Chapter Six

Project Contract
Management

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 What is contract?

 A contract is a mutually binding legal

relationship obligating the seller to
furnish the supplies or services and the
buyer to pay for them.

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 What is contract Mgt?

 Contract Management – Actions taken to ensure that

both the Agency and the Contractor comply with the
requirements of the Contract. Includes some
functions related to solicitation development, and
Contract development and close‐out, and also
includes, but is not limited to, Contract Monitoring,
evaluation of deliverables, invoice review, payment
approval, progress tracking, regular status
meetings, management of state‐owned property
used in Contract performance, dispute resolution
and “day to day” management.

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What is Contract Administration?

 Contract Administration – Actions

taken relating to changes to Contracts,
including renewals and extensions, as
well as receipt, review and retaining of
the Contract and Contract related
documents, and exercise of remedies
(e.g. issue amendments, cure notices,
etc.).

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 Processes of CM
 Planning
 Monitoring Contractor performance
 Payment approval
 Dispute resolution
 File maintenance
 Change management
 Remedies for non‐performance or sub‐
standard performance
 Contract close‐out
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 Elements of a Contract

 Introduction of the contracting parties

 Definitions
 Scope of agreement
 Purchase orders
 Supply and delivery
 Specifications, quality, and health,
safety, and environment

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 Cont’d…

 Payment
 Liability
 Force majeure
 Effective date and termination
 Intellectual property
 Assignment and contracting
 Technology improvements

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 Cont’d…

 Most favored customer

 Confidentiality
 Statistics
 Key performance indicators and
compensation
 Notices
 Severability

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 Cont’d…

 Third-party rights
 Free trade areas
 Minority- or women-owned business
enterprises
 General
 Governing law
 Signatures
 Appendices (schedules)
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 Types of Contracts

 Fixed-price contracts
 Firm fixed price
 Fixed-price contract with escalation
 Fixed-price contract with redetermination
 Fixed-price contract with incentives

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 Types of Contracts

 Cost-based contracts
 Cost plus incentive fee
 Cost-sharing contract
 Time and materials contract
 Cost plus fixed-fee contract

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 Firm-Fixed Price

 Most basic contractual mechanism

 Price stated does not change
 Can be obtained using
 Price quotation
 Supplier response to RFP
 Negotiation
 Simplest and easiest contract

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 Cont’d…

 Supplier bears financial risk in a rising

market
 Buyer assumes financial risk in a
declining market
 Supplier may add a contingency fee if
uncertainty is high
 Important for buyer to understand
underlying market conditions
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 Fixed-Price with Escalation

 Used for longer-term contracts where

costs are likely to increase over time
 Escalation clauses allow either price
increase or decrease of base price
 Should be tied to an independent,
published third-party index

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Fixed-Price with Redetermination

 Used when parties cannot accurately

predict labor or material costs and
quantities required
 Base price is determined using “best
guess” estimates
 At a predetermined future time, buyer
and supplier review actual experience
and adjust price
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 Fixed-Price with Incentives

 Terms and conditions allow cost-

savings sharing with supplier
 At a predetermined rate of sharing
 Similar to fixed-price with
redetermination contract
 Typically utilized under conditions of
high unit cost and relatively long lead
times
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 B) Cost-Based Contracts

 Used when there is a high risk of a

supplier contingency fee that would be
included in any fixed-price contract
 Lower risk of economic loss for
supplier
 Economic risk is transferred from supplier
to buyer
 Can result in much lower cost to buyer
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 Cont’d….

 Need to include terms and conditions

that require supplier to carefully
monitor and control costs
 Parties must agree on allowable costs
 Generally applicable when goods
and/or services are expensive, complex,
or important to buyer and there is a
high degree of uncertainty
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 Cost Plus Incentive Fee

 Similar to fixed-price plus incentive

except incentive is based on changes
in allowable costs
 May include cost-savings sharing at a
predetermined rate
 Appropriate when parties are confident
of initial target cost estimates

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 Cost-Sharing

 Allowable costs are shared between

parties on a predetermined percentage
basis
 Key is identification of a firm set of
operating guidelines, goals, and
objectives
 Need to spell out expectations clearly

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 Time and Materials

 Generally used in plant and equipment

maintenance agreements
 Costs cannot be determined prior to the
actual repair
 Based on an agreed upon labor rate
 Requires a “not to exceed” amount
 Little buyer control over the estimated
maximum price
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 Cost Plus Fixed-Fee

 Supplier receives reimbursement for all

allowable costs up to a predetermined
level plus a fixed fee
 Fixed fee represents a percentage of
the targeted cost
 Supplier is guaranteed a minimal level
of profit above its costs
 Little motivation to control costs
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 Selection Considerations

 Component market uncertainty

 Long-term agreements
 Degree of trust between parties
 Process or technology uncertainty
 Supplier’s ability to impact costs
 Total dollar value of the purchase

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 Desirability of Contract Types
Environmental Fixed-Price Cost-Based
Incentive Contract
Condition Contract Contract
Desirability of Use
High component
Low High
market uncertainty

Long-term
Low High
agreements

High degree of
Low High
trust

High process/
technology Low High
uncertainty

Supplier’s ability to
Low High
affect costs
High $ value Low High

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 Contract Length
 Spot contracts – those purchases that
are made on a nonrecurring or limited
basis
 Short-term contracts – contract
purchases that are routinely made over
a relatively limited time horizon
 Long-term contracts – made on a
continuing basis for a specified or
indefinite period (often ≥ 1 year)
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 Benefits of Long-Term Contracts

 Assurance of supply
 Access to supplier technology
 Access to cost/price information
 Volume leveraging
 Supplier receives better information for
planning

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Questions in Long-Term Contracts

 What is the potential for opportunism?

 Is this the right supplier to engage in a
long-term contract?
 Is there a fair distribution of risk and
gains between the parties involved?

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 Risks in Long-Term Contracts

 Supplier opportunism
 Selecting the wrong supplier
 Supplier volume uncertainty
 Supplier foregoes other business
 Buyer is unreasonable

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 Contingency Elements

 Initial price
 Price-adjustment mechanisms
 Supplier performance improvements
 Evergreen, penalty, and escape clauses

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 Nontraditional Contracting

 IT systems contracts
 Systems contracting risks
 Level of service
 Turnkey vs. modular vs. shared
 Price
 Performance criteria
 Procedures

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Other Service Outsourcing Contracts

 Facility management services

 Research and development
 Logistics and distribution
 Order entry and customer service
operations
 Accounting and audit services

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 Consulting Contracts

 Consultant is an agent (or independent

contractor), not an employee
 Ownership of intellectual property
 Issue of residuals
 Copyright ownership

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 Outside Consultant Goals

 Avoidance of  Assurance of
misunderstanding payment
 Maintenance of  Avoidance of
working liability
independence and  Prevention of
freedom litigation
 Assurance of work

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 Consultant Contract Terms

 Payment on delivery of final report

 Late-payment penalties
 Negotiable promissory note or
collateralized promissory note
 Arbitration agreement
 Need to develop a standard consultant
agreement template

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 Construction Contracts

 Sequence of events
 Stated completion period
 Overhead costs
 Safety requirements
 Substantiated cost summaries
 Contractor claims
 Liquidated damages clauses

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 Other Types of Contracts

 Purchasing agreements
 Online catalogs and e-commerce
contracts

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 Settling Contractual Disputes

 All contracts are subject to dispute and

interpretation
 The more complex and larger the dollar
volume, the more likely a dispute will
arise
 Build in dispute resolution terms and
mechanisms

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 Means of Settling Disputes
Action Description
Legal action File a lawsuit in a federal/state/local court
Nonlegal action
Arbitration Use of an impartial third party to resolve a
contractual dispute
Mediation
Intervention by a third party to promote settlement,
reconciliation, or compromise between the parties

Minitrial An exchange of information between managers in

each organization, followed by negotiation
Rent-a-judge A neutral party conducts a “trial” between the
parties and is responsible for the final judgment
Dispute prevention A progressive schedule of negotiation, mediation,
arbitration, and legal proceedings agreed to in the
contract
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 Legal Action

 Traditional dispute resolution

mechanism
 Case heard before an impartial judge
 Issues
 Uncertainty
 Cost
 Length of time

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 Arbitration

 Fastest growth alternative to legal

action
 Helps deal with emotional reactions
 Arbitration clause is often built into the
contract’s boilerplate language
 Source of trained and qualified
arbitrators – American Arbitration
Association
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Contractual Terms for Arbitration

 Spell out location and method of

conducting the arbitration
 Review state statutes to ensure
presence of appropriate legal
provisions
 Word arbitration clauses carefully
using applicable laws and American
Arbitration Association guidelines
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 Dispute Resolution Factors

 Relationship between the parties

 Type of outcome desired by buyer
 Setting precedence for future disputes
 Need for direct involvement by the
parties
 Level of emotion present
 Cost to resolve dispute

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 Dispute Resolution Factors

 Time pressures
 Information required to reach
settlement
 Strict rules of evidence
 Likelihood of publicity
 Credibility of available experts and
other witnesses

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