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PARTICIPANT GUIDE

Managing Cost-Reimbursement Contracts

CUR:COU:EN:000 ver. 0.0

PARTICIPANT
GUIDE
Contract Management
Principles and Practices

PMC:DF3:EN:000 ver. 2.0

No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any
form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the
prior written permission of TwentyEighty Strategy Execution.

“Strategy Execution” refers to TwentyEighty Strategy Execution, Inc., a Virginia, USA, corporation, or
an affiliate thereof.

Strategy Execution grants federal government users "Restricted Rights" (as the term is defined in
FAR 52.227-14 and DFARS 252.227-7013). Use, reproduction, or disclosure of these materials is
subject to the restrictions set forth in the MOBIS, FSS, or contract under which the materials were
provided.

All material from A Guide to the Project Management Body of Knowledge (PMBOK® Guide) is
reprinted with permission of the Project Management Institute, 14 Campus Boulevard, Newtown
Square, Pennsylvania 19073-3299, USA, a worldwide organization of advancing the state-of-the-art
in project management. Phone: (610) 356-4600, Fax: (610) 356-4647.

PMI did not participate in the development of this publication and has not reviewed the content for
accuracy. PMI does not endorse or otherwise sponsor this publication and makes no warranty,
guarantee, or representation, expressed or implied, as to its accuracy or content. PMI does not have
any financial interest in this publication and has not contributed any financial resources.

The names of all companies and characters used in these materials are purely fictional. Any
resemblance to any existing or no longer existing company, or living or dead person is not intended,
and is purely coincidental.

PMI, PMBOK and PMP are registered marks of the Project Management Institute, Inc.

TwentyEighty Strategy Execution

Arlington, VA USA
Course Introduction
© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 IN-1
Welcome

 Emergency phone number

 Local emergency exit procedures
 Floor and facility layout
 Start and end expectations
 Breaks
 Attendance
 Agenda
 Passing this course
 Ground rules

This course does This course does not

 Discuss contracting in a  Teach basic project
project management management tools and
environment techniques except to
 Present Strategy explain how they are used
Execution’s Contract along with contract
Management Methodology management

 A standard is a “basis for uniformly measuring or specifying

performance.”1
 A best practice is a generally accepted process or technique that
consistently outperforms and delivers greater value and benefits
within a discipline.

1 Ward, J. LeRoy. Dictionary of Project Management Terms. 3rd ed. Arlington, Va.: ESI International, 2008, p. 416.

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 IN-4
Global Best Practices in Project Management

Global best practices in project management are promoted

through the following:
 Various project management standards organizations,
including—
– Project Management Institute (PMI)
– International Project Management Association (IPMA)
– Association for Project Management (APM)
– International Organization for Standardization (ISO)
 Practicing experts within the field
 Your organization

 Course Introduction
 Module 1: The Contract Management Process
 Module 2: Contracting Methods and Contract Types
 Module 3: The Preaward Phase
 Module 4: The Award Phase
 Module 5: The Postaward Phase

By the end of this course, you will be able to—

 Define a contract
 Describe both the buyer’s and seller’s perspectives of contract
management
 Protect your organization’s commercial, technical, financial, and
legal concerns
 Use the contracting process to add value, increase profitability,
and improve customer satisfaction

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 IN-7
Participant Introductions
DISCUSSION

 Name
 Location
 Years in current organization
 Project experience
 Expectations of this course
 Most challenging project you have worked on

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 IN-8
Contract Management—What Is It?

 A process of planning, forming, and administering agreement(s) to

buy or sell goods and services from or to another party
 The art and science of managing a contractual agreement(s)
throughout the contracting process
 A term that refers to the same concepts and ideas as the term
"procurement" (procurement includes all the stages in the process
of acquiring supplies and/or services)
 A process that begins with the buyer's determination of need and
ends with contract closeout

 Why does contract management matter?

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 IN-10
Contract Management in Context

When planning for a contract, you need to consider the context

of the project you will be applying it to. Considerations include:
 Contractor availability
 Complexity
 Regulations
 Location

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 IN-11
Contract Management in Alternative Environments

 Combination of agile and traditional methods

 Collaborative procurement
– Buyer and seller
– Multiple sellers

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 IN-12
Emerging Contract Management Trends

 Improved technology
– Central procurement posting site
– Use of video technology for stakeholder communication and review
– Seller use of procurement software (which incorporates document
management)
 Specified risk allocation
 Increased use of standard contract clauses and forms
 Deliverable-based contract award
 Improved supply chain management

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 IN-13
The Contract Management Process

By the end of this module, you will be able to—

 Define contract management principles and processes from
both the buyer’s and seller’s perspective
 Define a contract and its structure
 List the typical contract management team members and
describe their roles and responsibilities
 Explain the importance of contract law and privity
 Define terms and conditions (Ts&Cs)
 Apply the general rules of contract interpretation

An agreement between 2 or more (competent) parties or persons that

creates an obligation to do or not do a particular thing
 Agreement
– Subject matter sufficiently defined
• Meeting of the minds
 2 or more (competent) parties or persons
– Separate legal entities
– Legal capacity (competency)
 Obligation
– A legal requirement subject to enforcement in a court of law
 To do or not do a particular thing
– Mutual understanding as to the requirements

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 1-3
Contracts Are Not Just Agreements

 Agreement (Contract): The manifestation of an agreement

between parties, either oral or written
 Relationship: The personal or professional commitment that forms
the understanding between people who enter into agreements,
either oral or written
– Buyer: The person or organization that is entering the contract in order
to obtain the goods or services of another party
– Seller: The person or organization that is entering the contract in order
to sell goods or services to another party

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 1-4
Generic Structure of a Contract

 Definitions: Provide a detailed description of important terms and

acronyms
 Statement of work (SOW): Describes the buyer’s requirements in
sufficient detail to allow potential sellers to meet those requirements
and to estimate the associated costs
 Contract formation: Details the description of the process by which the
contract is formed
 General agreement: Is the main body of the contract document,
containing the general business Ts&Cs (Ts&Cs), except for those
concerned with pricing
 Pricing conditions: Describe the Ts&Cs associated with the pricing
arrangements
 Attachments: Cover any additional terms, conditions, or requirements
added by the local geographic, product/service, or customer-focused
business unit of the buyer
© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 1-5
Contracts Have Many Uses

Contracts are—
 Sources of business: For sellers
 Sources of goods and services: For buyers
 Risk management tools: For both buyers and sellers
 Protection: Vehicles to protect intellectual property (IP)
 Projects: Must be managed by people from both the buyer’s
and seller’s organizations

 Intellectual property (IP)

– Any number of distinct creations of the mind (intangibles) that are
covered by the corresponding field of law, including the concepts,
ideas, inventions, trademarks, industrial designs, patents, copyrights,
and technical information
 Intellectual capital (IC)
– The intangible assets of an organization, such as employee know-how
and expertise, IP, and organizational systems
 Intellectual property rights (IPR)
– Granting the rights to the owner and affording the legal protection of
the IP through various vehicles: patents, copyrights, trademarks, and
so on

 Printer Confusion

As contract law developed through the English system of

common law, several essential elements of a contract came to
be identified. They include the following:
 The elements of contracts
– The offer
– Acceptance
– Competent parties
– Mutual consideration
– Legality of purpose
 The life cycle of contracts
– Preaward
– Award
– Postaward

A "response to a solicitation or tender that, if accepted, would

bind the contractor to perform the resulting contract."1 An offer
and acceptance of the offer creates the contract.

1 Ward, J. LeRoy. Dictionary of Project Management Terms. 3rd ed. Arlington, Va.: ESI International, 2008, p. 290.

An offer made in response to a previous offer by the other party

during negotiations for a final contract. Making a counter offer
automatically rejects the prior offer, and requires an acceptance
under the terms of the counter offer or there is no contract.1

1©2009 Incisive Media Properties, Inc. Reprinted with permission from the 2009 edition of “The People’s Law Dictionary,” ©2009 Incisive Media
Properties, Inc. All rights reserved. Further duplication without permission is prohibited.

An offeree’s “act of accepting an offer (that is, awarding a

contract based on an offer under a request for proposals)."1
An acceptance of an offer may be—
 Written
 Verbal
 Conduct
An acceptance of an offer must be given freely

1 Ward, J. LeRoy. Dictionary of Project Management Terms. 3rd ed. Arlington, Va.: ESI International, 2008, p. 2.

A competent party is legally capable of understanding and

entering a contractual relationship:
 Has the appropriate authority to enter into contracts
 Is of legal age
 Is mentally capable of understanding the impacts and
conditions imposed by the contract

Consideration is the "inducement to a contract—the cause,

motive, price, or impelling influence that leads a party to enter a
contract.”1

1 Ward, J. LeRoy. Dictionary of Project Management Terms. 3rd ed. Arlington, Va.: ESI International, 2008, p. 83.

Courts will not enforce contracts that are for an illegal purpose.

People
 Authority: Who can sign or approve?
 Responsibilities: Who does what?
Process
 Buyer: Plans, conducts, administers, and closes contracts
 Seller: Conducts the presales activity, makes bid/no-bid
decisions, prepares the proposal, negotiates the contract,
administers the contract, and closes contracts
Performance
 Fulfillment of all contractual requirements
Price
 Fair and reasonable
Payment
 Timely payment
© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 1-16
Contract Management—People

 Contract management is a team effort.

 Contract managers support project managers.
 Project managers support the total team effort to buy or sell goods
and services.

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 1-17
Contract Management—People (continued)

Typical functions

Buyer’s Team Seller’s Team

 Purchasing  Marketing/sales
 Technical  Technical
 Financial  Financial
 Contracting  Contracting
 Legal  Legal
 Project management  Project management

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 1-18
Contract Management—People (continued)

Contract managers and project managers

 Authority
 Responsibility
 Accountability
Sources of conflict
 Precontract actions
 Seller selection
 Pricing arrangements and contract Ts&Cs
 Specification of requirements
 Control of contacts with other party

Actual: Authority that an individual is intended to have

 Express: Specific, written authority
 Implied: Not specific or written but intended (that is, by virtue of
one's position)
Apparent: Authority that an individual was not intended to have
but by virtue of his or her actions, behavior, and so on, gave the
appearance of having authority

Buyer’s and Seller’s Steps

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 1-22
Contract Management—Performance

Why should I care about contract management performance?

 Because the decisions made and actions taken, both before
and after the contract is awarded, significantly affect the results
of your project!
 Because an improved understanding of contract management
can produce superior project results and greater customer
satisfaction

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 1-23
Contract Management—Price and Payment

Price—
 Is the amount of money assigned to the goods, services, or
results contracted
 Is set by the seller and must be fair and reasonable
Payment—
 Is the invoicing and payment for the delivered goods, services,
or results
 Is expected to be paid on time by the buyer

The core idea: Certain agreements are so important to the

maintenance of an orderly society with a market economy that
the government must take action to enforce them.
Agent law and privity
Contracting terminology
 Terms and conditions (Ts&Cs)
 Breach of contract
 Waivers and forbearance
 Force majeure
 Remedies to injured parties
Legal systems and contract interpretation

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 1-25
Basic Concepts of Agency–Agent Law

A legal, contractual relationship that exists between the buyer

and the seller, and between the seller and the subcontractor

Define the rights and responsibilities of the parties to the

agreement
Term: An enforceable promise that addresses a specific subject
 May address either a technical segment of the contract (for
example, the specifications or SOW) or administrative sections
of the contract (for example, resolution of disputes, modification
procedures, or terminations)
Condition: A clause that may activate, suspend, or rescind a
term of the contract, but the occurrence or nonoccurrence of
the condition does not change the terms agreed upon

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 1-28
Breach, Waiver, and Forbearance

Breach
 A failure, without legal excuse, to perform any promise that
forms any part of a contract
Waiver
 An active decision, written or verbal, to give up the right to
enforce a contractual requirement
Forbearance
 An intentional failure of a party to enforce a contractual
requirement—usually done for an act of immediate or future
consideration
 Temporary forbearance, which does not prevent the injured
party from enforcing rights later—however, continued
forbearance may become a waiver over time

 Is a major or irresistible force that protects both parties in the event

that a part of the contract cannot be performed due to causes
outside the control of the parties
 Refers only to events that could not be avoided by exercise of due
care
 Is normally temporary
 Examples: Hurricanes, floods, fires, riots, wars, quarantines, and
so on

The party in a contract that is injured by a breach of contract

has several methods to be compensated for any damages:
 Compensatory damages: The injured party must prove the
amount of damage/harm—and could be compensated up to this
amount.
 Specific performance: The court rules against compensatory
damages and for the breaching party to fulfill the terms of the
contract anyway.
 Liquidated damages: The injured party is compensated by an
amount previously agreed to and stated in the contract.
 Punitive damages: Contract law does not allow for the injured
party to be compensated beyond the actual (or agreed) amount
of damages.

 When working across borders, remember that each country has its
own legal system.
 The contract manager should understand the legal systems of all
the countries involved—or better yet, find a source to help.
 The project manager should understand where conflicts may
occur.
 Regardless of which country’s law governs the contract, both
parties must comply with the laws of both countries.
 The governing principles identified and used should be specified in
the contract.
 For more assistance, your organization's contracting
representatives should be contacted.

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 1-32
A Note on Contracting with Government Agencies

Each country has its own set of rules that govern how to
contract with that government.
These registers may include—
 Policies, procedures, regulations, and so on
 Open tenders, requests for proposals (RFPs)
Some of the known agencies include—
 European Union (EU): Official Journal of the European Union
(OJEU) (http://www.ojeu.eu)
 Singapore: Infocomm Media Development Authority (IMDA) and
GovTech (www.tech.gov.sg)
 United States: Federal Register and the Federal Acquisition
Regulation (FAR) (https://www.federalregister.gov)

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 1-33
A Note on Construction Contracting

FIDIC—
 Stands for the International Federation of Consulting Engineers
(the acronym stands for the French version of the name—
Fédération Internationale Des Ingénieurs-Conseils)
– Web site: http://fidic.org
 Represents globally the consulting engineering industry and as
such, promotes the business interest of firms supplying
technology-based intellectual services for built and natural
environments
 Provides contract types

Objective
 The purpose of the parties should be ascertained from the point
of view of an impartial third party knowledgeable of the facts.
 These interpretation guidelines are similar for most countries—
please take advice from your local legal counselor to cover
local laws.
The first rule of contract interpretation
 The original intent of the parties

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 1-35
Contract Interpretation (continued)

First rule: The original intent of the parties

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 1-36
Contract Interpretation Guidelines

When the parties have agreed in writing, evidence of prior,

contradictory understandings and agreements will not be
entertained (parol evidence rule).
The order of precedence clauses will be respected.
Express language:
 Definitions are contained in the contract.
 Technical terms and words of art are given their technical
meaning when used in their field.
 Commonly accepted meanings are given to words.
Evidence of prior oral or written agreements and evidence of
contemporaneous oral agreements will not be admitted to vary
the terms of a written contract.

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 1-37
Contract Interpretation Guidelines (continued)

 Rules of statements:
– Special provisions prevail over general provisions in the event of
conflicts.
– Handwritten provisions prevail over printed provisions in the event of
conflicts.
– Words prevail over figures in the event of conflicts.
– Specific and exact terms prevail over general language.
 The contract is interpreted as a whole.
 The behavior of the parties during the normal course of performance
on this contract may give meaning to a term in dispute.
 The prior course of dealings may give meaning to a term in dispute.
 Ambiguous language will be construed against the writer (contra
proferentem).

 Printer Confusion (Conclusion)

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 1-39
 Contract management is about planning, forming,
KEY MESSAGES
and administering contracts.
 A contract is an agreement between two or more
(competent) parties or persons that creates an
obligation to do or not do a particular thing.
 Successful contract management consists of the 5
Ps—people, process, performance, price, and
payment.
 Organizations should only enter into contracts
through agents that have the appropriate level of
authority.
 The authority of any agents you deal with on
contractual matters should always be verified.

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 1-40
 Privity is a legal, contractual relationship that exists
between the buyer and the seller, and between the
KEY MESSAGES

seller and the subcontractor—not between the

buyer and the subcontractor.
(continued)

 Contract management is most effective when

project managers and contract managers work as a
team pursuant to consistent performance measures
and rewards.
 Any breach of contract may give rise to a claim for
compensatory damages.
 Punitive damages are not awarded for breach of
contract, nor are liquidated damages that serve as a
penalty.
 The primary rule of contract interpretation is to
determine the intent of the parties.

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 1-41
Contracting Methods and Contract
Types

By the end of this module, you will be able to—

 Identify the various contracting methods
 Discuss a form of competitive proposals known as reverse
auction
 Describe the noncompetitive selection processes, which
include single-source or sole-source negotiations
 Describe the 3 general categories of contracts and the contract
types within each category developed to deal with various cost
uncertainties and risks
 Identify the factors to be considered in selecting the appropriate
contract type
 Explain how selecting a contract type may affect contract
performance

Tool: Buyer's Guide to Contracting Methods

 Purchase agreements
 Credit or purchase cards (P-cards)
 Petty cash

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 2-4
Formal Competitive Bidding Methods

 2 approaches
– Sealed bidding
– 2-step sealed bidding
 Sealed bidding appropriate with definitive specifications
 2-step approach appropriate when specifications are not definitive
but award will be made to the low bidder in step 2

 Price is the primary attribute of interest.

 The low bidder (usually) gets the contract.
 Firm-fixed-price (FFP) contracts are used.
 No discussions between the buyer and seller occur after the
opening of the bids.

Step 1
 Review the technical bids and other qualification data submitted
by the sellers.
 Identify the “technically acceptable” bids.
Step 2
 Solicit prices from acceptable sellers.
 Apply the sealed bid criteria for the award.

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 2-7
Competitive Proposals: Key Steps in Source
Selection

Step 1: The buyer develops the requirements and selection

criteria and procedures.
Step 2: The buyer solicits proposals from the potential sources.
Step 3: The buyer receives and evaluates the proposals.
Step 4 (optional): The buyer determines a “short list.”
 Step 4a: Discuss/negotiate with the short list.
 Step 4b: Sellers submit the revised proposals.
Step 5: The buyer selects the best source.
Step 6 (optional): The buyer negotiates with the selected source.

Reverse auction is—

 An accelerated form of competitive proposals
 Popular in government and commercial e-commerce
Buyers and sellers
 Sellers compete in an online, real-time process of bidding
against each other to offer the lowest price (or best value) to
the buyer.
 Sellers are aware of each other’s offers, and multiple “rounds”
of offers are encouraged.
 The buyer selects the seller based on the criteria of low price or
best value, as appropriate and as previously announced.

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 2-9
Formal Noncompetitive Method: Negotiation with a
Single Source (Sole Source)

 The process is relatively flexible.

 The proposal is preceded by preliminary discussions.
 The proposal is followed by fact finding.
 Negotiation leads to an agreement and award.
 The process requires skill, patience, and know-how.

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 2-10
Comparison of Contracting Methods

 Contracting Method Selection

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 2-12
Uncertainty and Risk in Contracting

Sources of uncertainty
 Lack of clarity/understanding of requirements
 Cost uncertainty
 Technical unknowns
 Schedule uncertainty
 Behavioral/cultural issues
– Interpretation, haste, regulated environment
Contracts must be structured and managed to distribute and
control risk in an equitable way.

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 2-13
Categories and Types of Contracts

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 2-14
Range of Contract Types and Distribution of Risk

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 2-15
Type of Contract—Business Objective

To negotiate a contract type and price (or estimated cost and

fee) that will result in reasonable seller risk and provide the
seller with the greatest incentive for efficient and economical
performance

Tool: Buyer's Guide to Pricing Arrangements

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 2-20
Point of Total Assumption (PTA)

 This is the point at which the seller assumes total responsibility

for any further increases in cost.
 PTA is being introduced to FPIF contracts on an increasingly
wide basis.
 PTA is not 1 of the elements that the parties specifically agreed
to in the contract structure.
 PTA can be calculated from the agreed-upon elements.

The calculation for PTA is—

Ceiling Price – Target Price + Target Cost

Buyer’s Share

Base fee
 The minimum amount of fee the seller will receive
 0 to 3% of estimated contract cost
Maximum fee
 The maximum amount of fee the seller will receive
Award fee
 Governed by an award-fee plan
 Divided into award-fee periods (3 to 6 months)
 Paid by a unilateral contract modification
 Can be used with other types of contracts

Developed by the buyer

Includes—
 The reason for using an award fee
 A description of the evaluation organization
 The structure of the award-fee plan
 Responsibilities of the players
 Procedures for award-fee evaluation
 The precise breakdown of the evaluation categories, criteria,
and possible performance ratings
 Payment procedures

 These contracts are a combination of fixed-price and cost-

reimbursement contracts.
 These contracts use fixed-price hourly labor rates.
 Direct and indirect costs and profit are included in the rates.
 The buyer pays for actual labor hours at hourly rates plus
materials.
 Some countries may consider T&M contracts to have equal status
as a binding cost estimate.

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 2-27
Disadvantages of T&M Contracts

 Hours and materials costs need to be confirmed (audited).

 The seller profit increases when the usage exceeds the original
estimates.
 The arrangement rewards inefficiency.

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 2-28
Factors in Selecting Contract Types

 Capability of seller’s accounting system

 Willingness to share cost and profit information with the buyer
 Uncertainty in the cost estimate
 Type and complexity of the requirements
 Urgency of the requirement
 Marketplace and competition
 Seller’s technical capability
 Administrative costs to both parties
 Size and amount of the contract

 Contract Type Selection

 Pricing Arrangements (Optional Exercise)

 Simplified contracting methods eliminate many of

the steps of formal methods in order to make small
or routine buys cost-effective.
 Competitive bidding and competitive proposals are
formal contracting methods.
 Noncompetitive negotiations with sole-source or
single-source sellers should be justified before
being undertaken instead of pursuing competition.

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 2-32
KEY MESSAGES
 Contract types are the primary way to allocate risk
between buyers and sellers:
‒ The most risk is placed on the seller under an FFP
(continued)

contract.
‒ The most risk placed on the buyer is with a T&M
contract.
 CPAF contracts can be used when fee incentives
are tied to subjective measures.
 To use a cost-based price term successfully, the
seller must have a sophisticated cost accounting
system and be willing to share cost, overhead, and
profit information.

By the end of this module, you will be able to—

 Describe each step a buyer and a seller must complete during
the preaward phase
 As a buyer, determine whether goods and services should be
provided within or outside an organization
 As a buyer, determine the appropriate contracting method and
contract type
 Describe the evaluation criteria commonly used by buyers to
select sellers
 As a seller, analyze opportunities, weigh risks versus benefits,
and determine whether to pursue a business opportunity

Needs are formalized into—

 Objectives
 Requirements
– Business
– User
– Functional
– Nonfunctional

Collect requirements to define and document the needs of the

project.
 Needs exist on various levels.
 Needs should be separated from wants.
 Projects are often built on conflicting needs.
 Customers often do not know, or understand, their needs.
– Review the organization’s methodologies and internal processes.
 Needs are assessed passively through a document review,
questionnaires, surveys, analyses, and audits.
 A participative needs assessment can be done using
interviews, focus groups, facilitative workshops, and prototypes.

A management technique used to determine whether a

particular product or service can be produced or performed
cost-effectively by the performing organization or should be
contracted out to another organization
 The analysis considers—
– The direct costs of contracting for the product or service
– Any administrative costs in managing the contract
– The performing organization’s capability (and desire) to make it in
house or to purchase from another organization
 The "buy" decision begins the contract planning process.

Tool: Make-or-Buy-Analysis Checklist

 Going “outside the team” to purchase or acquire—

– Materials
– Services
– People
 The project team, led by the project manager (and working with the
contract manager, if appropriate), becomes the customer—
– Selecting the contract type
– Preparing contracting documents
– Selecting the contractor (vendor)
 Get your contract group involved early.

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 3-6
The Objectives of Contract Planning

The most important reasons to plan contracting include—

 Documenting why you have chosen to buy versus make
 Documenting how the contract plan impacts the overall project
management plan
 Producing the contract documents, which—
– Define in sufficient detail what exactly you need to outsource
(procure) so that all parties can clearly understand the
requirements
– Provide all parties with a clear understanding of how the potential
sellers will be evaluated and selected
– Define a pragmatic time line for the contract process

Buyer’s and Seller’s Steps

The contract management plan describes how the contracting

processes will be managed throughout the life of the contract, from
developing the various documents until the contract is closed.
 Types of contracts
 Risk management issues
 Independent estimates
 Roles and responsibilities
 Standardized contract documents and procedures
 Constraints and assumptions
 Handling lead times
 Managing multiple suppliers
 Handling make-or-buy decisions
 Formatting of contract SOWs (for the seller's use)
 Defining the involvement of specialists/experts
© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 3-9
CASE STUDY

 Finalizing the Contract Management Plan

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Issuing the Invitations/Solicitations

Contract documents are used to solicit information and

proposals from sellers. Some of the most common ones are—

Request for information (RFI) Issued to solicit information about a product or

service to determine whether the product or
service is viable and cost-effective
Request for proposal (RFP) Used to request proposals from prospective
sellers
Request for quotation (RFQ) Used to specifically solicit quotes or bids from
prospective sellers

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 3-11
Source Selection Criteria (Attributes)

 Attributes are features or qualities of a product, service, or

supplier.
 Their importance depends on the customer’s needs.
 The evaluation of the product, service, or supplier is the sum of
weighted attribute evaluations.

There are 3 general categories:

 Technical
 Management
 Price
The selection and weighting of the attributes must reflect the
buyer’s needs.

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 3-13
Technical Evaluation Criteria

Relate to features or qualities of the offered product or service

Examples:
 Understanding of need
 Technical approach
 Technical capability

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 3-14
Management Evaluation Criteria

Features or qualities of the seller as an organization

Examples:
 Management approach
 Production capacity and interest
 Financial capacity
 Business size and type
 IP rights
 Proprietary rights
 References

The acquisition price is often made up from 2 elements:

 Capital expenditure
 Operating expenditure
Life-cycle cost
 Maintenance
 Ownership costs

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 3-16
Seller’s Past Performance as an Evaluation Factor

 There is an increasing trend toward the evaluation of the seller's

past performance.
 Past performance reduces the emphasis on merely writing good
proposals.
 Past performance can be evaluated as a separate evaluation
factor or as a subfactor under technical excellence or management
capability.
 There are many tools that can help you to evaluate a seller's past
performance:
– Independent analyses from specialist companies
– Your own company’s/an individual's experience
– Industry benchmarking companies

 Selection Criteria and Instructions to Offerors'

Development

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 3-18
Contract Management Process: Preaward Phase

Seller’s Steps

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 3-19
The Seller's Presales Activity

 Is the process of early involvement with potential buyers—

understanding and influencing their needs, plans, and
expectations
 Includes market research, the evaluation of competitors, the
evaluation of ourselves, and the identification of potential/existing
customer needs
 Results in a competitive analysis report and preliminary bid/no-bid
decision

Tool: Competitive Analysis Matrix

Tool: Opportunity Analysis and Risk Versus Benefits Template
© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 3-20
Seller: Bid/No-Bid Decision Making

 Is the process of evaluating risk threats vs. opportunities and

making an informed and intelligent decision
 Includes a review of the solicitation, buyer-specific information, and
the competitive analysis report
 Results in a bid/no-bid decision, a justification for the decision, and
a budget for the proposal effort

Tool: Bid Risk Decision Checklist

 Is the process of developing and implementing a successful bid or

proposal strategy, thus winning new business
 Involves the seller using the solicitation, past proposals, and the
competitive analysis to develop a proposal
 Results in a bid/proposal, supporting documentation, and
sometimes an oral presentation

Tool: Proposal Compliance Matrix—Sample

Bid or proposal: The actual proposal preparation is usually a team

effort that should be managed as a mini-project.
 As such, the proposal effort must be planned, coordinated,
funded, implemented, and controlled from the perspective of
time, cost, and quality.
 The proposal is more than just a technical document; it is a
written sales presentation and it must be persuasive.
 All the customer's needs must be addressed.
 Attention to detail is essential!

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 3-23
The Final Bid or Proposal (continued)

 Winning theme: Use high-level benefits and features that lead

the entire proposal.
 Supporting documentation: Use, as necessary, to increase
the credibility or impact of the proposal.
 Oral presentation: When allowed by the buyer (frequently for
the short list), allow for real-time discussions, clarifications,
demonstrations, and feedback.
– Frequently, the oral presentation is where the opportunity is won or
lost.
– Do not underestimate the time it takes to prepare an oral
presentation—including rehearsals.

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 3-24
 The make-or-buy analysis and decision are the
KEY MESSAGES most important aspects of contract planning for the
project manager and should be based on input from
the key members of the project team.
 Contract planning for the buyer is the process of
documenting the purchase decisions, specifying the
approach, and identifying the potential sellers,
including make-or-buy decisions and releasing
contracting documents.
 The buyer should select 5 to 6 specific evaluation
criteria from the 3 major categories of source
selection criteria, which are technical, management,
and cost-related criteria.
 Conducting presales activities for the seller is the
process of documenting the bid/no-bid decision,
specifying the approach to the response, and writing
the response.

 The seller’s bid/no-bid decision should be based on

a thorough analysis of the risks and opportunities
presented by the invitation compared to other
alternatives.
 In addition to responding to solicitations, sellers
should conduct presales activities designed to
generate sales opportunities.

By the end of this module, you will be able to—

 Explain the process to select the correct seller
 Explain the various approaches used for source selection
evaluation standards
 Describe the contract negotiation process
 Apply negotiation planning tools and negotiation best practices
 Develop negotiation strategies, tactics, and countertactics

Buyer’s and Seller’s Steps

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 4-3
Solicitation and Evaluation of Proposals

The solicitation and evaluation of proposals is part of the

buyer's process.
 Involves obtaining seller responses, selecting a seller, and
awarding the contract
 Involves taking into consideration that—
– Price may be the primary determinant
– Proposals are often separated into technical, price, and
management sections, with each evaluated separately
– Multiple sources may be required for critical products and services
 Includes the use of expert evaluators, the application of
evaluation criteria to proposals, and negotiations
 Results in the selected seller(s), the contract award, and project
document updates
Tool: Vendor Proposal Evaluation Chart
© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 4-4
Source Selection Process

The process of comparison and decision

Informational prerequisites include the knowledge of—
 Required goods and services
 Industry
 Market practices
Selection criteria elements:
 Attributes of interest
 Standards
 Weights

 Relate to attribute values

 Are compared to standards as the basis for proposal evaluation
 Include three approaches:
– Absolute standards
– Minimum standards
– Relative standards

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 4-6
Absolute Standards of Evaluation

 The evaluator must determine the best and worst attribute values.
 The evaluation score is determined by comparing proposed
attribute values to standards.

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 4-7
Minimum Standards of Evaluation

 The buyer defines only the minimum acceptable level of attribute

values.
 Proposal values below the minimum acceptable level receive a
score of 0 for that attribute or are disqualified.
 The best proposal gets the highest score.
 Others’ scores are based on the ratio to the best.

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 4-8
Relative Standards of Evaluation

 The buyer defines neither the minimum nor best performance.

 Each supplier is compared directly to others.
 The best value gets the highest score—the worst gets 0.

 Collect information about the potential sources.

 Read and analyze the information.
 Make comparisons based on the standards.
 Assign scores.
 Apply weights.
 Rank the alternatives.
 Select the best alternative.
 Keep records for justification (if necessary).

 Proposal Evaluation

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 4-12
Contract Negotiations and Formation

Buyer’s view and seller’s view

 The process of reaching agreement on the technical, schedule,
price, and other Ts&Cs

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 4-13
Contract Negotiation: A Complex Activity for Both
Buyers and Sellers

Successful negotiators must—

 Exhibit behavioral and analytical skills to diagnose problems
and adapt winning strategies
 Understand their own personalities and personal ethics and
values
 Know their products and services, desired Ts&Cs, and pricing
strategy

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 4-14
Impact on Long-Term Relationships

 Win-win negotiations result in win-win relationships where both

parties gain from the relationship.
 Win-lose negotiations frequently result in lose-lose relationships
where both parties, even the 1 that “won” the negotiation, are
worse off than they would have been with a different deal
(Remember John and Rachel?).

 Personal: Family and friends

 Professional
– Internal: Your organization
– External: Buyers and subcontractors

Questions: How well do you negotiate?

Are your negotiations win-win or win-lose?

Intuitive approach
 Nonstructured
 Informal—not written
 Inconsistent results
Process approach
 Structured, planned
 Documented actions
 More consistent results

Getting to “yes” means—

 Getting around “yes, but—”
– Focusing on common interests, not positions
– Using joint problem solving, both internally and externally
– Realizing that the right solution is a matter of perspective—buyer or
seller
 Getting past “no”1

1Fisher, Roger, and William Ury. Getting to Yes: Negotiating Agreement Without Giving In. 2nd ed. New York: Penguin Books, 1991, pp. 22–24,
40, and 59.

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 4-18
Buyer’s Negotiation Objectives (Interests)

 Acquire the necessary supplies and services of the desired

quality—on time and at the lowest-reasonable price.
 Establish and administer a pricing arrangement that results in the
payment of a fair and reasonable price.
 Satisfy the needs of the end user (customer).

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 4-19
Seller’s Negotiation Objectives (Interests)

 Profitability (long term vs. short term)

 Market share
 Satisfying the needs of the customer

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 4-20
The Key to Successful Negotiation Is Preparation

 Prepare adequately and completely.

 Determine each party's interest.
 Create options and know your alternatives.
 Establish an up-front and respectful tone.
 Establish and maintain effective communications.
 Deal with issues honestly and forthrightly.
 Encourage the cooperation of the entire team.
 Exercise sound business judgment.

Tool: Negotiation—Things to Know About the Other Party

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 4-21
The Contract Negotiation Process: Best Practices

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 4-24
Tactics and Countertactics (the Good, the Bad, and
the Ugly)

 Tactics and countertactics are a means to a desired end.

 The key is to—
– Know what they are
– Identify the tactic when it is being used
– Know how best to counter the tactic

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 4-25
Tactics and Countertactics I (Buyer vs. Seller)

Tactics Countertactics
 Attacks (hot buttons)  Disclose the attack
– Personal insults  Strike back
– Emotional reactions  Give in
– Professional insults  Break off
 Explore alternatives

 Tricks  Know the truth

– False data – Have the right data
– No authority to negotiate – Establish in writing who
has authority
 Escalate

Tactics Countertactics
 Arbitrary deadlines  Agree with the deadline
 Counter the offer with a
compromise to the schedule
 Refuse to change the
schedule

 Coordinate schedules in
 Limited availability
advance
 Counter with your limited
availability
 Be flexible
 Escalate

Tactics Countertactics
 Third-party scapegoat  Escalate to a third party
– Real approval required  Compromise
– Pretend such approval is
required

 Disclose them as
 Giveaways giveaways
 Exchange giveaways

Tactics Countertactics
 Good guy-bad guy  Counter with bad guy-good
guy
 Escalate

 Prolonging the negotiation  Take a break or have a

caucus
 Maintain silence

Tactics Countertactics
 Delays  Start on time
– Submission of data  Claim limited availability
– Start of negotiation  Leave or create greater
– Return from breaks delays

 Diversions  Keep things on track

– Questions – Refocus the team
– Telephone calls – Have no phones in the
– Faxed messages room
– Personal breaks – Allow no interruptions
 Take a break

Tactics Countertactics
 Stonewall  Give in
– Take it or leave it!  Say "Yes, and..."
– I shall not move!  Walk away
 Escalate

 End-of-quarter or end-of-  Settle in next quarter or

year negotiation pressure next year

 Take the time throughout the negotiation to take notes.

 If possible, assign 1 team member to be your note taker.
 Use periodic summaries of agreement on interests or issues
throughout the negotiation.
 At the end of the negotiation, summarize your mutual agreement
both orally and in writing.
 If you do not reach a settlement, document your areas of both
agreement and disagreement—if possible, plan a future meeting to
resolve differences.

Postnegotiation activities include writing up the agreement,

obtaining necessary approvals, and getting authorized
signatures from both parties.

 Let's Make a Deal

© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 4-34
KEY MESSAGES
 The objective of source selection, in many cases, is
to get the best overall deal for each party, not
necessarily the lowest price for the buyer or the
highest price for the seller.
 Evaluation criteria can be judged by absolute,
minimum, or relative standards, and weighting
factors can be applied to the scores generated by
the standard to arrive at a final overall score for
each proposal.
 Win-win results are accomplished most easily by
focusing on problem solving, objective standards,
and the interests of the parties rather than their
positions on the issues.

 Prepare for negotiations thoroughly and know in

advance your opening, target, and walkaway
(continued)

positions so that you do not agree to a bad deal.

 Recognize win-lose negotiating tactics and be
prepared to respond to them in a rational way to
achieve win-win results.
 Document the results of negotiations as they
progress and again when they have been
completed, even if only tentative agreements are
reached.

By the end of this module, you will be able to—

 State the principal objective of contract administration from the
viewpoints of the buyer and seller
 Explain the 5 key policies of contract administration
 Describe the purpose and content of a preperformance
conference
 Differentiate between contract modification and contract
variance
 Assess the actions available to correct variances

 Describe the principles of change management and the

difference between unilateral and bilateral changes
 Apply proper methods for adequate documentation and
understand its significance in effective dispute resolution
 Implement the procedures available to terminate a contract

 Contract administration is the management of the relationship with the

contractor from contract award to closeout, focused specifically on ensuring
that the contractor delivers a product or service in conformance with the
contract's requirements.1
 Both the buyer and seller must administer the contract to ensure that both
parties meet their contractual obligations and that their own legal rights are
protected.
 On larger projects with multiple products, services, and results providers, a key
aspect of contract administration is managing interfaces and relationships
among the various providers.
 Contract administration includes the application of the appropriate project
management processes and integration of the outputs from these processes
into the overall management of the project.
 Contract administration also has a financial management component that
involves the monitoring of payments to the seller.
1 Ward, J. LeRoy. Dictionary of Project Management Terms. 3rd ed. Arlington, Va.: ESI International, 2008, p. 87.

 Compliance with Ts&Cs

 Effective internal and external communication and control
 Effective control of contract changes
 Effective resolution of claims and disputes
 Timely payment of invoices

Definition
 Treating independent contract personnel as if they were
employees
Issues
 Tax consequence
 Fringe benefits
 Liability for injury to or actions of “employees”
 Ability to terminate

The 6 great excuses:

 I never saw the contract.
 I didn’t have a chance to read the contract.
 I didn’t understand the contract.
 I thought the contract was wrong.
 That’s not what the contract says.
 What contract?

 Contracts are relationships.

 Relationships are not cast in concrete—they change with the
circumstances.
 Communication is essential for effective responses to changes.
 Sharing information is necessary.

 Analyze obligations, assign responsibilities, and set performance

goals.
 Conduct a preperformance (kickoff) meeting.
 Observe, document decisions and events, and report performance.
 Identify and analyze variances.
 Take corrective action.
 Follow up.
 Manage changes and disputes.
 Close out the contract.

 Read all the Ts&Cs.

 Separate into technical and administrative requirements.
 Develop a work breakdown structure (WBS).
 Identify who is responsible for the work elements.

 Discuss the requirements with the affected managers.

 Determine—
– Who
– What
– When
– Where
– How
 Seek an agreement and/or commitment.

 Set up the conference as a meeting between the buyer and seller.

 Hold the conference before the start of performance.
 Review the contract Ts&Cs.
 Establish administrative procedures.
 Establish communication protocols.
 Keep and distribute meeting minutes.

Tool: Preperformance Checklist and Contract Requirements Matrix

 A focus on the critical aspects of performance

 4 primary areas of concern:
– Costs
– Schedule
– Technical and quality
– Administrative tasks

 May be oral or written

 Include the observations and conclusions of others
 Present information that is not “real time”
 May afford opportunities for errors:
– Accuracy
– Objectivity
– Honesty
– Timeliness
– Competence of observer

 Subject matter
 Contents
– Raw data
– Analyses
– Conclusions
– Combination of above
 Frequency and timing
 Format
 Address(es)

 Main purpose: Reduce reliance on the human memory.

 Efforts must be thorough and consistent.
 They are essential for—
– Proof of performance
– Management of changes
– Proof of claims
– Evidence in case of litigation
 Official copy of contract and modifications
 Working copy of contract
 Correspondence file

 Pending action items

 Telephone log
 Records of deliveries, inspections, acceptances
 Progress reports
 Property administration records
 Invoice and payment records

 Are departures from expectations

 Must be identified, measured, and analyzed
 Require prompt recognition and appropriate response
 Have technical, schedule, and/or cost impact
 Cost overrun: Increase in cost, no increase in scope
 Cost growth: Increase in cost, increase in scope

NOTE: Cost increase can be characterized as either a cost overrun

or as cost growth.

 Objectives include—
– Eliminate the cause of significant variance.
– Correct the defective performance.
 Follow up and document.
 Notify the other party.

Requires mutual consent, unless—

 The contract authorizes a unilateral direction

 Changes modify the contract requirements and Ts&Cs.

 They add, delete, or both.
 They affect the project constraints.
 Modifications are inevitable.
 Change provides an opportunity for additional sales.

Management objectives include—

 Control
 Customer satisfaction
 Cost recovery
 Schedule adjustment
 Profit

 Ensure that only authorized representatives make, accept, or

negotiate the contract changes.
 Add the appointed representatives to the contract.
 Change the orders in writing, when possible.
 Confirm the oral changes in writing.

Tool: Change Request

 Notify the other party of actions or inactions that are changes, such
as a constructive change.
 Notify promptly, in writing.
 Provide a full description and explanation.

 Contract Modifications

 Contract agreements are not perfect.

 Misunderstandings are inevitable.
 Claims and disputes—
– Are sometimes a part of the contracting process
– Must not be allowed to disrupt performance
– Must be resolved promptly and dispassionately

 Negotiation, compromise
 Escalation
 Mediation
 Arbitration
– A submission of dispute to the disinterested person or persons for a
final decision
– Objective: A final disposition in an inexpensive, expeditious, and less
formal manner
– A substitute for litigation
 Litigation

Termination by mutual agreement:

• Both parties agree to terminate their rights and obligations under
the contract.
Termination for cause or default:
• The seller or buyer fails to perform, as required, by the contract
terms.
Termination for convenience:
• A no-cause termination—either the buyer’s requirement has
substantially changed, it no longer exists, or it is otherwise in the
best interest of 1 of the parties to terminate.

Buyer's and seller's steps

 Is the process of completing each project contract
 Includes administrative activities, such as finalizing open
claims, updating records to show the final status, and archiving
documentation
 May include audits, the negotiation of final contract actions, and
the payment of money due from 1 party to the other

The contract closeout checklist describes 9 steps to assist you

in closing out a contract. It includes questions relating to—
 Products and services delivered to the buyer
 The formal acceptance of all contract items
 Pending claims and investigations
 The return of buyer-furnished property
 Price revision and changes

Tool: Contract Closeout Checklist

 Lessons learned are critical to future success.

 A user-friendly database is an easy way to access valuable
information.

Tool: Lessons Learned

Tool: Postcontract Summary
© 2018 TWENTYEIGHTY Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 5-33
 Project managers should begin the postaward
phase with a kickoff meeting for internal staff and a
KEY MESSAGES
preperformance conference for the customer and
major subcontractors.
 Performance reports and overall contract
documentation are the essential means of
monitoring progress and documenting what
occurred in the event of claims or disputes.
 Changes and claims usually cannot be avoided, so
they must be managed and controlled.
 Contracts may reach their conclusion through a—
– Normal closeout process after the completion of
performance
– Default termination
– Termination for convenience

Financial Impact of Nonstandard Ts&Cs

This document identifies several frequently used, nonstandard Ts&Cs. The use of these Ts&Cs
can have a serious negative impact on the profitability of a contract—particularly if several of
them are used on the same contract.

The probable financial impact usually is not recognized during the negotiation phase of the
contract, when the Ts&Cs are being agreed to. The financial impact does not become apparent
until the completion of the contract, when it is too late to correct it. The result is that a contract
that appeared to be a “good deal” at the beginning turns into a “bad deal” (sometimes a very
bad deal) by the time it is completed.

These nonstandard Ts&Cs have a negative financial impact in one of two ways: (1) by directly
reducing profit (because of either reduced revenue or increased cost) or (2) by delaying the
receipt of cash (thereby reducing profitability in the amount of the time value of the delayed
receipt).

The amount of the negative financial impact will differ from contract to contract. Project
managers should be sensitive to the appearance of any of these clauses. Some of these
clauses may even be suggested by the sales team as a way of “sweetening the deal” to help
ensure that the seller wins the contract. If any of these clauses are suggested, an honest
appraisal of their probable impact must be estimated before they are agreed to. The clause
should be eliminated, modified to reduce its negative impact, or the seller’s price should be
adjusted upward to accommodate the probable impact—otherwise significant profit erosion can
be expected.

Ts&Cs That Cause a Direct Reduction of Profit

Price Discounts

Price discounts reduce profitability directly by the amount of the discount.

Taxes and Duties Payable By The Seller

Taxes and duties should be paid by (or at least collected from) the buyer. If the seller agrees to
pay them, the profit will be reduced accordingly.

Liquidated Damages
Liquidated damages will result in a reduced revenue in the amount of the damages paid. The
probable impact can be estimated by multiplying the amount of the damages by the probability
of occurrence of the event causing the damage.

© 2018 TwentyEighty Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 A1
Liability
Other liabilities that are specified in the contract can be estimated by multiplying the amount of
the liability by the probability of its occurrence.

Special Financing
If the seller is required to provide special financing, contract profitability will be reduced by the
cost of the financing. Normally, this can be estimated using the net present value computation
for the amount and duration of the financing.

Extended Warranty
Extending the warranty will reduce contract profitability by the probable cost incurred during the
extended warranty period.

Premium Transportation
The use of premium transportation reduces profitability directly in the amount of the premium
transportation cost.

Additional Technical Support/Training

Additional technical support/training cost is a direct reduction of contract profitability.

Unclear Scope
Unclear scope has an indefinite impact on contract profitability. Frequently, the concessions
made by the seller as a result of an unclear scope are approximately 5 percent of the contract
value.

Ts&Cs That Cause a Delayed Receipt of Cash

Extended Payment Terms

The financial impact of extended payment terms can be estimated by multiplying the amount of
the deferred payment(s) by the company’s cost of money factor for the duration of the delayed
payment.

Delayed Invoicing
Delayed invoicing will have the same financial impact as the extended payment terms.

Subjective Acceptance
Subjective acceptance criteria allow the buyer to prolong the acceptance process, thereby
delaying the invoicing and/or payment. Subjective acceptance criteria can often cause a 60-day
delay in the invoicing and/or payment.

A2 PMC:DF3:EN:000 ver. 2.0 | © 2018 TwentyEighty Strategy Execution. All rights reserved.
Customer-Caused Delays
Any customer-caused delays (delayed inspection, delayed facilities availability or access,
delayed approvals, and so on) can result in the delayed completion and billing of the work. If
customer requirements are not addressed clearly in the contract, delays of 60 days (or more)
can be anticipated. At a minimum, the financial impact is the time value of the delayed payment.
These delays can result in a significantly increased cost as well.

Precontract Costs
Precontract costs are incurred when schedules are critical and work must start before the
complete contract authorization is in place. Incurring cost before the contract award can result in
a delayed payment for the work performed and, in extreme cases, may result in work performed
that is never paid for. The impact can be determined only on a case-by-case basis, depending
on the amount and duration of exposure and the probability of a successful outcome.

© 2018 TwentyEighty Strategy Execution. All rights reserved. | PMC:DF3:EN:000 ver. 2.0 A3
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