Contracting for Program ManagersDon Shannon PMP CFCM/CPCM

Why do PM’s need to know about contracts? Contracts form the basis (authority) for us to do

work and the assurance we will be paid for doing it.

Contracts define the scope of effort for our project Statement of Work Schedule Deliverable items

Contracts provide a formalized means of managing changes to our projects

What is the FAR and why do I need to know about it? The Federal Acquisition Regulation (FAR) is the document that promulgates various federal laws and regulations

that concern contracting to federal agencies. The “Law” requiring the FAR is codified in Pub L. 93-400 or 41 USC 405 Sec 405a

The FAR applies to all Federal agencies (except the Postal Service) but does not include specific departmental guidance

Departments (e.g. Defense) may publish supplementary regulations such as the Defense Federal Acquisition Regulation (DFAR)

The FAR is binding on Federal agencies and their employees and establishes procurement procedures and policy.

The FAR contains specific provisions and contract clauses which are included in contracts with the government.

Individuals (other than Federal employees) are not bound by the FAR, but they are bound to obey the underlying law and comply with the specific contract provisions.

Short Definitions Contract : A legally enforceable agreement between two or

more parties consisting of An Offer (made by either the buyer or seller) Acceptance (mutual agreement) Consideration (Payment or acts to one’s determent)

Unilateral Contract: Requires only acceptance to form a contract – example: wanted poster

Bilateral Contract: Requires both parties to agree

Express Contract: Agreement is orally or in writing

Implied-in-fact Contract: The seller must have furnished some service or property to the buyer based on a reasonable assumption the buyer has requested it.

Short Definitions (Cont) Unenforceable Contract: An otherwise valid

contract that is rendered unenforceable by statute or law.

Capacity: The legal right or ability to enter into a contract such as “authority to bind” but also includes being of age and mentally competent.

Formal contract: A contract that requires a special form or method of formation in order to be enforceable – Real Estate contracts

(Fully)Executed contract: A contract that has been signed by both parties.

Is a Purchase Order a Contract? Yes – a very simple one

Offer – The purchase order is our offer to the vendor to pay them if they provide the requested item(s) or services.

Acceptance – is signified by the seller signing and returning the PO or by the seller’s performance.

Consideration – the determent that the vendor experiences by doing the work or the cost of the item they provide and the payment made by the buyer.

Note: There are typically a simplified set of boilerplate terms and conditions included with the PO (often in very small print on the back of the form) which become binding upon both parties once the seller accepts the PO.

What happens if I don’t follow the contract? It depends.

Sellers who do not follow the contractual requirements may be deemed to have breeched (defaulted on) the contract with potential civil penalties Sellers are responsible for the actions (or inaction) of their employees

The other party may forebear the incident or may require some additional consideration to obtain their forbearance.

One remedy for breech (or repudiation) is termination of the contract for cause. If the contractual requirement was implementing a law then the seller could be subject to

specific civil or criminal penalties Actual damages Liquidated damages

Sellers could be debarred and not allowed to compete for future contracts.

Contract Interpretation The key to contract interpretation is to give effect to the intent of the parties as

expressed in their agreement. Intent (what did the parties intend) The Plain Meaning Rule (we all know the meaning of “is”) Rules of Interpretation

Contra Proferentem – literally “against the offeror” – ambiguous contract language is interpreted against the party that drafted it.

Christian Doctrine – Has nothing to do with scripture. Court decision stating if the law requires a contract provision be included in a government contract, the contract shall be read so as to include that provision even if it is not physically included in the contract document.

Contract Changes Changes to the contract can only be made by an empowered (authorized) official such as the

Contracting Officer.

The COR or COTR is NOT authorized to change the contract (terms, conditions, quantities, delivery dates etc.) Their authority is limited to technical direction.

If the CO directs a change we must immediately implement that change We may be asked to provide a change proposal prior to the actual change If we don’t provide a change proposal then we seek an “equitable adjustment of the contract value”

If we perform work outside the scope of the contract there is no guarantee we will be paid for that work “Constructive Change” Unauthorized Procurement Action / Ratification

Negotiation (FAR Part 15) Used for both competitive and non-competitive

proposals

Negotiations officially conducted through “discussions” and may require a revised proposal.

Includes all contracts not awarded by sealed bidding regardless of whether actual negotiations took place.

Soliciting document is a Request for Proposal (RFP) or Request for Technical Proposal if a Two-Step process is to be used.

Basic Contract Types Three Basic Types

Fixed Price Cost Reimbursement Time and Materials

Each contract type has unique characteristics that make it “right” for a particular procurement Risk (Cost, Schedule or Quality) is a primary

consideration Completeness / level of detail of

specifications or requirements.

Risk vs. Contract Type As viewed across the program life Risk must be viewed from both

sides.

Both parties seek to minimize risks: Lowest overall cost Technical/Performance Risk

Contract type is negotiable and a quid pro quo exchange is possible between contract type and cost.

RisksBuyer (Government)

Price may exceed budget/funding

Work will not meet customer requirements Quality

Workmanship Materials

Schedule

Seller (Contractor) Incomplete specifications / requirements (scope creep)

Differing conditions

Business Conditions Material costs Labor Laws or regulations Weather

Force Majeure – Unforeseen events War Disaster Failure by third party outside their control

Fixed Price Contracts Several variations possible

Buyer and seller agree to a price for the work to be done

The price does not (usually) change .

Buyer transfers majority of cost risk to seller

Buyer still liable for cost risk from: Differing conditions Imperfect specifications

Seller agrees to perform all work/deliver all services for one price.

Seller assumes risks for cost variations such as materials, labor etc.

Preferred contract type for most Government agencies.

Firm Fixed Price – Lump Sum Price not subject to adjustment

Often one (lump sum) payment

Strong incentive for seller to control costs

Buyer must accurately state requirements

Buyer may still be at risk for quality and schedule

Often used for Construction Commercial items/services

Fixed Price – Economic Adjustment Allows revision of Contract price

keyed to a particular factor: Established prices Actual costs of labor or materials Published index

CPI

Adjustment is event driven e.g., the CPI went outside a certain range

Seller’s risk constrained in volatile economy.

Fixed Price - Redetermination Usually applied to multi-year or long term

contracts

Fixed price in initial year with either (but not both) types of adjustments in the ‘out years’ Redetermination is at specific times Prospective (forward looking)

redetermination at some point. Fixed ceiling with retroactive (after the

fact) adjustment on completion Buyers risk is bound by ceiling value

but is at risk everything up to that value

Fixed Price – Level of Effort (LOE) Fixed sum paid over time

Contractor is limited to a “level of effort” such as 2 FTE or some number of labor hours

Contractor not bound to continue performance beyond the stated LOE

Contractor is required to provide essentially 100% of the stated hours (usually 95+%) to declare completion.

Cost is invoiced evenly over the period of performance by dividing total value by the number of billing periods.

Cost Reimbursement Contracts Contractor is paid (reimbursed) for allowable actual costs

Ceiling price is established (Price = cost + profit) Contractor may not exceed ceiling except at their

peril. When the money is gone .. the work stops Contractor only obligated to make a “best effort” to

complete Buyer may elect to exceed ceiling if initial cost

estimate will be exceeded If excess cost is due to poor management or

causes within the contractor’s control the excess is declared an “overrun”

Fee is generally paid on increased ceiling unless it is declared an overrun

Cost Reimbursable Contracts Costs are only reimbursed if “Allowable”

Specifically allocatable to a contract requirement or objective

Cost must be “reasonable” Assumes arms length bargaining Price normally paid by prudent

buyer in the normal course of business

Not specifically excluded Political contributions Bribes Alcoholic beverages

Most common is Cost Plus Fixed Fee.

Non Profits use Cost Contract (no fee)

Cost Sharing Contracts (50-50)

Cost Plus Fixed Fee Contractor is reimbursed for their

actual costs

Contractor is entitled to a negotiated fixed (or set amount) fee Key point: Fee is NOT a percent of cost.

Contractor invoices for direct cost, indirect cost and a pro-rata portion of the fee.

When the money is gone the work stops. Period.

Incentivized Contracts Can be used with either cost or fixed price

contracts

Provides added motivation for contractor to control specific risk(s) Schedule Quality Performance

Performance can be positively (bonus) or negatively (liquidated damages) incentivized.

Time and Materials Hybrid contract combining elements of

both fixed price and cost reimbursable Labor is billed per negotiated rates

‘wrap around rates” Labor cost Indirect costs/fringe Profit

Materials and other direct costs are billed at actual (allowable) cost May allow some burdens May allow some profit

Time and Material Seller is at risk for changes in internal

costs/rates Similar to FFP Level of Effort Obligated to provide level of effort

only. May stop work once LOE is reached Actual hours worked per period are

invoiced at the agreed billing rate.

Buyer is at risk for total cost of materials or ODC.

Labor Hour Contract Same general idea as T&M Contract

Only difference is no materials

“Level of Effort”

Other Contract Devices Framework Pricing Agreement

Includes all elements of the contract including a method for calculating the price using an index, formula etc.

Performance Based Contract Defines the outcome of the contract in terms of desired results

Single Source Negotiation Contracting with single provider – non-competitive Often requires seller to provide cost or pricing information to ensure price reasonableness May be used for contract extensions or modifications or when only one credible source

exists.

Other Contract Devices

Federal Supply Schedule Example is GSA purchasing schedules

Allow the pre-negotiation of terms and conditions (ordering agreement)

Orders are placed against these agreements for purchase Primary means is eBuy via GSA Advantage Credit card use is possible

Typically a simplified acquisition action and is used extensively for commercial products and some Scientific and Engineering services

The Schafer GSA – PES Contract

Contract GS-23F-0176L

Valid through May 8, 2016

Professional Engineering Services (Schedule 871) … provides a streamlined approach for federal agencies to access qualified firms in the

engineering disciplines of mechanical, electrical, chemical, … and sub-disciplines such as aerospace …

6 Special Item Numbers provide the following support: 871-1 Strategic Planning for Technology Programs/Activity 871-2 Concept Development and Requirements Analysis 871-3 System Design Engineering and Integration 871-4 Test and Evaluation 871-5 Integrated Logistics Support 871-6 Acquisition and Life Cycle Management

Schafer Federal Supply Schedule

What type of Contract is Appropriate? Contract type is primarily based on

risk

With greater risk comes greater reward.

Normally the risk is shared by both parties Equity – what’s fair? Government should not place

itself in position to make or break an offeror.

Solicitation Devices Request for Proposal (RFP) – Seller is asked to submit a proposal typically for a

negotiated procurement. Multi-part document with cost and technical content May be limited to a specific page length

Request for Quote (RFQ) Seller submits a document consisting of product information and cost. Documents submitted are NOT an offer but may be acted upon without further discussion

or negotiation Often used with GSA or Delivery Order contracts Government may issue an order based on the quote which must be accepted by the seller

to form a binding contract

Solicitation Devices Request for Information (RFI)

Sometimes used as part of Market Research to determine capabilities Often times lead to submittal of Statement of Capabilities as a response

Unsolicited Proposal Submitted by offeror without a solicitation (Cold-Call selling) Typically not acted upon unless they address a compelling need and offer new and unique

solutions

Sales Contract All elements of the transaction are determined at the time of the sale (buying a car) Includes Mutual Assent, Consideration, capacity to contract and legal purpose

Other Solicitation Devices Prequalification

Similar in some respects to the first stage in a two part sealed bid or proposal Used to narrow the number of proposals to a manageable number by limiting

competition to those who are judged able to perform.

Broad Area Announcement Used (in R&D) to identify agencies interests to offerors Technical proposals are solicited by issuing “Calls” against the BAA sometimes

narrowed by “Interest Areas” Responses are often called “White Papers” White papers are rank ordered by agency and the most promising are requested

to propose.

Getting Practical – Contract Issues Q – What is Technical Direction?

A - The term “technical direction” is defined to include, without limitation: Providing direction to the Contractor that redirects contract effort, shift work emphasis

between work areas or tasks, require pursuit of certain lines of inquiry, fill in details, or otherwise serve to accomplish the contractual Statement of Work.

Providing written information to the Contractor that assists in interpreting drawings, specifications, or technical portions of the work description.

Reviewing and, where required by the contract, approving, technical reports, drawings, specifications, and technical information to be delivered by the Contractor to the Government.

Technical Direction must be in writing. If there is a question about it being in scope, the direction is referred to the CO.

Getting Practical – Contract Issues Q – Can “Technical Direction” from the COR change the nature of the contract from R&D to

Personal Services?A – It’s a fine line but the assumption is as contractors we either provide non-personal services (JTO, AMOS) or we do R&D. If Government personnel adopt an employer/employee relationship with contract personnel they have crossed the line into Personal Services. In general our work should be characterized by:

Freedom to determine the means and methods to be employed to achieve a result Assignment of a tasking as a generalized requirement with a due date. We should be free to

prioritize our work so as to meet the overall due date. With some exceptions we should be able to establish schedules and the place where the work is

performed. The customer is given a completed assignment which they may accept or reject. If rejected they

must specify why or how the work product is defective and allow for its correction or resubmittal.

Getting Practical – How do we make a profit? Profit = Revenue (what we bill) – our costs

On CPFF contracts we negotiate a fixed profit (dollar value) which we are paid in addition to our allowable costs

On FFP contracts the revenue is pre determined and we keep whatever is left after paying our costs.

On T&M contracts it’s a little of both

Getting Practical – How do we make a profit? Controlling cost is a key profit strategy.

What are our costs? Indirect Costs

Fringe benefits (health insurance, vacation, paid holidays, life insurance)

Supervision and Management Rent (if supporting several programs) IT infrastructure & telephones Office furniture and computers Utilities Etc.

Direct (attributable to the work being done) costs Actual payment for labor (your

wages) Actual costs of materials used Travel, lodging, meals etc.

The combination of the two costs allows us to determine an overall rate (cost x multiplier) for our services.

The lower the multiplier, the more competitive we are among our peers.

What are these “Rates” that keep changing? The rates being referred to are our Indirect Rates (Overhead and G&A)

These rates are estimated for the future by assuming a level of activity (number of employees, revenue, etc.) and by estimating the costs associated with that level of activity.

The sum of those costs is divided by the projected revenue to determine how much revenue will be needed to recover the indirect costs.

These are converted to a percentage such that for every dollar of direct cost (labor) we add x amount for overhead and y amount for G&A expenses. These are then our projected rates.

Those rates are submitted to the DCAA who reviews them and approves them for billing (Provisional Indirect Rates)

At the end of the year we re-compute the rates using actual costs and actual revenue. If we were off in our estimate of the indirect costs or the revenue we anticipated, we may need to adjust the rates

At the end of the contract our costs are audited and the Provisional Rates are Finalized. This may be 5 – 7 years after completion

What are these “Rates” that keep changing? Rate adjustments only impact the customer on Cost Reimbursable (CPFF)

contracts. On Fixed Price and Time and Material contracts the contractor assumes the risk for

rate changes. Only exception is Materials or travel in a T&M contract may include some indirect

rates that could be subject to change

Increased rates reduce the dollars available for labor.

Questions?