Chapter 4 1

Chapter 13

٠ Contract Types٠ Supplier Management

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1. Supplier Selection2. Price3. Contract Type

The type of contract chosen is important because contracts by their nature:

-Allocate risk-Influence supplier performance

Three key decisions in procurement:

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Three General Categoriesof Contracts

1. Fixed Price Contracts2. Cost Reimbursable Contracts3. 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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FFP FP/Escalation FP/Redetermination FPI

Example: TC = $1000

T = 100

TP = $1100 CP = $1300

Share Ratios = 50/50 70/30

Contract Types by Risk Level to the buyer-firm

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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

50/50

100/0

70/30

100/0

Cost

TP

TC

R. I. E.

Buyer/Contractor Share Ratios

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For next class period . . .

Submit your individual case analysis of

Selection of a Pressure Vessel Manufacturer

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Spot contracts (transactional)

Short-term contracts (transactional) Evergreen Clauses (partnership)

Long-term contracts need to reflect and guide a relationship (partnership or alliance)

The Issue of Long-term Contracts

Issues include: initial price, mechanisms for price adjustments, expectations, confidentiality agreement, special clauses on incentives, etc.

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Supplier complacency Selecting the wrong supplier

Downsides to long-term contracts from the buyer-firm’s perspective

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Supplier Management

Post-Award Activities

“Once a contract has been negotiated and signed, the real work begins.”

“It is the buyer’s responsibility to ensure that all of the terms and conditions of the agreement are fulfilled.”

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Starts with Pre-Award Conference All terms and conditions Specifications Milestones Delivery schedule Review buyer responsibilities Performance evaluation and

feedback: Access, reports, conferences

Supplier Management

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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

$

Time

Plan

Actual

TNow

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Earned Value Concept

BCWS BCWP ACWP$1000 $800

Schedule Variance equals BCWP – BCWS = -

$200

BCWS BCWP ACWP$1000 $800 $860Cost Variance equals ACWP – BCWP = $60In 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 $860Cost Variance equals ACWP – BCWP = $60The “spend plan” analysis however has everything looking great. Budget to date is $1000 and expenditures to date are only $860!

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Bendix Corporation’s performance on Contract AF-8260 16 Weeks into the Contract:

ACWP = $220,440BCWP = $216,000BCWS = $214,440Total Budget at Completion (TBC) = $660,000

Example Problem

Evaluate Bendix Corporation’s performance by computingthe cost variance and the schedule variance to date.

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Evaluate Bendix Corporation’s performance on Contract AF-8260 16 Weeks into the Contract:

ACWP = $220,440BCWP = $216,000BCWS = $214,440Total Budget at Completion (TBC) = $660,000

SV = BCWP – BCWS = +1,560 CV = ACWP – BCWP = +4,440

Cost Performance Index (CPI) = ACWP/BCWP = 1.02056Estimate at Completion (EAC) = CPI x TBC = $673,567

Example Problem

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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

Motivation in Supplier Management

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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 RoundtablesReview company’s procurement program with key suppliers as a way to manage and improve relationships

Relationship Management

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