Managing contracts
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This document discusses various types of contracts for acquiring software from external suppliers, including fixed price, time and materials, and fixed price per delivered unit. It describes the advantages and disadvantages of each type from the customer's perspective. The document also outlines the stages in a contract placement process, including requirements analysis, invitation to tender, proposal evaluation, and evaluation plan.
Managing contracts
- 1. 1 ©The McGraw-Hill Companies, Software Project Management 4th Edition Managing contracts Chapter 10
- 2. 2 ©The McGraw-Hill Companies, Acquiring software from external supplier This could be: • a bespoke system - created specially for the customer • off-the-shelf - bought ‘as is’ • customized off-the-shelf (COTS) - a core system is customized to meet needs of a particular customer
- 3. 3 ©The McGraw-Hill Companies, ISO 12207 acquisition and supply process
- 4. 4 ©The McGraw-Hill Companies, Types of contract • fixed price contracts • time and materials contracts • fixed price per delivered unit Note difference between goods and services Often license to use software is bought rather than the software itself
- 5. 5 ©The McGraw-Hill Companies, Fixed price contracts Advantages to customer • known expenditure • supplier motivated to be cost-effective
- 6. 6 ©The McGraw-Hill Companies, Fixed price contracts Disadvantages • supplier will increase price to meet contingencies • difficult to modify requirements • upward pressure on the cost of changes • threat to system quality
- 7. 7 ©The McGraw-Hill Companies, Time and materials Advantages to customer • easy to change requirements • lack of price pressure can assist product quality
- 8. 8 ©The McGraw-Hill Companies, Time and materials Disadvantages • Customer liability - the customer absorbs all the risk associated with poorly defined or changing requirements • Lack of incentive for supplier to be cost- effective
- 9. 9 ©The McGraw-Hill Companies, Fixed price per unit delivered FP count Design cost/FP implement- ation cost/FP total cost/FP to 2,000 $242 $725 $967 2,001- 2,500 $255 $764 $1,019 2,501- 3,000 $265 $793 $1,058 3,001- 3,500 $274 $820 $1,094 3,501- 4,000 $284 $850 $1,134
- 10. 10 ©The McGraw-Hill Companies, Fixed price/unit example • Estimated system size 2,600 FPs • Price – 2000 FPs x $967 plus – 500 FPs x $1,019 plus – 100 FPs x $1,058 – i.e. $2,549,300 • What would be charge for 3,200 FPs?
- 11. 11 ©The McGraw-Hill Companies, Fixed price/unit Advantages for customer • customer understanding of how price is calculated • comparability between different pricing schedules • emerging functionality can be accounted for • supplier incentive to be cost-effective
- 12. 12 ©The McGraw-Hill Companies, Fixed price/unit Disadvantages • difficulties with software size measurement - may need independent FP counter • changing (as opposed to new) requirements: how do you charge?
- 13. 13 ©The McGraw-Hill Companies, The tendering process • Open tendering – any supplier can bid in response to the invitation to tender – all tenders must be evaluated in the same way – government bodies may have to do this by local/international law
- 14. 14 ©The McGraw-Hill Companies, The tendering process • Restricted tendering process – bids only from those specifically invited – can reduce suppliers being considered at any stage • Negotiated procedure – negotiate with one supplier e.g. for extensions to software already supplied
- 15. 15 ©The McGraw-Hill Companies, Stages in contract placement requirements analysis invitation to tender evaluation of proposals evaluation plan
- 16. 16 ©The McGraw-Hill Companies, Requirements document: sections • introduction • description of existing system and current environment • future strategy or plans • system requirements - – mandatory/desirable features • deadlines • additional information required from bidders
- 17. 17 ©The McGraw-Hill Companies, Requirements • These will include – functions in software, with necessary inputs and outputs – standards to be adhered to – other applications with which software is to be compatible – quality requirements e.g. response times
- 18. 18 ©The McGraw-Hill Companies, Evaluation plan • How are proposals to be evaluated? • Methods could include: – reading proposals – interviews – demonstrations – site visits – practical tests
- 19. 19 ©The McGraw-Hill Companies, Evaluation plan - contd. • Need to assess value for money for each desirable feature • Example: – feeder file saves data input – 4 hours a month saved – cost of inputter £20 an hour – system to be used for 4 years – if cost of feature £1000, would it be worth it?
- 20. 20 ©The McGraw-Hill Companies, Invitation to tender (ITT) • Note that bidder is making an offer in response to ITT • acceptance of offer creates a contract • Customer may need further information • Problem of different technical solutions to the same problem
- 21. 21 ©The McGraw-Hill Companies, Memoranda of agreement (MoA) • Customer asks for technical proposals • Technical proposals are examined and discussed • Agreed technical solution in MoA • Tenders are then requested from suppliers based in MoA • Tenders judged on price • Fee could be paid for technical proposals by customer
- 22. 22 ©The McGraw-Hill Companies, How would you evaluate the following? • usability of an existing package • usability of an application yet to be built • maintenance costs of hardware • time taken to respond to requests for software support • training
- 23. 23 ©The McGraw-Hill Companies, Contract management Contracts should include agreement about how customer/supplier relationship is to be managed e.g. – decision points - could be linked to payment – quality reviews – changes to requirements
Editor's Notes
- #2: This talk provides an overview of the basic steps needed to produce a project plan. The framework provided should allow students to identify where some of the particular issues discussed in other chapters are applied to the planning process. As the focus is on project planning, techniques to do with project control are not explicitly described. However, in practice, one element of project planning will be to decide what project control procedures need to be in place.
- #4: Part of the ISO 12207 standard relates to the process by which software can be acquired from an external supplier. As can be seen from the diagram, there are two parallel and complementary processes. The acquirer (who wants the software) has a set of processes to carry out which interact with the processes for which the supplier would be responsible. Sections 10.2 and 10.3 of the textbook cover this in more detail.
- #5: Section 10.4 of the textbook provides more detail about the types of contract.
- #7: Even though the supplier will have to add a margin to the price to deal with contingencies, the cost could still be less than doing the work in-house as the supplier may be able to exploit economies of scale and the expertise that the have from having done similar projects in the past.
- #9: Because suppliers appear to be given a blank cheque, this approach does not normally find favour with customers. However, the employment of contract developers may involve this type of contract.
- #10: These figures do come from a real source (RDI Technologies in the USA). These are now several year old. The bigger the project, the higher the cost per function point. Recall that function points were covered in Lecture/Chapter 5 on software effort estimation.
- #11: 2000 FPs at$967 =$1,934,000 500 FPs at $1019 = $509,500 500 FPs at$1058 =$529,000 200 FPs at $1094$218,800 total$3,191,300
- #17: The requirements document is sometimes referred to as the operational requirement or OR. If a mandatory requirement cannot be met the proposed application would have to be rejected regardless of how good it might be in other ways. A shortfall in one desirable requirement might be compensated for by other qualities or features.
- #19: Off the shelf software clearly has an advantage here as there is actually product that can be evaluated in existence.
- #20: £(4 x 10 x 12 x 4) would be saved i.e. £3,840. The payback period would be just over a year and so this feature would be worth the additional cost.
- #21: ISO 12207 refers to an ITT as a Request for Proposal or RFP.
- #23: Usability of existing package – you could try out a demo or ask existing users Usability of application to be built – here you would have to make stipulation about the process e.g. on the development of interface prototypes; you could also specify performance requirements Maintenance costs of hardware – this could be incorporated in a maintenance agreement and you could compare the terms offered by different potential suppliers; another approach is ask current users of the hardware about their experience of it Time taken to respond to support requests – this could once again be made a contractual matter and the terms offered by different suppliers could be compared; suppliers could be asked to supply evidence of their past performance (but they might refuse, or not tell the truth); you could ask for references from current customers of the supplier; Training – once again references could be taken up; you could ask for the CV of the trainer; you could even get them to give a short presentation