Project ManagementProject Management

Contracts and ProcurementContracts and Procurement

OutlineOutline1. Introduction

2. Procurement

3. Requirement Cycle

4. Requisition Cycle

5. Solicitation Cycle

6. Award Cycle

1. Introduction

2. Procurement

3. Requirement Cycle

4. Requisition Cycle

5. Solicitation Cycle

6. Award Cycle

OutlineOutline7. Types of Contracts

8. Incentive Contracts

9. Contract Type versus Risk

10. Contract Administration Cycle

11. Using a Checklist

12. Proposal-Contractual Interaction

7. Types of Contracts

8. Incentive Contracts

9. Contract Type versus Risk

10. Contract Administration Cycle

11. Using a Checklist

12. Proposal-Contractual Interaction

Procurement StrategiesProcurement Strategies

Corporate procurement strategy: the relationship of specific procurement actions to the corporate strategy

Project procurement strategy: the relationship of specific procurement actions to the operating environment of the project

Corporate procurement strategy: the relationship of specific procurement actions to the corporate strategy

Project procurement strategy: the relationship of specific procurement actions to the operating environment of the project

Procurement ObjectivesProcurement Objectives

Procure all goods/services from a single source.

Procure all goods/services from multiple sources.

Procure only a small portion of the goods/ services.

Procure none of the goods/services.

Procure all goods/services from a single source.

Procure all goods/services from multiple sources.

Procure only a small portion of the goods/ services.

Procure none of the goods/services.

Procurement ManagementProcurement Management

Requirement cycle: definition of the boundaries of the project

Requisition cycle: analysis of sources Solicitation cycle: the bidding process Award cycle: contractor selection and

contract award Contract administration cycle: managing the

subcontractor until completion of the contract

Requirement cycle: definition of the boundaries of the project

Requisition cycle: analysis of sources Solicitation cycle: the bidding process Award cycle: contractor selection and

contract award Contract administration cycle: managing the

subcontractor until completion of the contract

Requirement CycleRequirement Cycle Defining the need for the project Development of the statement of work,

specifications, and work breakdown structure Performing a make or buy analysis Laying out the major milestones and the

timing/schedule Cost estimating, including life-cycle costing Obtaining authorization and approval to proceed

Defining the need for the project Development of the statement of work,

specifications, and work breakdown structure Performing a make or buy analysis Laying out the major milestones and the

timing/schedule Cost estimating, including life-cycle costing Obtaining authorization and approval to proceed

Specifications are written, pictorial, or graphic information that describe, define, or specify the services or items to be procured. There are three types of specifications:

Specifications are written, pictorial, or graphic information that describe, define, or specify the services or items to be procured. There are three types of specifications:

Specifications

Types of SpecificationsTypes of Specifications

Design specifications: These detail what is to be done in terms of physical characteristics. The risk of performance is on the buyer.

Performance specifications: These specify measurable capabilities the end product must achieve in terms of operational characteristics. The risk of performance is on the contractor.

Design specifications: These detail what is to be done in terms of physical characteristics. The risk of performance is on the buyer.

Performance specifications: These specify measurable capabilities the end product must achieve in terms of operational characteristics. The risk of performance is on the contractor.

Types of Specifications (Continued)

Types of Specifications (Continued)

Functional specifications: This is when the seller describes the end use of the item to stimulate competition among commercial items, at a lower overall cost. This is a subset of the performance specification, and the risk of performance is on the contractor.

Functional specifications: This is when the seller describes the end use of the item to stimulate competition among commercial items, at a lower overall cost. This is a subset of the performance specification, and the risk of performance is on the contractor.

The Make DecisionThe Make Decision

Less costly (but not always!!) Easy integration of operations Utilize existing capacity that is idle Maintain direct control Maintain design/production secrecy Avoid unreliable supplier base Stabilize existing workforce

Less costly (but not always!!) Easy integration of operations Utilize existing capacity that is idle Maintain direct control Maintain design/production secrecy Avoid unreliable supplier base Stabilize existing workforce

The Buy DecisionThe Buy Decision

Less costly (but not always!!) Utilize skills of suppliers Small volume requirement (not cost effective

to produce) Having limited capacity or capability Augment existing labor force Maintain multiple sources (qualified vendor

list) Indirect control

Less costly (but not always!!) Utilize skills of suppliers Small volume requirement (not cost effective

to produce) Having limited capacity or capability Augment existing labor force Maintain multiple sources (qualified vendor

list) Indirect control

Requisition CycleRequisition Cycle

Evaluating/confirming specifications (are they current?)

Confirming sources Reviewing past performance of sources Producing solicitation package

Evaluating/confirming specifications (are they current?)

Confirming sources Reviewing past performance of sources Producing solicitation package

Solicitation PackageSolicitation Package

Bid documents (usually standardized) Listing of qualified vendors (expected to

bid) Proposal evaluation criteria Bidder conferences How change requests will be managed Supplier payment plan

Bid documents (usually standardized) Listing of qualified vendors (expected to

bid) Proposal evaluation criteria Bidder conferences How change requests will be managed Supplier payment plan

Solicitation CycleSolicitation Cycle

Advertising Negotiation Small purchases (i.e., office supplies)

Advertising Negotiation Small purchases (i.e., office supplies)

Negotiation ProcessesNegotiation Processes

Request for information (RFI) Request for quotation (RFQ) Request for proposal (RFP)

Request for information (RFI) Request for quotation (RFQ) Request for proposal (RFP)

Negotiation FactorsNegotiation Factors

Compromise ability Adaptability Good faith

Compromise ability Adaptability Good faith

Negotiation PlanningNegotiation Planning

Develop objectives (i.e., min-max positions)

Evaluate your opponent Define your strategy and tactics Gather the facts Perform a complete price/cost analysis Arrange “hygiene” factors

Develop objectives (i.e., min-max positions)

Evaluate your opponent Define your strategy and tactics Gather the facts Perform a complete price/cost analysis Arrange “hygiene” factors

Negotiation Objective-SettingNegotiation Objective-Setting

Buyer

Seller

Min

Min Objective

Objective Max

Max

Price

Award CycleAward Cycle

Conclusion: The objective of the award cycle is to negotiate a contract type and price that will result in reasonable contractor risk and provide the contractor with the greatest incentive for efficient and economic performance.

Conclusion: The objective of the award cycle is to negotiate a contract type and price that will result in reasonable contractor risk and provide the contractor with the greatest incentive for efficient and economic performance.

Contracting ElementsContracting Elements

Mutual agreement Consideration Contract capability Legal purpose Form provided by law

Mutual agreement Consideration Contract capability Legal purpose Form provided by law

Contract FormsContract Forms

Completion contract Term contract

Completion contract Term contract

Contract Selection CriteriaContract Selection Criteria

Overall degree of cost and schedule risk Type and complexity of requirement

(technical risk) Extent of price competition Cost/price analysis Urgency of the requirements Performance period Contractor’s responsibility (and risk)

Overall degree of cost and schedule risk Type and complexity of requirement

(technical risk) Extent of price competition Cost/price analysis Urgency of the requirements Performance period Contractor’s responsibility (and risk)

Contract Selection Criteria (Continued)

Contract Selection Criteria (Continued)

Contractor’s accounting system (is it capable of earned value reporting?)

Concurrent contracts (will my contract take a back seat to existing work?)

Extent of subcontracting (how much work will the contractor outsource?)

Contractor’s accounting system (is it capable of earned value reporting?)

Concurrent contracts (will my contract take a back seat to existing work?)

Extent of subcontracting (how much work will the contractor outsource?)

Contractor’s RisksContractor’s Risks

FFP CPFFRisk On Contractor

HIGH LOW

LEGENDFFP FIRM FIXED PRICECPFF COST PLUS FIXED FEE

Firm-Fixed-Price Contract (FFP)Firm-Fixed-Price Contract (FFP)

0 %

0 %

100 %

100 %

CO

NT

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OR

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CU

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RIS

K

RIS

K

RISK SHARING METER

RISKLOCATION

•Maximum risk with contractor

•Higher negotiated profit margins

•High likelihood of scope changes

Firm-Fixed-Price With Economic Price Adjustments (FPE)Firm-Fixed-Price With Economic Price Adjustments (FPE)

0 %

0 %

100 %

100 %

CO

NT

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CT

OR

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RIS

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RIS

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RISK SHARING METER

RISKLOCATION

•Adjustments for escalation factors

•Adjustments for inflation

•Negotiated adjustment cycle

Incentive ContractsIncentive Contracts

•Additional profits are possible by lowering cost

•Customer and contractor share cost savings

Principles of Incentive ContractsPrinciples of Incentive Contracts

TARGET COST: $20,000TARGET FEE: $1500SHARING RATIO: 80/20 %

•CUSTOMER PAYS 80 % OF OVERRUN

•CONTRACTOR PAY 20 % OF OVERRUN

•PROFIT IS $1500 LESSCONTRACTOR’S 20 %

•CUSTOMER KEEPS 80 % OF OVERRUN

•CONTRACTOR KEEPS 20 % OF OVERRUN

•PROFIT IS $1500 PLUSCONTRACTOR’S 20 %

NOTE: LIMITATIONS MAY BE IMPOSED ON PRICE OR PROFIT

EXAMPLE

Fixed-Price-Incentive-Fee Contract (FPIF)Fixed-Price-Incentive-Fee Contract (FPIF)

0 %

0 %

100 %

100 %

CO

NT

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’S

RIS

K

RIS

K

RISK SHARING METER

RISKLOCATION

•Contractor can earn additional profits

•Contract has a ceiling on price (or cost) paid

•Price (or cost) ceiling at point of total assumption

Cost-Plus-Incentive-Fee Contract (CPIF)Cost-Plus-Incentive-Fee Contract (CPIF)

0 %

0 %

100 %

100 %

CO

NT

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CT

OR

’S

CU

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’S

RIS

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RIS

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RISK SHARING METER

RISKLOCATION

•Contractor can earn additional profits

•All costs are reimbursed (cost run-ups)

•A “floor” and “ceiling” exists on profits

Cost-Plus-Award-Fee Contract (CPAF)Cost-Plus-Award-Fee Contract (CPAF)

0 %

0 %

100 %

100 %

CO

NT

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OR

’S

CU

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RIS

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RIS

K

RISK SHARING METER

RISKLOCATION

•All costs are reimbursed (cost run-ups)

•Negotiated range of possible profits

•Customer determines profit paid at completion

Cost-Plus-Fixed-Fee Contract (CPFF)Cost-Plus-Fixed-Fee Contract (CPFF)

0 %

0 %

100 %

100 %

CO

NT

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OR

’S

CU

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’S

RIS

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RIS

K

RISK SHARING METER

RISKLOCATION

•All costs are reimbursed (cost run-ups)

•Fee is fixed (in $$$ not %) irrespective of costs

•Contractor is motivated for early completion

Cost-Sharing Contract (CS)Cost-Sharing Contract (CS)

0 %

0 %

100 %

100 %

CO

NT

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OR

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RIS

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RIS

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RISK SHARING METER

RISKLOCATION

•No profits allowed

•Customer and contractor share costs

•Contractor may retain control of

Cost Contract (C)Cost Contract (C)

0 %

0 %

100 %

100 %

CO

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RIS

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RIS

K

RISK SHARING METER

RISKLOCATION

•No profits allowed

•Contractor is usually a non-profit organization

•Limitations on costs allowed may be imposed

Cost-Plus-Percentage-Of-Cost Contract (CPPC)Cost-Plus-Percentage-Of-Cost Contract (CPPC)

0 %

0 %

100 %

100 %

CO

NT

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CT

OR

’S

CU

ST

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’S

RIS

K

RIS

K

RISK SHARING METER

RISKLOCATION

•Costs incurred may be unlimited

•Contractors can maximize profits

•Scope changes may be frequent and unlimited

Relative Contract RiskRelative Contract Risk

RISKLOCATION

FFP

FFE

FPIF

CPIF

CPAF

CPFF

CSC

CPPC

0 %

100 %

CO

NT

RA

CT

OR

’SR

ISK

0 %

100 %

CU

ST

OM

ER

’SR

ISK

RISK SHARING METER

There are several other types of contracts available. They may be derivatives of these contracts, combinations, or simply special contracts for special circumstances.

There are several other types of contracts available. They may be derivatives of these contracts, combinations, or simply special contracts for special circumstances.

Contract Administration CycleContract Administration Cycle Change management Specification interpretation Adherence to quality Warranties Subcontractor management Production surveillance Waivers Contract breach

Change management Specification interpretation Adherence to quality Warranties Subcontractor management Production surveillance Waivers Contract breach

Contract Administration Cycle (Continued)

Contract Administration Cycle (Continued)

Resolution of disputes Project termination Payment schedules Project closeout

Resolution of disputes Project termination Payment schedules Project closeout

Order of PrecedenceOrder of Precedence

A. Specifications (first priority)

B. Other instructions (second priority)

C. Other documents, such as exhibits, attachments, appendices, SOW, contract date requirements list [CDRL], etc. (third priority)

D. Contract clauses (fourth priority)

E. The schedule (fifth priority)

A. Specifications (first priority)

B. Other instructions (second priority)

C. Other documents, such as exhibits, attachments, appendices, SOW, contract date requirements list [CDRL], etc. (third priority)

D. Contract clauses (fourth priority)

E. The schedule (fifth priority)

Type of ChangesType of Changes

Administrative change Change order Contract modification Undefinitized contractual action Supplemental agreement Constructive change

Administrative change Change order Contract modification Undefinitized contractual action Supplemental agreement Constructive change

Causes of Constructive ChangesCauses of Constructive Changes Defective specification with impossibility of

performance Erroneous interpretation of contract Over-inspection of work Failure to disclose superior knowledge Acceleration of performance Late or unsuitable owner or customer

furnished property

Defective specification with impossibility of performance

Erroneous interpretation of contract Over-inspection of work Failure to disclose superior knowledge Acceleration of performance Late or unsuitable owner or customer

furnished property

Causes of Constructive ChangesCauses of Constructive Changes Failure to cooperate Improperly exercised options Misusing proprietary data

Failure to cooperate Improperly exercised options Misusing proprietary data

Reasons for Termination for Convenience of the CustomerReasons for Termination for Convenience of the Customer

Elimination of the requirement Technological advances in the state-of-

the-art Budgetary changes Related requirements and/or procurements Anticipating profits not allowed

Elimination of the requirement Technological advances in the state-of-

the-art Budgetary changes Related requirements and/or procurements Anticipating profits not allowed

Reasons for Termination for Default Due to Contractor’s Actions

Reasons for Termination for Default Due to Contractor’s Actions

Contractor fails to make delivery on scheduled date.

Contractor fails to make progress so as to endanger performance of the contract and its terms.

Contractor fails to perform any other provisions of the contract.

Contractor fails to make delivery on scheduled date.

Contractor fails to make progress so as to endanger performance of the contract and its terms.

Contractor fails to perform any other provisions of the contract.

Contract Administration RightsContract Administration Rights

Reject the entire shipment Accept the entire shipment (barring latent

defects) Accept part of the shipment

Reject the entire shipment Accept the entire shipment (barring latent

defects) Accept part of the shipment