Contract Issues in Project Management

1. Contract Issues in Project Management Kathy Daniels Project Management for ARA Engineers and Scientists

2. Desired Learning Objectives • Understand the different considerations for commercial and government customers • Understand the different attributes (and cautions) of T&M, CPFF, CPAF and Fixed Price contracts • Be able to know what to look for in a contract and what to avoid • Know what it takes to work at risk and what it means • Understand authority on both sides of the contract

3. Overview • Customers and Contracts – the good, the bad, the ugly • Types of contracts and their implications • What to look for in a contract and what to avoid • Working at risk and what it means • Authority on both sides of the contract • Ethics and standards of conduct reminder • How to get help

4. Commercial Customers • Do we know the customer and ability to pay? • Financial Risk Assessment Procedure • We can check DBS or customer’s bank • Commercial contracts generally are fixed price… • However, read the fine print • Payment, when, by whom, based on what? • What are the deliverables? • Who accepts work and approves payment? • Are there intellectual property or liability issues? • In some ways, riskier than government business

5. Government Customers • Must understand roles and authorities of customers • Procuring Contracting Officer (PCO) can negotiate and sign contract, approve changes and issue mods, terminate contract • Administrative Contracting Officer (ACO) administers contract, ensures delivery, oversees contract closeout • Contract Auditor (DCAA) audits cost, payments, rates • Technical Representative (COR, COTR, CTM) is performance monitor, cannot make changes or authorize new work • A contract must be signed before we start work • Contracts range from simple to very complex based on risk of completion and dollar value

7. Contract Type Refresher • CPFF – Cost Plus Fixed Fee • CPAF – Cost Plus Award Fee • T&M – Time and Materials • FFP – Firm Fixed Price • Type used depends on relative buyer-seller risk and other considerations

8. Cost Plus Fixed Fee -- CPFF • R&D with high technical risk • Buyer reimburses actual costs • Contract modification required to exceed not-to-exceed price • ARA policy to avoid cost overrun • Negotiated fixed fee amount paid • Cost-plus-percent-of-cost illegal • Must report costs incurred and notify Buyer before 75 percent point of completion

9. Cost Plus Award Fee -- CPAF • R&D with high technical risk • Buyer reimburses actual costs (like CPFF) • Maximum award fee percent specified in contract (may be base and variable portions) • Evaluation criteria spelled out in contract fee plan • Customer determines fee percent earned usually every six months • Fee determination cannot be disputed

10. Time and Materials – T&M • Cost ceiling on labor, other direct costs (ODCs) or both • Labor is reimbursed at fixed hourly rates • Includes DL, OH, GA, Fee • Quantity of hours estimated – can change • Materials, travel, ODCs reimbursed at actual cost plus negotiated – not actual – burden (e.g. 13% G&A or 4% materials burden) if authorized in contract • No fee on these non-labor costs

11. T&M Cautions • Limited to people/rates listed in contract • May not be able to use a new person • No changes allowed for pay raises • Consider use of average vs. individual rates • Can only bill labor unless ODCs specifically listed • Earned fee reduced by high materials or ODC ratio • Billed at negotiated vs. actual rates • Post Audit often reduced payments • Prefer CPFF or FFP as alternative

12. Firm Fixed Price – FFP • Buyer pays specified price for job • No adjustment based on actual cost • Seller (ARA) bears all risk (performance and cost) • Warrants a higher profit percentage • Profit is remaining residual when costs are paid (plus or minus) • Try to reserve for well defined task or requirement • The “norm” in commercial contracting

13. Profit or Fee • Depends on: • Contract type and relative risks • Amount of competition • Government or commercial • Not restricted to government rates on commercial jobs • General rules • Cost Reimbursable – propose 10 percent • Fixed Price – propose 15 percent – more on commercial jobs • Will almost always be reduced in the final negotiations • Profit is not a dirty word • It’s how we stay in business and grow

14. What to Look for in a Contract • Subcontracts awarded to ARA by Government prime contractors often attempt to pass liabilities or impose conditions unfavorable to ARA • Indemnification clauses that shield prime • Clauses that give IP ownership to prime • Clauses that prevent access to customer • Unreasonable review and approval requirements • Pay-when-paid clause • Refusal to recognize all costs (e.g. computer use)

15. What to Look for in a Contract • Government contracts • Understand what is to be delivered and when (SOW, CDRLs, other contract clauses) • Contract value, funding, options are different • Limitation of cost/funds notices are important • Understand payment provisions • Protect ARA intellectual property – assert rights otherwise government has unlimited rights • Adhere to security provisions, clauses requiring approval of public releases, Government Property requirements • If contract is greater than $550K, Small Business subcontracting plan and reporting required

16. Working at Risk – What Does it Mean? • Working at Risk includes: • Commencing work prior to contract award • Continuing work prior to receipt of fund increment • Continuing work beyond contract end date • Sector Manager must approve working at risk • PI sends request in writing documenting circumstances in advance of the need date • The SM approval will be included in the project file with copy provided to COO

17. Working at Risk – What Does it Mean? • To commence work pending contract award • Written authorization of the customer (pre-contract cost letter, letter contract or notice to proceed signed by authorized official). Authorization must state effective date and dollar ceiling pending award. Equivalent documents if commercial. • To continue work pending contract modification, adding funding or extending end date • Document the funding status or the request for time extension including customer response in request to the SM • PI insures timely notification has been given under Limitation of Funds clause to include estimate to complete contract

18. ARA Proposal Signature Authority • Division Manager (if corporate officer) • Sector Manager • Vice President, Contracts • Executive Vice President, CFO, CEO • Urgent – any ARA Vice President • Provide copy to corporate if signed elsewhere

19. ARA Contract Signature Authority • Vice President, Contracts (routine) • Executive Vice President, President, CEO • Urgent – any ARA Vice President • Provide copy to corporate if signed elsewhere

20. Ethics and Standards of Conduct • BOD policy statement updated on Feb. 10, 2009 • Frank, open and ethical dealings • Corporate and individual acceptance of responsibility • Ethics – behavior based on right conduct • Managers create supportive work environment • Demonstrate ethical behavior day to day • Train staff and deal with issues forthrightly • Report breaches and forbid retaliation • Federal requirements for Disclosure and Training

21. Ethics and Standards of Conduct • Specific Requirements: • Integrity in accounting and contracts • Full, accurate, timely disclosure • Avoidance of conflicts of interest • Avoid acceptance or giving of gratuities • Maintain confidentiality of information • Safeguard physical and intellectual property of ARA and its clients • Further details in Policy Guide #11 and #12

22. Where to Find Help • Spend time perusing the ARA Intranet • http://intranet.ara.com/cont_purch • Forms and Formats • Policies and Procedures • Information to Prepare Proposals http://intranet.ara.com/marketing/proposalsupport.html • Call (505) 881-8074 or contact the key person as identified on the corporate responsibilities list • Contracts, subcontracts, purchasing, P-Cards, government property, small business program, project set-up and administration, proposals • Ethics and Standards of Conduct guidance

23. Phases of Project Management • Elation • Disenchantment • Confusion • Search for the Guilty • Reprimand for the Innocent • Distinction for the Uninvolved