CSU Project Management Education Program …Contracts – all kinds. . . •Agreement • Subcontract • Letter contract - an initial agreement used to authorize immediate work prior

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Contracts and Procurement Management

Instructor: Jeff Van Buskirk, [email protected]

Jan 2008

CSU Project Management Education Program

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Agenda• Where Procurement Mgmt. Processes fit in?• What is Procurement Management?• What is a Contract – types and components• How to Plan & Respond to Requests• Summary and Review

Procurement ManagementProcurement Management

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Course Objectives – is and is not

• Introduction to procurement/contract planning• Practice selecting contract types• Discuss planning for purchases and acquisitions,

planning contracts, requesting seller responses, and selecting sellers

• Introduce contract administration and structures • Discuss importance of contract closure

• Is Not a. . .In depth view of contracts or agreements

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Where Procurement fits in. . . (PMBOK page 70)Knowledge Area Initiating Planning Execution Controlling Closing

Integration 4.1, 4.2 4.3 4.4 4.5, 4.6 4.7

Scope 5.1, 5.2, 5.3 5.4, 5.5

Time 6.1, 6.2, 6.3, 6.4, 6.5

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Cost 7.1, 7.2 7.3

Quality 8.1 8.2 8.3

HR 9.1 9.2, 9.3 9.4

Communications 10.1 10.2 10.3, 10.4

Risk 11.1, 11.2, 11.3, 11.4, 11.5

11.6

Procurement 12.1, 12.2 12.3, 12.4

12.5 12.6

* Notice processes are across most all process groups

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Project Procurement Management

… is the processes to purchase or acquire the products, services, or results needed from outside the project team to perform the work.

Two perspectives: may be buyer or seller of the contract (** Note: PMI looks at things from Buyers perspective)

Seller **BuyerContractor Customer/Client

Sub-Contractor Purchaser

Vendor Prime Contractor

Service Provider Acquiring Organization

Supplier Gov. Agency

Note: Seller usually manages work as project

Service Requestor –provides requirements

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Assumption - this is external to the organization but could apply internally if there are formal agreementsBuyer becomes customer and is key stakeholder (PMI is from buyers view)Contract terms and conditions can contain deliverables, milestones, and cost objectives and can limit options

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Terms and Conditions (T’s & C’s)Define the business relationship between the buyer and seller (of the contract) and how it is conducted throughout the established period of performance.Terms: Necessary statements by which the contract is legally valid. Example: The total term duration of this contract, including the exercise of any options under this clause, shall not exceed 60 months. Conditions: Defined events that must happen in order for contingent terms in a contract to become fixed. Example:Financial penalty for late product delivery, which is only valid when the product delivery is late (If/Then scenario).

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… a mutually binding agreement that obligates the seller to provide a specified product or service and obligates the buyer to pay for it.

• Mutual agreement - offer & acceptance• Consideration for work/item produced – has to

be for something of value

• Two or more parties with legal capacity (competence) to make the deal

• Legal purpose/obligation

What is a contract?

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Contracts – all kinds. . .

• Agreement• Subcontract• Letter contract - an initial agreement used to authorize

immediate work prior to negotiating and executing the final agreement (often T&M)

• Consulting agreement - used to obtain professional advise or specialized expertise, but does not transfer any risks to the seller

• Purchase order - fixed/unit price for simple commodity purchase

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The Procurement ProcessesPlan Purchases and Acquisitions

Plan Contracting

Request Seller Responses

Select Sellers

Contract Administration

Contract Closeout

Exec

utin

g

CLOSING

Monitoring/Controlling

Plan

ning

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The Procurement ProcessesPlan Purchases and Acquisitions

Plan Contracting


Select Sellers


Contract Closeout

Plan Purchases and Acquisitions

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• Inputs Enterprise environmental factors – the marketplaceOrganizational process assets – organizational procurement mgmt policies, guidelines, etc.Project scope statementWork Breakdown StructureWBS DictionaryProject Management Plan

Identifies which project needs can best be met by purchasing or acquiring products or services outside the project organization, and which project needs can be accomplished by the project team during project execution.

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12.1 - Plan Purchases & Acquisitions

• Tools and TechniquesMake-or-buy analysisExpert judgmentContract types

• OutputsProcurement management planContract Statement(s) of work (SOW)Make-or-Buy DecisionsRequested Changes

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Make-or-Buy Analysis - Tools

Used to determine whether a product or service can be produced by the project team or can be purchased.

•Long range Corporate goals

•Idle existing capacity?

•Limited existing capacity?

•Design secrecy?

•Stabilize the work force?

•Increase the work force?

•Maintain multiple suppliers?

•Limited long range market?

•Short range project specific perspective

•Direct costs/price are less?

•Indirect costs are less?

•Control of delivery schedule?

•Control of product quality?

•Risk Management Strategy/Issues

•Integration of operations?

•Unreliable suppliers?

•Supplier’s skills unique/required?

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Selection Objective

To select a contract type that will result in:

• Delivery of a desired product, on schedule and within budget

• Reasonable and acceptable contractor risk • Provide the contractor with the greatest incentive for

efficient and economical performance, while achieving or exceeding scope, specifications and quality

Contract Types - Tools

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Factors to consider:• Overall degree of technical, cost, and schedule risk• Type/complexity of requirements• Extent of price competition• Cost/price analysis required• Urgency of requirement• Period of performance• Contractor’s accounting system – Financial stability• Other concurrent contracts• Extent of subcontracting and material acquisition• Change forecasted over the contract period

Contract types - Tools

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Fixed Price or Lump Sum (see p220 Heldman for examples)• Fixed Price Plus Incentive (FPPI or FPI)• Firm Fixed Price (FFP)

T&M – mixture of both (p221 Heldman & p278 PMBOK)

• Time and Materials/Fixed Unit Rate

Cost Reimbursable (p221 Heldman & p278 PMBOK)

• Cost-Plus-Fee (CPF) or Cost-Plus-Percent of Cost (CPPC)

• Cost Plus Fixed Fee (CPFF)• Cost Plus Incentive Fee (CPIF)• Cost Plus Award Fee (CPAF)

Contract Types

(As recognized by PMI)

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Cost Reimbursable:• Used for:

Unique/ill-defined products & servicesCustom products Difficult schedule

• Buyer retains cost & schedule risksRequires payment of all allowable, allocable, & reasonable costsRequires no guarantee that services/product can be delivered

Contract Types - Tools

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Award/Incentive fees

• Additions to a contract type• Reduces the purchase price by assigning or

sharing the risks with the contractor• Encourages specific behaviors by tying the

contractor’s fee to their performance relative to cost, time, or technical requirements

Contract type additions - Tools

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• Firm Fixed Price (Lump sum, Fixed Price)Most desirable for buyerLump sum priceNot subject to adjustment based on actual costOwner responsible to define and manage scopeUsed for routine products and servicesPlaces maximum risk on sellerReduces administrative burden on contracting parties

• Use when:Reasonably definitive specsFair and reasonable price can be established at outset

Types of Contracts - FFP

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• Fixed Price Plus Incentive (also known as FPIF)Fixed price with provisions for profit adjustmentFinal price derived by applying formulaFormula based on cost relationshipCeiling priceFirm fixed target & successive target types

• Use when:Firm fixed price not suitablePositive profit incentiveMostly technical incentivesBilling prices established and adjusted

Types of Contracts - FPPI

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• Time and Materials/Fixed Unit RateFixed hourly rates or cost per unit (GSA Schedule)Not-to-exceed amounts establishedIncurred hours and materials costs used need to be properly recorded and subject to auditOther direct costs or materials reimbursed as actual costs, usually with applicable burdens

• Use when:Buyer requires controlSmaller dollar amounts/short term projectUsed in emergency when work needs to begin, but contract not completed

Types of Contracts - T&M

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• Cost Plus Fixed FeeBuyer pays for allowable costFee is percentage of estimated cost - FixedFee is based on amount of risk involvedSeller has minimum risk and minimum cost control incentive

Use when:Uncertainties in contract performanceResearch work or preliminary exploration

• Cost Plus Fee (CPF)Seller reimbursed for allowable costsFee varies with actual cost

Cost Plus Percentage of Costs (CPPC) not generally used –prohibited by Federal government.

Types of Contracts- CPFF

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• Cost Plus Incentive FeeBuyer and seller agree on feeShared savingsSeller can lose feeFee negotiated and later adjusted by formulaFormula includes target cost, target fee, max fee, and fee adjustment formulaFormula based on cost relationship; total allowable costs to target costs

• Use when:Cost reimbursement contract is necessaryAn appropriate fee adjustment contract can be negotiatedYou want contractor to align with specific objectivesCan include technical incentives

Types of Contracts - CPIF

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• Cost Plus Award Fee (similar to CPIF)Buyer and seller negotiate a base fee and award fee targetSeller can lose award fee based on performanceFee set by periodic evaluation (i.e., monthly based on performance)Objective and subjective criteria set at beginning of periodNo protest mechanism available once award fee score set

• Use when:Cost reimbursable contracts where greater incentive is desiredEfforts where greater administrative burden to evaluate performance is deemed beneficial to both parties

Types of Contracts - CPAF

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Detailed Scope

Very Little Partial Complete

Unknowns High Moderate Low

Degree of Risk

High Medium Low

Suggested Allocation

Contract Types

CPPF CPIF CPFF

FPPI FFP

BuyerSeller

From Wideman, p. IX-2

Types of Contracts – comparison

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Cost Plus Percent Fee

Cost Plus Incentive Fee

Cost Plus Fixed Fee

Cost Plus Award Fee

Fixed Price Plus Incentive

Firm Fixed Price

Degree of work scope definition

Poorly defined

Less well defined Not well defined Less well defined

Reasonably well defined

Well defined

Difficulty to negotiate scope change

None Medium Little Medium High Highest

Degree of owner oversight necessary

Highest Moderate Higher High Low Lowest

Cost/schedule performance risk • Owner • Contractor

Highest None

High Moderate

High None

High Low

Low High

Lowest Highest

Incentive to meet cost/schedule performance requirements

None

Moderate

Low

Moderate

High

Highest

Types of Contracts - comparison

Another chart describing various contracts:

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Team Exercise

• Select three (3) types of vendor situations on your project

• Decide what kind of contract you would have for each vendor and why you’ve chosen it

• Take maximum of 15 minutes • Be prepared to present to class

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Procurement Management Plan

OutputsDocument the decisions - some items may be:

Type of contract(s)Cost/price controlActions/involvement of other groupsDocumentation/specifications requiredManagement strategies/actionsCoordination with the rest of the project requirementsDifferent contracts during different phases of the project?Best organizational structure to manage multiple contractsMetrics to measure and evaluate sellers

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SOW: Describes the product or service in detail to allow prospective sellers to determine if they are capable of providing the item, based on the nature, the needs of the buyer, or the expected form of the contract.

Performance – what final product should accomplish instead of how builtFunctional or detailed – end purpose or results rather than specific procedures. Minimum essential characteristicsDesign – precisely what work is to be doneAlso commonly called Performance Work Statement (PWS)

Contract SOW - Outputs

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Team Exercise• Create a brief Contract

SOW for your team project. Use SOW template.

• Select 2-3 important areas from SOW template.

• Read selected portion to class

• Class discussion• 15-20 min

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The Procurement Processes


Plan Contracting


Select Sellers


Contract Closeout

Plan Contracting

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12.2 - Plan Contracting Preparing documents needed to support the Request Seller Responses and Select Sellers processes.

InputsProcurement mgmt plan, contract SOW(s), make-or-buy decisions, project management plan

Tools and TechniquesStandard forms and expert judgment

OutputsProcurement documents (RFPs, etc.)Evaluation criteriaContract Statement of Work updates

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Plan Contracting - Outputs

• Procurement documents such as RFPs, IFBs, RFQs should:

Assure accurate, complete, and comparable responses from the prospective sellers/providers.Include the relevant contract SOW, description of the required response and the anticipated contract form/ terms/conditionsElicit suggestions from the vendors for better ways to satisfy the requirements

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Plan Contracting - Outputs

Evaluation Criteria – used to rate or score proposals such as:

Best value vs. lowest priceUnderstanding of needOverall product/life cycle costTechnical capability to performManagement approachFinancial capabilityPast Performance

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Contract Closeout

Plan Purchases and Acquisition

Plan Contracting


Select SellersRequest Seller Responses

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12.3 - Request Seller Responses

InputsOrganizational process assets, Procurement Mgmt Plan, and Procurement documents

Tools and TechniquesBidder conferencesAdvertising (or not for single/sole source supplier) Developed Qualified Sellers List

OutputsQualified Sellers ListProcurement Document Package – buyer completesProposals – seller completes

Obtaining responses (bids and proposals) from prospective sellers on how requirements will be met.

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Request Seller Responses -Tools & Techniques

Non-competitive bidSingle source – preferred supplier you have contracted with before.Sole source

• Specific or unique requirements that must be met• (Non) availability of sources for product/services• Sole Source product/system specified by the

designer/developer• Critical schedule or constraints preclude consideration of

other suppliers due to specific reason• Supplier has unique qualifications to satisfy specific

requirements (patent)

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Request Seller Responses –

OutputsResponse/proposal

Oral/verbal presentationFormal (qualifications/proposal/bid)Understanding of need

• Overall product/life cycle cost• Technical capability to perform• Management approach• Financial capability• Past Performance

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Contract Closeout


Plan Contracting


Select SellersSelect Sellers

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12.4 - Select SellersReceives bids or proposals and applies evaluation criteria to select

one or more sellers who are qualified and acceptable.Main Inputs

• Proposals, evaluation criteria (and 5 other inputs)Tools and Techniques

• Weighting system• Screening system• Contract negotiation• Independent estimates• Seller rating system• Expert judgment• Proposal evaluation techniques

Main Outputs• Select sellers• Contract• Contract Management Plan• See 3 other outputs in PMBOK

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Select Sellers - Input

Evaluation Criteria: Understanding of needOverall or life-cycle costTechnical capability and approachManagement approachFinancial capacityProduction capacity and interestBusiness size and typeReferencesIntellectual property rightsProprietary rights

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Select Sellers - Tools

• Screening system• Weighting system

Applied to technical, cost, time, otherAssign a numerical weight to each of the evaluation criteriaRate the prospective sellers on the criterionMultiply the weight by the ratingTotal the resultant products to compute an overall score

• Independent estimates

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Select Sellers – Tools

Contract NegotiationShould be conducted to assure complete understanding of all aspects of risk, responsibilities, the scope of work, the terms & conditions, and price of the contract

Things to think about: • Data rights, penalties, payment schedules, fee

structure, schedule of deliveries

From Frame, p 235

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Contract Negotiation• Getting to Yes – Negotiation Agreement

without Giving InDon’t bargain over positionsSeparate people from the problemFocus on interests, not positionsInvent options for mutual gainUse objective criteria

Getting to Yes by Fisher and Ury

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Negotiation• Sharing responsibility (clearly defined)

Communicate (work) effectively with your counterpart to assure understanding.Avoid confrontational relationships with customers and suppliersResolve problems so that they don’t keep recurring-if not resolved in negotiation, they may show up in execution of the project

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Select Sellers – Output

ContractComplex or SimpleMutually bindingLegal relationship subject to remedy in courtAlso called agreement, subcontract, purchase order, memorandum of understandingExtensive approval processFederal contract awards may result in protests with prospective bidders

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Parts of the Contract - sample• Definitions of contract terms• Scope of services and description of project• Contract administration • Terms of payment, Indemnity• Client obligation and supplied items• Warranties and guarantees• Liability limitation and consequential damages• Patent indemnification• Confidential information• Termination provisions• Changes and extras• Delays, including force majeure• Insurance requirements• Arbitration, Escalation • Time of completion

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Parts of the Contract – T&Cs

• Articles of the agreement• Provisions

GeneralSupplementalSpecial

• How change will be managed• Contract interpretation guidelines

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Team Exercise• Proposal/Contractor evaluation

criteria

• Select three “parts of your contract” (i.e., T&C, SOW, Schedule, Quality Assurance) and decide what evaluation criteria is important.

• 15 minutes

• Brief class discussion

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Contract Closeout


Plan Contracting


Select SellersContract Administration

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12.5 - Contract AdministrationEnsures that buyer and seller meet their contractual

obligations and their own legal rights are protected.

Major Inputs• Contract, contract management plan, performance

reports, work performance informationSome Tools and Techniques

• Contract Change Control System• Buyer-conducted performance review• Performance reporting• Payment system

Some Outputs• Contract documentation• Requested changes

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Contract Administration - Tools

Contract change control systemDefines process for changing the contract• Paperwork• Tracking systems • Dispute resolution procedures• Approval levels necessary for changes

Integrated with overall project change control system

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Contract Administration - Tools

• Performance reportingProgress/performance reportingCosts: Budget vs. actualIntegrated with full project performance reportingSelf reporting

• Buyer-conducted performance review

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Outputs• Contract documentation• Requested changes• Recommended corrective actions• Organization Process Assets updates• Project Management Plan updates

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Contract Closeout


Plan Contracting


Select Sellers

Contract Closeout

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12.6 - Contract ClosureSimilar to administrative closure in that it involves both product verification and administrative closeout. (Contract terms and conditions may prescribe specific procedures for contract closeout.)

Inputs• Procurement management plan, contract management plan,

contract documentation, contract closure procedureTools and Techniques

• Procurement audits, records management systemOutputs

• Closed contracts• Organizational Process Assets

• Contract file• Deliverable acceptance (formal acceptance)• Lessons learned documentation

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Contract Close Out

• Substantial completion• Final completion (formal acceptance)• Inventory closeout• Release of liens/claims (formal)• Final payment • Record retention

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• Understand buyer/seller risk in a contract type.• Understand the motivations in the contract.• Know the SOW and contract/agreement. • Understand evaluation criteria, make it as

objective as possible.• Work to create a good buyer/seller

relationship.• Ensure consistent contract performance

reporting/documentation.

Summary

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Assessment• Complete Questions/Class discussion

• Please complete course evals

Documents

CSU Project Management Education Program …Contracts – all kinds. . . •Agreement • Subcontract • Letter contract - an initial agreement used to authorize immediate work prior