Procurement Management

Procurement Management
PMP Study Group Procurement Management

Project Procurement Management Definition
Engaging in the systematic “processes necessary to purchase or acquire products, services, or results needed from outside the project team.” PMBoK® Guide, 5th Edition, p. 355 2

Project Procurement Management Processes
12.1 Plan Procurement Management 12.2 Conduct Procurements 12.3 Control Procurements 12.4 Close Procurements 3

Guiding Principals - Contracts
Contracts are formal and legally binding between a buyer and seller Contracts can be simple or complex All requirements (product, project, etc.) should be specifically spelled out in the contract If included in the contract, it must be done If not in the contract, does not have to be done Formal change control is the only way to add or remove items from the contract Changes must be in writing Contract terms and conditions are designed to avoid and mitigate project risk Contested changes (claims, disputes, appeals) may be resolved through: Negotiation Alternative dispute resolution (ADR) as outlined in the contract Highlight: Contracts are formal, legal documents and all changes should be done in writing. Government Agencies (federal, city, state) put all product and services out to bid and provide jurisdiction by providing a court system for dispute resolution.

Contract Roles Contractor - One who enters into a contract, undertaking to do work for a company or corporation on a large scale, at a certain price, or to furnish goods to another at a fixed or ascertained price Subcontractor - a person or business which has a contract (as an "independent contractor" and not an employee) with a contractor to provide some portion of the work or services on a project which the contractor has agreed to perform. Buyer – The acquirer of products, services, or results for an organization Sellers – External companies that enter into a contractual agreement to provide components or services necessary for the project, The seller can be called a contractor, subcontractor, vendor, service provider, or supplier. 5 5

PM’s Role in Procurement
Know the procurement process; seek support early from specialists in contracting, purchasing, law, and technical disciplines Involvement should begin at the start of the procurement process Understand contract terms and conditions Ensure the contract contains all project management requirements and scope for the product or services being procured Identify risks and incorporate ways to avoid, mitigate, transfer to seller, or share the potential risk within the contract Fit the schedule for completion of the procurement process into the schedule for the project Be engaged during contract negotiation to establish a relationships with the seller Manage the entire project, not just the contract statement of work Work with the contract or procurement manager to manage contract change control Don’t rush through this slide. Stress how important it is for Project Managers to get involved in the procurement cycle at the start.

Exercise 1 - Background You are the Project Manager for a new, very visible, and big income producer project. In your preliminary analysis, you find out the following: The project will have multiple interfaces to various systems and hardware for internal and external customers. The project is a discretionary project and you will need some help from a team of financial specialists within your organization. In your meeting with the financial specialists manager, you find out that they have a non-discretionary project (FRB Project) that is number one on their list of priorities. The FRB Project was dictated to the financial organization by the Federal Reserve Bank. Non-compliance with the FRB Project places the firm at risk for severe penalties. Background for discussion. You need to talk to the group lead in person. When you walk into that meeting, what should you know? What questions should you have

Exercise 1 – Background (cont’d)
In the meeting with the financial specialists, the manager told you the following: They currently have a 10 person staff Approximately 200 hours a week (work effort) for the FRB Project The FRB project must be completed in four months Their staff is working approximately 100 hours a week on maintenance Maintenance of current systems takes priority over everything The number of hours available will vary from week to week The manager of the financial support group says, “…off the top of my head, and the limited information you have, similar types of projects have taken approximately 1000 hours to complete”. You were assured that when they were not working on the FRB project or maintenance, you will have first priority Like most things in life – this is borderline. Yes they have the resources to do the project, however if the Federal Reserve project falls behind schedule, maintenance goes up, projects are reprioritized or a new non-discretionary project comes along, this project will get bumped. This now becomes a major risk for your project Discuss ways/options to mitigate the risk.

Exercise 1 – Background (cont’d)
Is it better to have the in-house people do it or send it outside? If you decide to seek a contract from an outside vendor, what items do you want to place in this contract?

Project Management Process Groups Monitoring & Controlling
Plan Procurement Management Knowledge Area Project Management Process Groups Initiating Planning Executing Monitoring & Controlling Closing 12. Project Procurement Management 12.1 Plan Procurement Management 12.2 Conduct Procurements 12.3 Control Procurements 12.4 Close Procurements 10

12.1 Plan Procurement Management
Definition: “The process of documenting project procurement decisions, specifying the approach, and identifying potential sellers.” PMBoK® Guide, 5th Edition, Glossary 11

12.1.1 Plan Procurement Management Inputs
Project Management Plan Describes the need, justification, requirements, etc., for the project and is inclusive of the following: Project Scope Statement: contains the description of services, list of deliverables, acceptance criteria, and important information regarding technical issues that could impact cost estimating. WBS: provides the relationship among all the components of the project and deliverables. WBS Dictionary: provides detailed statements of work that provide an identification of the deliverables and a description of the work within each WBS component required to produce each deliverable. Requirements Documentation Information about the project that is required during planning for procurement (project and requirements with contractual and legal implications). Section Risk Register Includes risk-related information (identified risks, risk owners, and risk mitigation/responses). Sections 11.2, 11.3, 11.4 and 11.5 Activity Resource Requirements Contain information on specific needs such as people, equipment, or location. Section

12.1.1 Plan Procurement Management Inputs (cont’d)
Project Schedule Contains information on timelines or mandated deliverable dates. Section Activity Cost Estimates Cost estimates which are used to evaluate the reasonableness of the bids or proposals received from potential sellers. Section Stakeholder Register Provides detail on the project participants and their interest in the project. Section Enterprise Environmental Factors Factors that can influence the Plan Procurements Management process, such as: conditions of the marketplace products, services and results available from the marketplace from whom and under what terms and conditions Organizational Process Assets Provides the existing formal and informal procurement related policies, procedures, guidelines and management systems that are considered in developing the procurement management plan and selecting the contract types to be used

12.1.2 Plan Procurement Management Tools and Techniques
Make-or-Buy Analysis Technique used to determine whether a particular product or service can be produced by the project team or must be purchased from outside sources. This analysis include all related costs; both direct and indirect costs. Expert Judgment Used to assess the inputs and outputs from this process. Can be used to develop or modify the criteria that will be used to evaluate the seller proposal such as legal, technical, business, and procurement management judgment. Market Research Includes examination of industry specific vendor capabilities. Procurement teams may leverage information gained at conferences, online reviews and a variety of sources to identify market capabilities. The team may also refine particular procurement objectives to leverage maturing technologies while balancing ricks associated with the breadth of vendors who can provide the materials or services desired. Meetings Additional information exchange with potential bidders is necessary to formulate a procurement strategy. By collaborating with potential bidders, the organization purchasing the material or service may benefit while the supplier can influence a mutually beneficial approach or product.

Definition of a Contract
Definition: “A mutually binding agreement that obligates the seller to provide the specified product or service or result and obligates the buyer to pay for it.” PMBoK® Guide, 5th Edition, Glossary

All parties are legally allowed to sign
What Makes a Contract? An offer is made An offer is accepted All parties are legally allowed to sign All parties receive “consideration” (Money, property, chicken, etc.) The contract covers a legal activity Objective for the slide. This is what makes a legal contract. If any one of these points are not met, then the contract is null and void.

Why Contracts? Avoid misunderstandings Define and agree upon
Deliverables / Specifications Delivery Schedule Payment Schedule Verify specifications are met Avoid changing key resources - Bait and Switch Get the best deal for your organization Contracts are to protect BOTH buyer and seller. Discuss your experiences related to this can stress: Situations with bait and switch (experience people come to the orals; inexperienced people show up on-site to work. Internal contracts – SLA’s

Fixed-Price Contracts
Plan Procurement Management Contract Types Fixed-Price Contracts Involves setting a fixed total price for a defined product or service to be provided. May also incorporate financial incentives for achieving or exceeding objectives. Firm Fixed Price Contracts (FFP): Most commonly used type of fixed price contract where the buyer pays the seller a set amount (as defined by the contract), regardless of the seller’s costs. Fixed Price Incentive Fee contracts (FPIF): Type of contract where the buyer pays the seller a set amount (as defined by the contract), and the seller can earn an additional amount if the seller meets defined performance criteria (usually achieving agreed upon metrics). Fixed Price with Economic Price Adjustment Contracts (FP-EPA): Type of contract used whenever the seller’s performance period spans a considerable period of years. It contains a special provision allowing adjustments to the contract price due to changed conditions, such as inflation, cost increases (or decreases) for specific commodities.

Cost-Reimbursable Contracts
Plan Procurement Management Contract Types (cont’d) Cost-Reimbursable Contracts Involves payment to the seller for the seller’s actual costs, plus a fee typically representing seller’s profit. Often these contracts include incentive clauses where if the seller meets or exceeds the selected objectives, then the seller receives from the buyer an incentive or bonus payment. Cost Plus fixed Fee Contracts (CPFF): Type of contract where the buyer reimburses the seller for the seller’s allowable costs plus a fixed amount of profit (fee) Cost Plus Incentive Fee Contracts (CPIF): Type of contract where the buyer reimburses the seller for the seller’s allowable costs and the seller earns its profit if it meets defined performance criteria Cost Plus Award Fee Contracts (CPAF): Type of contract where the seller is reimbursed for all legitimate costs, but the majority of the fee is earned based on the satisfaction of certain broad performance criteria which is defined in the contract. Fee is based on subjective determination of seller performance by the buyer and is generally not subject to appeals.

Time and Material Contracts
Plan Procurement Management Contract Types (cont’d) Time and Material Contracts Hybrid contractual arrangement containing aspects of both cost-reimbursable and fixed-price contracts. Resemble cost-reimbursable contract type agreements in that they are open ended. Resemble fixed-price contracts because unit rates can be preset by the buyer and seller when both parties agree on the rates for a specific resource category

Contract Type - Buyer’s Point of View
Pro’s Con’s FIXED-PRICE Most commonly used Reduce cost uncertainty Motivates seller to control costs Motivates seller to complete Statement of work and responsibilities must be clearly defined Higher costs for additional scope (extra’s) Seller may look for extras or consider items “out of scope” if losing money COST-REIMBURSABLE Allows forward movement when details are uncertain (typical for massive government design/build contracts) Typically lower cost then FP since seller does not need to compensate for as much risk More work to manage Higher risk (price is known and seller has a moderate incentive to control costs) TIME & MATERIALS No lengthy contractual issues Duration is usually brief Scope is not fully defined Hard to avoid front-end loading Contractor may stall; no incentive to control costs Needs careful monitoring and oversight for improper charges Spend time on this slide – test questions can come out of this and students need to understand that a type of contract has pro’s and con’s depending if you are the buyer or seller.

Contract Type – Seller’s Point of View
Pro’s Con’s FIXED-PRICE Work guaranteed Easier to claim extras for poorly defined work if statement of work is not clearly defined Highest risk Especially risky for a new products. COST-REIMBURSABLE No lengthy contractual issues Easier to add work to contract No cost risk No guarantee of work TIME & MATERIALS No guarantee of work or length of engagement Spend time on this slide – test questions can come out of this and students need to understand that a type of contract has pro’s and con’s depending if you are the buyer or seller. 22 22

12.1.3 Plan Procurement Management Outputs
Procurement Management Plan Describes how the procurement processes will be managed from developing procurement documentation through contract closure Procurement Statement of Work Developed from the project scope baseline and defines only that portion of the project scope that is to be included within the contract Describes the procurement item in enough detail to allow prospective sellers to determine if they can provide the product, service or results Procurement Documents Documents used to solicit proposals from prospective sellers such as: RFI: Request for Information IFB: Invitation for Bid RFP: Request for Proposal RFQ: Request for Quotation

12.1.3 Plan Procurement Management Outputs (cont’d)
Source Selection Criteria Criteria developed to rate or score seller(s) proposals such as: Understanding of need Cost Technical Capability Risk Approach (Technical, Staffing, Management) Warranty Financial Capacity Production Capacity Size of organization Past Performance References Intellectual Property and Proprietary Rights

12.1.3 Plan Procurement Management Outputs (cont’d)
Make-or-Buy decisions Documented conclusions reached regarding what products, services or results will be either acquired or will be developed by the project team. Change Requests Requested changes to the project management plans and subsidiary plans may result from the Plan Procurement process. Project Documents Updates Project documents that may be updated include, but are not limited to: Requirements Documentation Requirements Traceability Matrix Risk Register

Procurement Documents
Request for Information (RFI) Document where the buyer requests information related to product or service from various potential sellers. Often used in in preparation or combination with a RFP, IFB, or RFQ. Invitation for Bid (IFB) Equivalent to a request for proposal however the seller with the lowest bid is usually awarded the contract provided they meet the criteria in the bid. Request for Proposal (RFP) Invitation for sellers to submit proposals on a specific product or service via a bidding process. Provides structure to the procurement decisions and allows the risks and benefits to be identified upfront. Process is lengthier then others. Request for Quotation (RFQ) Document used to request price quotes from perspective sellers for a product or service. Sometimes used in place of a RFP. Often include detailed specifications of the product or services to ensure all sellers are bidding on the same thing. 26

Conduct Procurements Process Knowledge Area Project Management Process Groups Initiating Planning Executing Monitoring & Controlling Closing 12. Project Procurement Management 12.1 Plan Procurement Management 12.2 Conduct Procurements 12.3 Control Procurements 12.4 Close Procurements 27

12.2 Conduct Procurements Process
Definition: “The process of obtaining seller responses, selecting a seller, and awarding a contract.” PMBoK® Guide,5th Edition, p 371 PMBoK® Guide,5th Edition, p 371

Exercise #2 How and where do I find the best contractor for this piece of the project? How do I get the needs of the project and product across to the contractors? What would be your selection criteria for vendor selection? Does each item have the same weight?

12.2.1 Conduct Procurements Inputs
Procurement Management Plan A formal, approved document that defines how the project is executed, monitored, and controlled. Section Procurement Documents Documents used to solicit proposals from prospective sellers such as RFI, IFB, RFP, and RFQ. Section Source Selection Criteria Criteria developed to rate or score seller(s) proposals. Section Seller Proposals Prepared in response to a procurement document package form the basic set of information that will be used by evaluation body to select one or more successful bidders. Project Documents Items that will assist in selecting the appropriate supplier; may include the Risk Register or Project Scope Documents

12.2.1 Conduct Procurements Inputs (cont’d)
Make-or-Buy Decisions Documented conclusions reached regarding what products, services or results will be either acquired or will be developed by the project team. Section Procurement Statement of Work Provides suppliers with a clearly stated set of goals, requirements, and outcomes from which they can provide a quantifiable response. The statement of work is a critical component of the procurement process and can be modified as needed through this process until a final agreement is in place. The SOW may include, but is not limited to: Specifications, Quantities, Quality, Performance data, Period of performance, Work Location, etc. Section Organizational Process Assets May include lessons learned and historical information that can be used to assist in the Conduct Procurements process (list of prospective or previously qualified sellers, feedback on past seller experiences, etc.) Section

12.2.2 Conduct Procurements Tools and Techniques
Bidder Conferences Meetings with prospective sellers prior to preparation of a bid or proposal. Usually hosted by the buyer and provides an opportunity for the sellers to ask clarification or questions related to an RFP or RFQ. Proposal Evaluation Techniques Different techniques can be used to rate and score proposals, but all will use expert judgment and some form of evaluation criteria Independent Estimates Costs prepared by the buyer’s organization using non-biased factors or an outside firm to provide a benchmark value to evaluate received responses Expert Judgment Relies on prior experience for similar requirements to select sellers Advertising Existing lists of potential sellers can often be expanded by placing advertisements in general circulation publications Analytical Techniques Procurements should be defined in such a way that vendors can bring value through their offerings. Analytical techniques help organizations identify the readiness of a vendor to provide the desired end state, determine costs and avoid overruns due to changes. Procurement Negotiations Clarify the structure, requirements, and other terms of purchases to solidify a mutual agreement between the buyer and seller. These items need to be resolved prior to signing a contract.

Sample: Contract Items to Negotiate
Deliverables Schedule Period of Performance Pricing Payment Terms Warranty Penalties/Incentives Change Procedures Objective for the slide. This is what makes a legal contract. If any one of these points are not met, then the contract is null and void. 33

Sample: Contract Criteria
Who establishes the target date? Who approves the requirements? Who is allowed to change requirements? What is procedure for making changes? How closely is progress tracked? Are there any mandatory meetings? What are the milestones?

Sample: Contract Criteria (cont’d)
Who are the players? Vendors Internal Decision Makers Who’s time are you buying - “Key Person” Clause may be required (Make sure to have everything in writing!) 35 35

12.2.3 Conduct Procurements Outputs
Selected Sellers Sellers who have been judged to be in a competitive range based upon the outcome of the proposal or bid evaluation, and who have negotiated a draft contract, which will be the actual contract when an award is made Agreements Mutually binding legal agreement that obligates the buyer to pay the seller Resource Calendars The availability and pool of contracted resources with dates they can be called upon to use Change Requests Changes to the project management plan and its subsidiary plans and other components, such as the project schedule and procurement management plan, may result from the Select Sellers process Project Management Plan Updates Elements of the Project Management Plan that may be updated such as: cost, scope, schedule baselines, and procurement management plan Project Documents Updates Project documents that need to be updated such as: requirements document, risk register, and requirements traceability documents

Exercise #3: The Choice Potential Contractor #1
Company Started: 1982 2003 1999 Size: Large Small Medium Reputation: Good Not established Excellent On Time Performance: Unknown Cost: Expensive to very expensive Inexpensive Expensive Quality: Project Manager: Experienced PMP Often changed in the middle of the project 37 37

Control Procurements Process Knowledge Area Project Management Process Groups Initiating Planning Executing Monitoring & Controlling Closing 12. Project Procurement Management 12.1 Plan Procurement Management 12.2 Conduct Procurements 12.3 Control Procurements 12.4 Close Procurements 38

12.3 Control Procurements Definition: “The process of managing procurement relationships, monitoring contract performance, and making changes and corrections to contracts as appropriate.” PMBoK® Guide,5th Edition, p 379 PMBoK® Guide,5th Edition, p 379

12.3.1 Control Procurements Inputs
Project Management Plan A formal, approved document that defines how the project is executed, monitored, and controlled. Section Procurement Documents Supporting documentation including contract, Statement of Work, etc. Section Agreements Are mutually binding. Provide an understanding between parties, including an understanding of the duties of each party. Section Approved Change Requests Documents modifications to the terms and conditions of the contract (approved via integrated change control), including the contract statement of work, pricing, and description of the products, services, or results to be provided

12.3.1 Control Procurements Inputs (cont’d)
Work Performance Reports Documents provided within the terms of the contract such as Seller developed technical documents and performance reports. Section Status Report - “standing” of project at this moment Progress Report - how much has been accomplished to date Forecast Report - predicts future status relative to progress achieved Variance Report - comparison of actual project results to planned Trend Report - review of results relative to time to determine improving or deteriorating performance Earned Value Report - integration of scope, cost, and scheduling to assess project performance (PV, AC, EV, CV, SV, CPI, SPI) Work Performance Data Collected as part of Execution. Highlights the extent to which quality standards are met, cost incurred/committed, and invoicing. Section

12.3.2 Control Procurements Tools and Techniques
Contract Change Control System Defines the process by which the procurement can be modified Procurement Performance Reviews Structured review of the seller’s progress to deliver project scope and quality, within cost and on schedule, as compared to the contract Inspections and Audits Required by the buyer and supported by the seller as specified in the procurement contract, can be conducted during the execution of the project to verify compliance in the seller’s work processes or deliverables Performance Reporting Provides management with information about how effectively the seller is achieving the contractual objectives Payment Systems Includes certification of satisfactory work by an authorized person on the project team and the payments made in accordance with the terms of the contract

12.3.2 Control Procurements Tools and Techniques
Claims Administration Contested changes and constructive changes are those changes where the buyer and seller cannot agree on compensation for the change, or cannot agree that a change has occurred. If the parties themselves do not resolve the claim, it may be handled in accordance with the dispute resolution procedures established in the contract. Records Management System Specific set of documentation processes, related control functions, and automation tools that are consolidated and combined as part of the project management information system (Section )

12.3.2 Control Procurements Outputs
Work Performance Information Provides a basis for identification of current or potential problems to support later claims or new procurements. By reporting on the performance of the vendor, the organization increases knowledge of the performance of the procurement, which supports improved forecasting, risk management and decision making. Performance reports also assist in the event there is a dispute. Change Requests Includes direction provided by the buyer, or actions taken by the seller, that the other party considers a constructive change to the contract Submitted to address issues encountered during project execution Project Management Plan Updates Procurement management plan - updated to reflect any approved change requests that affect procurement management Scope, Schedule and Cost baselines - updated if there are any slippages that impact overall project performance

12.3.2 Control Procurements Outputs (cont’d)
Procurement Documentation The contract along with all supporting schedules Requested unapproved contract changes Approved change requests Any seller-developed technical documentation and other work performance information, such as: deliverables, seller performance reports, warranties, financial documents (invoices, payment records, results of contract-related inspections) Organizational Process Assets Updates Correspondence - Contract terms and conditions often require written documentation of certain aspects of buyer/seller communications, such as: warnings of unsatisfactory performance and requests for contract changes or clarification Payment schedules and requests Seller performance evaluation documentation - Documents the sellers ability to continue to perform work on the current contract, indicate if the seller can be allowed to perform work on future projects, or rate how well the seller is performing the project work

Close Procurements Process Knowledge Area Project Management Process Groups Initiating Planning Executing Monitoring & Controlling Closing 12. Project Procurement Management 12.1 Plan Procurement Management 12.2 Conduct Procurements 12.3 Control Procurements 12.4 Close Procurements 46

12.4 Close Procurements Process
Definition: “The process of completing each project procurement.” PMBoK® Guide,5th Edition, p 386 PMBoK® Guide,5th Edition, p 386

It’s not done until the paperwork is complete . . .
Exercise #4: It’s not done until the paperwork is complete . . . It is finally over. Some good things happened but of course, some not so good things happened. What information would you like to save about this aspect of the project?

12.4.1 Close Procurement Process Inputs
Project Management Plan A formal, approved document that defines how the project is executed, monitored, and controlled. Section Procurement Documents All procurement documentation is collected, indexed, and filed

12.4.2 Close Procurement Process Tools and Techniques
Procurement Audits A structured review of the procurement process, including supporting documentation (contract, statement of work, etc.), originating from the Plan Procurement Management process (Section 12.1) through Control Procurements (Section 12.3) Identifies successes and failures that may assist administration of current/future contracts Procurement Negotiations Final equitable settlement of all outstanding issues, claims and disputes by negotiation is a primary goal. When settlement cannot be achieved through direct negotiation, some form of ADR including mediation or arbitration may be explored. Litigation in courts is least desirable. Records Management System Specific set of documentation processes, related control functions, and automation tools that are consolidated and combined as part of the project management information system Section

12.4.3 Close Procurement Process Outputs
Closed Procurements The buyer, usually through its authorized procurement administrator, provides the seller with formal written notice that the contract has been completed Organizational Process Asset Updates Procurement file: A complete set of indexed contract documentation, including the closed contract, is prepared for the inclusion with the final project files Deliverable acceptance: The buyer, usually through its authorized procurement administrator, provides the seller with formal written notice that the deliverables have been accepted or rejected Lessons learned documentation: Lessons learned, what has been experienced, and process improvement recommendations are developed for the project file to improve future procurements

Summary and Helpful Hints

As you prepare, don’t be afraid to walk away
Know your BATNA (Best Alternative To a Negotiated Agreement) Use the Legal Department Be prepared to give direction Performance Clause Payment/Penalty Clause Contract Type Key Person Clause Are there Approved Vendors? Associated Procedures?

Key on Deliverables Specifications are detailed and clearly defined
Payment schedules are detailed and clearly defined

Contract Be careful what you say or do! Payment Requests vs. Payments
Verbal agreements Violating terms of an existing agreement Forfeiture of agreement rights Payment Requests vs. Payments

Project Manager Responsibilities
Require plans Project / Subproject Internal / Vendor Dates Deliverables Define the reporting structure Vendor and Project organization Progress metrics Performance metrics Create and implement status reporting Deflate any Us/Them relationships Correct deviations from the plan

Project /Contract Completion
Facilitate the transfer of knowledge Should be in original contract! Ensure proper closure Security Documentation Products Status of process Status of product Maintenance Agreement? Key person? Enhancement vs. fix Replacement vs. fix Response time

Good Luck!!

Confidentiality or Non-disclosure Agreement (NDA)
Contract Definitions Agent A person who is authorized to represent each party Assignment The transfer of rights held by one party—the assignor—to another party—the assignee. Authority The ability of an individual to make a legally binding contract on behalf of an organization Bonds A performance bond is a issued by an insurance company or a bank to guarantee satisfactory completion of a project by a contractor. Changes Clause The Changes clause allows the seller to propose changes to the work. This results in a more efficient contract performance. Moreover, the Changes clause permits the government to avoid the costs of new procurement. Confidentiality or Non-disclosure Agreement (NDA) The non-disclosure agreement (NDA), also known as a confidentiality agreement is a legal contract between two parties that defines the confidential materials, knowledge, or information that the parties wish to share with one another for certain purposes. Force Majeure A common clause which frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties takes place. The event is described by the legal term “act of God” and that prevents one or both parties from fulfilling their obligations under the contract.

Indemnification (Liability) Intellectual Property
Contract Definitions (cont’d) Incentives What benefits can the seller receive for aligning with the buyer’s objectives of time, cost, quality, risk and performance? Indemnification (Liability) Compensation clause for loss or damage Intellectual Property Clause within a contract that addresses ownership of intellectual property (patents, trademarks, copyrights, processes, source code, books) used in connection with or developed as part of the contract. Liquidated Damages Estimated damages whose amount the parties designate during the formation of the contract for the injured party to collect as compensation upon a specific breach (e.g., late performance). Term of Agreement Length of the contract ; parameters related to commencement through termination. Warranties A legal promises related to the quality of the goods or services delivered under contract, usually restricted to a time period. It often provides for a specific remedy such as repair or replacement in the event the good or service fails to meet the agreed upon specifications. A breach of warranty occurs when the promise is broken, i.e., a product is defective or not as should be expected by a reasonable buyer.

Contract Definitions (cont’d)
Payments Defines within the contract the parameters when payment will be made, addresses late fees and reasons for non-payment. Reporting Defines the types of reports that are required, timeframe, frequency and to whom they should be sent. Retainage An amount of money, usually 5 percent or 10 percent, withheld from each payment. This money is paid when all the final work is completed and helps ensure completion. Termination Clauses These clauses ensure that either or both parties have the right to terminate the contract under certain circumstances. Generally, termination clauses describe breach of contract events that trigger the right to terminate the contract. Waivers Statements saying the rights under the contract may not be waived or modified other than by express agreement of the parties. Arbitration Clause Clause that states that disputes arising under the contract must be settled through arbitration rather than through court litigation. Such clauses generally include the name of the organization that will conduct the arbitration, the city in which the arbitration will be held, and the method for selecting arbitrators.

Contract Definitions (cont’d)
Breach/Default A breach occurs when an obligation of a contract is not met. Watch out…a breach on the sellers part cannot be fixed by a breach on the buyers part, e.g. not completing an item in the contract statement of work (sellers breach) cannot be handled by the buyer by stopping ALL Payments (buyers breach). Material Breach A breach so large that it may not be possible to complete the work under contract

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