Project Contracting

1
Project Contracting

• Procurement Quality Management
• Unit 2
• Procurement Planning - part 1

2
Todays Agenda

• Recap of Unit 1
• Procurement Planning part 1
• Class Exercise

3
Recap of Unit 1

• What do you remember about Unit 1?

4
Todays Learning Objectives

• Understand an overview of Plan Purchases and
  Acquisitions (Procurement Planning)
• Understand scope planning and how it relates to
  the above
• Understand and be able to execute a Make or
  Buy analysis
• Understand the various contract types, their
  risks and benefits

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Plan Purchases and Acquisitions

• Considers what to purchase or acquire and
  determines when and how.
  PMBOK, 3rd edition

Source Fleming, Project Procurement Management
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Plan Purchases and Acquisitions
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Scope Planning
Vehicle Project
Vehicle Structure
Vehicle Testing
Project Data
Project Mgmt
Transmission
Test Plans
Test Manuals
Project
Design Data
Frame
QA Tests
Systems
Management
Suspension
Road Tests
Quality
Engine
Critical Buy Items
Source Fleming, Project Procurement Management
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Tools Techniques

• Experts
• Both internal and external, can provide valuable
  inputs in procurement decisions
• Make or Buy Analysis
• Determining whether a product or service should
  be made or performed inside the organization or
  purchased outside
• Contracts
• Determining the appropriate contracts for the
  purchase

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Make versus Buy
Must Make Work
Final Make List
May Make Or May Buy
100 Project Scope
Final Buy List
Must Buy Work
Source Fleming, Project Procurement Management
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Make versus Buy
Source Kerzner, 2003
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Make versus Buy Example

• You can purchase a product for 200/day. To make
  the item, the investment cost is 1000 and there
  is an additional daily cost of 50.
• How long will it take for the buy cost to be the
  same as the make cost?
• If you need the item for 10 days, should you buy
  or make the product?

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Contracts

• 3 Broad Categories of Contracts (understand your
  contract options)
• Fixed Price or Lump Sum Contracts (Seller has
  Risk)
• FFP
• FPIF
• Involves fixed total price for a well defined
  product (Buyer has Risk)
• Cost Reimbursable
• CPIF
• CPFF
• CPPC or CPF
• CPAF (referenced by Fleming)
• Involves payment to the seller for actual costs
  plus an additional fee
• Time and Material
• The full value of the agreement and quantity
  of items is not defined at the time the contract
  is awarded. Hybrid of both the above.

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Comparison of Contract Types
PMBOK, 3rd edition
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Incentives versus Awards
Incentive Fee Contracts
Award Fee Contracts

• Measured objectively
• To specific metrics
• Fees can be appealed
• Early delivery fee

• Measured subjectively
• To broad criteria
• Not subject to disputes
• Restaurant tip

Source Fleming, Project Procurement Management
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Contract Types and Risk
Seller Risk
High
Low
Buyer Risk
Low
High
CPPC
CPFF
CPIF
FPIF
FFP
Cost of Cost
Cost-Plus- Incentive Fee
Cost-Plus- Fixed Fee
Fixed-Price Incentive
Firm-Fixed Price
Source Principles of Project Management, PMI,
1997
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Class Exercise

• Exercise Objectives
• Understand the contract types and be able to
  recognize them
• Practice applying contract types to various
  situations

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Next Week

• Unit 3 Procurement Planning, part 2
• Reading
• Project Procurement Management
• Chapter 7
• Optional
• PMBOK, chapter 12.1