Case: ELIT – type of contract for a web solution.

Erik Larsen has worked in the insurance industry for nearly 15 years. He has had several employers and has built up a good knowledge of the industry. One afternoon, while with four friends, he brought up a business idea he had been thinking about for a while. The idea was to create a product based on a web solution, which would be offered to employers and which focused on the employees’ financial situation.

After purchasing the product, the idea was that each employer would make some choices and adapt the product to their own situation, for example, entering information about the employees’ salaries, bonuses, insurances etc. Then, each employee could log in to their personal webpage to check their financial situation. The idea was that the webpage would provide personal information about the financial situation if, for example, certain events occurred, such as illness, accident, death or layoffs. The website would also calculate future pensions and acted as a sort of financial advisor.

The others thought the idea sounded interesting. After further discussion and some clarifications, they agreed to start up their own company to further develop the idea. The company was named ELIT. Collectively, they agreed that Erik Larsen would be the company’s leader. Based on market research, a list of potential suppliers that could develop and deliver web solutions was created.

Discuss at least five considerations that you believe ELIT should prioritize when choosing a supplier.

When choosing a supplier for the development and delivery of the web solution, ELIT should consider the following five points:

Experience and expertise: It is important to choose a supplier who has relevant experience and expertise in web development and delivery of similar solutions. An experienced supplier will have knowledge of best practices, technologies and functionalities that are necessary for the web solution to succeed. Check references and previous projects to evaluate the supplier’s experience and competence.

Scalability and flexibility: ELIT’s web solution could potentially grow and expand in the future. Therefore, the supplier should be able to offer a scalable and flexible solution that can handle increased traffic, functionality changes and customizations over time. The supplier should demonstrate a robust infrastructure and the ability to adapt to changes in ELIT’s needs and the market.

Security and privacy: Since the web solution contains personal and sensitive financial data, it is crucial that the supplier has solid security measures and high standards for privacy. Ensure that the supplier has implemented industry-specific security protocols and guidelines to protect the data of ELIT’s customers and employees. Ask about security approvals and any privacy certifications they can show.

User-friendliness and design: The web solution is a tool for employees to manage their financial situation and obtain relevant information. Therefore, ELIT should prioritize a supplier who can create a user-friendly and intuitive design. User experience should be in focus and the interface should be easy to navigate and understand. Request demonstrations or previous examples of user-friendly design from the supplier.

Cost-effectiveness and long-term collaboration: Of course, costs are important, but it’s also essential to consider the long-term value and possibility for a sustainable collaboration with the supplier. Consider both the initial development costs and any ongoing costs, such as maintenance, updates and customer support. A supplier who can offer cost-effective solutions and has a good reputation for long-term collaboration can be a beneficial choice for ELIT.

By carefully considering and weighing these factors, ELIT can make an informed decision about which supplier is best suited to develop and deliver the web solution that meets their needs and expectations.

Discuss what type of contract and compensation format ELIT should choose in this situation.

In this situation, ELIT could consider different types of contracts and compensation formats, including traditional contracts, neo-traditional contracts, relational contracts and alliance contracts. The choice of contract type and compensation format will depend on ELIT’s needs, the nature and complexity of the project, and the desired level of cooperation and risk-sharing between ELIT and the supplier.

Traditional contract: A traditional contract is based on clearly defined requirements, specifications, and deliverables. The contract is typically legally binding and regulates responsibilities, costs, deadlines and other matters. Compensation can be based on a fixed price or a unit price for delivered services or products. The traditional contract is suitable when the project has clearly defined requirements and limited changes are expected and when there is a desire for a clear division of responsibilities between ELIT and the supplier.

Neo-traditional contract: Neo-traditional contracts also take into account efficiency and incentive problems that may arise in the contractual relationship. This type of contract includes elements such as performance measurements, incentives and reward systems to motivate the supplier to achieve specific results. Compensation may be based on agreed-upon indicators or results achieved. Neo-traditional contracts may be appropriate when ELIT wants to encourage specific results or fulfillment of performance goals.

Relational contract: Relational contracts focus on long-term collaboration and building a trustful relationship between ELIT and the supplier. The contract will be flexible and adapt to changes along the way. There is usually a greater degree of mutual dependency and collaboration in relational contracts. Compensation can be based on a combination of a fixed price and result-oriented incentives. Relational contracts are suitable when ELIT wants to maintain long-term cooperation and transparency with the supplier.

Alliance contract: An alliance contract is a form of cooperation agreement where ELIT and the supplier work closely together as an integrated unit. The goal is to achieve common objectives and share risk and reward. Compensation may be based on cost sharing, profit sharing or a combination of both. Alliance contracts are suitable when there is a need for a high degree of collaboration, risk sharing and knowledge sharing between ELIT and the supplier.

It is important for ELIT to carefully consider these types of contracts in relation to the specific needs of the project, the desired degree of cooperation and risk distribution. It may be appropriate to involve legal experts and key stakeholders to choose the most suitable contract type and compensation format for the project.

Discuss at least five factors that you believe ELIT should emphasize when following up on the contract.

When it comes to following up on the contract, there are several factors that ELIT should emphasize to ensure a successful execution of the project. Here are five key considerations that ELIT should consider:

Communication: It’s crucial to maintain good and open communication with the supplier throughout the contract period. This includes regular meetings, reporting and updates on progress, any issues or changes in the project. Effective communication helps prevent misunderstandings, resolve issues in time and maintain a trustful cooperation.

Progress monitoring: ELIT should actively monitor the supplier’s progress in accordance with the contract. This involves setting up and closely monitoring milestones, deadlines and quality objectives. By having a good monitoring system in place, ELIT can identify any delays or discrepancies in time, cost or quality and take necessary actions to rectify the situation.

Quality control: ELIT should also ensure that the supplier meets the agreed quality standards and contract requirements. This may include testing, auditing or approval of partial or final results to ensure they meet expectations. By having a thorough quality control system, ELIT can reduce the risk of deficiencies or errors in the web solution and ensure that it is delivered in accordance with the agreed specifications.

Change management: Changes or adjustments in the project’s requirements or scope may arise along the way. ELIT should have a clear and structured system for managing such changes in accordance with the contract. This may include procedures for evaluating the impact of changes on cost, time and quality, as well as negotiating change agreements with the supplier. Effective change management helps minimize conflicts and ensure that the project stays on track.

Conflict management and dispute resolution: Even with good contractual and collaboration processes, disagreements or conflicts may arise between ELIT and the supplier. ELIT should be prepared to handle such situations and have mechanisms in place to resolve disputes in an efficient and fair manner. This may include the use of alternative dispute resolution methods such as negotiation or mediation, depending on the terms of the contract and applicable laws.

By carefully following up on these considerations, ELIT can help ensure successful execution of the contract and achieve the desired results in the development of the web solution.

Discuss the factors a supplier should consider before submitting a bid.

When a supplier is considering submitting a bid for a project, there are several factors that should be carefully considered to ensure that the bid is realistic, competitive and meets both the customer’s needs and the supplier’s own objectives. Here are some key factors a supplier should consider before submitting a bid:

Customer’s requirements and needs: The supplier should thoroughly analyze and understand the customer’s requirements and needs as described in the request or project documents. This includes identifying key requirements, functionality, scope, deadlines, quality standards and other specifications. A clear understanding of the customer’s needs will help the supplier develop a bid that aligns with expectations and ensures they can deliver what is required.

Resource capacity and competence: The supplier needs to assess their own capacity, available resources and competence to execute the assignment. This includes considering whether they have sufficient manpower, technical expertise, experience and equipment to handle the project effectively. Being realistic about one’s capacities is important to avoid overcommitment or inability to fulfill contractual obligations.

Cost analysis: A thorough cost analysis should be carried out to estimate the total costs of implementing the project. This includes considering material costs, labor, equipment, subcontractors, transportation and other relevant expenses. The supplier should also consider any risks and uncertainties that could impact the costs. Having a clear understanding of the cost structure will help the supplier set a competitive and sustainable price for the bid.

Competitive analysis: It’s important to analyze the competitive situation and assess other potential bidders who might participate in the bid. This includes considering competitors’ experience, reputation, competence and resources. The supplier should consider their competitive advantage and differentiating factors that could make their bid more attractive to the customer. This could include unique expertise, past success stories, innovative solutions or competitive prices.

Uncertainty assessment: The supplier should consider potential uncertainties associated with the project. This includes identifying risk areas such as technical complexities, time pressures, changes in requirements, budget constraints and other factors that could impact the execution of the project. But also opportunities that might benefit the project in a positive way. By identifying and assessing the uncertainties, the supplier can develop measures and strategies to manage them and ensure project success.

A builder once claimed at a seminar that “choosing a cost-plus contract is the same as giving the supplier your wallet.” Discuss whether you agree with this statement.

The statement that “choosing a cost-plus contract is the same as giving the supplier your wallet” is a generalization that does not necessarily apply in all cases. A cost-plus contract, also known as a time and materials contract, implies that the builder pays the supplier for all the actual costs associated with the project, in addition to an agreed percentage or fixed markup for the supplier’s profit and administrative costs. This can give the supplier more flexibility and responsibility for the costs. However, it is important to note that the choice of contract type, including cost-plus contracts, depends on the nature, scope, complexity, and risk profile of the project.

Some benefits of cost-plus contracts include:

  • Flexibility: Cost-plus contracts can be useful when there is uncertainty or changes in the project’s scope or requirements. The supplier can adapt to changes along the way without having to enter new contracts or renegotiate prices.
  • Transparency: By using cost-plus contracts, the builder may have greater insight and control over the actual costs associated with the project. This can help identify and manage costs more effectively and reduce the possibilities of cost overruns.
  • Quicker startup: Cost-plus contracts can allow the project to start quicker since there is no need for an extensive bid process and negotiations on prices.

On the other hand, there may be some concerns or disadvantages with cost-plus contracts:

  • Risk of cost overruns: If the project is not sufficiently defined or controlled, there may be a risk that the supplier increases the costs without necessary control or justification, which can lead to cost overruns for the builder.
  • Limited incentive for efficiency: Since the supplier gets paid for actual costs, there might be less incentive to maximize efficiency or minimize costs compared to fixed-price contracts where the supplier bears the risk of cost overruns.
  • Need for good control and follow-up: For the cost-plus contract to be successful, it requires careful control and follow-up from the builder’s side to ensure the costs are reasonable, correct and in line with the project’s needs.

In practice, the choice of contract can be a trade-off between risk, control and flexibility. It’s important to consider the project’s specific conditions, the relationship with the supplier and the desired outcome before concluding which contract type is most appropriate.

Assume you are the client and are outsourcing project work to a supplier. Discuss what type of contract and compensation format you think best suits the following situations:

  • Purchasing computer equipment.
  • Research and development of a new product.
  • Installation of an elevator in an office building.
  • Building of five new vessels based on new technology.

Regarding contract types and compensation formats for different project situations, the following recommendations can be considered:

Purchasing computer equipment:

  • Contract type: Purchase contract.
  • Compensation format: Fixed price or unit price.

The resources and costs associated with purchasing computer equipment can usually be estimated in advance, and therefore a fixed price or unit price contract might be appropriate. This provides a predictable cost for the client.

Research and development of a new product:

  • Contract type: Research and development contract.
  • Compensation format: Time-based or fixed price with milestones.

Research and development projects often involve uncertainty and changes along the way. A time-based contract provides flexibility to adapt to changes in project scope. Alternatively, a fixed price contract with milestones might be suitable, where payment is dependent on achieved results or project milestones.

Installation of an elevator in an office building:

  • Contract type: Construction contract.
  • Compensation format: Fixed price or unit price with additional payment for any changes.

For construction projects such as elevator installation, a construction contract is common. This type of contract provides a fixed price or unit price for the work and any changes can be assessed separately and compensated extra.

Building of five new vessels based on new technology:

  • Contract type: Turnkey contract.
  • Compensation format: Fixed price with incentive-based elements.

For large and complex projects like vessel building, a turnkey contract might be suitable. A fixed price contract can be used, but with incentive-based elements such as rewards for achieving certain goals or delivering within a specified timeframe.

The choice of contract type and compensation format should be carefully considered based on the project’s specific requirements, complexity, risk and the relationship between the client and the supplier. It could also be wise to seek advice from legal and field-specific professionals to guarantee that the contract maintains balance for all parties involved.

This case is taken from the book “Prosjektledelse – fra initiering til gevinstrealisering” – 2016, 4. Edition, by Jan Terje Karlsen.

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