Contract & Procurement Management
PMBOK DEFINITION OF CONTRACT
A contract is a mutually binding agreement which obligates the Seller to provide the specified product and obligates the Buyer to pay for it.
What Are Other Names For Contracts?
•Agreements •Subcontracts •Purchase Orders •Memorandum of Understanding
What is a contract?
An agreement, enforceable at law! It can be: written oral both
Who makes the rules?
Where does contract law come from? • • Judges (common law) Parliament (legislation)
Legislation prevails over common law, but only if it exists!
When does a contract exist?
When the parties:
• • • have agreed on terms intend to be legally bound (objective test) are able to be legally bound
Elements of a Contract
Legal Offer Legal Acceptance Consideration Genuine Assent Competent Parties Legal Object
Objective intent (reasonable person assume there is a serious intent to contract) Definite: Reference to subject matter, quantity, price etc. Communicated
Intent to accept must be shown by the offeree Intent must be communicated by proper means to the person who made the offer Intent must stated in the same terms as the offer. (otherwise, it is a counter offer)
Adequacy of consideration, not a factor An exchange of something of nominal value or inferred value Does NOT have to be Money!!!!!
Both parties entered into the contract of their own free will If fraud, duress, undue influence, mutual mistake exists, then rescission of the contract.
Must be proven at the time the contract was entered into Defense:
– Minors – Insanity – Intoxication
Contracts that are in violation of state or federal statutes or case law are void as a matter of public policy
– Statutory Law, State/Federal regulations, etc. – Case Law: Determined by a court
Steps in reaching a contract
Decision to subcontract Invitation to tender Tender received and evaluated Winning bid chosen Negotiate contract Award contract
You want some work done on your house. You meet two or three potential contractors and specify you want the flooring replaced in the bedrooms. You received two quotations for the replacement of the floor tiles. Before accepting one of these, in the course of your renovations you discover that the flooring in the bathrooms need replacing. You write to the lower bidder accepting the bid, but state in your letter that you want flooring in the bathrooms replaced at the same time. Do you have a contract with the bidder at this point?
Why contracts go wrong
1. Inadequate time given to planning and design of contract 2. Inadequate specifications 3. Insufficient attention paid to what the tenderer is actually offering 4. Lack of control of change
What is Procurement?
It is the process of obtaining services, components, supplies, etc. at an acceptable price at the proper time and place, in the appropriate quantities.
What is involved in Procurement Planning?
The project manager must identify the general scope of the project. A scope statement describes what needs to be done. It also states where the project stops.
Procurement planning involves identifying which project needs can be best met by using products or services outside the organization. It includes deciding
– – – – –
whether to procure how to procure what to procure how much to procure when to procure
What Procurement Resources are Available?
•Does the company have formal contracting systems? •Do they have a purchasing system that includes requisitions or multilevel sign-offs? •How do they handle Request for Proposals (RFP’s)?
To reduce both fixed and recurrent costs To allow the client organization to focus on its core business To access skills and technologies To provide flexibility To increase accountability
Procurement Planning Tools and Techniques
Make-or-buy analysis: determining whether a particular product or service should be made or performed inside the organization or purchased from someone else. Often involves financial analysis Experts, both internal and external, can provide valuable inputs in procurement decisions
Make-or Buy Example
Assume you can lease an item you need for a project for $150/day. To purchase the item, the investment cost is $1,000, and the daily cost would be another $50/day. How long will it take for the lease cost to be the same as the purchase cost? If you need the item for 12 days, should you lease it or purchase it?
Make-or Buy Solution
Set up an equation so the “make” is equal to the “buy” In this example, use the following equation. Let d be the number of days to use the item.
$150d = $1,000 + $50d
Solve for d as follows:
– Subtract $50d from the right side of the equation to get
$100d = $1,000 – Divide both sides of the equation by $100 d = 10 days
The lease cost is the same as the purchase cost at 10 days If you need the item for 12 days, it would be more economical to purchase it
Solicitation involves obtaining proposals or bids from prospective sellers Organizations can advertise to procure goods and services in several ways
– approaching the preferred vendor – approaching several potential vendors – advertising to anyone interested
A bidders’ conference can help clarify the buyer’s expectations
Involves preparing the documents needed to support solicitation What Type of Contractors and Estimates Do We Need? Do we acquire: In-house talent? Consultants? Contractors?
What is a Statement of Work (SOW) ?
This is a written document that describes the needed items in accurate detail so vendors can provide precise bids. Many contracts, or mutually binding agreements, include SOWs A good SOW gives bidders a better understanding of the buyer’s expectations This can be constantly revised as the procurement process moves along.
• • •
Deliverables – what will be delivered to customer at end of project Acceptance Criteria – should be objective Constraints – a nonnegotiable limitation Assumptions – premises assumed to be true for planning purposes
Statement of Work (SOW) Template
I. II. III. Scope of Work: Describe the work to be done to detail. Specify the hardware and software involved and the exact nature of the work. Location of Work: Describe where the work must be performed. Specify the location of hardware and software and where the people must perform the work Period of Performance: Specify when the work is expected to start and end, working hours, number of hours that can be billed per week, where the work must be performed, and related schedule information. Deliverables Schedule: List specific deliverables, describe them in detail, and specify when they are due. Applicable Standards: Specify any company or industry-specific standards that are relevant to performing the work. Acceptance Criteria: Describe how the buyer organization will determine if the work is acceptable. Special Requirements: Specify any special requirements such as hardware or software certifications, minimum degree or experience level of personnel, travel requirements, and so on.
IV. V. VI. VII.
What Types of Bid Documents are Considered?
•Request for Proposals (RFP’s) •Request for Quotes: (RFQ) •Invitation for Bid (IFB) •Invitation for Quotation (IFQ) •Invitation for Negotiation (IFN) •Contracts
Contract / Procurement Management Planning
Outline for a Request for Proposal (RFP)
I. II. III. IV. V. VI. VII. Purpose of RFP Organization’s Background Basic Requirements Hardware and Software Environment Description of RFP Process Statement of Work and Schedule Information Possible Appendices A. Current System Overview B. System Requirements C. Volume and Size Data D. Required Contents of Vendor’s Response to RFP E. Sample Contract
Source selection involves
– evaluating bidders’ proposals – choosing the best one – negotiating the contract – awarding the contract
It is helpful to prepare formal evaluation procedures for selecting vendors Buyers often create a “short list”
. Sample Proposal Evaluation Sheet
Detailed Criteria for Selecting Suppliers
What Type of Evaluation Criteria Will We Use To Choose The Best Proposal?
•Purchase Price •Overall life cycle costs •Technical capability •Management Approach •Subjective Influences
What Should The Proposals Describe?
•Contractor’s ability to perform •Contractor’s willingness to perform •Is it in accordance with requirements of the bid?
Contracts generally fall into one of three broad categories: • • • Fixed Price or Lump Sum Cost Reimbursable Contracts Unit Price Contract
1. Fixed Price or Lump Sum Contract
Involves a Fixed Total Price for a well-defined product or service
To the extent that the product is not well defined, both the buyer and the Seller are at RISK. Buyer: May not receive the desired product Seller: May need to incur additional costs in order to provide product or service Incentives may be included in Fixed Price or Lump Sum Contracts for meeting or exceeding selected
2. Cost Reimbursable Contract
This category of contract involves payment (reimbursement) to the Contractor for its ACTUAL COSTS.
Costs are usually defined as: Direct Costs Costs incurred directly by the project. Examples: Project Labor Materials used in the project Salaries of project staff
2. Cost Reimbursable Contract
Indirect Costs Costs allocated to the project by the performing organization as a cost of doing business. Examples: Salaries of Corporate Executives Home Office Accounting/Payroll Services Home Office Information System/Project Controls Indirect Costs are usually calculated as a percentage of direct costs.
3. Unit Price Contract
Contractor is paid a present amount per unit of service
Could be used by/on: Professional Services Consultants Engineers Design Organizations Generally, the original contract is based on an Estimated Set of Quantities and the final contract is adjusted to reflect the actual quantities performed or put into place.
Other Contract VariationsCPIF
Cost plus incentive fee (CPIF): the buyer pays the seller for allowable performance costs plus a predetermined fee and an incentive bonus Examples: Cost Price Contract = RM1,000 CPIF = RM1,000, plus RM100 for @ month early
Cost Plus Incentive Fee (CPIF) – Provides to the seller reimbursement of allowable costs, plus a predetermined fee as a bonus for superior performance. – If actual cost is less than expected cost, the buyer and seller share in the savings, based on a predetermined formula called a SHARING RATIO – Buyer and Seller share the risk – Used primarily for contracts with long performance periods
Cost plus fixed fee (CPFF): the buyer pays the seller for allowable performance costs plus a fixed fee payment usually based on a percentage of estimated costs Example: Contract = Cost + fixed fee of RM1,000
Seller’s profit has ceiling but risk still remains with buyer because there is no motivation to control costs
Used mainly for R&D projects where effort is uncertain at time of contract start
Cost plus percentage of costs (CPPC): the buyer pays the seller for allowable performance costs plus a predetermined percentage based on total costs
CPPC = Cost Plus Percentage of Costs Example: Contract = Cost + 5% of costs as fee
– Seller is obligated only to make its best effort to
fulfill the contract within the estimated amount – Buyer funds all overruns – Rarely used in commercial sector – Most risk to Buyer; least to Seller
Contract Types Versus Risk
You are a manager at a large organization. A contract has been assumed with a vendor to purchase and install PCs at various locations in your organization. The combined cost to install the PCs is cited by the vendor as RM 60,000 per month, with an estimate to complete the installation of 6 months. The vendor’s incentive for completing a project under 6 months is RM10,000 /month. The project was completed in two months. How much should the vendor receive?
Cost: $60,000 X 2 months = $120,000 Incentive:$10,000 X 4 months = $ 40,000 Total $160,000 Original value: $60k X 6 months Benefit to Buyer = $360,000 = $200,000
Contract administration ensures that the seller’s performance meets contractual requirements Contracts are legal relationships, so it is important that legal and contracting professionals be involved in writing and administering contracts Many project managers ignore contractual issues, which can result in serious problems
Function of Contract Administration
•Financial Management • Change Management • Specification Interpretation • Quality & Performance • Subcontract Management • Production Surveillance • Safety • Disputes/Conflict Resolution • Acceptance • Closeout • Warranties
What constitutes a change?
Clarification of Ambiguous Contract An Ambiguous Contract will be interpreted against the party who drafted the document. Offerors in a “Bid” situation are expected to be knowledgeable of the normal and ordinary industrial or construction practices pertinent to their work.
A written order, signed by the contracting officer, directing the contractor to make a change that the changes clause authorizes the CO to order without the contractor’s consent. Contract Modification Any written change in the terms of a contract.
Suggestions on Change Control for Contracts
Changes to any part of the project need to be reviewed, approved, and documented by the same people in the same way that the original part of the plan was approved Evaluation of any change should include an impact analysis. How will the change affect the scope, time, cost, and quality of the goods or services being provided? Changes must be documented in writing. Project team members should also document all important meetings and telephone calls
A contract modification that is accomplished by the mutual action of the parties. Constructive Change When contracting officer (or others) actions are such as to have the effect of requiring performance differing from that prescribed by the contract.
Contract close-out includes
– product verification to determine if all work was
completed correctly and satisfactorily – administrative activities to update records to reflect final results – archiving information for future use
Termination For Default
Owner may terminate for default when: C)Contractor fails to make delivery on schedule date. B) Contractor fails to make progress so as to endanger performance of the contract law or terms. C) Contractor fails to perform any other provisions of the contract
Termination For Default
If reasons B or C, Owner must give contractor written notice stating failure, allowing time for corrective action. If contractor does not take corrective action, contract may be terminated with a second notice. (“Show Cause” also may be issued.) Excusable delay may mitigate failure. This clause rarely implemented!
The Tendering Process
Why have competition
Competition should be viewed not as a constraint, but as a tool in obtaining the best from the market place and the tendering process is the best way this can be achieved.
Benefits of a tendering process
Provides clear public accountability Protects employees from bias Level playing field to judge the market Ensures value for money Potential suppliers have the same clear understanding of the requirement Sound basis for a properly constructed contract It prevents complacency
Principles of effective tendering
All tenderers receive the same information All tenderers work to the same timetable Properly controlled opening procedures guarantee confidentiality Conditions which protect both parties Like for like assessments are made
Every tender document must contain
Formal invitation Instructions to tenderers The closing date Contract award criteria Definition of size & scope Comprehensive specification Contract period & extension options Conditions of contract Performance criteria Change controls How to deal with variations A termination clause Form of tender Instructions for return of tender Pricing document Articles of the agreement
– Instructions to the tenderers
• Dates and times • Method of return of documents • Award evaluation criteria • Where to direct tender queries
– Basic company information
• Company accounts • Insurance ( Public Liability ) • Directors • Criminal Proceedings • Parent Company • Accreditations • Policies
– The service or goods required
• Complete the schedules ( quality, availability, price)
– General terms and conditions – Tender specific terms and conditions
Vetting Potential Suppliers
Bona fide & are capable suppliers Formal pre-qualification Pre-determined criteria for appraisal – Skills & competencies – Financial stability – Capacity – Track record – Product/ Service quality – References
Evaluation of tenders
Award criteria should always consider:
– Quality, capability, availability & price
Qualification of specification Must compare like with like Have an evaluation check list
Evaluation of Tenders Checklist
Comply with specification All questions answered Comparison schedule Objective evaluation of non price submissions Shortlist best two or three submissions Presentations by bidders Evaluate the real financial elements Ensure sufficient budget provision & authority