answer the 4 question attach

Project Procurement Management Chapter 06: Selecting the Appropriate

Contract Type

Contract Negotiations Chapter 07: Forming and Documenting the

Right Type of Performance-Based Contract

Week 6

Question: What is the appropriate type of contract to use? What is the most often type of contract used?

Answer:  There are a variety of contract types available.

 Governments most often select the Firm-Fixed-Price (Lump Sum) contract type.

However, the selection of contract type and price negotiation (determination) are closely related and NEED TO BE CONSIDERED TOGETHER!

Contract Type Selection

Fixed-Price Contracts: “Fixed-price contracts provide for a firm price or, in appropriate cases, an adjustable price. Fixed-price contracts providing for an economic adjustable price may include a ceiling price, a target price (including target cost) or both. Unless otherwise specified in the contract, the ceiling price or target price is subject to adjustment only by operation of contract clauses providing for equitable adjustment or other revision of the contract under stated circumstances. The contracting officer shall use firm-fixed price or fixed-price with economic price adjustment contracts when acquiring commercial items.”

(PPM, p.79-80)

What does this Mean? A Fixed-Price contract can have a price change based upon negotiated terms and conditions (“triggers”) for certain components. Adjustment requires an overt action by the contracting officer.

Major Types of Contracts

Cost-Reimbursement Contracts: “Cost-reimbursement types of contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract. These contracts establish an estimate of the total cost for the purpose of obligating funds and establishing a ceiling that contractor may not exceed (except at its own risk) without the approval of the citrating officer.” (PPM, p.81)

What does this Mean? Total price may be limited by a cap, but the actual price of the contract is unknown, and is based upon an agreed to set of conditions and/or set of cost values…for which documentation of actual expenses experienced is required for payment.

Major Types of Contracts

Major Types of Contracts

Project Procurement Management Figure 6.2: Contract Types: Two Generic Families

Contract Type Selection

Project Procurement Management Figure 6.1: The Art of Selecting a Contract Type

First, just what does “Fee” actually mean?  Formal Definition:

“A payment made to a professional person or to a professional or public body in exchange for advice or services.” (Merriam-Webster)

 Loose Definition Relative to Contacts:

Contract amount, and in-specific the amount paid beyond the costs of the work or item…Read: PROFIT!!!

Is “Fee” the same thing as an “Incentive”

No.

Contract “Fee” Provisions

Incentive Fee Contracts: “Incentive contacts . . . are appropriate when a firm-fixed-price contract is not appropriate and the required supplies or services can be acquired at lower costs and, in certain instances, with improved delivery or technical performance, by relating the amount of profit or fee payable under the contract to the contractor’s.” (PPM, p.83)

Contract Fee-Modifying Provisions

Project Procurement Management, Figure 6.3: Incentive Fee versus Award Fee Relationships

What Other Types of Contracts Are There?  Time and Material Contacts

“. . . provides for acquiring supplies or services on the basis of : (1) Direct labor hours at specified fixed hourly rates that include wages,

overhead, general conditions and administrative expenses, and profit, and,

(2) Materials at cost, including if appropriate, material handling costs, as a part of material costs.” (PPM, p.108)

 Labor Hour Contracts

“A labor-hour contract is a variation of the time-and-materials contract, differing only in that materials are not supplied by the contractor.”

(PPM, p.110)

Other Contact Types

What Other Types of Contracts Are There?  Letter Contracts

“A letter contract is a written preliminary contractual instrument that authorizes the contractor to begin immediately manufacturing supplies or performing services. . . Used when the Government’s (or others) interests demand that the contractor be given a binding commitment so that work can start. . . An negotiating a definitive contract is not possible in sufficient time to meet the requirement.” (PPM, p.110)

 Basic Ordering Agreements (AKA, “ID/IQ” Contracts) “. . . a written instrument of understanding, negotiated between an agency . . . and a contractor that contains: (1) Terms and clauses applying to future contracts (orders) . . . (2) A description, as specific as practicable, of supplies or services to be

provided, and (3) Methods for pricing and delivering future orders . . .” (PPM, p.111-112) It may not be considered a contract

Other Contact Types

Contract Type Variations

Project Procurement Management Figure 6.4: Various Contract Types are Available

The Risk Mitigation Plan

Project Procurement Management Figure 6.8: Balancing Risks between Buyer and Seller

 Best Done by a Multifunctional Procurement Committee

Interests may be broad: procurement, engineering, manufacturing, contract, finance, legal, quality, etc.

 The Best Interests of BOTH Parties Should be Balanced

Both parties should mutually benefit from the type of contract selected (the “Win-Win” from Contract negotiations)

 Other than a Firm-Fixed Price Contract NEEDS TO BE JUSTIFIED

Don’t add unnecessary complexity or uncertainty to delivery  The Most-Often Used FFP Contract may be the wrong type, too

There may be unknowns in the FFP scope, unnecessary (and possibly unknown) contingencies may be included by the seller within the FFP to address the aforementioned unknown scope

Contact Type Determination Guidelines

Contact Type Definitions and Characteristics

Project Procurement Management Chapter 06: Selecting the Appropriate

Contract Type

PPM Week 6 Discussion Question

Question 06a: Identify and define the advantages and disadvantages to both parties to a fixed price contract and a cost reimbursement contract.

Performance-Based Contacts (PBCs) Typically Include:  Performance-Based Works Statements (PWS) and/or

Performance-Based Statements-of-Work (SOW)

They DO NOT direct how the work to be accomplished, but rather provides MEASURABLE PERFORMANCE REQUIREMENTS

 Quality Assurance Surveillance Plans (QASP)

Assures that the buyer is getting what they paid for AND the evidence for fulfillment of the incentive criteria. Some Key Elements Included in a QASP: - Surveillance Schedule

- Surveillance Methods - Documentation Requirements

- Performance Criteria and Payment Formulas

What is a Performance-Based Contract

 Performance-Based Metrics – Types that may be Included:

Financial: Budget Adherence, Cost Reduction, ROI, ROA, NPV, DSO, Cost Performance, Revenue (Gross, Net, Annual, Quarterly), Profit

Obtained from Finance and Accounting within Company

Schedule: Milestones On-time, Cycle Times, On-time Delivery

Operational Data, Ongoing and Post-Completion/Delivery

Technical: Capacity, Operation Time, Capabilities, Outages

Operations- and/or Leadership-Developed

Quality: Mean Time Between Failures (MTBF), Mean Time to Repair (MTTR), Complaint Quantity, Defect Quantity, Quality of Service

May Require Independent Quality Audit

What is a Performance-Based Contract

Garrett, Walters, and Kluweer (2004) Managing Complex Outsourced Projects Figure 7-1 Performance-Based Metrics, Contract Negotiation, p.148)

 Contractual Incentives – Positive and Negative

Superior Performance versus Inadequate Performance Additive Fees (“Bonuses”) versus Deductive Fees (“Penalties”)

 The Right Pricing Arrangement (Read: Type of Contract)

Can the BUYER properly describe the performance-based requirements for the SELLER to understand and achieve? Can the SELLER adequately determine (estimate) the cost to perform the work as defined by the SELLER?

What is a Performance-Based Contract

Incentive Types

Types of Incentives Positive

(Rewards) No

Reward or Penalty Negative

(Penalties)

Objective Incentives

Cost Performance Under Budget On Budget Over Budget

Schedule or Delivery Performance

Early Delivery On-Time Delivery Late Delivery

Quality Performance Exceeds

Requirements Achieve Contract

Requirements Do Not Achieve Requirements

Subjective Requirements

Award Fee Other Special Incentives

Exceed Requirements

Achieve Award Fee Plan

Do Not Achieve Requirements

Contract Negotiations Figure 7-3, p.158

 Think Creatively for Incentive Development

 Avoid Baseline Rewards  Criteria Clarity and Objectivity is a Challenge to Develop

 Create a Balance between Incentive Types: Cost-Schedule-Quality

 Focus SELLER’S Incentives BUYER’S Desired Objectives  Make Incentives CHALLENGING but ACHEIVABLE

 Motivate Quality and Define Measurability

 Tie On-Time Delivery to Quality Achievement  Not all Measures are Objective – Consider Subjective Performance Measures

 Require Communication when Developing Incentive Criteria

 Consider Non-Scope of Work (SOW) Socioeconomic Incentives  Develop Simple and Clear Performance Formulas

 Require BOTH Positive and Negative Incentives – WITH Limits

 Include Incentives for Early Payment Discounts

PBC Best Practices

Contract Negotiations Chapter 07: Forming and Documenting the

Right Type of Performance-Based Contract

CN Week 6 Discussion Question

Question 07b: Define the three types of contracts and identify which one you believe is the most-advantageous and why?

Project Procurement Management Chapter 06: Selecting the Appropriate

Contract Type

Contract Negotiations Chapter 07: Forming and Documenting the

Right Type of Performance-Based Contract

Week 6