1. Contracts and Procurement
Project Management
Contracts and Procurement

2. Outline Introduction Procurement Requirement Cycle Requisition Cycle
Solicitation Cycle
Award Cycle

3. Outline Types of Contracts Incentive Contracts
Contract Type versus Risk
Contract Administration Cycle
Using a Checklist
Proposal-Contractual Interaction

4. Procurement 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

5. Procurement 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.

6. Procurement 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

7. Requirement 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

8. 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:

9. Types 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.

10. 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.

11. The 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

12. The 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

13. Requisition Cycle
Evaluating/confirming specifications (are they current?)
Confirming sources
Reviewing past performance of sources
Producing solicitation package

14. Solicitation 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

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

16. Negotiation Processes
Request for information (RFI)
Request for quotation (RFQ)
Request for proposal (RFP)

17. Negotiation Factors
Compromise ability
Adaptability
Good faith

18. Negotiation 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

19. Negotiation Objective-Setting
Buyer
Min
Objective
Max
Seller
Min
Objective
Max
Price

20. Award 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.

21. Contracting Elements Mutual agreement Consideration
Contract capability
Legal purpose
Form provided by law

22. Contract Forms
Completion contract
Term contract

23. Contract 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)

24. 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?)

25. Contractor’s Risks FFP CPFF HIGH LOW Risk On Contractor LEGEND
FFP FIRM FIXED PRICE
CPFF COST PLUS FIXED FEE

26. Firm-Fixed-Price Contract (FFP)
Maximum risk with contractor
Higher negotiated profit margins
High likelihood of scope changes
100 %
RISK SHARING METER
0 %
RISK
CONTRACTOR’S
CUSTOMER’S
RISK
RISK
LOCATION
0 %
100 %

27. Firm-Fixed-Price With Economic Price Adjustments (FPE)
Adjustments for escalation factors
Adjustments for inflation
Negotiated adjustment cycle
100 %
RISK SHARING METER
0 %
RISK
CONTRACTOR’S
CUSTOMER’S
RISK
RISK
LOCATION
0 %
100 %

28. Incentive Contracts Additional profits are possible by lowering cost
Customer and contractor share cost savings

29. Principles of Incentive Contracts
CUSTOMER PAYS 80 % OF OVERRUN
CONTRACTOR PAY 20 % OF OVERRUN
PROFIT IS $1500 LESS
EXAMPLE
CONTRACTOR’S 20 %
TARGET COST: $20,000
TARGET FEE: $1500
CUSTOMER KEEPS 80 % OF OVERRUN
CONTRACTOR KEEPS 20 % OF OVERRUN
PROFIT IS $1500 PLUS
SHARING RATIO: 80/20 %
CONTRACTOR’S 20 %
NOTE: LIMITATIONS MAY BE IMPOSED ON PRICE OR PROFIT

30. Fixed-Price-Incentive-Fee Contract (FPIF)
Contractor can earn additional profits
Contract has a ceiling on price (or cost) paid
Price (or cost) ceiling at point of total assumption
100 %
RISK SHARING METER
0 %
RISK
CONTRACTOR’S
CUSTOMER’S
RISK
RISK
LOCATION
0 %
100 %

31. Cost-Plus-Incentive-Fee Contract (CPIF)
Contractor can earn additional profits
All costs are reimbursed (cost run-ups)
A “floor” and “ceiling” exists on profits
100 %
RISK SHARING METER
0 %
RISK
CONTRACTOR’S
CUSTOMER’S
RISK
RISK
LOCATION
0 %
100 %

32. Cost-Plus-Award-Fee Contract (CPAF)
All costs are reimbursed (cost run-ups)
Negotiated range of possible profits
Customer determines profit paid at completion
100 %
RISK SHARING METER
0 %
RISK
CONTRACTOR’S
CUSTOMER’S
RISK
RISK
LOCATION
0 %
100 %

33. Cost-Plus-Fixed-Fee Contract (CPFF)
All costs are reimbursed (cost run-ups)
Fee is fixed (in $$$ not %) irrespective of costs
Contractor is motivated for early completion
100 %
RISK SHARING METER
0 %
RISK
CONTRACTOR’S
CUSTOMER’S
RISK
RISK
LOCATION
0 %
100 %

34. Cost-Sharing Contract (CS)
No profits allowed
Customer and contractor share costs
Contractor may retain control of
100 %
RISK SHARING METER
0 %
RISK
CONTRACTOR’S
CUSTOMER’S
RISK
RISK
LOCATION
0 %
100 %

35. Cost Contract (C) 100 % 0 % 0 % 100 % No profits allowed
Contractor is usually a non-profit organization
Limitations on costs allowed may be imposed
100 %
RISK SHARING METER
0 %
RISK
CONTRACTOR’S
CUSTOMER’S
RISK
RISK
LOCATION
0 %
100 %

36. Cost-Plus-Percentage-Of-Cost Contract (CPPC)
Costs incurred may be unlimited
Contractors can maximize profits
Scope changes may be frequent and unlimited
100 %
RISK SHARING METER
0 %
RISK
CONTRACTOR’S
CUSTOMER’S
RISK
RISK
LOCATION
0 %
100 %

37. Relative Contract Risk
RISK SHARING METER
0 %
100 %
FFP
FFE
RISK
RISK
FPIF
CUSTOMER’S
CONTRACTOR’S
CPIF
CPAF
CPPC
CPFF
RISK
LOCATION CS C
0 %
100 %

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

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

40. Contract Administration Cycle (Continued)
Resolution of disputes
Project termination
Payment schedules
Project closeout

41. Order of Precedence Specifications (first priority)
Other instructions (second priority)
Other documents, such as exhibits, attachments, appendices, SOW, contract date requirements list [CDRL], etc. (third priority)
Contract clauses (fourth priority)
The schedule (fifth priority)

42. Type of Changes Administrative change Change order
Contract modification
Undefinitized contractual action
Supplemental agreement
Constructive change

43. Causes 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

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

45. Reasons 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

46. 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.

47. Contract Administration Rights
Reject the entire shipment
Accept the entire shipment (barring latent defects)
Accept part of the shipment