Project Management

1. 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 HIGH LOW FFP CPFF 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 RISK SHARING METER 100 % 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 RISK SHARING METER 100 % 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 RISK SHARING METER 100 % 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 RISK SHARING METER 100 % 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 RISK SHARING METER 100 % 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 RISK SHARING METER 100 % 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 RISK SHARING METER 100 % 0 % RISK CONTRACTOR’S CUSTOMER’S RISK RISK LOCATION 0 % 100 %

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

38. 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