Contract Types

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Chapter 13

• ? Contract Types
• ? Supplier Management

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Three key decisions in procurement

• Supplier Selection
• Price
• Contract Type
• The type of contract chosen is important because
  contracts by their nature
• -Allocate risk
• -Influence supplier performance

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Three General Categoriesof Contracts

• Fixed Price Contracts
• Cost Reimbursable Contracts
• Incentive Contracts to incentivize
• - Cost control
• - Technical achievement
• - Schedule
• - Other

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The concept of Risk

• Risk is uncertainty
• Suppliers are risk averse
• Types of risk - Technical risk
• - Cost risk
• - Schedule slippage
• Extremes in contract risk
• FFP
  CPPC

increasing risk to buyer
increasing risk to supplier
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Contract Types by Risk Level to the buyer-firm

• FFP
• FP/Escalation
• FP/Redetermination
• FPI
• Example TC 1000
• T? 100
• TP 1100
• CP 1300
  Share Ratios 50/50 70/30

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Contract Types by Risk Level to the buyer-firm

• CPIF
• Just like a FPI but
• - No ceiling
• - Minimum and Maximum Profit amounts
• Time and Materials Contracts
• CPFF
• CPPC

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Two other Contract Types

• Award Fee contracts
• Letter Contracts

Award Fee is tied into another type of contract
e.g., CPIF Award Fee
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CPIF Contract

• Price

100/0
TP
70/30
Buyer/Contractor Share Ratios
50/50
100/0
Cost
TC
R. I. E.
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For next class period . . .

• Submit your individual case analysis of
• Selection of a Pressure Vessel Manufacturer

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The Issue of Long-term Contracts

• Spot contracts (transactional)
• Short-term contracts (transactional)
• Evergreen Clauses (partnership)
• Long-term contracts need to reflect and guide a
  relationship (partnership or alliance)

Issues include initial price, mechanisms for
price adjustments, expectations, confidentiality
agreement, special clauses on incentives, etc.
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Downsides to long-term contracts from the
buyer-firms perspective

• Supplier complacency
• Selecting the wrong supplier

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Supplier Management

• Post-Award Activities

Once a contract has been negotiated and signed,
the real work begins. It is the buyers
responsibility to ensure that all of the terms
and conditions of the agreement are fulfilled.
?
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Supplier Management

• Starts with Pre-Award Conference
• All terms and conditions
• Specifications
• Milestones
• Delivery schedule
• Review buyer responsibilities
• Performance evaluation and feedback Access,
  reports, conferences

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Supplier Management

• Continues with either Routine or Special
  activities
• 1. Routine (Administrative actions for
  follow-up)
• 2. Special (Employ formal performance
  tracking)
• Gantt Charts
• CPM
• Earned-Value Accounting
• Site Visits and Weighted-Point Evaluations
• Recurring Reports (Cost, Schedule, Technical)
• Program Assessment Reviews (PARs)
• On-site Monitors (Buyer-firm co-location)

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Earned Value (EV) Accounting

• Background The Spend Plan Concept

Plan
Actual
Time
TNow
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Earned Value Concept
BCWS BCWP ACWP 1000
800 Schedule Variance equals BCWP
BCWS -200 BCWS BCWP
ACWP 1000 800
860 Cost Variance equals ACWP BCWP 60
In this example, the contractor has an
unfavorable schedule variance (behind schedule)
and an unfavorable cost variance (over budget)
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Earned Value Concept
BCWS BCWP ACWP 1000
800 Schedule Variance equals BCWP
BCWS -200 BCWS BCWP
ACWP 1000 800
860 Cost Variance equals ACWP BCWP 60
The spend plan analysis however has everything
looking great. Budget to date is 1000 and
expenditures to date are only 860!
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Example Problem
Bendix Corporations performance on Contract
AF-8260 16 Weeks into the Contract ACWP
220,440 BCWP 216,000 BCWS
214,440 Total Budget at Completion (TBC)
660,000
Evaluate Bendix Corporations performance by
computing the cost variance and the schedule
variance to date.
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Example Problem
Evaluate Bendix Corporations performance on
Contract AF-8260 16 Weeks into the
Contract ACWP 220,440 BCWP
216,000 BCWS 214,440 Total Budget at
Completion (TBC) 660,000 SV BCWP BCWS
1,560 CV ACWP BCWP 4,440 Cost
Performance Index (CPI) ACWP/BCWP
1.02056 Estimate at Completion (EAC) CPI x TBC
673,567
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Motivation in Supplier Management

• Punishment
• Bill backs
• Award Fee denial
• Downgrade a supplier
• Remove supplier from approved list
• Rewards
• Incentive fee
• Formal recognition
• Follow-on business
• Elevate level of relationship

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Relationship Management

• Supplier Surveys
• Are our buyers knowledgeable?
• Are we ETDBW?
• Do we team with you?
• Do we pay on time?
• Are our buyers and technical people available to
  you?
• Do we engage in any questionable or poor business
  practices?
• Are we a preferred customer?
• Supplier Roundtables
• Review companys procurement program with key
  suppliers as a way to manage and improve
  relationships

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