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Public or Private Construction Contract

The Contractor’s Dilemma Resolved

 

STUDENT PAPER

By Jordy Efanga

SKEMA Business School

Lille, France

 



ABSTRACT

The World is still recovering from a crisis that no one really anticipated. In the United States, numerous banks, companies and contractors went bankrupt. At that time, contractors working for the Federal government, more precisely those executing contracts for it, were quite protected from the effects of the crisis compared to the ones operating in the commercial construction project sector. However, as the economy is recovering, a problem may arise. In a situation in which a contractor can choose between the two alternatives suggested by the paper title, its choice may be influenced by many factors. For instance, a contractor’s decision to bid for one alternative or the other and the resulting contractual obligations due to the choice can affect its profitability. It may increase the probability that the amount the contractor devoted to the project goes up.  After analyzing the dynamics of this topic, the paper suggests that private construction contracts provide the best framework to protect the contractor against carrying unwanted increase in the contract price. Also among the industry’s best practices in relation to private construction contracts, the FIDIC framework provides the best guarantee.

Keywords: Performance bonds, Payment bonds, Contract, Construction, Claims, Procurement, Cost

INTRODUCTION

It is commonly accepted that the main goal of every single private company or organization is to make profit. In that purpose, companies are constantly looking for market opportunities and contracts to cover their initial investment. Some companies work closely with government and bid contracts in which they engage to deliver goods and/or services. The private sector often struggles when the economy is in recession. It is not always the case for the government which primarily get its income by taxing the citizens and companies operating on its territory. Therefore, its cash flows remain quite steady. There are firms that try to grab some public contracts when the economy is not performing well and tend to go back to private sector when things get better.

Getting involved with a government is not as simple as working with a private company. Because given the fact that the government pays the bill with taxpayer’s money, it must be very careful and needs to justify clearly where the money goes, what is it used for. As a result, there are more control and, most of the time, less revenue for the companies contracting with the State. In the field of project management, dealing with Cost is very important, as the final cost of a project must not exceed the budget allocated to it. However, once a project has started, many factors can lead to a cost increase. Many contractors find themselves bankrupt because those contractors chained contracts on which it is hard to make a margin. One reason for it, is that those contractors had to face a contract cost increase. Most of the time, this could not have been avoided because the contractor had to respect the contractual obligations.

Choosing carefully the type of contract to execute is essential for a contractor survival. In this paper, the aim is to analyze clauses in contracts that may increase the financial cost of a project compared to the estimated cost from the contractor’s perspective, when it decides to bid with whether a Public or Private contract (a comparison of the bidding processes will be performed). Change orders are excluded because usually the owner carries the extra cost involved. Based on this analysis, the contract that will minimize the probability of a project’s cost increase will be highlighted.

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To read entire paper, click here

 

Editor’s note: Student papers are authored by graduate or undergraduate students based on coursework at accredited universities or training programs.  This paper was prepared as a deliverable for the course “International Contract Management” facilitated by Dr Paul D. Giammalvo of PT Mitratata Citragraha, Jakarta, Indonesia as an Adjunct Professor under contract to SKEMA Business School for the program Master of Science in Project and Programme Management and Business Development.  http://www.skema.edu/programmes/masters-of-science. For more information on this global program (Lille and Paris in France; Belo Horizonte in Brazil), contact Dr Paul Gardiner, Global Programme Director [email protected].

How to cite this paper: Efanga, J. (2018). Public or Private Construction Contract: The Contractor’s Dilemma Resolved, PM World Journal, Volume VII, Issue VIII – August.  Available online at https://pmworldjournal.net/wp-content/uploads/2018/08/pmwj73-Aug2018-Efanga-public-or-private-construction-contract.pdf

 



About the Author


Jordy Efanga

Lille, France

 

 

 

 

 Jordy Efanga is currently a Masters Candidate at SKEMA Business School, Lille Campus, based in France for the academic year 2017-2019. He hails from the Republic of Congo. He has previously completed his Masters in Globalization and the World Economy from the University of Lille, 2016-2017. Previously, he has also completed his bachelor’s degree from University of Lille in Strategic Management 2012 – 2016. He may be contacted at [email protected]