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Relationship of Contract Type to Financial Management. Breakout Session # 704 John E. McCormick, Counsel, Federal Contracts Electronic Data Systems, Corporation Date April 26, 2004 Time 4:30 PM – 5:30 PM. Contract Types. Fixed Price Firm Fixed Price

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NCMA World Congress 2004

“Maximizing Value to Stakeholders…Contract Management in the Business World”

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Relationship of Contract Type to Financial Management

Breakout Session # 704

John E. McCormick, Counsel, Federal Contracts

Electronic Data Systems, Corporation

Date April 26, 2004

Time 4:30 PM – 5:30 PM

NCMA World Congress 2004

“Maximizing Value to Stakeholders…Contract Management in the Business World”

contract types
Contract Types
  • Fixed Price
    • Firm Fixed Price
    • Fixed Price w/economic price adjustment
    • Firm-Fixed-Price-Level-of-Effort-Term
    • Fixed Price Redeterminable (prospective/retrospective)
    • Fixed Price Incentive (firm target)
    • Fixed Price Incentive (successive targets)
    • Fixed Price Award Fee

NCMA World Congress 2004

“Maximizing Value to Stakeholders…Contract Management in the Business World”

contract types1
CONTRACT TYPES
  • COST REIMBURSEMENT
    • Cost
    • Cost Sharing
    • Cost Plus Incentive Fee
    • Cost Plus Award Fee
    • Cost Plus Fixed Fee (completion v. term)
  • OTHERS
    • Labor-Hour
    • Time and Materials
    • Letter

NCMA World Congress 2004

“Maximizing Value to Stakeholders…Contract Management in the Business World”

contract types2
CONTRACT TYPES
  • BASIC MONOLITHIC (traditional)
    • (old fashion??)
  • INDEFINITE DELIVERY
    • Definite Quantity
    • Requirements
    • Indefinite Quantity
  • MULTIPLE AWARD

NCMA World Congress 2004

“Maximizing Value to Stakeholders…Contract Management in the Business World”

agreements
AGREEMENTS
  • BASIC AGREEMENTS
  • BASIC ORDERING AGREEMENTS

NCMA World Congress 2004

“Maximizing Value to Stakeholders…Contract Management in the Business World”

selection of contract type principal factors
Selection of Contract Type(principal factors)
  • Financial arrangement should be driven largely by risk and risk avoidance inherent in the contractor’s performance or experience with similar acquisitions.
  • Ordering and execution driven by anticipated government requirements and/or funding
  • Some examples
    • Software application development or conversion
    • Hardware acquisition, integration, and deployment
    • Facility construction
    • Omnibus contracts
    • Combination contracts

NCMA World Congress 2004

“Maximizing Value to Stakeholders…Contract Management in the Business World”

fixed price type considerations
Fixed Price Type Considerations
  • Payment is not generally driven by contractor’s cost experience
  • Invoicing is based on delivery and acceptance of product or service
  • Risk and responsibility for cost and profit is held by contractor
  • Contractor has maximum incentive to control Costs (profit motive)
  • Contractor has greatest financial risk or reward
  • Bears lowest administrative burden (for example, reporting)

NCMA World Congress 2004

“Maximizing Value to Stakeholders…Contract Management in the Business World”

fixed price type considerations1
Fixed Price Type Considerations
  • Specifications of statement of work (SOW) are very detailed and fit within the contract’s scope of work
  • Thorough understanding of requirements is imperative
  • “Scope Creep” is dangerous
  • Government customers may not understand the nature of risks
  • Duty is to provide specific deliverable or service not effort (except for LOE types)

NCMA World Congress 2004

“Maximizing Value to Stakeholders…Contract Management in the Business World”

time and materials type considerations
Time and Materials Type Considerations
  • Payments driven by work effort (hours x rate)
  • Invoicing conducted at regular intervals (for example, monthly)
  • Financial risk confined to unit costs of direct labor, indirect expenses, and profit (fixed price per unit of time)
  • Materials and other direct costs do not generate profit (quasi-cost reimbursement)

NCMA World Congress 2004

“Maximizing Value to Stakeholders…Contract Management in the Business World”

time and materials type considerations1
Time and Materials Type Considerations
  • Specifications of statement of work may be general
  • Must provide and account for the specific labor categories
  • Funded on a not to exceed (NTE) basis
  • Duty to provide direct labor, not specific deliverable

NCMA World Congress 2004

“Maximizing Value to Stakeholders…Contract Management in the Business World”

cost reimbursement type considerations
Cost Reimbursement Type Considerations
  • Payments driven by cost experience (allowable costs)
  • Invoicing done on regular intervals (for example, monthly)
  • Financial risks limited to FEE (most government customers incorrectly equate this with profit)
  • Bears heavy administrative burden (for example, reporting)

NCMA World Congress 2004

“Maximizing Value to Stakeholders…Contract Management in the Business World”

cost reimbursement type considerations1
Cost Reimbursement Type Considerations
  • Funded on a limitation of costs basis
  • “Labor mix” and type may vary from bid (but contract specific requirements may restrict this)
  • Other Direct Costs (ODCs) may include materials and bear fee
  • Duty to provide effort in accordance with the specific statement of work (Scope Creep is insidious)

NCMA World Congress 2004

“Maximizing Value to Stakeholders…Contract Management in the Business World”

profit versus fee
Profit Versus Fee
  • Profit is the amount left after collecting revenue and paying all expenses (allowable and unallowable). Theoretically there is no limit on the percentage or amount of profit under a fixed price contract.
  • Fee is the amount negotiated in excess of allowable costs. It is not a percentage. (Costs plus percentage of costs contracts are illegal.)
  • Not all costs are allowable.
    • Contingent marketing consultant fees (illegal)
    • Employee related (for example, spouse perks)
    • Contract specific items (for example, G&A on travel)

NCMA World Congress 2004

“Maximizing Value to Stakeholders…Contract Management in the Business World”

risk management
Risk Management
  • Lack of adequate statement of work definition
  • Warranties and guarantees
  • Vagueness or flexibility in schedule
  • Scarcity of human resources
  • Undefined or vague acceptance criteria
  • Limitations or caps on indirect rates
  • Inexperienced customer
  • Customer versus use confusion (CO, COR, COTR, User, and so forth)

NCMA World Congress 2004

“Maximizing Value to Stakeholders…Contract Management in the Business World”

risk mitigation
Risk Mitigation
  • Careful proposal preparation
  • Well-developed project plan
  • Sensitivity to “scope creep”
  • Early and Frequent customer “buy-in”
  • Understanding of what is “required” by the contract
  • Don’t plan on passing any miracles

NCMA World Congress 2004

“Maximizing Value to Stakeholders…Contract Management in the Business World”

revenue and profitability issues
Revenue and Profitability Issues
  • Unlike the fixed price enviornment, in the “cost reimbursement” world there is no revenue or profit without expense.

For example, in the normal fixed price performance, successfully compressing the schedule will mean realizing the same revenue but with lower expenses (labor, facilities, and ODCs, thereby increasing profit. In the cost reimbursement environment, compressing the schedule generally means lower expenses and therefore lower revenue (the amount of profit may be unchanged but could conceivably be lowered.)

NCMA World Congress 2004

“Maximizing Value to Stakeholders…Contract Management in the Business World”

revenue and profitability issues continued
Revenue and Profitability Issues (continued)
  • Some considerations
    • Maximize direct labor charging to the DO, strive for the 100 percent billable time
    • Manage VAHOLS to avoid negative impact on revenue
    • Backup staff when possible
    • Carefully cost proposals to include all allowable costs (for example, subcontractor management)
    • Closely manage performance to statement of work
    • Remember that the DO has limitations on the period of performance, work allowed, and money

NCMA World Congress 2004

“Maximizing Value to Stakeholders…Contract Management in the Business World”