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Project Management Risk Assessment

You are the project manager for a new multi-million dollar building renovation for your organization. The company needs to maximize the space that they have 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 fluxuations in the raw materials market. You ignore those other companies and settle on an agreement with a local company, who is willing to accept your terms for a fixed price contract.

You find out that a few weeks into a four 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 they are 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 might this situation been different with a different contract approach.

Discuss the following questions.
•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?

Solution Preview

I do not feel that the contract type selected it was incorrect, due to the fact that a fixed-price contract would provide the greatest benefit and security to the project manager's organization. In addition, this form of contract strategically places the majority of the risk on the contractor which is beneficial to the project manager's organization, and reduces the amount of budgeting that must be conducted in this situation due to the fact that there is a fixed amount that must be ...