Project Contract Types in Industrial Project Management

A Request For Quote (RFQ)* document is issued by facility owners or contractors (in the case of required subcontracts) to solicit proposals for project work to be done. The components of a typical RFQ are:

• Contract Type and Execution Method
• Technical Scope 
• Schedule
• Commercial Terms

In this article, we will provide information on common project contract types for capital projects within industries such as energy, chemicals, and terminal and logistics.

How Capital Projects Are Executed

Most larger projects (typically over $10 million) are executed under an individual contract for the specific type of project. The contract is a “self-contained” agreement that provides governance for the expectations and requirements for that project.

Smaller projects are typically executed under the umbrella of a Master Services Agreement (MSA) that a facility owner or corporate entity will have in place with selected contractors that dictate the “ground rules” under which projects will be performed. This should include any overarching requirements that apply to all projects executed under the MSA, such as insurance requirements, legal agreements (e.g. confidentiality and dispute resolution), safety requirements, etc. Most MSAs are valid between one and three years.

Project Contract Types in Industrial Construction

There are many variations of project contract types, but for smaller projects, the most common are Time and Materials (T&M) and Separated Fixed-Price.

• T&M Contracts**: T&M projects are reimbursed as costs are incurred under a pre-approved Rate Sheet that is supplied with the MSA. The rate sheet dictates the labor price per category and the markup for purchased materials, equipment, and subcontracts.  
• Separated Fixed-Price Contracts***: Separated Fixed-Price is a price that covers all of the requirements of the project regardless of the actual cost of labor or materials. For this reason, fixed-price represents fewer administrative requirements but more risk to the contractor.

* Terms used interchangeably: Request for Proposal (RFP), Invitation to Bid (ITB).

** Also called “Reimbursable”.

*** Sometimes called “Lump Sum,” but “Separated Fixed-Price” describes the required split in pricing between materials and labor for taxation purposes.

**** Administrative requirements include the supply of timesheets, supplier, and subcontractor invoices.

Choosing Between Project Contract Types

There is no “right” or “wrong” project contract type; however, both contract types are great choices for specific project circumstances. 

T&M can be beneficial for:

• Early-stage project definition: Throughout the stages of defining a project, T&M contracts can be utilized when it is unclear or hard to pin down how long the full development and definition of a project will take. T&M contracts are particularly useful during the front-end loading (FEL) phase where the scope is unknown or undefined and the project scope is to be determined.
• The execution stage: T&M contracts can be advantageous during the execution stage when project owners believe the project may finish under budget.
• Maintenance work: T&M contracts can be favorable for maintenance work, as project owners simply pay for the required hours of labor necessary to complete a maintenance job or instances in which a known number of people are required at a site continuously. 
• Projects under time constraints: Under situations where there are severe time constraints, such as a commercial obligation, and the project schedule overrides any cost risk associated with proceeding, T&M contracts can be appropriate. When the schedule is paramount to project success, T&M contracts allow projects to begin immediately without delay.
• Sole-sourced projects: T&M is beneficial when you know exactly who you want to contract so the project can begin right away.

Separated Fixed-Price contracts can be beneficial for:

• Fully-defined projects: Separated Fixed-Price contracts are valuable for projects where the scope is fully defined. A well-defined scope will typically yield the most favorable bids. 
• Budget-based projects: When budget certainty is of the highest importance for project success, Separated Fixed-Price contracts may be favorable.
• Competitive bid situations: Separated Fixed-Price contracts are ideal when you are looking for the best price.

Your Capital Project, Your Way

At H+M Industrial EPC, we value the individual needs of our clients and will work with you to determine which contract type will provide you with the highest level of success. We can complete your capital project from concept to startup or provide individual front-end planning, engineering, procurement, fabrication, construction, or maintenance services to fit your individual needs.