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Contracts EECE 295. Estimating. Estimating takes place at proposal time, and includes an estimate of: Time phased cost: Direct labor Direct material Overhead, G & A The sum of cost and G&A equals your cost through G&A The above defines your “breakeven point”

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estimating
Estimating
  • Estimating takes place at proposal time, and includes an estimate of:
    • Time phased cost:
      • Direct labor
      • Direct material
    • Overhead, G & A
    • The sum of cost and G&A equals your cost through G&A
  • The above defines your “breakeven point”
  • Please note that this is based on your cost estimate, not what you end up spending on a project
    • Actual cost can vary significantly from the estimate
contract negotiations
Contract Negotiations
  • A final iteration of contract cost and fee is accomplished at a negotiation after the contract award
  • The idea is to define the “cost” and the “fee” for the entire project
  • The “price” of the contract equals cost plus fee
  • There are a variety of incentives available based on the type of contract
      • Cost reimbursable
      • Fixed price
      • Time and Material
direct material and labor
Direct Material and Labor
  • The term “Direct” implies that both the labor hours expended and the material utilized is incorporated into the deliverable product
  • Direct Material and Labor do not include the cost of the contractor’s facilities, rent, utilities, etc.
    • Included in the “Overhead” that is applied to the cost of Direct Material and Labor
  • The cost of direct material and labor does include employee benefits, the cost of buyer labor to procure material, etc.
typical overhead items
Typical Overhead Items
  • Direct Labor would include:
    • Vacation pay
    • Sick pay
    • Insurance
    • FICA
  • Direct Material would include
    • Cost of shipping
    • Buyers to purchase the material and their overhead
how are overhead rates calculated
How are Overhead Rates Calculated?
  • An accounting methodology that conforms to the Federal Accounting Standards Board (FASB) for government contracts, and generally acceptable accounting practices for commercial companies
  • The approach may vary from Company to Company
  • Overhead does not include “Wheat Tax” or the cost of non-direct labor
    • Supervisors, department heads, executives, etc.
    • Also referred to as “Indirect” cost
  • Overhead does include the “Cost of Doing Business”
definition of a contract
Definition of a Contract
  • A “bilateral” agreement between two business entities to do something in the future for “Consideration”
    • Giving party is the “Customer” (or Buyer, or Client)
    • Receiving party is the “Contractor” (or Seller)
  • The contractor can subcontract work to other companies and individuals
    • However, the contractor is still responsible for contract performance
  • Governed by the Uniform Commercial Code
contractual relationships
Contractual Relationships
  • Interactions between business entities are based on Common Law
  • Ultimately, contracts are administered by the Federal and State Government if a dispute arises
    • Court of Claims
      • Settlement of Contract Disputes
    • Court of Patent Appeals
      • Settlement of Intellectual Property Disputes
consideration
Consideration
  • Consideration is provided to the contractor upon successful completion of the contract terms
  • Consider the following scenario:
    • Contractor builds a building, pays for all labor, subcontractors, and material suppliers
    • Contractor delivers the finished building with a perfect title.
    • Owner gives the contractor money as consideration
  • All contracts and changes to contracts have consideration
  • Consideration can take forms other than money, such as schedule relief, technical performance relief, etc.
requirements for the creation of a contract
Requirements for the Creation of a Contract
  • In order to establish a contract, a mutual understanding as to what each business entity will give and receive in return must be defined
    • Consideration, ie. cost and fee
    • Deliverable items and data
    • Technical performance of deliverables
    • Schedule
    • Tasks (work) to be performed
  • If you don’t have all of the above items defined, you do not have an executable contract
requirements for the creation of a contract cont d
Requirements for the Creation of a Contract (cont’d)
  • The contractor makes an offer to the customer (Proposal)
    • Can be a written or verbal offer, or an offer created by other acts of communication by responsible officers of the seller
      • Fax, email?
    • Contractor defines the period within which the proposal will be honored
      • Customer enters into negotiations by issuing a letter of acceptance
      • The offer must be revoked in writing if something happens that requires withdrawal of the offer prior to expiration
    • The offer defines all cost, schedule, and technical requirements
  • Factfinding then takes place with the customer team
  • Negotiations are then held to clarify items in the proposal, and to state the customer’s perception of the “should cost”
requirements for the creation of a contract cont d15
Requirements for the Creation of a Contract (cont’d)
  • The customer then counteroffers to the seller to converge differences in understanding
    • This can take multiple iterations
  • Customer then generates a “Best and Final Offer,” or BAFO
  • This is then either accepted by the performer (seller) or the seller “takes a hike”
  • If the offer is accepted, a contract is generated which incorporates all of the final changes, and everyone signs it
    • The signators must be able to legally obligate the business
    • Typically, signators would be officers of the company with a delegated signature authority greater than the value of the contract
      • This could be many $100 Million
requirements for the creation of a contract cont d16
Requirements for the Creation of a Contract (cont’d)
  • Upon everyone’s signature, the project starts
    • The seller is “under contract” to perform in accordance with the final negotiated document
contract changes
Contract Changes
  • Things happen during the course of the project that change either the amount of work ($$$$), or the schedule
  • A formal change process is incorporated into all contracts
    • Unilateral Change
      • Imposed by the Customer on the Contractor without concurrance
    • Constructive Change
      • Failure by the Customer to meet contractual requirement, ie. “Breach of Contract”
    • Bilateral Change
      • Mutually agreed to change between the Customer and Contractor
  • Unilateral and Constructive Changes generally result in a “Dispute”
disputes and breaches
Disputes and Breaches
  • Unilateral changes are typically not acceptable to Contractor
    • Consideration is insufficient
      • Need more money to do the additional work
    • Impossible to perform to changed schedule, performance, etc.
  • Breach of contract occurs when the Customer or Contractor fail to meet the requirements of the contract
    • Failure to provide Customer Furnished Equipment, Facilities, etc.
dispute resolution
Dispute Resolution
  • Negotiations are required by all parties to resolve dispute
  • Contract letters and supporting documentation are very important in order to document the situation and position of both parties
    • Getting ready to go to trial
    • Lawyers get involved
    • Generally very unproductive and expensive
    • Not worth the effort for less than $10K on a large job
  • Disputes must eventually adjudicated by the Court of Claims, which requires a legal trial
termination
Termination
  • Contract Termination is possible under certain pre-negotiated conditions
    • “Termination for Convenience of the Government”
  • Termination is also possible for failure to meet Contract requirements
    • Cost, Schedule, or Technical Performance
    • Termination for “Cause”
    • Termination for Default
  • Termination clauses are always included as a part of the original Contract
termination cont d
Termination (cont’d)
  • Termination for cause allows the customer to re-procure the item at the expense of the original contractor!
    • This is extremely serious and can bankrupt a company
  • Termination for convenience requires a “Termination Proposal,” which is then negotiated like a new contract
    • Material purchased is packaged and turned over to the customer
    • Subcontracts must also be terminated
    • Costs associated with early termination of employees are included
      • Layoff notification, etc.
contract concepts
Contract Concepts
  • Different contract types are available
  • The contract type selected must be based upon a mutual understanding of the risk of success of the project
    • If the customer is incorrect with regard to their perception of risk, than there should be no bidders on the contract
    • Success is defined as the achievement of all contract objectives Cost, Schedule, Performance
    • Improper utilization of a contract type can, and does frequently result in project failure
  • All contracts provide a concept of “Profit” or “Fee”
    • Related to consideration
    • Generally, the fee equals funds left over at contract completion, and after closeout
contract concepts cont d
Contract Concepts (cont’d)
  • Residual materials or equipment are not included in the final profit
    • Sold as surplus and credited to overhead
    • Delivered to Customer
  • Profit percentage varies with the type of contract, ie. cost reimbursable or fixed price

The residual funds can be negative!!

types of contracts
Types of Contracts
  • Fixed Price
  • Cost Reimburseable
  • Time and Material
fixed price contracts
Fixed Price Contracts
  • Highest risk to Seller. Used for low risk procurements.
  • Three Types
    • Fixed Fee (FFP)
    • Incentive Fee (FPIF)
    • Fixed Price with Redertimination (FPR)
firm fixed price contracts ffp
Firm Fixed Price Contracts (FFP)
  • Fixed profit, no ceiling price
  • Exceptions
    • Constructive Changes
    • Unilateral Changes
  • Definition of “Change” subject to interpretation
    • Generally used as negotiating tool
    • Customer has upper hand by withholding of funds
  • Can overrun! Can also have costs disallowed.
fixed price incentive fee fpif
Fixed Price Incentive Fee (FPIF)
  • Lower Risk to Seller, fee determined by targets
  • Ceiling Price
  • Cost/Profit Sharing
    • Incentive Curve
      • 30/70 Share for Underrunns
      • 70/30 Share for Overruns
  • Still subject to Changes Clause
  • Can receive minimal or no profit and overrun!
  • Customer can also disallow costs.
fixed price with redetermination fpr
Fixed Price with Redetermination (FPR)
  • Two types: Prospective and Retroactive
  • Prospective FPR negotiates prices to be paid in a prospective period
    • Similar to two FFP arrangements negotiated at stated times during contract performance period
  • Retroactive FPR provides for adjusting price after performance
    • Essentially like FPIF
  • Maximizes Project Managers attention on happines of Customer
cost reimbursable contracts
Cost Reimbursable Contracts
  • Lower Risk to Seller than Fixed Price Contracts
  • Used for higher risk procurements
    • Uncertainty of performance goals, etc.
  • Three Types
    • Fixed Fee (CPFF)
    • Incentive Fee (CPIF)
    • Award Fee (CPAF)
cost plus fixed fee cpff
Cost Plus Fixed Fee (CPFF)
  • Fixed profit, no renegotiation of contract allowed
  • No ceiling price
  • Exceptions
    • Constructive Changes
    • Unilateral Changes
  • Definition of “Change” subject to interpretation
    • Generally used as negotiating tool
    • Customer has upper hand by withholding of funds
  • All “Costs” are paid
    • Subject to interpretation as to “Allowable” cost
cost plus fixed fee cont d
Cost Plus Fixed Fee (cont’d)
  • If project overruns at cost, no increase in fee (lower profit margin)
  • If project underruns at cost, higher profit margin achieved
  • Can overrun, but will always make a profit
cost plus incentive fee cpif
Cost Plus Incentive Fee (CPIF)
  • Lower Risk to Seller
  • Established Targets (Cost, Schedule, Performance)
  • Cost/Profit Sharing
    • Incentive Curve
      • 30/70 Share for Underrunns
      • 70/30 Share for Overruns
  • Still subject to Changes Clause
  • Can overrun and still make a profit subject to the Incentive Curve
cost plus award fee cpaf
Cost Plus Award Fee (CPAF)
  • Fee determined by Customer via award criteria
    • No rules regarding Award Criteria
  • Typical targets established
    • “Responsiveness to Customer”
    • Cost/Schedule Controls, etc.
  • Completely dependent on “Grade” of Customer.
  • Can receive $0 profit, but will always be reimbursed for costs
  • Maximizes Project Manager’s attention on happiness of Customer
time and material contracts
Time and Material Contracts
  • Lowest risk to Seller. Generally used for studies with indeterminate outcome, or support, operational or maintenance contracts.
  • Not to Exceed Contract for labor and material
  • Task orders from Customer are negotiated with Seller
    • Defines effort for small tasks
    • Minimizes any cost uncertainty
cost fee examples
Cost/Fee Examples
  • FFP
  • FPIF
  • CPFF
  • CPIF

Note: In the following slides, the “price” to the customer

equals the sum of the profit and cost.

elements of a contract
Elements of a Contract
  • Contract Form
  • Schedule
  • Statement of Work (SOW)
    • Deliverables
    • Contract Data Requirements
    • Contract Data Requirements List
    • Specifications
contract form
Contract Form
  • Document which provides all “contractual” details
    • Type of Contract
    • Total Cost
    • Deliverables/Services and Prices
    • Packaging and Marking
    • Inspection and Acceptance
    • Contract Clauses and Administration Data
    • List of Documents, Exhibits
    • Representations and Certifications
contract form cont d
Contract Form (cont’d)
  • Technically, Schedule and SOW are part of Contract
    • Generally referenced in body of Contract Form
  • No Schedule or Technical Information. Cost only!
schedule
Schedule
  • Time phased tasks and deliverables which are detailed in SOW, Supplies List, and CDRL
  • Generally identical to the proposed schedule, with modifications resulting from negotiations
  • No Cost or Technical Information. Schedule only!
statement of work
Statement of Work
  • Details all tasks and activities to be accomplished on Contract
  • References the following documents
    • Contract Data Requirements
    • Contract Data Requirements List (CDRL)
    • Deliverable Items
    • Specifications
  • Defines all design activities, documentation, etc.
  • No Cost or Schedule Information. Technical Only!
other topics of interest
Other Topics of Interest
  • Government Acquisition Regulations
    • DARS/FARS
  • Government Contracting vs. Commercial Contracting
  • Estimating/Scheduling Methodology
  • Work Planning
  • Specification Development and System Engineering
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