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
• Contractors responsibility (and risk)

24
Contract Selection Criteria (Continued)

• Contractors 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
Contractors 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
CONTRACTORS
CUSTOMERS
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
CONTRACTORS
CUSTOMERS
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
CONTRACTORS 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
CONTRACTORS 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
CONTRACTORS
CUSTOMERS
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
CONTRACTORS
CUSTOMERS
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
CONTRACTORS
CUSTOMERS
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
CONTRACTORS
CUSTOMERS
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
CONTRACTORS
CUSTOMERS
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
CONTRACTORS
CUSTOMERS
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
CONTRACTORS
CUSTOMERS
RISK
RISK
LOCATION
0
100
37
Relative Contract Risk
RISK SHARING METER
0
100
FFP
FFE
RISK
RISK
FPIF
CUSTOMERS
CPIF
CONTRACTORS
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
Contractors 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