11. PROJECT PROCUREMENT MANAGEMENT: PMBOK® Guide Chapter 12
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“MAKE OR BUY” DECISION1
Here is a check‐list that could be helpful in reaching a make‐or‐buy decision. The scenario is that an item
of hardware (or software) is needed for your project, and there is some debate about developing it in‐
house, or buying it from a vendor. There are many issues to be considered, but the basic question is, will
the project be better served by buying the product than making it, followed by will the company be
better served? The latter generally implies a wider discussion.
# Issue to be Addressed Make Buy
1 Item/product is readily available in the marketplace, √
2 In use in applications similar to yours, with documented success, √
3 Available at a reasonable price, √
4 Delivered when you need it, and √
5 We have time for a competitive procurement process √
6 Your company wishes to develop such a product for future program use, or as a new market entry
√
7 Having it subcontracted could establish others as future competitors to you √
8 You have the internal resources to develop it. Will not deflect from your current program attention, or eat up resources.
√
9 Is doing it in-house being pushed by engineering or R&D? √
10 The application is special, and integration into your hardware is critical/ difficult/finicky
√
11 There is much documentation required with each delivered item, hence more CADM work and “paper policing” is required
√
12 The item will require specialized test equipment √
13 Substantial spares are required √
14 You can enter into the contract type you prefer √
These are just a few of the thoughts one might have when deciding on “make or buy”. The bottom line
would seem to be, if your company will be stronger, and the project will be less risky (overall), by doing
a make, then do so. However, if the customer has any hesitation about your in‐house capability in
respect of this item, and you cannot make a water‐tight case for doing so, better seek a way to
outsource.
1 Courtesy of Terry Ussher, formerly of Spar Aerospace, Program Manager for the Canadarm
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Firm Fixed Price (FFP)
Known scope, known price
AKA “stipulated price”, “lump sum”
Fixed Price with Economic Price Adjustments (FP‐EPA)
Considers inflation
Fixed Price Incentive Fee (FPIF)
Price may vary according to actual cost, schedule, or performance
May have a price “ceiling”
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CONTRACT TYPES – HOUSE PAINTING EXAMPLE
You want to paint the rooms on the ground floor of your house. There are about 2000 square feet of
wall space. It would take about 200 hours for the painters to do the work. The painting contractor would
have to pay about $180 for the paint. The contractor would have to pay the union rate for painters of
$8.09/hr. It would be normal in these market conditions for the painter to expect to get about a 10%
“fee” on top of the labour and material costs to cover corporate overhead and profit.
If everything goes according to plan, any of the methods below will result in a final price of about $2000.
Firm Fixed Price (FFP):
I’ll paint all the rooms on the ground floor of your house for $2,000. That includes supplying the paint.
Cost Plus Percentage of Cost (CPPC):
I have to pay my painter $8.19 per hour, and I will buy the paint. You reimburse me for those actual
direct costs and pay me 10% “fee” on the labour and materials to cover my overhead and profit.
Cost Plus Fixed Fee (CPFF):
I’ll paint all the rooms on the ground floor of your house. I have to pay my painters $8.19 per hour, and I
will buy the paint. You reimburse me for those actual direct costs and pay me a $180 “fee” to cover my
overhead and profit.
Cost Plus Incentive Fee (CPIF):
I’ll paint all the rooms on the ground floor of your house. I have to pay my painters $8.19 per hour, and I
will buy the paint. You reimburse me for those actual direct costs and pay me a $180 “fee” to cover my
overhead and profit. I estimate that the direct cost will be $1,818. If the direct costs actually cost less,
then my “fee” increases by 10% of the under‐run. If the direct costs actually cost more, then my “fee”
decreases by 10% of the overrun.
Time & Materials (T&M):
I’ll paint any rooms you want. You pay me $9.10 per hour for the painters. I will also buy the paint and
bill you for the cost of it.
Unit Price:
I’ll paint any rooms you want for $1.00 per square foot of wall. That includes supplying the paint.
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CUSTOMER MIGHT CHOOSE COST‐REIMBURSABLE WHEN…
The scope is vague and the cost is hard to estimate.
There are uncertainties in the future that would affect the cost.
The customer wants to be involved in managing the work and might change the scope
significantly or frequently.
The customer is in a hurry and does not want to wait for the scope to be more fully defined or
does not want to wait for a competitive fixed‐price procurement process.
The customer is willing and able to take the cost risk.
Cost reimbursable works best if the customer is willing to exert some supervision of the seller’s
management of the work, and/or if trust exists in the relationship.
CUSTOMER MIGHT CHOOSE FIXED PRICE WHEN…
The scope is tightly defined, can be tightly estimated, and is not subject to many future changes
by the customer.
The customer needs to know the final cost before deciding to go ahead. (In other words, is not
willing to assume the cost risk.)
There are potential sellers interested in doing the work, willing to offer competitive prices, and
willing to take the cost risk.
A possible advantage of fixed price contracts is that it discourages the customer from making
changes.
With fixed price, the customer usually just has to monitor the schedule and quality being
delivered.
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PROJECT DELIVERY STRATEGIES
Traditional Design‐Bid‐Build
The owner signs two contracts:
With the design consultant
With the general contractor The design consultant is typically designated as an agent of the owner. The general contractor signs contracts with various vendors and sub‐contractors specializing in particular aspects of project delivery. Traditionally, projects used “master builders” who looked after design and construction. About 100 years ago, we started to separate design and construction, and that is now considered “traditional”. The intent was to obtain the best design and then have builders compete on price. Since
design costs are typically considerably less than construction costs, this model was considered good “value for money”. It is a slower process as the design and construction are sequential, but is considered less risky, because the “final” price is known before starting construction.
To apply the traditional design‐bid‐build delivery strategy, there should be:
• An evaluation process of potential designers and contractors • Clear detailed specifications and drawings at the time of construction award • Appropriate standard contracts (OAA, CCDC or Owner‐developed) • A process for handling changes and disputes
This process may pit the design consultant against the general contractor in the case of disputes or conflicts between the design objectives and the project objectives of time and cost.
Design‐Bid‐Build Schedule
Design
Construct
Procure
Start
Award
Complete
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Design‐Build
The owner signs one contract with the contractor.
The contractor is responsible for developing the design and
constructing to the design. As with the design‐bid‐build delivery
strategy, the contractor signs contracts with various vendors and sub‐
contractors specializing in particular aspects of project delivery.
This approach has regained popularity since the 1970’s. It tends to be
used more in the private than public sector, industrial rather than
building projects, and in larger rather than smaller projects. For
Owners, Design‐Build offers better performance on “schedule, changes,
re‐work and practice use”, in accordance to the Construction Industry
Institute (CII).
If the contract is awarded on a fixed price basis, cost performance can
be quite good or even better than the design‐bid build delivery
strategy, as the designer and builder are motivated to be cost‐conscious in the design. Schedule
performance tends to also be better than design‐bid‐build if design and construction can be performed
concurrently.
To apply the design‐build strategy, there should be:
Well defined performance specifications before award
Monitoring for quality and schedule performance
A well‐defined change process
A fixed price contract, except for change orders
For good cost performance, in additional to the above bullet points, there should be also good pre‐
project planning and the owner should not meddle in the relationship between the designer and
constructor.
Dispute resolution can be more efficient as only two parties are legally involved in any dispute.
As an example, a developer might sign a contract with
a municipality, gas supplier, pipeline and electrical
utility. The developer is then responsible for the design
and build but in this case hires a constructor to design
and build on a fixed price basis with tight performance
specifications and liquidated damages.
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Design‐Build Schedule
Public‐Private Partnership
This project delivery strategy has been developed to reduce financial risk for the owner, usually a
government entity. A long‐term partnership contract is signed between the owner and contractor. The
contractor is responsible for the financing, design and construction, and remuneration from the owner is
linked to performance criteria. Under this arrangement, the owner may sign a design‐build‐finance,
design‐build‐finance‐maintain contract or a design‐build‐operate‐finance‐maintain contract.
Remuneration is awarded with any combination of completion, maintenance and operate phases. These
arrangements motivate a contractor to build quickly and minimize the “total cost of ownership”.
Key elements for these arrangements are:
Very well‐defined performance specifications before award,
A well‐defined change process,
Price is fixed, except for change orders, and
Clearly defined responsibilities.
These projects can suffer from poor maintenance, especially towards the end of contract term.
Construct
Design
Procure
Start
Award
Complete
Specify
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Integrated Project Team Delivery
Overlapped sequence of planning, design
and construction. Owner signs one contract
with Designer and Contractor (some are
calling this a tri‐partite contract).
There is more cost and effort in design and
planning to maximize construction efficiency
and potentially reduce construction costs.
The objective is to have the design expertise
work with the constructability expertise to
minimize rework, mistakes,
misinterpretations of the design and
disputes. The schedule would likely be iterative as for the design‐build.
Construction Management
The owner signs a number of contracts:
With the design consultant
With the construction manager
With the specialty vendors and contractors In this case, the construction manager is an agent of the owner. This delivery strategy achieves good schedule performance as it allows for concurrent design and construction. The owner can have considerable input to the design and direct changes during the design and construction. This strategy is best suited for a sophisticated Owner. The Construction Management at Risk project delivery
strategy is a version of the construction management delivery strategy where the construction manager is NOT an agent of the Owner. The construction management firm signs the contracts with the specialty vendors and subcontractors. This reduces the risk for the owner, but, correspondingly raises the risk for the construction manager.
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Project Management
The owner signs a number of contracts:
With the design consultant
With the project manager
With specialty vendors and contractors The project manager is an agent of the Owner and manages both the design and construction process.
Engineer‐Procure‐Construction Management (EPCM)
The owner signs a number of contracts with:
The EPCM contractor
Specialty vendors and contractors The EPCM contractor acts as the agent of the owner and is responsible for the design and engineering work.
Engineer‐Procure‐Construct (EPC)
This strategy is similar to the design‐build project delivery strategy in that the owner signs one contract with the EPC vendor, who is responsible for the design and engineering as well as the construction. The EPC contractor engages the specialty vendors and subcontractors.
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EXAMPLE OF A PROCUREMENT MANAGEMENT PLAN2
This is an example of a procurement management plan, of a scale which is probably only justifiable on a
very large, complex and unique project.
TABLE OF CONTENTS
1. Contract packages breakdown structure
2. Reason(s) for procuring instead of “making”
3. Roles and responsibilities
4. Sourcing plan
5. Pre‐qualification plan, including pre‐qualification criteria
6. Budget
7. Schedule
8. Quality level and plan
9. Specification types
10. Contract types
11. Plan for the solicitation process, including:
Standard instructions to bidders
Proposal/bid evaluation criteria
Pre‐bid meetings
Alternate proposals
12. Source selection plan
13. Contract administration plan
14. Contract closure plan
APPENDIX
A. Standard forms
B. Referenced documents
2 Thanks to Michael Stefanovic, Procept Associates Ltd.
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THE LAW OF COMPETITIVE TENDERING IN CANADA
If we want to award a contract to a seller, we can either negotiate directly with a seller, or we can use
competition (competitive tendering) between two or more potential sellers to reach a deal.
Through precedent, the courts have built up a body of law about competitive tendering. If a customer
goes to the marketplace with competitive procurement documents (e.g. request for proposals or
invitation to bid, or request for quotation), then it means the customer has decided to use competition
among the bidders to select the best bid (or tender or proposal). During this competitive tendering
process, the customer should not short‐circuit the competitive tendering process by negotiating directly
with one of the bidders.
The Canadian courts have described a short‐lived “Contract A” which is formed between the customer
and each seller which submits a bid. This Contract A is in place until it is replaced by “Contract B” being
formed by the customer awarding the actual performance of the work to one of the bidders.
In this Contract A, the customer promises that:
All bidders will be treated equally and fairly. For example, they will each be provided the same
information and the same opportunities.
A non‐compliant bid (one that fails to meet a mandatory requirement) will be rejected.
The customer promises to follow whatever process it described in its procurement documents.
For example, if evaluation criteria are described, then they must be followed.
The customer promises to award the Contract B according to the process described, usually by
accepting the lowest compliant bid, or the proposal which offers the best value to the customer.
The bidder goes to some trouble and expense to prepare the bid, and promises that:
The bid is irrevocable (cannot be withdrawn) for some period of time specified in the bid
documents.
An owner is allowed to reject all the bids and award it to no‐one, if it has said so in the procurement
documents.
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MJB ENTERPRISES v. DEFENCE CONSTRUCTION3
A significant case in tendering law was decided by the Supreme Court of Canada in 1999.
MJB, a losing bidder was awarded damages of $398,000 based upon its expected loss of profits. The
company had responded to a tender package issued by Defence Construction that included a privilege
clause saying that the “….lowest or any tender would not necessarily be accepted.” Four tenders,
including MJB’s second lowest tender, were submitted. Defence awarded the contract to the lowest
tenderer although the bid did not comply with the tender specifications.
MJB sued Defence for breach of its tendering obligations saying that the winning tender should have
been disqualified and that MJB’s tender should have been accepted.
The Court held that “Contract A” had an implied term that only a compliant bid would be accepted. The
“lowest or any tender” clause did not override Defence’s Constructions obligation to accept only
complaint bids. As the accepted bid was non‐compliant, Defence breached its obligations to MJB.
EXAMPLE OF FAIRNESS TO THE BIDDERS
Two bids identical down to the last cent:
Coin toss may decide winner4
I guess you would have to call it a fluke.
Toronto officials can’t make heads or tails out of two identical bids to repaint lane markings on
Etobicoke streets, which were the same down to the last penny. Their proposed solution: What else? A
coin toss.
Two companies offered to do the work for the exact same amount: $111,242.55.
The bids from Guild Electric Ltd. and Mark‐All Services Inc. were opened back in February and the city
has been struggling with what to do ever since.
They couldn’t eliminate one because both meet the bid conditions and have good track records with the
city, said John Thomas, director of transportation services in District 2, which includes Etobicoke.
“We couldn’t discount one for bad performance or anything like that,” Thomas said yesterday.
Stumped for an answer, they turned to the legal department, which is suggesting flipping a coin in public
at a date, time and location to be determined.
If city council agrees, Guild Electric would be assigned heads and Mark‐All Services would get tails.
A coin will be tossed into the air by purchasing and materials management staff and after it lands, the
face showing upward (head or tail) will be announced as the winner, says a proposed procedure to be
discussed to‐day at council’s policy and finance committee.
3 adapted from The Legal Edge newsletter, published by National Education Consulting Inc. 4 Paul Moloney, Toronto Star, July 2003
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EXAMPLE OF PROPOSAL EVALUATION CRITERIA5
The following is adapted from a Government of Canada request for proposals. It provides a good
example, and it illustrates a way to include both quality and price into a single figure comparison. Note
that if we specify our solicitation and evaluation process in our procurement documents, then we must
follow that process.
I. MANDATORY REQUIREMENTS YES NO
1. Compliance with the Request for Proposal submission requirements
2. Minimum corporate experience (number of similar assignments) per requirements
3. Minimum personnel qualification per requirements
4. Compliance with the terms and conditions of the Request for Proposal. The
Proponent must sign and return a copy of page one (1) of the RFP (or equivalent
form)
II. RATED REQUIREMENTS MAX PTS SCORE
1, TECHNICAL PROPOSAL
a) understanding of the scope and importance of the requirement 10.0
b) proposed approach, methods of handling 8.0
c) level of effort 5.0
d) potential problems & methods of handling 5.0
e) originality and innovation 4.0
Minimum acceptable points (75%) 24/32
2. TRAINING & EXPERIENCE
a) relevant training & experience of personnel 15.0
b) corporate background & experience 12.0
c) references 8.0
Minimum acceptable points (75%) 26/35
3. ORGANIZATION
a) adequacy, availability and allocation of personnel 8.0
5from a Government of Canada RFP, 2002
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b) time management, including work schedule and commitment to completion dates 10.0
c) liaison with necessary parties 5.0
d) overall organization of the project 10.0
Minimum acceptable points (75%) 25/33
TOTAL POINTS AVAILABLE 100
III. CONTRACTOR SELECTION‐ASSESSED BEST VALUE
MERIT: Proponent’s Overall Total Point Score/Highest Overall Total Point Score X 80
COST: Lowest Total Estimated Cost/Proponent’s Total Estimated Cost X 20
ASSESSED BEST VALUE ( MERIT + COST)
EVALUATION
Each evaluation criterion has a point allotment that reflects its importance in personal submissions. The
degree to which the proposal satisfies the requirement of each criterion will be assessed and a score will
be assigned ranging from 0 to the total point allotment meaning the proposal fully meets the outlined
criterion.
Your proposal must meet all of the mandatory requirements set out in the evaluation criteria. Proposals
which fail to meet these requirements will be discarded at this stage without further consideration.
Your proposal will archive a minimum score of 75% of the maximum points available in EACH category
subject to point rating. Proposals which fail to achieve this score will be considered technically
unacceptable and will be given no further consideration.
SELECTION METHOD
The contractor will be selected on the basis of the ASSESSED BEST VALUE to the Crown taking into account
merit and cost factors. Best value to the Crown will be determined on the basis of the highest combined
rating of merit and price. The scoring of merit is done by giving full marks to the highest rated proposal,
with other proposals being given a prorated score. The scoring of price is done by giving full marks to the
lowest price proposal, with the other proposals given a prorated score. The proposal which offers the
highest combined point score for merit and cost will be recommended for award.
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CASE STUDY6
Dowler‐Karn, which runs a fleet of oil delivery trucks in London, Ontario, wanted to upgrade its entire
computer system. JDH Microsystems, a Toronto‐based company, was contacted by Dowler‐Karn to
develop and install a custom truck dispatch, route planning and billing system. A fixed‐price contract
was signed, and work began.
Soon after work started, it became apparent that the supplier had grossly underestimated the time and
effort required to develop the custom software. For example, of the amount originally budgeted by the
supplier for writing the program, very quickly the time spent amounted to almost three times that
amount, and still the system did not work.
Several testing/acceptance dates were missed, and it became obvious that major problems plagued the
new system, including the fact that it ran much too slowly on its intended hardware ‐ when it ran at all,
as it had a nasty habit of crashing or seizing.
The user soon had its lawyer send a letter to the supplier requiring a detailed correction plan for the
problems that continued to plague the system. At this point the supplier did a relatively unusual thing ‐
it sued the user for final payment for the system.
[The true case was argued in the Ontario Court of Justice in April 1994, and is recorded in 47 A.C.W.S.
(3d) 282.]
Q. What would Dowler‐Karn likely do at this point?
Q. What could Dowler‐Karn have done to have avoided this situation?
Q. What do you think the court decided?
6"Crafting effective software development contracts", George Takach, partner in law firm McCarthy
Tetrault, The Legal Edge, Vancouver, June 1995.
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SAMPLE DISPUTE RESOLUTION CLAUSES7
8.1.3 If a dispute is not resolved promptly, the Consultant will give such instructions as in the Consultant's opinion are necessary for the proper performance of the Work and to prevent delays pending settlement of the dispute. The parties shall act immediately according to such instructions, it being understood that by so doing neither party will jeopardize any claim the party may have. If it is subsequently determined that such instructions were in error or at variance with the Contract Documents, the Owner shall pay the Contractor costs incurred by the Contractor in carrying out such instructions which the Contractor was required to do beyond what the Contract Documents correctly understood and interpreted would have required, including costs resulting from interruption of the Work.
GC 8.2
8.2.1 In accordance with the Rules for Mediation of Construction Disputes as provided in CCDC 40 in effect at the time of bid closing, the parties shall appoint a Project Mediator .1 within 20 Working Days after the Contract was awarded, or .2 if the parties neglected to make an appointment within the 20 Working Days, within 10 Working
Days after either party by Notice in Writing requests that the Project Mediator be appointed.
8.2.2 A party shall be conclusively deemed to have accepted a finding of the Consultant under GC 2.2 ‐ ROLE OF THE CONSULTANT and to have expressly waived and released the other party from any claims in respect of the particular matter dealt with in that finding unless, within 15 Working Days after receipt of that finding, the party sends a Notice in Writing of dispute to the other party and to the Consultant, which contains the particulars of the matter in dispute and the relevant provisions of the Contract Documents. The responding party shall
7 CCDC2 stipulated price contract, Canadian Construction Documents Committee, 2008.
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send a Notice in Writing of reply to the dispute within 10 Working Days after receipt of such Notice in Writing setting out particulars of this response and any relevant provisions of the Contract Documents.
8.2.3 The parties shall make all reasonable efforts to resolve their dispute by amicable negotiations and agree to provide, without prejudice, frank, candid and timely disclosure of relevant facts, information and documents to facilitate these negotiations.
8.2.4 After a period of 10 Working Days following receipt of a responding party's Notice in Writing of reply under paragraph 8.2.2, the parties shall request the Project Mediator to assist the parties to reach agreement on any unresolved dispute. The mediated negotiations shall be conducted in accordance with the Rules for Mediation of Construction Disputes as provided in CCDC 40 in effect at the time of bid closing.
8.2.5 If the dispute has not been resolved within 10 Working Days after the Project Mediator was requested under paragraph 8.2.4 or within such further period agreed by the parties, the Project Mediator shall terminate the mediated negotiations by giving Notice in Writing to the Owner, the Contractor and the Consultant.
8.2.6 By giving a Notice in Writing to the other party and the Consultant, not later than 10 Working Days after the date of termination of the mediated negotiations under paragraph 8.2.5, either party may refer the dispute to be finally resolved by arbitration under the Rules for Arbitration of Construction Disputes as provided in CCDC 40 in effect at the time of bid closing. The arbitration shall be conducted in the jurisdiction of the Place of the Work.
8.2.7 On expiration of the 10 Working Days, the arbitration agreement under paragraph 8.2.6 is not binding on the parties and, if a Notice in Writing is not given under paragraph 8.2.6 within the required time, the parties may refer the unresolved dispute to the courts or to any other form of dispute resolution, including arbitration, which they have agreed to use.
8.2.8 If neither party, by Notice in Writing, given within 10 Working Days of the date of Notice in Writing requesting arbitration in paragraph 8.2.6, requires that a dispute be arbitrated immediately, all disputes referred to arbitration as provided in paragraph 8.2.6 shall be .1 held in abeyance until
(1) Substantial Performance of the Work, (2) the Contract has been terminated, or (3) the Contractor has abandoned the Work, whichever is earlier; and
.2 consolidated into a single arbitration under the rules governing the arbitration under paragraph 8.2.6.
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EXAMPLE OF A PROCUREMENT CONTROL REPORT
Status RFx issued
Proposal Received
Proposal Evals
Complete6 5 3 3.5 3
P 9-Sep-19 21-Oct-19 25-Nov-19 16-Dec-19 9-Jan-20 30-Jan-20FA
P 9-Sep-19 21-Oct-19 25-Nov-19 16-Dec-19 9-Jan-20 30-Jan-20F 22-Oct-19 26-Nov-19 17-Dec-19 10-Jan-20 31-Jan-20A 10-Sep-19
5P 9-Sep-19 21-Oct-19 25-Nov-19 16-Dec-19 9-Jan-20 30-Jan-20F 22-Oct-19 26-Nov-19 17-Dec-19 10-Jan-20 31-Jan-20A 10-Sep-19
5
LEGEND:P - Planned
F - Forecast
A - Actual
- Progress bar
Project Name: Status Date:
Remarks
Duration in Weeks*
1 Pkg.1
Contract Pkg. No. Contract Pkg. Name
SOW Spec Issued and Approved
PROPOSAL Recom-mendation to Award
Issued
Recom-mendation to
Award Approved, Contract Award
2
3
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APPENDIX: CHAPTER 10
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