project management contracts and procurement. outline 1.introduction 2.procurement 3.requirement...
TRANSCRIPT
OutlineOutline1. Introduction
2. Procurement
3. Requirement Cycle
4. Requisition Cycle
5. Solicitation Cycle
6. Award Cycle
1. Introduction
2. Procurement
3. Requirement Cycle
4. Requisition Cycle
5. Solicitation Cycle
6. Award Cycle
OutlineOutline7. Types of Contracts
8. Incentive Contracts
9. Contract Type versus Risk
10. Contract Administration Cycle
11. Using a Checklist
12. Proposal-Contractual Interaction
7. Types of Contracts
8. Incentive Contracts
9. Contract Type versus Risk
10. Contract Administration Cycle
11. Using a Checklist
12. Proposal-Contractual Interaction
Procurement StrategiesProcurement 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
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
Procurement ObjectivesProcurement 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.
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.
Procurement ManagementProcurement 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
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
Requirement CycleRequirement 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
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
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:
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:
Specifications
Types of SpecificationsTypes 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.
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.
Types of Specifications (Continued)
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.
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.
The Make DecisionThe 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
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
The Buy DecisionThe 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
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
Requisition CycleRequisition Cycle
Evaluating/confirming specifications (are they current?)
Confirming sources Reviewing past performance of sources Producing solicitation package
Evaluating/confirming specifications (are they current?)
Confirming sources Reviewing past performance of sources Producing solicitation package
Solicitation PackageSolicitation 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
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
Solicitation CycleSolicitation Cycle
Advertising Negotiation Small purchases (i.e., office supplies)
Advertising Negotiation Small purchases (i.e., office supplies)
Negotiation ProcessesNegotiation Processes
Request for information (RFI) Request for quotation (RFQ) Request for proposal (RFP)
Request for information (RFI) Request for quotation (RFQ) Request for proposal (RFP)
Negotiation FactorsNegotiation Factors
Compromise ability Adaptability Good faith
Compromise ability Adaptability Good faith
Negotiation PlanningNegotiation 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
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
Negotiation Objective-SettingNegotiation Objective-Setting
Buyer
Seller
Min
Min Objective
Objective Max
Max
Price
Award CycleAward 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.
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.
Contracting ElementsContracting Elements
Mutual agreement Consideration Contract capability Legal purpose Form provided by law
Mutual agreement Consideration Contract capability Legal purpose Form provided by law
Contract Selection CriteriaContract 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 Contractor’s responsibility (and risk)
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 Contractor’s responsibility (and risk)
Contract Selection Criteria (Continued)
Contract Selection Criteria (Continued)
Contractor’s 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?)
Contractor’s 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?)
Contractor’s RisksContractor’s Risks
FFP CPFFRisk On Contractor
HIGH LOW
LEGENDFFP FIRM FIXED PRICECPFF COST PLUS FIXED FEE
Firm-Fixed-Price Contract (FFP)Firm-Fixed-Price Contract (FFP)
0 %
0 %
100 %
100 %
CO
NT
RA
CT
OR
’S
CU
ST
OM
ER
’S
RIS
K
RIS
K
RISK SHARING METER
RISKLOCATION
•Maximum risk with contractor
•Higher negotiated profit margins
•High likelihood of scope changes
Firm-Fixed-Price With Economic Price Adjustments (FPE)Firm-Fixed-Price With Economic Price Adjustments (FPE)
0 %
0 %
100 %
100 %
CO
NT
RA
CT
OR
’S
CU
ST
OM
ER
’S
RIS
K
RIS
K
RISK SHARING METER
RISKLOCATION
•Adjustments for escalation factors
•Adjustments for inflation
•Negotiated adjustment cycle
Incentive ContractsIncentive Contracts
•Additional profits are possible by lowering cost
•Customer and contractor share cost savings
Principles of Incentive ContractsPrinciples of Incentive Contracts
TARGET COST: $20,000TARGET FEE: $1500SHARING RATIO: 80/20 %
•CUSTOMER PAYS 80 % OF OVERRUN
•CONTRACTOR PAY 20 % OF OVERRUN
•PROFIT IS $1500 LESSCONTRACTOR’S 20 %
•CUSTOMER KEEPS 80 % OF OVERRUN
•CONTRACTOR KEEPS 20 % OF OVERRUN
•PROFIT IS $1500 PLUSCONTRACTOR’S 20 %
NOTE: LIMITATIONS MAY BE IMPOSED ON PRICE OR PROFIT
EXAMPLE
Fixed-Price-Incentive-Fee Contract (FPIF)Fixed-Price-Incentive-Fee Contract (FPIF)
0 %
0 %
100 %
100 %
CO
NT
RA
CT
OR
’S
CU
ST
OM
ER
’S
RIS
K
RIS
K
RISK SHARING METER
RISKLOCATION
•Contractor can earn additional profits
•Contract has a ceiling on price (or cost) paid
•Price (or cost) ceiling at point of total assumption
Cost-Plus-Incentive-Fee Contract (CPIF)Cost-Plus-Incentive-Fee Contract (CPIF)
0 %
0 %
100 %
100 %
CO
NT
RA
CT
OR
’S
CU
ST
OM
ER
’S
RIS
K
RIS
K
RISK SHARING METER
RISKLOCATION
•Contractor can earn additional profits
•All costs are reimbursed (cost run-ups)
•A “floor” and “ceiling” exists on profits
Cost-Plus-Award-Fee Contract (CPAF)Cost-Plus-Award-Fee Contract (CPAF)
0 %
0 %
100 %
100 %
CO
NT
RA
CT
OR
’S
CU
ST
OM
ER
’S
RIS
K
RIS
K
RISK SHARING METER
RISKLOCATION
•All costs are reimbursed (cost run-ups)
•Negotiated range of possible profits
•Customer determines profit paid at completion
Cost-Plus-Fixed-Fee Contract (CPFF)Cost-Plus-Fixed-Fee Contract (CPFF)
0 %
0 %
100 %
100 %
CO
NT
RA
CT
OR
’S
CU
ST
OM
ER
’S
RIS
K
RIS
K
RISK SHARING METER
RISKLOCATION
•All costs are reimbursed (cost run-ups)
•Fee is fixed (in $$$ not %) irrespective of costs
•Contractor is motivated for early completion
Cost-Sharing Contract (CS)Cost-Sharing Contract (CS)
0 %
0 %
100 %
100 %
CO
NT
RA
CT
OR
’S
CU
ST
OM
ER
’S
RIS
K
RIS
K
RISK SHARING METER
RISKLOCATION
•No profits allowed
•Customer and contractor share costs
•Contractor may retain control of
Cost Contract (C)Cost Contract (C)
0 %
0 %
100 %
100 %
CO
NT
RA
CT
OR
’S
CU
ST
OM
ER
’S
RIS
K
RIS
K
RISK SHARING METER
RISKLOCATION
•No profits allowed
•Contractor is usually a non-profit organization
•Limitations on costs allowed may be imposed
Cost-Plus-Percentage-Of-Cost Contract (CPPC)Cost-Plus-Percentage-Of-Cost Contract (CPPC)
0 %
0 %
100 %
100 %
CO
NT
RA
CT
OR
’S
CU
ST
OM
ER
’S
RIS
K
RIS
K
RISK SHARING METER
RISKLOCATION
•Costs incurred may be unlimited
•Contractors can maximize profits
•Scope changes may be frequent and unlimited
Relative Contract RiskRelative Contract Risk
RISKLOCATION
FFP
FFE
FPIF
CPIF
CPAF
CPFF
CSC
CPPC
0 %
100 %
CO
NT
RA
CT
OR
’SR
ISK
0 %
100 %
CU
ST
OM
ER
’SR
ISK
RISK SHARING METER
There are several other types of contracts available. They may be derivatives of these contracts, combinations, or simply special contracts for special circumstances.
There are several other types of contracts available. They may be derivatives of these contracts, combinations, or simply special contracts for special circumstances.
Contract Administration CycleContract Administration Cycle Change management Specification interpretation Adherence to quality Warranties Subcontractor management Production surveillance Waivers Contract breach
Change management Specification interpretation Adherence to quality Warranties Subcontractor management Production surveillance Waivers Contract breach
Contract Administration Cycle (Continued)
Contract Administration Cycle (Continued)
Resolution of disputes Project termination Payment schedules Project closeout
Resolution of disputes Project termination Payment schedules Project closeout
Order of PrecedenceOrder of Precedence
A. Specifications (first priority)
B. Other instructions (second priority)
C. Other documents, such as exhibits, attachments, appendices, SOW, contract date requirements list [CDRL], etc. (third priority)
D. Contract clauses (fourth priority)
E. The schedule (fifth priority)
A. Specifications (first priority)
B. Other instructions (second priority)
C. Other documents, such as exhibits, attachments, appendices, SOW, contract date requirements list [CDRL], etc. (third priority)
D. Contract clauses (fourth priority)
E. The schedule (fifth priority)
Type of ChangesType of Changes
Administrative change Change order Contract modification Undefinitized contractual action Supplemental agreement Constructive change
Administrative change Change order Contract modification Undefinitized contractual action Supplemental agreement Constructive change
Causes of Constructive ChangesCauses 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
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
Causes of Constructive ChangesCauses of Constructive Changes Failure to cooperate Improperly exercised options Misusing proprietary data
Failure to cooperate Improperly exercised options Misusing proprietary data
Reasons for Termination for Convenience of the CustomerReasons 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
Elimination of the requirement Technological advances in the state-of-
the-art Budgetary changes Related requirements and/or procurements Anticipating profits not allowed
Reasons for Termination for Default Due to Contractor’s Actions
Reasons for Termination for Default Due to Contractor’s 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.
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.