CS-411W VII – Resource Planning and Allocation – Contracts and Subcontracts

Definitions Contract - a legally binding exchange of promises or agreement between parties that the law will enforcelegally Subcontract - a contract to perform part or all of the obligations of another's contract.contract

Definitions (Continued) A Sales Contract is a contract between a Seller and a Customer. –The Seller promises to sell products and/or services – The customer in return is agrees (is obligated) to pay for the product/services bought. A Purchasing Contract is a contract between a Buyer and a Supplier. –The Buyer promises to procure products of services for an agreed set of terms (price, delivery time, payment terms) –The Seller promises to sell products and/or services and is obligated to hold to the agreed terms

Contract – Why Important Legal binding document - between parties Identifies critical requirements List potential or known resources Establishes costs - contract fee Describes deliverables Establishes milestones - deliverable dates Describes potential methods of performance

Contract – Concepts Principle based on the Latin phrase pacta sunt servanda (literally, promises must be kept) important feature of a contract is that one party makes an offer for a bargain that another accepts Can be written (buying a house) or oral (ordering lunch) – both equally binding – value of transaction typically dictates when written form is necessity (any contract for sale of goods for $500 or more must be in written form in the USA) Written form is binding in terms once signed – regardless of whether is was read or understood by all parties (as long as the agreement is legal)

Contract – Common Terms Terms and Conditions: The collection of Clauses which, together, establish the basis and details of a contractual agreement Venue - Establishes the Governing Law under which contract disputes will be resolved Effectivity – the conditions dictating when or how the contract will come into effect (date, action/milestone, etc.) Validity - contract is invalid and void if it is based on an illegal purpose or contrary to public policy

Contract – Common Terms Breach of contract - a legal concept in which a binding agreement not honored by one or more of the parties to the contract –by failure to perform or –by failure to comply with the Terms and Conditions of the contract. Liquidated Damages – defined by the contract as the agreed schedule of compensation to be paid by one party if the other party should breach the contract

Contract – Common Terms Force majeure (French for "greater force") –A common clause in contracts which essentially frees one or both parties from liability or obligation –Invoked due to extraordinary events or circumstances beyond the control of the parties, such as war, strike, riot, crime, act of God (e.g., flood, earthquake, volcano) –The occurrence of the event prevents one or both parties from fulfilling their obligations under the contract.

Types of Contracts Fixed Price - you are paid a fixed amount to perform – no matter what it may actually cost you (higher risk, higher profit potential) –Fixed price: $1,000,000 –Total Paid to Seller: $1,000,000 Fixed Price with incentives - better-than-expected performance (higher quality, faster delivery) is rewarded with additional profit ($$) –Fixed Price: $1,000,000 –Incentive Fee: 10% –Maximum Paid to Seller: $1,100,000

Types of Contracts Cost Plus fixed fee – all of your costs are reimbursed plus a fixed profit (little risk of loss, smaller profit percentage) –Budgeted costs: $1,000,000 –Budgeted Profit (10%): $100,000 –Actual Costs: $1,500,000 –Actual Profit: $100,000 (6.7%) Cost Plus fixed fee with incentives – more profit possible for better-than-expected performance –Same as above with Incentive fee: $10,000 –Maximum Profit: $110,000

Types of Contracts Time and Materials – Fixed amount is paid for individual quantities of time (labor) and materials – risk is in keeping labor and material costs within fixed bounds. Saving labor/materials costs yields more profit –Budgeted labor (with 10% profit): 10 $22/hour = $220 –Budgeted material (with 10% profit): $220 –Budgeted total profit: $40 –Contract value: $400 –Actual Labor Cost at completion: 10 = $180 –Actual Material Cost: $125 –Total Cost: $305 –Labor Costs reimbursed: 10 $22/hour = $220 –Materials reimbursed (with 10% profit): $ –Total paid to seller: $ –Total profit: $52.50 Labor: $40 Material: $12.50

Types of Contracts Cost Plus fixed fee – all of your costs are reimbursed plus a fixed profit (little risk of loss, smaller profit percentage) Cost Plus fixed fee with incentives – more profit possible for better-than-expected performance

External Resources (Subcontractors) Why Use Subcontractors: –Lack of internal capability (subcontractor required for unique expertise) –Time limitations (availability of internal resources insufficient to meet schedule) –Cost limitations (sometimes using subcontractors can save cost of internal training or skills development) –Better solution available via some outside resources (no need to “reinvent”)

Subcontract Example Prime Contractor (Buyer): XYZ Corporation Subcontractor (Seller): Greenwich Limited Product/capability: Bubble Detector and Popping Processor