Procurement Management in Project Management - Taking Out a Contract

October 30, 2008 | Author: PM Hut | Filed under: Contract Administration & Close-out, Procurement Management, Solicitation & Source Selection

Procurement Management in Project Management - Taking Out a Contract (#4 in the series Procurement Management in Project Management)
By Joseph Phillips

Contracts override everything: promises, email, secret handshakes. As long as they don’t include illegal activities, contracts are backed by the U.S. legal system. A contract is what makes the deal a deal.

To get to the contracting activities, you need to create the procurement documents. The initial document is usually the statement of work (SOW), which describes the thing or service you want to buy. The SOW is provided to the vendor with an invitation to bid (IFB), which you probably also know as a request for quote (RFQ). The IFB and the RFQ are basically the same thing and are focused just on price, not ideas.

A request for proposal wants a price, but also suggestions and ideas on how the project work should be done. Proposals are more than just costs—they’re a bit of consulting from the vendor.

In big-dollar contracts, you’ll likely host a bidders’ conference in which all vendors that want to create a proposal or bid will meet with you at once and ask questions concerning the SOW. This setup ensures that all the vendors have the same info on which to base prices and proposals.

Once you make a decision on which vendor to use, you go through negotiations—which lead to a contract. The contract-type selection might also be negotiated, but usually the type of work or goods being procured dictate the appropriate contract type. The following table lists the most common contract types and their attributes.

Contract Type Description Risk
Fixed fee Fixed fee for the goods or services provided. Nice and easy. The vendor has the risk of cost overruns.
Time and materials You pay for the time and materials to complete the work. Low risk as long as the contract includes a "not to exceed" (NTE) clause as a price cap.
Unit price Fee per item or hour purchased. Sometimes these plans include incentives such as "Buy more items and the cost per item drops." Low risk.
Cost plus (anything) Cost of the goods and services plus a fee or percentage of the cost. Who uses these anymore? Not too many folks. High risk for the buyer, as waste means you get to buy more and pay more.
Incentive fee contracts These contracts award a bonus if the project is done early and can include penalties if the work is late or lacking in quality. Usually low risk.

Common contract types and their attributes

Joseph Phillips is the author of five books on project management and is a, PMI Project Management Professional, a CompTIA certified Project Professional, and a Certified Technical Trainer. For more information about Project Management Training, please visit Project Seminars.

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