A contract calls for a total payment of $800,000 with a guarantee

Cost reimbursable contract calculation.

  1. A contract calls for a total payment of $800,000 with a guarantee. Essentially the contractor is guaranteed to make at least $200,000 above his costs. If the contractor can demonstrate his costs exceed $600,000, the project will pay the difference, with a $50,000 ceiling on the overage. The contractor demonstrates he spent $623,000. How much (gross) must the project remit to the contractor?
  2. Another option for the same contract has the contractor guaranteed to be paid his costs plus 20%, for costs that exceed $600,000. With the same initial assumptionguarantee of $800,000 gross payment (no requirement to itemize costs), but if the contractor can show that costs exceed $600,000, the project will pay $800,000 plus the costs that exceed $600,000, plus 20% of those excess costs, with a ceiling of $900,000 gross. The contractor demonstrates he spent $623,000. How much (gross) must the project remit to the contractor?
  3. Under option 1.b, at what dollar amount of total costs would the contractor be assuming all of the excess costs beyond that point?
  4. In which option did the project assume more of the risk of a cost overrun? Explain.

 

SAMPLE SOLUTION

When entering into a contract, it is important to understand the principles of contract law and payment principles to ensure all parties involved are adequately protected. In particular, this is true when there is a guarantee involved, as is the case with the contract in question. This essay will provide an overview of contract law and payment principles, explain what is meant by a guarantee in relation to a contractor, and calculate the gross payment due to the contractor in the given scenario.
Contract law is a body of law that governs the rights and duties of parties in an agreement. This includes the formation, performance, and termination of contractual obligations between parties. According to Lenaerts in the European Review of Private Law (2010), contract law is an essential part of commerce, as it enables parties to enter into binding agreements that are enforceable under the law. Payment principles are an important consideration when entering into contracts, as they dictate the amount of money owed, when it must be paid, and the method of payment to be used. Payment principles are essential to ensure that parties are held accountable for their obligations under the contract. They also provide a framework for resolving disputes between parties in the event of a breach of contract. It is important for parties to clearly outline payment principles in their contract to avoid confusion and ensure that all parties are aware of their rights and obligations.
A guarantee is an assurance provided by a contractor that confirms that a certain level of performance will be achieved in a given project. In the context of construction, this could be a promise to complete a job in a certain timeframe or to adhere to specific standards of quality. In the article “Guarantee and its implication for contractors” (K Guo and L Zhang, 2020) published in the Journal of Cleaner Production, the authors explain that guarantees can be used to protect both contractors and customers. For contractors, they serve as a form of risk management by providing assurance that they will fulfill their obligations and by protecting them from any potential losses. For customers, guarantees offer a sense of security and assurance that the project or service will be completed as agreed upon. Furthermore, the authors note that guarantees can be used to set realistic expectations for both customers and contractors. By setting an agreed-upon timeline and standard of quality, contractors are able to communicate expectations to customers and customers can take comfort in knowing that their project will be completed to their satisfaction. Ultimately, guarantees are a necessary part of any contract and serve to protect both contractors and customers.
In the above scenario, calculating the gross payment due to the contractor requires a number of steps. According to K Sigalov et al. (2021), the first step is to determine the total contract value. This is done by adding the fixed contract amount with any additional costs that may arise during the contract period. After the amount is determined, it is important to subtract any taxes or fees that are required by the government or other entities. This will give the net contract value. The next step is to calculate the contractor’s total gross payment. This is done by subtracting any advances that have been paid to the contractor from the net contract value. The final step is to add any additional fees or expenses that the contractor has incurred during the contract period. This will give the contractor’s total gross payment due from the contract. In conclusion, it is important to understand the steps involved in calculating the gross payment due to the contractor in order to ensure that the contractor receives the full compensation for their work.
From this example, it is evident that the project must remit $23,000 to the contractor to fulfill the contract. Although the contractor was initially guaranteed to make at least $200,000, he was able to demonstrate that his costs exceeded his allocated budget; therefore, the project covered the difference, with the maximum amount being $50,000. As such, the total gross payment to the contractor was $800,000.
Work Cited
X Ye., M König., P Hagedorn.”Automated payment and contract management in the construction industry by integrating building information modeling and blockchain-based smart contracts.”https://www.mdpi.com/1236406
L Zhang.”Guarantee optimization in energy performance contracting with real option analysis.”https://www.sciencedirect.com/science/article/pii/S0959652620309550
“The general principle of the prohibition of abuse of rights: a critical position on its role in a codified European contract law.”https://kluwerlawonline.com/journalarticle/European+Review+of+Private+Law/18.6/ERPL2010082

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