How NEC can provide a standard form for all PMBOK contract types

Key Points

• The US Project Management Institute’s PMBOK guide defines a range of contract types for various project procurement and payment situations.
• North American construction clients tend to draft bespoke versions of these contract types, which adds to the cost of procurement and delivery.
• All PMBOK contract types can be effected using the main and secondary options of the NEC4 standard contract suite, mostly without the need for additional conditions (Z clauses).

The US Project Management Institute’s (2021) PMBOK guide, the go-to guide for North American construction project managers, describes and defines different types of procurement contracts. These include fixed-price, cost reimbursable, time and materials and ‘indefinite delivery indefinite quantity’.

In many countries, including the USA and Canada, the PMBOK contract types are routinely developed as bespoke contracts, often by the client’s lawyers. The result is that each contract is very different, adding significantly to the overall costs of procurement and delivery of infrastructure. As set out in this article, the NEC4 contract suite provides the building blocks for a standard form for all the PMBOK types of contract. NEC4 contracts are designed for clarity, flexibility and to support project management and collaboration.

Fixed price contracts

PMBOK defines three variations of a fixed price contract. A ‘firm fixed price contract’ (FFP) is a ‘type of fixed-price contract where the buyer pays the seller a set amount (as defined by the contract), regardless of the seller’s costs.’ In NEC, this can be directly provided by the NEC4 Engineering and Construction Contract (ECC) Option A (priced contract with activity schedule). The bidder bids an activity schedule and the amount due each month is based on the prices of the activities that have been completed.

PMBOK’s ‘fixed-price incentive fee contract’ (FPIF) is a ‘type of contract where the buyer pays the seller a set amount (as defined by the contract), and the seller can earn an additional amount if the seller meets defined performance criteria.’ Under NEC this can be achieved with ECC Option A and secondary option X20 on key performance indicators, or with option X29 if the client wants positive and/or negative payments related to performance.

A ‘fixed price with economic price adjustment contract’ (FPEPA) is defined by PMBOK as a ‘fixedprice contract, but with a special provision allowing for predefined final adjustments to the contract price due to changed conditions, such as inflation changes, or cost increases (or decreases) for specific commodities.’ In NEC this can be provided by ECC Option A with secondary option X1, price adjustment for inflation, which requires the client to select appropriate indices for inflation.

Cost reimbursable contracts

PMBOK defines three varieties of a costreimbursable contract. A ‘cost plus award fee contract’ (CPAF) is as a ‘category of contract that involves payments to the seller for all legitimate actual costs incurred for completed work, plus an award fee representing seller profit.’ In NEC this can be directly provided by ECC Option E (cost reimbursable contract). The contractor is paid defined cost plus a percentage fee, and the fee has to cover everything not included in defined cost, such as off-site overheads, disallowed costs and profit.

PMBOK’s ‘cost plus fixed fee contract’ (CPFF) is a ‘type of cost-reimbursable contract where the buyer reimburses the seller for the seller’s allowable costs (allowable costs are defined by the contract) plus a fixed amount of profit (fee).’ While not a standard option in NEC, the fixed fee option can be achieved in ECC Option E by an additional condition of contract or Z clause which simply redefines the fee. It would also need a simple mechanism to allow more fee for compensation events.

A ‘cost plus incentive fee contract’ (CPIF) is defined by PMBOK as a ‘type of cost-reimbursable contract where the buyer reimburses the seller for the seller’s allowable costs (allowable costs are defined by the contract), and the seller earns its profit if it meets defined performance criteria.’ If the performance criteria relate to outturn cost, in NEC this can be provided directly by ECC Option C (target contract with activity schedule). This allows the client to set out how any gain (coming in below the target) or pain (exceeding the target) is shared.

NEC option X29 includes a performance table that can include targets for climate change and anything else, with the option of setting positive incentives for beating those targets and/or negative damages for missing the targets. Alternatively, a Z clause could vary the fee percentage according to performance targets.

Time and materials contract

PMBOK defines a ‘time and materials contract’ (T&M) as a ‘type of contract that is a hybrid contractual arrangement containing aspects of both cost-reimbursable and fixed-price contracts.’

In the ECC target and reimbursable contracts, defined cost includes people on site reimbursed at the actual cost to the contractor employ them, designers off site and certain other cost elements paid at tendered rates. If a client has wishes to change this and use tendered rates for more items, there is a clear structure in the contract and changes are straightforward to make.

Indefinite delivery indefinite quantity contract

PMBOK defines an ‘indefinite delivery indefinite quantity contract’ (IDIQ) as one ‘which provides for an indefinite quantity of goods or services, with a stated lower and upper limit, and within a fixed time period. These contracts can be used for architectural, engineering, or information technology engagements.’

For goods the NEC4 Supply Contract (SC) has lump sum, target or reimbursable options, as does the NEC4 Term Service Contract (TSC) for a physical service over a defined period. Either of these may be appropriate for an IDIQ contract but several Z clauses are likely to be required.

Conclusion

North American construction clients could save significant sums of money by using standard versions of established PMBOK contract types rather than drafting bespoke versions of these for each project. The NEC4 contract suite can provide standard versions for all PMBOK contract types, mostly without the need for Z clauses.

NEC contracts are also designed as tools for project management, directly supporting the processes and principles set out for project management in PMBOK. This will be reviewed in more detail in a future article. 

Reference

Project Management Institute (2021) A Guide to the Project Management Body of Knowledge (PMBOK Guide) Seventh Edition and The Standard for Project Management. Newtown Square, PA: Project Management Institute, https://www.pmi.org/standards/pmbok.