Advanced Project Management Project Procurement/Contract Management

1. Advanced Project ManagementProject Procurement/Contract Management Ghazala Amin

2. PM Framework and Integration Project Life Cycle Team Development Managing Project Human Resources Project Initiation Planning Processes Executing/Control Closeout WBS Project Monitoring Project Closeout Project Organizing Control Meetings Project Scheduling Activities Change and Risk Management Contract and Customer Relationship Management Project Procurement Management

3. Contract Management Agreement- Any form of mutual commitment between two parties or two organizations. Contract- A legally binding form of commitment between two parties Contract Management The process of planning, forming and administering an agreement to buy/sell goods and/or services from one party to another. Contract administration Process of ensuring that the seller’s performance meets contractual requirements Agreements provide clarity and minimizes risk for both provider and buyer of services or products. Project Procurement Management

4. Purpose of a Contract To establish business relationship based on…. Confidence Understanding Agreement • Source/Reference: IBM Learning Centre for development of PM Curriculum Project Procurement Management

5. PM Role in Contract Management Role and responsibility of a project manager during negotiation, development or finalization of contract is dependent on the size and complexity of the project and the organization that he/she belongs to…. Project Manager Contract Legal Guidance Technical Interaction Sponsor or Supplier Procurement/Contract Team Formal Contract Interaction • Source/Reference: IBM Learning Centre for development of PM Curriculum Project Procurement Management

6. Negotiation

7. Contract Execution-Considerations • Changes • The change control system should be defined and included in the changes clause of the project. • The system should cover who initiates a change request, how is it processed and funded and who has the final approval authority. • Quality Control • Quality cannot be inspected into the product -- it must be built into it. • The attitude of quality must be present when the product is designed. • Warranties • The concept of warranty is based on one party’s assurance to the other that the goods will meet certain standards of quality, including condition, reliability, description, function or performance.

8. Contract Execution-Considerations • Waiver • If the client PM knowingly accepts incomplete, defective or late performance and accepts that performance without objection, the PM has waived his right to strict performance. • Bonds • Bonds contain penal amounts sufficient to assure performance and payment. When appropriate, bonds are drafted into the contract. • Breaches • Breach is the failure to perform a contractual obligation. • The measure of the damages for a breach is the amount of loss the injured party has sustained.

9. Contract Execution-Considerations • Specifications • Either standard in nature where a specific design has been accepted throughout the industry or tailored and unique to the situation at hand.

10. Contract Execution-Considerations • There is a behavioral component associated with the development of specifications: • Drive for competency: The person keeps changing the design which results in increasing complexity and cost. (cannot come to a closure) • Safety margin coefficient: related to design parameters in terms of how much is enough. At some point, costs increase exponentially, but safety gains do not. • Indifference methodology: related to an attitude that promotes a contingency approach to specifications even when not warranted. (Design is too flexible -- the engineer or architect is “indifferent” to the final structure of the product)

11. Contract Execution-Considerations • There is a behavioral component associated with the development of specifications: • Monument syndrome: based on the desire to build a product that will last forever regardless of the cost. (i.e., the pyramids) • Budget expansion: the designer develops the specifications with an eye to the available funds. The more money available, the more complex and costly the design. • Sole-source shelter: specifications are developed so that equipment, materials and supplies are tailored to require the products of a specific manufacturer or supplier.

12. Contract Type Selection Fixed Price or Lump Sum Contracts A fixed price for a well-defined product. May include incentives for meeting or exceeding selected project objectives such as schedule targets. Project Procurement Management

13. Contract Type Selection Fixed Price Contracts Includes Firm-fixed Price (FFP) Buyer pays the seller a set amount regardless of seller’s cost Fixed Price with Economic adjustment (FP/EPA) Fixed price Incentive (FPI) Project Procurement Management 13

14. Contract Type Selection Cost Reimbursable Contracts Payment (reimbursement) to the seller for its actual costs Cost Reimbursable Contracts Includes; Cost-reimbursement (CR) Buyer reimburses for the seller’s allowable cost Cost-plus-incentive fee (CPIF) Buyer reimburses for the seller’s allowable cost plus performance incentive Cost-plus-fixed-fee (CPFF) Buyer reimburses for the seller’s allowable cost plus fixed profit Cost-plus-award-fee (CPAF) An award pool is created. The level of award is determined by an award committee. Downside: administrative cost is high due to award committee. Project Procurement Management

15. Contract Type Selection Time and Material Contracts The seller is paid a preset amount per unit of service Time and Material Contracts Includes; Time and Material (T&M) Buyer reimburses seller for labor expended and cost of material provided Level-of-effort (LOE) Uniform level of activity over a specific period of time for a negotiated price Project Procurement Management

16. Contractor Risk Fixed-Price T&M Cost-Reimburse Buyer’s risk Low High Seller’s risk High Low Project Procurement Management

17. Fixed Price Contract – FFP (Lump Sum) Example Given Price: $1,000K Example A: Actual cost: $700K Seller makes a profit of $300K (Price - Actual Cost) Example B: Final cost $1,100K Seller loses $100K on contract Project Procurement Management 17

18. Incentive Contract – FPIF Example Given Target Cost: $1,000K Target Profit: $100K (Seller’s fee) Target Price: $1,100 Price Ceiling: $1,200 (Maximum payout to the seller) Sharing Ratio: 70/30 Calculate Seller Price and Buyer Savings with actual cost Example A: Actual cost: $800K Savings: $200K (Target cost - Actual cost) Seller gets: $800K + $100K + 60K = $960K (Actual cost + fee + 30%*savings) Buyer saves: $140K Example B: Actual cost: $1,300K Seller gets: $1,200K (no profit and a $100K loss on costs) Buyer loses: $100K (the payout is $100K over Target price = Ceiling Price) Project Procurement Management

19. Incentive Contract – CPIF Example Given Target Cost: $1,000K Target fee: $100K Sharing Formula: 85/15 (buyer uncertainty 85% and seller uncertainty 15%) Actual Cost: $800K Calculate Seller Price and Buyer Savings Savings : $200K Seller gets: $800K + $100K + $30K = $930K (Actual cost + Fee + 15%*Savings) Buyer saves: $170K Project Procurement Management

20. Cost-plus-fixed-fee Contract– CPFF Example Given Estimated cost: $1,000K Percentage: 10% ($100K) Estimated total price: $1,100K (Estimated cost + 10%*Estimated cost) If cost increases to $1,100K New Estimated total price would be: $1,100K plus 10% of the original estimated costs = $1,200K. Project Procurement Management 20