Contracting for Program Managers

1. Contracting for Program Managers Don Shannon PMP CFCM/CPCM

2. Why do PM’s need to know about contracts? • Contracts form the basis (authority) for us to do work and the assurance we will be paid for doing it. • Contracts define the scope of effort for our project • Statement of Work • Schedule • Deliverable items • Contracts provide a formalized means of managing changes to our projects

3. What is the FAR and why do I need to know about it? • The Federal Acquisition Regulation (FAR) is the document that promulgates various federal laws and regulations that concern contracting to federal agencies. • The “Law” requiring the FAR is codified in Pub L. 93-400 or 41 USC 405 Sec 405a • The FAR applies to all Federal agencies (except the Postal Service) but does not include specific departmental guidance • Departments (e.g. Defense) may publish supplementary regulations such as the Defense Federal Acquisition Regulation (DFAR) • The FAR is binding on Federal agencies and their employees and establishes procurement procedures and policy. • The FAR contains specific provisions and contract clauses which are included in contracts with the government. • Individuals (other than Federal employees) are not bound by the FAR, but they are bound to obey the underlying law and comply with the specific contract provisions.

4. Short Definitions • Contract : A legally enforceable agreement between two or more parties consisting of • An Offer (made by either the buyer or seller) • Acceptance (mutual agreement) • Consideration (Payment or acts to one’s determent) • Unilateral Contract: Requires only acceptance to form a contract – example: wanted poster • Bilateral Contract: Requires both parties to agree • Express Contract: Agreement is orally or in writing • Implied-in-fact Contract: The seller must have furnished some service or property to the buyer based on a reasonable assumption the buyer has requested it.

5. Short Definitions (Cont) • Unenforceable Contract: An otherwise valid contract that is rendered unenforceable by statute or law. • Capacity: The legal right or ability to enter into a contract such as “authority to bind” but also includes being of age and mentally competent. • Formal contract: A contract that requires a special form or method of formation in order to be enforceable – Real Estate contracts • (Fully)Executed contract: A contract that has been signed by both parties.

6. Is a Purchase Order a Contract? • Yes – a very simple one • Offer – The purchase order is our offer to the vendor to pay them if they provide the requested item(s) or services. • Acceptance – is signified by the seller signing and returning the PO or by the seller’s performance. • Consideration – the determent that the vendor experiences by doing the work or the cost of the item they provide and the payment made by the buyer. • Note: There are typically a simplified set of boilerplate terms and conditions included with the PO (often in very small print on the back of the form) which become binding upon both parties once the seller accepts the PO.

7. What happens if I don’t follow the contract? • It depends. • Sellers who do not follow the contractual requirements may be deemed to have breeched (defaulted on) the contract with potential civil penalties • Sellers are responsible for the actions (or inaction) of their employees • The other party may forebear the incident or may require some additional consideration to obtain their forbearance. • One remedy for breech (or repudiation) is termination of the contract for cause. • If the contractual requirement was implementing a law then the seller could be subject to specific civil or criminal penalties • Actual damages • Liquidated damages • Sellers could be debarred and not allowed to compete for future contracts.

8. Contract Interpretation • The key to contract interpretation is to give effect to the intent of the parties as expressed in their agreement. • Intent (what did the parties intend) • The Plain Meaning Rule (we all know the meaning of “is”) • Rules of Interpretation • Contra Proferentem– literally “against the offeror” – ambiguous contract language is interpreted against the party that drafted it. • Christian Doctrine – Has nothing to do with scripture. Court decision stating if the law requires a contract provision be included in a government contract, the contract shall be read so as to include that provision even if it is not physically included in the contract document.

9. Negotiation (FAR Part 15) • Used for both competitive and non-competitive proposals • Negotiations officially conducted through “discussions” and may require a revised proposal. • Includes all contracts not awarded by sealed bidding regardless of whether actual negotiations took place. • Soliciting document is a Request for Proposal (RFP) or Request for Technical Proposal if a Two-Step process is to be used.

10. Basic Contract Types • Three Basic Types • Fixed Price • Cost Reimbursement • Time and Materials • Each contract type has unique characteristics that make it “right” for a particular procurement • Risk (Cost, Schedule or Quality) is a primary consideration • Completeness / level of detail of specifications or requirements.

11. Risk vs. Contract Type As viewed across the program life • Risk must be viewed from both sides. • Both parties seek to minimize risks: • Lowest overall cost • Technical/Performance Risk • Contract type is negotiable and a quid pro quo exchange is possible between contract type and cost.

12. Risks Buyer (Government) Seller (Contractor) Incomplete specifications / requirements (scope creep) Differing conditions Business Conditions Material costs Labor Laws or regulations Weather Force Majeure – Unforeseen events War Disaster Failure by third party outside their control • Price may exceed budget/funding • Work will not meet customer requirements • Quality • Workmanship • Materials • Schedule

13. Fixed Price Contracts • Several variations possible • Buyer and seller agree to a price for the work to be done • The price does not (usually) change . • Buyer transfers majority of cost risk to seller • Buyer still liable for cost risk from: • Differing conditions • Imperfect specifications • Seller agrees to perform all work/deliver all services for one price. • Seller assumes risks for cost variations such as materials, labor etc. • Preferred contract type for most Government agencies.

14. Firm Fixed Price – Lump Sum • Price not subject to adjustment • Often one (lump sum) payment • Strong incentive for seller to control costs • Buyer must accurately state requirements • Buyer may still be at risk for quality and schedule • Often used for • Construction • Commercial items/services

15. Fixed Price – Economic Adjustment • Allows revision of Contract price keyed to a particular factor: • Established prices • Actual costs of labor or materials • Published index • CPI • Adjustment is event driven e.g., the CPI went outside a certain range • Seller’s risk constrained in volatile economy.

16. Fixed Price - Redetermination • Usually applied to multi-year or long term contracts • Fixed price in initial year with either (but not both) types of adjustments in the ‘out years’ • Redetermination is at specific times • Prospective (forward looking) redetermination at some point. • Fixed ceiling with retroactive (after the fact) adjustment on completion • Buyers risk is bound by ceiling value but is at risk everything up to that value

17. Fixed Price – Level of Effort (LOE) • Fixed sum paid over time • Contractor is limited to a “level of effort” such as 2 FTE or some number of labor hours • Contractor not bound to continue performance beyond the stated LOE • Contractor is required to provide essentially 100% of the stated hours (usually 95+%) to declare completion. • Cost is invoiced evenly over the period of performance by dividing total value by the number of billing periods.

18. Cost Reimbursement Contracts • Contractor is paid (reimbursed) for allowable actual costs • Ceiling price is established (Price = cost + profit) • Contractor may not exceed ceiling except at their peril. • When the money is gone .. the work stops • Contractor only obligated to make a “best effort” to complete • Buyer may elect to exceed ceiling if initial cost estimate will be exceeded • If excess cost is due to poor management or causes within the contractor’s control the excess is declared an “overrun” • Fee is generally paid on increased ceiling unless it is declared an overrun

19. Cost Reimbursable Contracts • Costs are only reimbursed if “Allowable” • Specifically allocatable to a contract requirement or objective • Cost must be “reasonable” • Assumes arms length bargaining • Price normally paid by prudent buyer in the normal course of business • Not specifically excluded • Political contributions • Bribes • Alcoholic beverages • Most common is Cost Plus Fixed Fee. • Non Profits use Cost Contract (no fee) • Cost Sharing Contracts (50-50)

20. Cost Plus Fixed Fee • Contractor is reimbursed for their actual costs • Contractor is entitled to a negotiated fixed (or set amount) fee Key point: Fee is NOT a percent of cost. • Contractor invoices for direct cost, indirect cost and a pro-rata portion of the fee. • When the money is gone the work stops. Period.

21. Incentivized Contracts • Can be used with either cost or fixed price contracts • Provides added motivation for contractor to control specific risk(s) • Schedule • Quality • Performance • Performance can be positively (bonus) or negatively (liquidated damages) incentivized.

22. Time and Materials • Hybrid contract combining elements of both fixed price and cost reimbursable • Labor is billed per negotiated rates ‘wrap around rates” • Labor cost • Indirect costs/fringe • Profit • Materials and other direct costs are billed at actual (allowable) cost • May allow some burdens • May allow some profit

23. Time and Material • Seller is at risk for changes in internal costs/rates • Similar to FFP Level of Effort • Obligated to provide level of effort only. • May stop work once LOE is reached • Actual hours worked per period are invoiced at the agreed billing rate. • Buyer is at risk for total cost of materials or ODC.

24. Labor Hour Contract • Same general idea as T&M Contract • Only difference is no materials • “Best Efforts”

25. What type of Contract is Appropriate? • Contract type is primarily based on risk • With greater risk comes greater reward. • Normally the risk is shared by both parties • Equity – what’s fair? • Government should not place itself in position to make or break an offeror.

26. Other Contract Devices • Framework Pricing Agreement • Includes all elements of the contract including a method for calculating the price using an index, formula etc. • Performance Based Contract • Defines the outcome of the contract in terms of desired results • Single Source Negotiation • Contracting with single provider – non-competitive • Often requires seller to provide cost or pricing information to ensure price reasonableness • May be used for contract extensions or modifications or when only one credible source exists.

27. Other Contract Devices

28. Federal Supply Schedule • Example is GSA purchasing schedules • Allow the pre-negotiation of terms and conditions (ordering agreement) • Orders are placed against these agreements for purchase • Primary means is eBuy via GSA Advantage • Credit card use is possible • Typically a simplified acquisition action and is used extensively for commercial products and some Scientific and Engineering services

29. The Schafer GSA – PES Contract Schafer Federal Supply Schedule • Contract GS-23F-0176L • Valid through May 8, 2016 • Professional Engineering Services (Schedule 871) • … provides a streamlined approach for federal agencies to access qualified firms in the engineering disciplines of mechanical, electrical, chemical, … and sub-disciplines such as aerospace … • 6 Special Item Numbers provide the following support: • 871-1 Strategic Planning for Technology Programs/Activity • 871-2 Concept Development and Requirements Analysis • 871-3 System Design Engineering and Integration • 871-4 Test and Evaluation • 871-5 Integrated Logistics Support • 871-6 Acquisition and Life Cycle Management

30. Solicitation Devices • Request for Proposal (RFP) – Seller is asked to submit a proposal typically for a negotiated procurement. • Multi-part document with cost and technical content • May be limited to a specific page length • Request for Quote (RFQ) • Seller submits a document consisting of product information and cost. • Documents submitted are NOT an offer but may be acted upon without further discussion or negotiation • Often used with GSA or Delivery Order contracts • Government may issue an order based on the quote which must be accepted by the seller to form a binding contract

31. Solicitation Devices • Request for Information (RFI) • Sometimes used as part of Market Research to determine capabilities • Often times lead to submittal of Statement of Capabilities as a response • Unsolicited Proposal • Submitted by offeror without a solicitation (Cold-Call selling) • Typically not acted upon unless they address a compelling need and offer new and unique solutions • Sales Contract • All elements of the transaction are determined at the time of the sale (buying a car) • Includes Mutual Assent, Consideration, capacity to contract and legal purpose

32. Other Solicitation Devices • Prequalification • Similar in some respects to the first stage in a two part sealed bid or proposal • Used to narrow the number of proposals to a manageable number by limiting competition to those who are judged able to perform. • Broad Area Announcement • Used (in R&D) to identify agencies interests to offerors • Technical proposals are solicited by issuing “Calls” against the BAA sometimes narrowed by “Interest Areas” Responses are often called “White Papers” • White papers are rank ordered by agency and the most promising are requested to propose.

33. Getting Practical – Contract Issues • Q - Who has the authority to change the contract? A – Only an individual with the authority to contract (or bind the company) may obligate either the buyer or the seller. In everyday terms that is the Government Contracting Officer (CO) and the company designated Contracts Manager or corporate officer. • Q – Can the Contracting Officer’s Representative (COR) direct a change in the contract?A – In most cases the answer is no. The COR’s authority is delegated to them by the CO and is normally limited to technical direction. If it adds cost, changes the schedule, or changes the requirement it’s a change and it needs to be directed by the CO.

34. Getting Practical – Contract Issues • Q – When does “Technical Direction” from the COR change the nature of the contract from R&D to Personal Services?A – It’s a fine line but the assumption is as contractors we either provide non-personal services (JTO, AMOS) or we do R&D. If Government personnel adopt an employer/employee relationship with contract personnel they have crossed the line into Personal Services. In general our work should be characterized by: • Freedom to determine the means and methods to be employed to achieve a result • Assignment of a tasking as a generalized requirement with a due date. We should be free to prioritize our work so as to meet the overall due date. • With some exceptions we should be able to establish schedules and the place where the work is performed. • The customer is given a completed assignment which they may accept or reject. If rejected they must specify why or how the work product is defective and allow for its correction or resubmittal.

35. Getting Practical – How do we make a profit? • Profit = Revenue (what we bill) – our costs • On CPFF contracts we negotiate a fixed profit (dollar value) which we are paid in addition to our allowable costs • On FFP contracts the revenue is pre determined and we keep whatever is left after paying our costs. • On T&M contracts it’s a little of both

36. Getting Practical – How do we make a profit? • Controlling cost is a key profit strategy. What are our costs? • Indirect Costs • Fringe benefits (health insurance, vacation, paid holidays, life insurance) • Supervision and Management • Rent (if supporting several programs) • IT infrastructure & telephones • Office furniture and computers • Utilities • Etc. • Direct (attributable to the work being done) costs • Actual payment for labor (your wages) • Actual costs of materials used • Travel, lodging, meals etc. • The combination of the two costs allows us to determine an overall rate (cost x multiplier) for our services. • The lower the multiplier, the more competitive we are among our peers.

37. What are these “Rates” that keep changing? • The rates being referred to are our Indirect Rates (Overhead and G&A) • These rates are estimated for the future by assuming a level of activity (number of employees, revenue, etc.) and by estimating the costs associated with that level of activity. • The sum of those costs is divided by the projected revenue to determine how much revenue will be needed to recover the indirect costs. • These are converted to a percentage such that for every dollar of direct cost (labor) we add x amount for overhead and y amount for G&A expenses. These are then our projected rates. • Those rates are submitted to the DCAA who reviews them and approves them for billing (Provisional Indirect Rates) • At the end of the year we re-compute the rates using actual costs and actual revenue. If we were off in our estimate of the indirect costs or the revenue we anticipated, we may need to adjust the rates • At the end of the contract our costs are audited and the Provisional Rates are Finalized. This may be 5 – 7 years after completion

38. What are these “Rates” that keep changing? • Rate adjustments only impact the customer on Cost Reimbursable (CPFF) contracts. • On Fixed Price and Time and Material contracts the contractor assumes the risk for rate changes. • Only exception is Materials or travel in a T&M contract may include some indirect rates that could be subject to change • Increased rates reduce the dollars available for labor.

39. Questions?