Question

You are the project manager for a new multimillion-dollar building renovation for your organization. The company needs to maximize the space that it has, and the best approach is to do a staggered build-out in order to better maximize the space in the existing building. You feel that the best approach was to negotiate with multiple contractors on a fixed-price contract. Different contractors discussed other contracts with you, particularly ones to address the current market fluctuations in the raw materials market. You ignore those other companies and settle on an agreement with a local company that is willing to accept your terms for a fixed-price contract. You find out a few weeks into a 4-month project that raw materials have increased by 250%. The contractor meets with you to discuss a price increase for the project. You have already committed a fixed price to the company and there is no contingency in the budget. The contractor advises that he will go bankrupt if he is forced to finish the project at this price and so the contractor sends you notification that he is stopping work on the project. Word of the work stoppage flies through your company and your boss calls you to his office for an update. You explain what has happened, but he feels that you are responsible for allowing this to get to this point. You are told by your boss to work something out with the contractor and to go into the negotiation with a good plan on how to mitigate the costs. Upon reflection of this situation, consider the below questions and how this situation might have been different with a different contract approach. Do you feel that the contract type selected was incorrect? What kind of abuses did you identify? What kind of positive or negative incentive could have improved this situation?

Answer 1

Yes, I feel that the contract type selecetd was incorrect because in such projects the estimation is done based on the present situation of the market and when the raw material market is such fluctuating there should have been considerations defined while creating the contract which would have actually helped dealing with such issues. The local company may have been inefficient while planning and that lead to the issue and the organization could have defined certain clause which could have made the situation not reach such a point where the work is stopped just within a month.

The local organization actually was violating the contract but in the ground that it may be bankrupted and in this case the organization initiating the contract actually failed to understand the local organization and it's resources in taking up such a project so it is generally a lack of knowledge issue. I feel that the organization selected should have been communicated the clause of the contract and the priorities that they need to maintain.