Overview
Contractors and consultants in all fields face a wide range of contract types and terms and conditions in proposal requests from both government and commercial clients. Winning the contract and delivering the required products and services while making a reasonable profit is becoming more and more difficult in the face of stiffer competition, more demanding clients, and more onerous liability clauses. This course is designed to take some of the mystery out of computing cost, and estimating revenue and profit. The course also describes the various types of common contracts and associated key financial and managerial issues.
The material is divided into three sections. The first section explains how to determine your real cost of doing business, including development of salary costs, employee benefits and overheads, and how these costs are incorporated into a billing structure. The second section explores the various common types of contracts (for example, cost plus percent fee, cost plus fixed fee, per-diem rates, fixed price, etc.). For each type of contract, the advantages and disadvantages to both the client and the contractor are described, and issues such as how to handle changed conditions and change orders are addressed. Also for each contract type, examples of billing rate calculations are presented, and potential pitfalls and financial exposure are discussed. Popular additional contract stipulations, such as incentive bonuses, liquidated damages, not-to-exceed ceilings and retainage are also described.
In the third section, a case history is presented, including how the contract was bid and won, what unforeseen events occurred soon after project start, and what steps the Project Manager should have taken to protect the profit margin and still complete the project successfully. Finally, an actual case of creative contracting is presented and followed to its conclusion.
The information presented in this course is based on the experience and insight of the author gained through over 30 years in the engineering consulting business. The approaches to developing billing structures and protecting profits under various contract types are timeless principles that are valid irrespective of the prevailing business environment and are applicable to any business where profit is made through billable hours.
The student must take a multiple-choice quiz consisting of twenty (20) questions at the end of the course to obtain PDH credits.
Specific Knowledge or Skill Obtained
This course teaches the following specific knowledge and skills:
- Develop a regular time cost adjusted for vacations and absences
- Compute the salary related costs associated with the employee’s benefit package
- Calculate the various types of overtime costs
- Figure out the overhead costs of delivering services
- Prepare and bill for direct costs
- Escalate the cost of services that extend beyond the end of a fiscal year
- How to add a profit margin to your calculated costs
You should also have gained insights as to how important employee benefits and overhead costs are in the determination of billing rates and the resulting profit margins. You should also understand the various common contract-types and what advantages and disadvantages are associated with each of the following ones:
- Cost plus percent fee
- Cost plus fixed fee
- Per day rates (also known as Per Diem Contracts)
- Lump sum (also known as Fixed Price)
For each contract type listed above, you will also be made aware of the:
- Typical kinds of projects that use this type of contract
- Advantages and disadvantages to the contractor and the client
- Handling of changed conditions
- Handling of change orders or changes in scope
- Typical billing cycle
- Calculation of billing amounts
- Potential pitfalls and financial exposure
- Effects of commonly used contractual stipulations
Finally, by working through the case study, you should become sensitized to how seemingly minor problems or unforeseen events may severely impact your ability to protect your profit margin especially if the Project Manager is not attentive, proactive and willing to engage and communicate with the client. A creative contracting case presented at the end reinforces the basic principles you have learned in this course.
Course
Click on the following link to the PDF document to review the course material before taking the quiz for credit.
Financial Principles for Project Management
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