Cons
* Unknown cost to complete project * Inaccurate determination on materials quantity * Changes may affect the final expenses
Other contractors offer to define the profit and expenses in the contract, which we find it very reasonable since we knew since the beginning the profit that the contractor will be making with our project. The contract that specified and agrees to pay the cost of all the labor and the materials that will be used plus an amount for the contractor overhead and the profit are called Cost Plus contract. As we did with the other contractors, we find some pros and cons in the contract;
Pros
* The contractor will not be able to decrease the workmanship * Quality will be focus instead of the cost * All the related expenses will be covered * We will pay only for work completed
Cons
* Final cost could not be simply determined * It will required additional resources to reproduce and justify cost * Project duration could be longer than expected * We will assume all the risk in overruns
After reviewing all the contract and different contractors we decide to use the Cost Plus contract, where we have seen the chance to save money since the contractor don’t have to pad an estimate to cover any potential cost, also, the potential risk is more since we have to cover any cost overruns. However since we didn’t know what we wanted in the house, we knew that the contactor will be focus on finishing with quality the project step by step while we were deciding what we want. We build a detailed scope with a plan to start and after times we increment the scope and add to the plan as we were deciding what we want for our dream house. We finished satisfied with our decision, because even though we spend 5% more of the budget, we have everything we wanted with quality and without problem with the contractor.

1. How did assumption of risk play a part in the type of contract used?
The assumption risk plays a big part in the contract that we used since we focused the risk on what we wanted to do. We put all the risk in the entire contract and the only one that based on the risk let us do and change as we wanted it was the Cost-Plus. We did not want to put all the risk on the contractor since we wanted the services based on quality and when the contractor feels that all the risk are on them the work is based more on the cost and how much they are spending than the quality of the services. 2. What type of contract was finally settled upon in this situation?
The cost plus contract since it was the contract that allows us to define what we wanted as the project was running, that was very important for us. Also, we used the cost plus since we can restrain the contractor to exceed until one specific amount. This type of contract provides us and the contractors a win-win situation since all the risk was covered and all the expenses are to be paid. 3. Was this type of contract appropriate for this situation or was there a better type that should have been used? .
I believe so since with the situation we have that we did not know what we wanted and in the cost plus contract we make changes and all the cost risk was on us, on what we wanted not based on an estimate that a contractor that did not know exactly what we want prepared. When you don’t know the different ramifications on a project it is better to have the ability to change the scope, plans or any other part you as a owner of the project seems necessary to achieve a desire final product. 4. Did the type of contract impact the success of the project?
Definitely, the final product of the project was what we wanted. If, we did not have the opportunity to add and change the scope of the project we may finished with a pretty house, but not with our dream house. The fact that the contract let us include while the project was running assure us that all the parts done of the plan were with quality. The contractor has time and materials to work through the project as we decide what we want. The freedom to change the plans even though we knew we have to pay for it help us to be able to sit down and decide what we wanted and we did not wanted, and this give us the opportunity to finished with our dream house.