Free Essay


In: Business and Management

Submitted By Guilao
Words 1888
Pages 8
Contract Types Contract types are tools in planning purchases and acquisitions that are important for the examination as well as for professional management. There will be several questions on the exam about the different types. One of the important facts to know is the degree of risk for the seller and the buyer that each type of contract contains. This graphic shows the risk levels for each of these types of contract.

Figure 16-1. Risk levels for contract types.

Each of the contract types has risk attached to it. As we go through these contract types, you need to learn who assumes the most risk, the buyer or the seller.

Fixed price/lump-sum contracts In this type of contract, the seller assumes the greatest risk because the price is set. This means that the seller must comply with the contract and provide the service/product for a specific price. If the time it takes to deliver the service/product expands, the seller cannot charge for the extra time. The same would be true if extra materials were needed to deliver the service/product. If this occurs, the seller cannot charge for the extra materials because the price for the contract is already fixed.

Incentives can be used with a fixed price contract based on meeting project deliverables or exceeding them. These deliverables could include schedules and costs as two of the measurements for incentives. In addition, some economic adjustment such as cost-of-living increases could be written into a fixed price contract.

Cost-reimbursable contracts These contracts involve paying for the actual costs that the seller incurs plus an agreed upon fee that will represent the profit for the seller. For the most part, the buyer is buying direct costs, costs that are incurred because the project is being done. Indirect costs are often called either overhead or general and administrative costs. These are costs that occur no matter whether the project is progressing or not, and a short negotiation may be necessary to have indirect costs included in the total cost package. There are several types of cost-reimbursable contracts to consider.

The cost-reimbursable contract has risk for both sides. If the contract is well written and specifies what costs can be included and those that are excluded, then the buyer is protected. If the allowable costs are not well defined, the buyer takes the risk of having the seller incur costs that are not expected. The key, as with all contracts, is clarity regarding what costs are allowable.

Cost-Plus-Fee (CPF) or Cost-Plus-Percentage of Cost (CPPC) When the contract is cost-plus-percentage of cost, the seller is reimbursed for costs that are incurred for performing the contract work, and then the seller receives a percentage of the cost that is agreed upon before beginning work. In this case, the fee varies with the actual cost.

Note that in this type of contract, you have a variable cost contract and you need to manage the costs as the seller incurs them. It is necessary in any type of cost-reimbursable contract to determine the costs that will be allowed and have these written in the contract. This type of contract puts most of the risk on the buyer.

Cost-Plus-Fixed-Fee (CPFF) In this type of contract, the seller is reimbursed for allowable costs and then receives a fee that is agreed upon before beginning the work. The fee will be the profit for the seller, so the seller should try to maximize the fee while the buyer tries to lower it. With good-faith negotiating, it is expected that both sides will come to an agreement on the fee quickly. The main part of writing this type of contract, as it is with all cost plus contracts, is to make sure that allowable costs are specified in the contract. Rather than having to go to formal arbitration or some other form of arbitration, it is most effective to have agreement by both parties to the contract as to what is allowable.

Cost-Plus-Incentive-Fee (CPIF) The seller is reimbursed for costs as with all cost plus contracts. In the case of the incentive fee, it is a predetermined fee that is paid if certain conditions of the contract are met or bettered. There will also be cases where both parties, buyer and seller, will benefit from producing above expectations.

Time and Material contracts (T&M) These types of contracts are a cross between cost-reimbursable and fixed price contracts. These contracts contain the highest risk for the buyer because they are open-ended. The seller simply charges for what is done to produce the product/service in the contract. This can be a problem if the time scheduled for the production is greatly underestimated. Because the contract simply states that time and materials will be paid for, the seller can charge for time that is needed, no matter whether it exceeds estimates. In the cases where time or material greatly exceeds the estimates, there may be a need for arbitration to determine the correct fee. The fixed price component of a T&M contract comes with agreement between the seller and buyer as to the types of materials that can be used and the amount of time that is expected. For instance, the buyer may require that standard versions of products be used in the building of a house rather than custom-made products.

The greatest risk to the buyer is the T&M contract. The greatest risk to the seller is the firm fixed price contract. Often, buyer and seller will negotiate aspects of both types so that the risk is spread between both the seller and the buyer.

Q. There are three general types of contracts: cost reimbursable, time and materials, and ________.

A. Cost required

B. Fixed price

C. Simple cost

D. Reimbursed time

The answer is B. The third type of contract is the fixed price, often called the firm fixed price contract.

Q. Which type of contract has the highest risk for the buyer?

A. Fixed price

B. Reimbursed time

C. Time and materials

D. Cost plus

The answer is C. There may be major variations between the estimated amount of time and the actual amount of time spent. In a time and materials contract, the buyer agrees to pay for time used by the seller, which creates the risk.

Q. In the cost plus contract with the initials CPFF, the FF stands for ________.

A. Formula foundation

B. Free fixed

C. Founded fixed

D. Fixed fee

The answer is D.

Q. Which type of contract has the highest risk for the seller?

A. Fixed price

B. Reimbursed time

C. Time and materials

D. Cost plus

The answer is A. Because the price is fixed in the contract, the seller must absorb any costs that are not covered in the initial contract.

Q. The type of contract where the buyer and seller share in the savings is ________.

A. Fixed Price

B. Cost reimbursable with incentive fee

C. Cost reimbursable with fixed fee

D. Time and materials

The answer is B. The percentage of the savings that will go to the seller and buyer is negotiated at the time of writing the contract.

Q. Which type of contract uses a percentage of cost as a part of the agreed upon contract?

A. T&M




The answer is D. The acronym reads "cost plus percentage of cost."

Here is an example of a question that uses the cost plus incentive fee contract.

Q. A buyer negotiates a fixed-price incentive contract with the seller. The target cost is $200,000, the target profit is $35,000, and the target price is $250,000. The buyer negotiates a ceiling price of $280,000 and a share ratio of 70/30. If the contract is completed with actual costs of $180,000, how much profit will the buyer pay the seller?

A. $49,000

B. $41,000

C. $38,000

D. $29,000

The answer is B. This is how to work this problem out. The numbers that you need to be concerned with are the target cost, $200,000, the target profit, $35,000, the share ratio of 70/30, and the actual costs of $180,000. (In a share ratio, the first percentage goes to the buyer and the second number is the percentage that the seller will get.) Using these numbers, the calculation goes like this. You subtract the actual costs from the target cost, which gives you $20,000. Seventy percent of that goes to the buyer, whereas thirty percent goes to the seller. In this case, that would be 30% of $20,000 or $6,000. Add $6,000 to the target profit of $35,000, and you have your answer, which is $41,000.

The outputs of planning purchases and acquisitions are the procurement management plan, the contract statement of work, make-or-buy decisions, and requested changes. The procurement management plan can be simple or very complex depending on the type and size of the project. Some of the parts of a procurement management plan are:

Definition of the contract types to be used

What actions the project team can take by itself if the organization already has a purchasing, legal, or procurement department

Document types to be used

Constraints and assumptions

How to estimate and handle lead times for procurement

Mitigation of project risk through insurance or performance bonds

Identifying pre-qualified sellers

Metrics used to manage contracts and evaluate seller offers

(There are other parts of the procurement management plan in the PMBOK. These can be found on page 279 of the 3rd edition.)

The contract statement of work describes the various procurement items in sufficient detail to give prospective sellers a guideline to see whether they can provide the item or items. This contract statement of work (CSOW) is a subset of the SOW. A CSOW may include specifications, quantities, quality levels, requested performance measurements and data, the work location, and the amount of time expected to fulfill the contract.

Q. Definition of contract types to be used, how to handle lead times for procurement, and metrics used to manage contracts are all found in the ________.


B. Procurement management plan


D. Scope Statement

The answer is B.

Q. The document that gives detail to prospective sellers concerning item or items to be purchased is the ________.


B. Charter



The answer is D. The contract statement of work is the place where detail is given, not the SOW. The CSOW is considered a subset of the SOW.

The make-or-buy decisions, which have been made by going through the make-or-buy analysis, will also be listed as an output of the planning for purchasing and acquisition. The main point is that the decisions (and why they were made) have been documented so that they can be examined if necessary.

The final output is the requested changes that have been made to the overall project management plan because of the planning of purchases and acquisition.

Hosted free by FREE WEBSITES - Free Hosting with Online Website Builder!

Similar Documents

Premium Essay


...Project Estimating Technique Paper By: Efrain Gonzalez Jr. CPMGT/303 October 6, 2014 Chanda Sanders This paper describes each of the project estimating techniques by explaining when each technique would be used, and how each technique is used. The information being explained provides sources of information that is needed to figure out the most appropriate technique for a project. When justifying an estimate there are certain tools you could use that will help one justify an estimate correctly, and the information being provide explains what tools will be used to justify estimates. Project estimating techniques and tools are important aspects needed to achieve the goal and objective of a project. An analogous estimation is a very common estimation technique used to estimate activities within a project through previous experiences with different projects and extrapolates onto the current project at hand. This technique is mainly used for projects that have the same type of work, and the same resources being used between projects. Parametric model estimation is another precise, easy, accurate technique that is used to estimate time, and resources needed within a project to perform activities. The use of this technique is created upon historical experiences, and lessons learned on different projects. The three point estimation techniques is used to clarify and understand levels of uncertainty within an estimation through the use of three sets of assumption that are all......

Words: 793 - Pages: 4

Premium Essay


...Chapter 3 Planning the Project This chapter begins by discussing the nine key elements of the project plan. The following two sections address the planning process in greater detail with considerable emphasis placed on the project launch meeting and the hierarchical planning process by which parts of the plan are sequentially broken down into finer levels of detail. This provides a natural transition to the creation of the Work Breakdown Structure. Finally, the chapter is concluded with a discussion of multidisciplinary teams including the topics of integration management and concurrent engineering. Cases and Readings Some cases appropriate to the subject of this chapter are: Harvard: 9-692-058 Taco Bell Corp. This 31-page best-selling case describes a project to implement a new strategic plan involving major changes in layout, staffing, quality, product design, and information systems. The coordination and integration of all these project activities is what makes the plan successful, and hard for competitors to imitate. Two teaching notes are available for this case: 5-692-091 (20 pages) and 5-196-073 (12 pages). Harvard: 9-694-059 Hardcard Project: Plus Development Corp. (A1); 9-694-060 Hardcard Project: Plus Development Corp. (A2) This 10-page (12-pages for A2) case allows the students to evaluate, using Microsoft Project software, the time line, resource allocations, and other aspects of a major project concerned with developing a hard disk drive...

Words: 3660 - Pages: 15

Premium Essay


...THE CONTRIBUTION OF PROJECT MANAGEMENT TO THE DEVELOPMENT OF GHANA INTRODUCTION Project management as a management discipline underpins much economic activity. In industries as diverse as pharmaceuticals, software and aerospace, projects drive business. And in the public sector, it is effective project management that translates politicians' promises of new roads, schools and hospitals into gleaming new constructions that improve everyday life. The development of Ghana Successive Ghanaian governments pursued various models of economic development throughout the 1960s, 70s and 80s. In the immediate post independent era of the early 1960s, Ghana’s economic development objectives were geared towards the ‘Big Push’ primary economic policies. These revolved around: a major investment effort; an industrialization drive; increased import substitution; processing of commodities and minerals previously exported in their raw form; and direct state participation in leading areas of the economy. The 1970s ushered in a policy of increased ‘Ghanaianisation’ or indigenisation with specified industrial activities reserved for state participation, Ghana-foreign ownership, and exclusive Ghana ownership, among others. The early 1980s saw the liberalization of the Ghanaian economy and the encouragement of foreign investments. All these approaches, however, fell far short of expectations and the failures were exacerbated by adverse terms of trade, falling commodity prices, and crippling debt......

Words: 1230 - Pages: 5

Premium Essay


...State University of New York Empire State College, MBA Program Course 651644: Tools and Processes in Project Management Summer 2013 term Instructor: Dr. Adams Assignment #1: X-philes Data Management Corporation: RFP Matters By Jose M Collazo What is the basis for the problem? There are two primary problems with how X-philes Data Management Corporation handled the request for proposal. The first one was the lack of communication by the managers who selected the same vendor for two different projects. This problem led to the creation of the second problem which is proper resource allocation. When dealing with multiple projects with the same vendor, the company runs the risk of creating multiple interdependencies. Any resource allocation decisions made in one project by the vendor are likely to have ramifications in the other projects. According to Pinto, Some of the better known problems include inefficient use of resources, resource bottlenecks, ripple effects, and the heightened pressure on personnel to multitask (Pinto 2013). The personnel issue in particular, was a main cause of schedule slippage as employees quit at the contractor and they were unable to maintain sufficient staffing levels to keep the projects on track. While bottleneck’s restricts a vendor's ability to make money, they realize that the best way to maximize income is to fully exploit the bottleneck resource (Chakravorty & Atwater§, 2006)...

Words: 1044 - Pages: 5

Premium Essay


...with any project team is a lack of good communication.This type issue could arrise where team members are scareterd all over the world without face to face communication.The communication through the internet, skype or some of the other communication technologies that are now available are sometimes not reliable and could cause miscommunication. what about one of the team members performing one of the tasks without informing the other team members about it. Overdetermining - project managers sometimes overstates their capabilities of comleting a project on time. That is when a project will take say two months to accomplish they use presure or lack of experience or presure to perform even the other factors that ignores reality for something that is not imporsimble to accomples in the time given. When everyone is not available at the same time to work as a team on the project this could cause a delay to finish and deliver the project on time. The trade offs that is to make a clear policy of communication from the begining of the project that nobody goes off course and that everyone have to work as a team and must be on the sameline with everyone on the team. The project head must make him or herself available at all time to make sure that all the policys are met by everyone in the group. Handster inc. 1. Which projects would you recommend Handstar pursue based on the NPV approach? The spreadsheet bellow summarizes the NPV calculations for the six projects......

Words: 518 - Pages: 3

Premium Essay


...Project Kick-Off Meeting Dwayne A. Blanchette BUS 611: Project Planning and Management Dr.: Donald McKay April 25, 2016 Recently the project charter for transitioning the Quick Drop 100 (QD100) from New York to Florida received final authorization. I was awarded the project and assigned as project manager (PM) to lead a team of qualified individuals and complete the task of relocating the QD100 program to the state of Florida. The next step in the preparation phase is to hold a project kickoff meeting. This meeting will be used to acclimate team members, clients, and other attendants to ensure everyone understands the key players and their respective roles. As the PM I plan to generate enthusiasm, motivation, and excitement while maintaining a guided discussion regarding the content, schedule, and duration of the project from start to finish. To prepare for the meeting I will accomplish several preliminary tasks. The most important areas to consider during preparation include identifying stakeholders, communication methods, team building, accountability and code of conduct. Once the tone has been set and key points discussed the meeting will conclude by first reiterating member expectations and responsibilities followed by a summary of all pertinent information. The bottom line is this kickoff meeting will be presented as such to ensure all relevant attendants and stakeholders are provided a transparent achievable list of goals. Stakeholders A......

Words: 1862 - Pages: 8

Premium Essay


...PROJECT MANAGEMENT COURSE ASSESSMENT 1 The final date for submission of this assessment without penalty is 24th March 2014 Assessment will be accepted for marking 14 days prior to the due date Late Penalty System Please refer to the Student/Programme Handbook This module is being delivered through the Manchester Blackboard virtual learning environment. All assessments must be submitted through Blackboard at: If you have any technical difficulties using blackboard, please visit our support pages at: Submitting your Assignment 1. Assignments should be typed, 10 or 11 point font size (Times Roman or similar if possible) double spaced with a 4 cm margin on the right side of the page with the page size specified as UK A4. All pages must be numbered. 2. Assignments should be submitted in either Microsoft Office and/or PDF format (.doc, .docx, .pdf etc.). File names should be kept simple and only contain alphanumeric characters (a-z0-9), spaces and underscores (e.g. Valid_filename_1.doc). Files with other characters such as apostrophes, brackets or commas may not be accessible by markers. 3. Assignments may be uploaded only once; substitutions are not permitted and students should therefore ensure that the version uploaded is their final submission. 4. Please ensure you include your student number and the assignment reference (PM/Student Number/Jan14/1) in all submitted assignments and that......

Words: 740 - Pages: 3

Premium Essay


...decision to earn a project management certification is a big one, so make sure you choose one that best fits your current expertise and your future career plans. You can apply for any certification that matches your qualifications, and no certification serves as a prerequisite for another. * Certified Associate in Project Management (CAPM)® * Project Management Professional (PMP)® * Program Management Professional (PgMP)® * PMI Agile Certified Practitioner (PMI-ACP)SM * PMI Risk Management Professional (PMI-RMP)® * PMI Scheduling Professional (PMI-SP)® Already have a PMI certificate PMI Educational Foundation Mission and Vision Join PMI Educational Foundation in Building Better Futures through project Management. PMI Educational Foundation (PMIEF), the philanthropic arm of PMI, announces the Building Better Futures capital campaign to expand its mission to champion project management knowledge and skill for educational and social good globally. Donations to the campaign support sustainable programs that further the very project management principles and practices that project management practitioners, employers and suppliers believe in by developing: * A Better Prepared Project Management Workforce for the Future * A Better Prepared Society for Future Success   * A Better Prepared Response in Future Times of Need Donations to the Building Better Futures campaign demonstrate a clear commitment to bringing the benefits of project......

Words: 554 - Pages: 3

Premium Essay


...The Project manager will put together a human resources team that will be responsible for building a cross-cultural team that will work closely together. Individuals who are bilingual and have worked on a global scale will be given priority. Employees will be selected through a thorough interview process that includes background checks and drug testing. We will only hire qualified individual because they will represent the Acme Company in Mexico and will help us establish a relationship with the community we will be serving An approach is to work with a reputable local employment agency, another one is to hire translators to assist management and local staff. The human resources team will implement current company policies and procedures A marketing and communication team will be responsible for: * promoting Acme products * Supporting project management in achieving the aims and objectives of the project. * Implementation and evolution of the brand guidelines. * Instilling and communicating good marketing and communications practice across Acme * Marketing analysis and environmental scanning (the team will ensure that Acme offers competitive prices than local competitors. * Helping the company communicate with the public. * Creating advertisements, campaigning, offering coupons In order to have an effective marketing strategy, we will work with local marketing companies because they have better understanding on how to market Acme’s......

Words: 319 - Pages: 2

Premium Essay


...Strategy & Project Management: Project orientated organisations Finnland 2005 Prof. (FH) Peter J. Mirski Prof.(FH) Mag. Peter J. Mirski Tel.: +43-512-2070-3510 E-Mail: Current Position MCI, University of Applied Sciences: Director of studies „Management & IT“, Head of IT-Services Academical Profile Research projectmangement, knowledgemanagement strategic information management, e-learning Education process, project, information management Publications and articles in journals Practice Profile Management, R&D Project Management, CEO, CIO Consulting & Training Agenda 10:00 – 14:00 Brief project management overview Project orientated organisations Project scorecard Discussion Literature De Marco T., „The Deadline“, Dorset House Publishing Co ,1997 Goldratt E., “The Critical Chain“, North River Press, 1997 Heerkins G., „project management“, briefcase books 2002 PMBOK Guide, „A Guide to the Project Management Body of Knowledge“, PM Institute, 2000 Links • (pm baseline english, german) • (pm information) project management overview Importance of Project Management • Projects represent change and allow organizations to effectively introduce new products, new processes, new programs • Project management offers a means for dealing with dramatically reduced product cycle times • Projects are becoming globalised, making them more difficult to manage without a formal methodology –...

Words: 1737 - Pages: 7

Premium Essay


...Research Project Management Key Concepts Dr Robin Henderson Research Project Management - Key Concepts © My Consultants Ltd 2010 Introduction The successful management of a research project depends upon the researchers ability to plan, coordinate and perform the research. Many researchers do not formally manage their research and whilst this does not necessarily mean that the research will not be completed successfully this approach has impacts on the staff whom are involved in the project. For example an unplanned approach can often lead to stress in members of the research team, crises management when deadlines are not effectively managed and the lack of time within the research to deliver effective outcomes for all the staff involved in the project. This short document outlines some of the key tools which you can utilise within research contracts to lead to more successful outcomes. Clearly understanding what success means for your project. The starting point for managing a project effectively is to have a clear understanding of what you are trying to achieve. A simple model to start to explore this is to distinguish between outputs and outcomes.  Outputs are the physical deliverables of the project  Outcomes are what happens as a result of the outputs For example in a clinical based trial the output could be a paper with the related outcome being the changes in clinical practise. The starting point for a project is to define what the desired......

Words: 2908 - Pages: 12

Premium Essay

Project a Project Manager in their Washington DC offices. Provides program support to team members as needed related to projects and program activities. Tasks include task tracking, program change management support, administrative support and project and program reporting. Helps with the preparation of project and program schedules and coordinates the necessary internal and external resources to fulfill the project and program activities within the prescribed time frames and funding parameters to ensure project and program objectives and stakeholders expectations are met. Specific responsibilities include: * Coordinates activities within the project life-cycle including initiation, planning, execution, monitoring and control phases. * * Helps with the preparation of Project and Program Weekly Status report as necessary and upload to the Project Server in a timely fashion. * Generates various other Project, Program and department related status reports as needed. * Helps prepare responses for anticipated questions during the weekly ITIL meeting (in case of a Red project). * Helps Identify and schedules project deliverables, milestones, and required tasks. * Prepares change management documentation in support of the change management process and supports the Change Management meeting. * Documents all change management decisions according to the change management process * Coordinates selection and assignment of SMEs to the......

Words: 343 - Pages: 2

Premium Essay


...Project Plan Outline 1.0 Goals and Objectives This section presents a general description of the project along with any general or technical constraints and/or considerations. Please include the sub-sections below. 1. Project name 2. Business goals and project goals 3. Scope 4. Time and budget constraints 5. General and technical requirements 6. Training and documentation 7. Installation 2.0 Project Estimates This section presents a set of estimates for the completion of the project, including people, hardware and software. Please include the following sub-sections. 1. People costs a. Historical or researched data used for estimates (Requires annotation listing where you got this information) b. Salary requirements 2. Equipment costs (Requires costs for all hardware and software used. It is assumed that all hardware and software will be new). a. Hardware b. Software 3. Estimation techniques and results a. Process-based (use the format shown in section 1.2.1 of the lecture) b. Second method c. Triangulation results 3.0 Project Schedule This section presents an overview of project tasks and the output of a project scheduling tool. The following sub-sections should be included: 3.1 Project task list The tasks that have been selected for the project are presented in this section. 3.2 Task network Project tasks and their dependencies are noted in this diagrammatic form. 3.3 Timeline chart A project timeline chart (Gantt chart) is......

Words: 508 - Pages: 3

Premium Essay

It Project

...frame: Coalitions composed of varied individuals and interest groups. Conflict and power are key issues Symbolic frame: Symbols and meanings related to events. Culture, language, traditions, and image are all parts of this frame Organization structure: Project organization structure (is hierarchical, but instead of functional managers or vice presidents reporting to the CEO, program managers report to the CEO.) Matrix organization: • represents the middle ground between functional and project structures. Process of Project management: 1. Starts the project 2. Initiate (the planning) 3. Plan 4. Execute 5. Close (end the project) Project management Process Groups: 1 Initiate (start) include defining and authorizing a project or project phase. Initiating processes take place during each phase of a project. 2 Planning (Scope document, schedule management plan, cost mgr plan, and procurement plan) 3 Execute (Implementation phase, acquiring and developing the project team, performing quality assurance, distributing information, managing stakeholder expectations,)building and testing 4 Monitor and control: include regularly measuring and monitoring progress to ensure that the project team...

Words: 323 - Pages: 2

Premium Essay


...The report describes how the IT system plays an important role in the organisation. To be on the move with the world and be effective in the services they provide, Holland Rise decides to implement the IT systems across the trust. The report is all about the tasks that will be involved during the implementation of the project. Task 1- Project Manager Responsibilities • Project manager of the Holland Rise and Social Care Trust is greatly responsible for the overall success. As a project manager he/ she needs to be a creative and self-motivated person. • Efficiency: As a project manager of Care Trust IT system manager should perform honestly and efficiently. In general that can help to deliver a better success rates. • Proposal Writing: Preparing a detailed project management plan and a proposal for this Care Trust project is one of the important issue that must be the considered by the project manager. • Time, Budget and resources: Manager must set a timeframe and budget limit. He/ she should ensure that the project finishes on time within the budget allocated. Proper utilization of resources is one of the vital task of the manager. • Leadership: Project Manager must have the power to be an excellent leader. He/ she has to lead the team to bring out the best. • Work environment: Manager should create an excellent work environment for the employees by dialogue and communicating with the team member. • Problem Solver: As being a leader he/she should solve the......

Words: 456 - Pages: 2