Project Management

Contract & Procurement

Management

Caveat Emptor!
PMBOK DEFINITION OF CONTRACT

A contract is a mutually
binding agreement which
obligates the Seller to
provide the specified
product and obligates the
Buyer to pay for it.
 What Are Other Names For
Contracts?
•Agreements
•Subcontracts
•Purchase Orders
•Memorandum of Understanding
 What is a contract?

An agreement, enforceable at law!

It can be:
written
oral
both
 Who makes the rules?

Where does contract law come from?

• Judges (common law)

• Parliament (legislation)

Legislation prevails over common law,

but only if it exists!
When does a contract exist?
When the parties:
• have agreed on terms
• intend to be legally bound
(objective test)
• are able to be legally
bound
 Elements of a Contract

 Legal Offer
 Legal Acceptance
 Consideration
 Genuine Assent
 Competent Parties
 Legal Object
Legal Offer

 Objective intent (reasonable person assume

there is a serious intent to contract)

 Definite: Reference to subject matter,

quantity, price etc.

 Communicated
 Legal Acceptance
 Intent to accept must be shown by the offeree

 Intent must be communicated by proper

means to the person who made the offer

 Intent must stated in the same terms as the

offer. (otherwise, it is a counter offer)
 Consideration

 Adequacy of consideration, not a factor

 An exchange of something of nominal

value or inferred value

 Does NOT have to be Money!!!!!

 Genuine Assent

 Both parties entered into the contract of

their own free will

 If fraud, duress, undue influence, mutual

mistake exists, then rescission of the
contract.
 Competent parties

 Must be proven at the time the contract

was entered into

 Defense:
– Minors
– Insanity
– Intoxication
 Legal object

 Contracts that are in violation of state or

federal statutes or case law are void as a
matter of public policy

– Statutory Law, State/Federal regulations, etc.

– Case Law: Determined by a court

 Steps in reaching a contract
Decision to subcontract

Invitation to tender

Tender received and evaluated

Winning bid chosen

Negotiate contract

Award contract
 Example
 You want some work done on your house. You
meet two or three potential contractors and specify
you want the flooring replaced in the bedrooms.
You received two quotations for the replacement
of the floor tiles. Before accepting one of these, in
the course of your renovations you discover that
the flooring in the bathrooms need replacing. You
write to the lower bidder accepting the bid, but
state in your letter that you want flooring in the
bathrooms replaced at the same time.
 Do you have a contract with the bidder at this
point?
 Why contracts go wrong
1. Inadequate time given to planning and
design of contract
2. Inadequate specifications
3. Insufficient attention paid to what the
tenderer is actually offering
4. Lack of control of change
 What is Procurement?
It is the process of obtaining services,
components, supplies, etc. at an
acceptable price at the proper time and
place, in the appropriate quantities.
What is involved in Procurement
Planning?
The project manager must identify
the general scope of the project. A
scope statement describes what
needs to be done. It also states
where the project stops.
 Procurement Planning
 Procurement planning involves identifying
which project needs can be best met by
using products or services outside the
organization. It includes deciding
– whether to procure
– how to procure
– what to procure
– how much to procure
– when to procure
What Procurement Resources are
Available?
•Does the company have formal
contracting systems?
•Do they have a purchasing system
that includes requisitions or multi-
level sign-offs?
•How do they handle Request for
Proposals (RFP’s)?
 Why Outsource?
 To reduce both fixed and recurrent costs
 To allow the client organization to focus
on its core business
 To access skills and technologies
 To provide flexibility
 To increase accountability
 Procurement Planning Tools and
Techniques
 Make-or-buy analysis: determining
whether a particular product or service
should be made or performed inside the
organization or purchased from someone
else. Often involves financial analysis
 Experts, both internal and external, can
provide valuable inputs in procurement
decisions
 Make-or Buy Example
 Assume you can lease an item you need for a
project for $150/day. To purchase the item,
the investment cost is $1,000, and the daily
cost would be another $50/day.
 How long will it take for the lease cost to be
the same as the purchase cost?
 If you need the item for 12 days, should you
lease it or purchase it?
 Make-or Buy Solution
 Set up an equation so the “make” is equal to the “buy”
 In this example, use the following equation. Let d be
the number of days to use the item.
$150d = $1,000 + $50d
 Solve for d as follows:
– Subtract $50d from the right side of the equation to get
$100d = $1,000
– Divide both sides of the equation by $100
d = 10 days
 The lease cost is the same as the purchase cost at 10
days
 If you need the item for 12 days, it would be more
economical to purchase it
 Solicitation
 Solicitation involves obtaining proposals or
bids from prospective sellers
 Organizations can advertise to procure goods
and services in several ways
– approaching the preferred vendor
– approaching several potential vendors
– advertising to anyone interested
 A bidders’ conference can help clarify the
buyer’s expectations
SOLICITATION PLANNING

Involves preparing the documents

needed to support solicitation

What Type of Contractors

and Estimates Do We Need?
Do we acquire:
In-house talent?
Consultants?
Contractors?
 What is a Statement of Work
(SOW) ?
This is a written document that describes
the needed items in accurate detail so
vendors can provide precise bids.
Many contracts, or mutually binding
agreements, include SOWs
A good SOW gives bidders a better
understanding of the buyer’s expectations
This can be constantly revised as the
procurement process moves along.
 • Deliverables – what
Work Package SOW
will be delivered to
customer at end of
project
• Acceptance Criteria
– should be objective
• Constraints – a non-
negotiable limitation
• Assumptions –
premises assumed to
be true for planning
purposes
 Statement of Work (SOW) Template
I. Scope of Work: Describe the work to be done to detail. Specify the hardware and
software involved and the exact nature of the work.
II. Location of Work: Describe where the work must be performed. Specify the
location of hardware and software and where the people must perform the work
III. Period of Performance: Specify when the work is expected to start and end,
working hours, number of hours that can be billed per week, where the work must
be performed, and related schedule information.
IV. Deliverables Schedule: List specific deliverables, describe them in detail, and
specify when they are due.
V. Applicable Standards: Specify any company or industry-specific standards that
are relevant to performing the work.
VI. Acceptance Criteria: Describe how the buyer organization will determine if the
work is acceptable.
VII. Special Requirements: Specify any special requirements such as hardware or
software certifications, minimum degree or experience level of personnel, travel
requirements, and so on.
 What Types of Bid Documents are
Considered?
•Request for Proposals (RFP’s)
•Request for Quotes: (RFQ)
•Invitation for Bid (IFB)
•Invitation for Quotation (IFQ)
•Invitation for Negotiation (IFN)
•Contracts
Contract / Procurement
Management Planning
 Outline for a Request for Proposal
(RFP)
I. Purpose of RFP
II. Organization’s Background
III. Basic Requirements
IV. Hardware and Software Environment
V. Description of RFP Process
VI. Statement of Work and Schedule Information
VII. Possible Appendices
A. Current System Overview
B. System Requirements
C. Volume and Size Data
D. Required Contents of Vendor’s Response to RFP
E. Sample Contract
 Source Selection
 Source selection involves
– evaluating bidders’ proposals
– choosing the best one
– negotiating the contract
– awarding the contract
 It is helpful to prepare formal evaluation
procedures for selecting vendors
 Buyers often create a “short list”
. Sample Proposal Evaluation Sheet
Detailed Criteria for Selecting Suppliers
What Type of Evaluation Criteria Will
We Use To Choose The Best Proposal?

•Purchase Price
•Overall life cycle costs
•Technical capability
•Management Approach
•Subjective Influences
 What Should The Proposals
Describe?
•Contractor’s ability to perform

•Contractor’s willingness to perform

•Is it in accordance with requirements

of the bid?
 Contract
Contracts generally fall into one of
three broad categories:

• Fixed Price or Lump Sum

• Cost Reimbursable Contracts

• Unit Price Contract

 1. Fixed Price or
Lump Sum Contract
Involves a Fixed Total Price for a
well-defined product or service

To the extent that the product is not well defined, both

the buyer and the Seller are at RISK.
Buyer: May not receive the desired product
Seller: May need to incur additional costs in order to
provide product or service
Incentives may be included in Fixed Price or Lump
Sum Contracts for meeting or exceeding selected
2. Cost Reimbursable Contract
This category of contract involves
payment (reimbursement) to the
Contractor for its ACTUAL COSTS.
Costs are usually defined as:
Direct Costs
Costs incurred directly by the project.
Examples:
Project Labor
Materials used in the project
Salaries of project staff
2. Cost Reimbursable Contract
Indirect Costs
Costs allocated to the project by the
performing organization as a cost of doing
business. Examples:
Salaries of Corporate Executives
Home Office Accounting/Payroll Services
Home Office Information System/Project
Controls
Indirect Costs are usually calculated as a
percentage of direct costs.
 3. Unit Price Contract
Contractor is paid a present amount
per unit of service
Could be used by/on:
Professional Services
Consultants
Engineers
Design Organizations
Generally, the original contract is based on an
Estimated Set of Quantities and the final contract
is adjusted to reflect the actual quantities
performed or put into place.
 Other Contract Variations-
CPIF
 Cost plus incentive fee (CPIF): the buyer pays
the seller for allowable performance costs plus a
predetermined fee and an incentive bonus

 Examples:
Cost Price Contract = RM1,000
CPIF = RM1,000, plus RM100 for @ month
early
 4. CPIF
 Cost Plus Incentive Fee (CPIF)
– Provides to the seller reimbursement of allowable
costs, plus a predetermined fee as a bonus for
superior performance.
– If actual cost is less than expected cost, the buyer
and seller share in the savings, based on a
predetermined formula called a SHARING
RATIO
– Buyer and Seller share the risk
– Used primarily for contracts with long
performance periods
 5. CPFF
Cost plus fixed fee (CPFF): the buyer pays the
seller for allowable performance costs plus a
fixed fee payment usually based on a
percentage of estimated costs
 Example:
Contract = Cost + fixed fee of RM1,000
 Seller’s profit has ceiling but risk still
remains with buyer because there is no
motivation to control costs
– Used mainly for R&D projects where effort is
uncertain at time of contract start
 6. CPPC
Cost plus percentage of costs (CPPC): the
buyer pays the seller for allowable performance
costs plus a predetermined percentage based
on total costs
CPPC = Cost Plus Percentage of Costs
Example:
Contract = Cost + 5% of costs as fee
– Seller is obligated only to make its best effort to
fulfill the contract within the estimated amount
– Buyer funds all overruns
– Rarely used in commercial sector
– Most risk to Buyer; least to Seller
Contract Types Versus Risk
 Class Exercise
You are a manager at a large organization.
A contract has been assumed with a vendor to purchase
and install PCs at various locations in your organization.
The combined cost to install the PCs is cited by the
vendor as RM 60,000 per month, with an estimate to
complete the installation of 6 months.
The vendor’s incentive for completing a project under 6
months is RM10,000 /month.

The project was completed in two months.

How much should the vendor receive?
Cost: $60,000 X 2 months = $120,000
Incentive:$10,000 X 4 months = $ 40,000
Total $160,000

Original value: $60k X 6 months = $360,000

Benefit to Buyer = $200,000
 Contract Administration
 Contract administration ensures that the
seller’s performance meets contractual
requirements
 Contracts are legal relationships, so it is
important that legal and contracting
professionals be involved in writing and
administering contracts
 Many project managers ignore contractual
issues, which can result in serious problems
 Function of
Contract Administration
•Financial Management
• Change Management
• Specification Interpretation
• Quality & Performance
• Subcontract Management
• Production Surveillance
• Safety
• Disputes/Conflict Resolution
• Acceptance
• Closeout
• Warranties
 What constitutes a change?
Clarification of Ambiguous Contract
An Ambiguous Contract will be
interpreted against the party who
drafted the document.
Offerors in a “Bid” situation are
expected to be knowledgeable of the
normal and ordinary industrial or
construction practices pertinent to
their work.
 Change Order
A written order, signed by the
contracting officer, directing the
contractor to make a change that the
changes clause authorizes the CO to
order without the contractor’s consent.

Contract Modification
Any written change in the terms of a
contract.
 Suggestions on Change Control for
Contracts
 Changes to any part of the project need to be
reviewed, approved, and documented by the same
people in the same way that the original part of the
plan was approved
 Evaluation of any change should include an impact
analysis. How will the change affect the scope, time,
cost, and quality of the goods or services being
provided?
 Changes must be documented in writing. Project
team members should also document all important
meetings and telephone calls
 Supplemental Agreement
A contract modification that is
accomplished by the mutual action
of the parties.

Constructive Change
When contracting officer (or others)
actions are such as to have the effect of
requiring performance differing from that
prescribed by the contract.
 Contract Close-out
 Contract close-out includes
– product verification to determine if all work was
completed correctly and satisfactorily
– administrative activities to update records to reflect
final results
– archiving information for future use
 Termination For Default
Owner may terminate for default when:

C)Contractor fails to make delivery on

schedule date.

B) Contractor fails to make progress so

as to endanger performance of the
contract law or terms.

C) Contractor fails to perform any other

provisions of the contract
 Termination For Default
If reasons B or C, Owner must give
contractor written notice stating failure,
allowing time for corrective action.
If contractor does not take corrective action,
contract may be terminated with a second
notice.
(“Show Cause” also may be issued.)
Excusable delay may mitigate failure.
This clause rarely implemented!
The Tendering Process
 Why have competition
Competition should be viewed not as a
constraint, but as a tool in obtaining the best
from the market place and the tendering
process is the best way this can be achieved.
 Benefits of a tendering process
 Provides clear public accountability
 Protects employees from bias
 Level playing field to judge the market
 Ensures value for money
 Potential suppliers have the same clear
understanding of the requirement
 Sound basis for a properly constructed contract
 It prevents complacency
 Principles of effective tendering
 All tenderers receive the same information
 All tenderers work to the same timetable
 Properly controlled opening procedures guarantee
confidentiality
 Conditions which protect both parties
 Like for like assessments are made
 Every tender document must contain
 Formal invitation
 Instructions to tenderers
 The closing date
 Contract award criteria
 Definition of size & scope
 Comprehensive
specification
 Contract period &
extension options
 Conditions of contract
 Performance criteria
 Change controls
 How to deal with
variations
 A termination clause
 Form of tender
 Instructions for return of
tender
 Pricing document
 Articles of the agreement
 Tender Documents
 Covering Letter
– Instructions to the tenderers
• Dates and times
• Method of return of documents
• Award evaluation criteria
• Where to direct tender queries
 Tender Documents
– Basic company information
• Company accounts
• Insurance ( Public Liability )
• Directors
• Criminal Proceedings
• Parent Company
• Accreditations
• Policies
 Tender Documents
 Specification
– The service or goods required
• Complete the schedules
( quality, availability, price)
 Tender Documents
 Contract Conditions
– General terms and conditions
– Tender specific terms and conditions
 Vetting Potential Suppliers
 Bona fide & are capable suppliers
 Formal pre-qualification
 Pre-determined criteria for appraisal
– Skills & competencies
– Financial stability
– Capacity
– Track record
– Product/ Service quality
– References
 Evaluation of tenders
 Award criteria should always consider:
– Quality, capability, availability & price
 Qualification of specification
 Must compare like with like
 Have an evaluation check list
 Evaluation of Tenders Checklist
 Comply with specification
 All questions answered
 Comparison schedule
 Objective evaluation of non price
submissions
 Shortlist best two or three submissions
 Presentations by bidders
 Evaluate the real financial elements
 Ensure sufficient budget provision &
authority