The impact of contract type on project success or failure
Prepared by: Majed Abdeen
When considering project success/failure, one important factor we must address is the contract between buyer and seller. So far, much of the literature examined has not discussed the effect of contract choice on the ultimate outcome of the project. I argue that the contract type and source selection criteria are critical factors in project success/failure.
Major types of contracts used include Fixed Price (FP), Cost-Plus (CP), and Time and Material (T&M) (PMBOK, 2017, pp. 471-472), each having various advantages/disadvantages, and being suited to different projects. There is often a common conception, especially in Government projects, that Buyers can use Firm FP (FFP) or Lump Sum contracts, which transfer risk and responsibility to the seller. They are one of the most commonly used contract types (PMBOK, 2017, pp. 471-472). Often the source selection criteria used in selecting FP contracts focus on the lowest cost possible. Product costs but not lifecycle costs are considered.
Research conducted by BAA prior to the T5 megaproject indicated that FP contracted projects often experience adversarial practices, delays in delivery, budget overruns, poor integration, and disputes/legal battles between clients and contractors (Davies, et al., 2009, p. 108). FP contracts affect working practices, thus are not always well-suited to large/complex projects. Buyer/Seller competition rarely results in successful project outcomes; as noted by BAA (Davies, et al., 2009, p. 108), the buyer can never really absolve themselves of responsibility; they must always pay, whether in dealing with risks, or in fees associated with a failed project and/or legal fees and disputes.
For large/complex projects, or those with an undefined scope, T&M contracts, as hybrids of both FP and CP contracts, may be more suitable. This collaborative approach shares both risks and rewards, thus all sides win (PMI; Agile Alliance, 2017, p. 77) leading to project success. The Agile approach to project management promotes teamwork; the seller becomes part of the Project team (illustrated below) while Megaprojects can be subdivided into small batches, using a Master Services Agreement (MSA), allowing more flexibility for items subject to change.
Evidently, when considering project success/failure, we must consider contracts. I worked on various FP projects, all of which were challenging to both buyer and seller due to the adversarial attitude employed by both parties. In contrast, when T&M contracts were implemented, those projects were delivered successfully. As PMBOK Agile notes, "Many project failures stem from breakdowns in the customer-supplier relationship. Projects incur more risk when those involved in the contract take the perspective of winners vs. losers." The benefit of the Agile approach is that the seller becomes part of the project team, thus enhancing the opportunities for successful project outcomes.
Davies, A., Gann, D. & Douglas, T., 2009. Innovation in megaprojects: systems integration at London Heathrow terminal 5. California Management Review, 51(2), pp. 101-125.
PMBOK, 2017. A Guide to the Project Management Body of Knowledge. 6th ed. Pennsylvania: Project Management Institute, Inc..
PMI; Agile Alliance, 2017. AGILE PRACTICE GUIDE. Pennsylvania: Project Management Institute, Inc.