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Index Page Modules Title No: Module 1 Influence of Laws on the Bid Process UCC vs. CISG 5 Module 2 Contracts...

Index Page Modules Title No: Module 1 Influence of Laws on the Bid Process UCC vs. CISG 5 Module 2 Contracts 29 What 10 things World Class Procurement Module 3 46 Organizations Do Module 4 Procurement (Bid) Process & Rules 67 Module 5 Understanding the Tender Process 92 Module 6 Contract types 125 Module 7 Contract Types: Cost Reimbursement 160 Index Page Modules Title No: Module 8 Selecting Contract Types 192 Module 9 Contract Management 213 Module 10 Negotiation of Change Orders 240 Module 11 Contract Pricing Principles 276 Module 12 FIDIC 300 Module 13 Drafting Guidelines and Recommendations 321 Module 14 Automation of contracts Virtual Management 344 Influence of Laws on the Bid Process UCC vs. CISG Module 1 Influence of Laws on the Bid Process UCC vs. CISG 6  UCC and CISG Student Learning Objectives At the completion of this course, students will be able to: 1. Explain the essential features of the U.N. Convention on Contracts for the International Sale of Goods and where & when to apply it in the purchasing and contracting process 2. Explain the essential features of the Uniform Commercial Code and where and when to apply it in the purchasing and contracting process 3. Explain the principal similarities and differences between the UCC and CISG 4. Explain the unique features of Malaysia Contract Law and where & when to apply it in the purchasing and contracting process 7 CISG 8  UCC and CISG UNCITRAL 1. UNCITRAL is the United Nations Commission on International Trade Law 2. The U.N. General Assembly established UNCITRAL in 1966 to remove obstacles to the flow of trade that result from disparities in national laws governing international trade 3. UNCITRAL is the core legal body of the U.N. in the field of international trade law 4. UNCITRAL has drafted several uniform rules in specific areas of international trade law including a) International commercial arbitration and conciliation (UNCITRAL Rules of Arbitration and Conciliation); and b) International sale of goods (U.N. Convention on Contracts for the International Sale of Goods) 9  UCC and CISG When Does the CISG Apply? The CISG applies to: 1. Contracts for the sale... 2. of goods … 3. when the transaction is international “Contracts for the sale” 1. Must be a commercial sale a) “Commercial” does not include consumer sales for personal, family, or household use b) “Sale” does not include leases or licenses c) Seller must deliver the goods, hand over any documents relating to them, and transfer the property in the goods d) Buyer must pay the price for the goods and take delivery of them e) The CISG makes it clear that it covers the contractual aspects of the sale and not the property aspects 10  UCC and CISG When Does the CISG Apply? Cont’d “of goods” 1. The CISG does not define “goods,” but the term is generally understood to mean “tangible movables” 2. Does not apply to sales of ships, vessels, hovercraft, aircraft, or electricity 3. Probably applies to software, although this is uncertain. If the contract is for software; the parties should reach an agreement on the applicable law and include a contract clause specifying the law that will control the relationship of the parties 4. Does not cover contracts for services 5. If the contract is a mixed contract covering goods and services, the CISG will apply unless “the preponderant part of the obligations of the party who furnishes the goods consists in the supply of labor or other services.” If the contract is a mixed contract, the parties should reach an agreement on the applicable law and include a contract clause specifying the law that will control the relationship of the parties 11  UCC and CISG “when the contract is international” 1. Under the CISG, a contract is international when the seller and buyer have their places of business in different countries and both such countries have ratified the CISG 2. When there are multiple business locations, the applicable place of business is the one “which has the closest relationship to the contract and its performance” 3. If the contract is international within the meaning of the CISG, the CISG will apply automatically unless the agreement between the parties specifies otherwise 12  UCC and CISG Choosing/Opting Out of the CSIG 1. Parties who otherwise would be bound by the CISG can choose to opt out of the CISG 2. In order to opt out of the CISG, the contract should explicitly: 1. Exclude the application of the CISG; and 2. Indicate what law should govern 3. Sample clause: “The rights and obligations of the parties under this Agreement shall not be governed by the provisions of the 1980 United Nations Convention on Contracts for the International Sale of Goods; rather, these rights and obligations shall be governed by the law of (Insert Country of Law), including the (Insert Choice of Law) as enacted in ____________.” 4. The facts and circumstances of each transaction should be considered carefully before determining the law that should apply. CONSULT LEGAL COUNSEL 13 UCC 14  UCC and CISG UCC Basics Code’s Purpose 1. To simplify, clarify and modernize the law governing commercial transactions 2. To permit the continued expansion of commercial practices through custom, usage and agreement of the parties 3. To make uniform the law among the various jurisdictions 15  UCC and CISG The Uniform Commercial Code (UCC) 1. Covers US domestic transactions for “goods”. (Many US buyers and suppliers invoke it even for nondomestic transactions) 2. All US states have codes which model the UCC, except for Louisiana, which has “legislative law” modelled after French law 3. DOES NOT apply to service contracts; however, may apply to contracts for mixed goods and services 4. Goods can include equipment or inventory; and consumer goods are covered 16 UCC and CISG Merchants UCC §2-104: A merchant is someone who routinely deals in the particular goods involved, or who appears to have special knowledge or skill in those goods, or who uses agents with special knowledge or skill in those goods The UCC frequently holds a merchant to a higher standard of conduct than a non- merchant 17  UCC and CISG Statute of Frauds 1. UCC §2-201 requires a writing for any sale for goods worth more than $500 (New UCC is $5,000) 2. Contracts for Goods over $500 ($5,000) a) Writing Sufficient to Indicate a Contract 1. In general, the writing must be signed by the defendant b) Incorrect or Omitted Terms 1. Under the UCC, a court may enforce a bargain even though one or more terms were left open c) Enforceable Only to Quality Stated 1. The Code will enforce the contract only up to the quality of goods stated in the writing 18 UCC and CISG UCC Contract Formation UCC 2-201: “A contract…may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.” Therefore, the T&C in such “agreements” may lack clarity and/or be ambiguous; results in the commercial “battle of the forms” Acceptance by performance is adequate 19 UCC and CISG Express Terms of the Contract The Express Terms of the contract govern The UCC and CISG are designed only to provide missing terms where the parties have not specified their intentions Therefore, under both the UCC and CISG, the parties should draft the contract carefully to specify all their rights and obligations 20  UCC and CISG UCC § 2-315 Implied Warranty: Fitness for Particular Purpose Where the Seller at the time of contracting has reason to know any particular purpose for which the goods are required, and that the Buyer is relying on the Seller's skill or judgment to select or furnish suitable goods, there is, unless excluded, or an implied warranty, that the goods shall be fit for such purpose 21 UCC and CISG Revocation of Acceptance (of Goods) Under both the UCC and CISG, the buyer can revoke acceptance of a defective good (i.e., a “lemon”), return the good, and get his money back The CISG allows a buyer to declare a contract “avoided” (i.e., repudiate the contract) if the seller’s failure to perform amounts to a “fundamental breach” of the contract 22  UCC and CISG Remedies 1. Although different wording is used, both allow similar remedies 2. These include: a) The right to “cover,” meaning to purchase alternative/ replacement goods in case of a breach of contract; and b) Consequential damages (loss suffered as a result of the breach, calculated in addition to the breach itself, like lost profits) 23 UCC and CISG Contract Interpretation There is “no such thing as a perfect contract”. Contracts are often ambiguous in certain areas, and both the UCC and CISG provide similar methods of interpretation. 24 UCC and CISG Comparing the CISG with the UCC Key Differences (cont’d) When a contract is created (The “Mailbox Rule”) Under the UCC, a contract is created when the acceptance is mailed or transmitted Under the CISG, a contract is created when the offeror receives the acceptance There is not much practical difference, however, because the offeror’s ability to revoke his offer is suspended when the acceptance is mailed or transmitted 25 UCC and CISG Are Electronic Contracts Valid? Under the UCC, “writing” requirements include any “intentional reductions to tangible form;” thus, electronic communications are enforceable Not addressed under the CISG. However, because writings are not technically required, it seems to imply that any electronic contract would be valid. This is not settled law, though, so companies should be careful when hoping to create contracts written in electronic formats 26 Notes 27 Notes 28 Contracts Module 2 Influence of Law on Bid Process Law Contracts Defining Basic Types 30 Law Contracts Defining Basic Types Legislative Law Determined by legislatures (National Parliament and State Legislative Assemblies) Consists of Statutes & Regulations 31 Law Contracts Defining Basic Types Common Law Judge-Made or Judicial Law with Jurors Based on the theory of Precedent Contract Dispute Legal Ruling Precedent Precedent – a legal principle established in previous court decisions which involved similar or analogous fact situations. 32 Law Contracts Defining Basic Types What is a Contract? Definition: Relationship between 2 or more parties defining legal rights and obligations 6 Essential Elements of a Contract: 1. Offer 2. Acceptance of Offer 3. Intention to Create Legal Relations 4. Consideration 5. Certainty 6. Capacity 33 Law Contracts Defining Basic Types Arbitration There are many institutions throughout the world, which handle national or international arbitration and have developed procedural rules to take care of most situations that may develop. Some of theseinstitutionsare: Kuala Lumpur Regional Centre for Arbitration International Chamber of Commerce Asia/Pacific Center for Resolution of International Business Disputes London Court of International Arbitration American Arbitration Association Central American Arbitration Association Center for Dispute Resolution (CEDR) 34 Law Contracts Defining Basic Types Additional Legal Issues Force majeure Choice of Law/Forum Intellectual Property Antitrust Assignment provisions Domestic vs. International legal relationships Protests Claims 35 Law Contracts Defining Basic Types Bilateral vs. Unilateral Contracts Every contract involves at least two parties: an offeror and an offeree. The offeror promises to do or not to do something. Whether a contract is unilateral or bilateral depends on what the offeree must do to accept Unilateral Bilateral A unilateral contract is a promise for an act; if the offeree A bilateral contract is a promise can accept only by complete for a promise; if the offeree performance, the contract is need only promise to perform, unilateral. A unilateral contract's the contract is bilateral. A two- offer becomes irrevocable once party purchase order is a substantial performance has bilateral contract been completed 36 Law Contracts Defining Basic Types Expressed vs. Implied Contracts An express contract is one in which the terms are expressed in words; oral or written Express Implied A contract that is implied from the conduct of the parties is an To establish an implied-in-fact implied-in-fact contract, or contract: (1) the plaintiff must simply an implied contract. The have furnished some service or parties' conduct reveals that property; (2) the plaintiff must they intended to form a contract have expected to be paid and and creates and defines its the defendant knew or should terms have known that payment was expected; and (3) the defendant had a chance to reject the service or property and did not 37 Law Contracts Defining Basic Types Formal vs. Informal Contracts Formal contracts require a All other contracts are special form or method of informal contracts, or simple formation to be enforceable. contracts. For these, no Formal contracts are special form is required normally sealed with the (except for certain types of corporate/ company seal. contracts that must be in Some countries require a writing). Purchase orders are public notarization generally considered “informal contracts” 38 Law Contracts Defining Basic Types Written vs. Oral Contracts Written generally preferred Oral contracts MAY BE OK if: 1. Confirmed in writing 2. Goods made specifically to purchaser’s order 3. Both parties behave as if a contract exists; or 4. Party against whom contract is being enforced admits in a legal proceeding a contract exists 39 Law Contracts Defining Basic Types Executed vs. Executory Contracts Contracts are also classified according to If one party has fully performed but the their stage of performance. A contract other has not, the contract is said to be that has been performed is an executed executed on the one side and executory contract. A contract that has not been on the other, and it is classified as performed is an executory contract executory 40 Law Contracts Defining Basic Types Valid, Void, Voidable and Unenforceable Contracts A valid contract results when all of the elements necessary to contract formation exist-when the parties agree, through an offer and an acceptance, to form a contract; the contract is supported by consideration; the contract is for a legal purpose; and the parties had legal capacity to contract A contract that is void is no contract. A void contract gives rise to no legal obligation on the part d any party. An illegal contract is, for example, a void contract A voidable contract is a valid contract in which one or both of the parties has the option of avoiding his or her legal obligation. If the contract is avoided, both parties are released. If it is ratified, both parties must perform An unenforceable contract is a valid contract that cannot be enforced due to certain defenses. For example, a valid contract barred by a statute of limitations is an unenforceable contract 41 Law Contracts Defining Basic Types Summary & Conclusions Contract law is a necessary discipline to study by procurement and contracts professionals Legal counsel must be available when procurement and contracts professionals encounter difficult or complex legal situations 42 Notes 43 Notes 44 END What 10 things World Class Procurement Organizations Do Module 3 What 10 Things World Class Procurement Organizations Do EFFICIENCY 1. Operate Effectively and Efficiently 1. Process costs EFFECTIVENESS 2. Productivity and Staffing Levels 3. Cycle times 1. Economic return 4. Costs per transaction 2. Supply base leverage & performance 3. Role of procurement 1. Examples 4. Process quality 2. 16% lower Cost of PR as a % of spend 3. 28% lower Direct-PR Cost as a % of Direct Spend Examples 4. 19% lower Indirect – PR Cost as a % of Indirect 1. 144% higher spend cost reduction Spend 2. 90% higher spend cost avoidances 5. 32% lower Purchase Operations cost as a % of 3. 58% less suppliers per $B Spend 4. 22% less suppliers that represent 6. 12% higher Span of Control 5. 80% of indirect spend 7. 174% more PoS processed per FTE 6. 50% higher spend influence in direct 8. 54% faster Direct Receiving cycle time materials/services 9. 63% less cost per PO 7. 33% higher spend influence in direct 10. 23% less FTEs per $1B of spend materials/services 11. 39% less direct FTEs per $1B direct spend 8. 42% less PO Pricing errors 12. 29% less indirect FTEs per $1B indirect spend 13. All cost, FTE, and wage rate data available at a process group level 47 What 10 Things World Class Procurement Organizations Do 1. Operate Effectively and Efficiently HIGH WORLD-CLASS WORLD-CLASS EFFECTIVENESS 1D 1Q EFFECTIVENESS WORLD-CLASS EFFICIENCY LOW EFFICIENCY 1Q 1D 48 What 10 Things World Class Procurement Organizations Do 1. Operate Effectively and Efficiently EFFICIENCY 1. Process costs 2. Productivity and Staffing Levels 3. Cycle times 4. Costs per transaction Examples 1. 16% lower Cost of PR as a % of spend 2. 28% lower Direct-PR Cost as a % of Direct Spend 3. 19% lower Indirect – PR Cost as a % of Indirect Spend 4. 32% lower Purchase Operations cost as a % of Spend 5. 12% higher Span of Control 6. 174% more PoS processed per FTE 7. 54% faster Direct Receiving cycle time 8. 63% less cost per PO 9. 23% less FTEs per $1B of spend 10. 39% less direct FTEs per $1B direct spend 11. 29% less indirect FTEs per $1B indirect spend 12. All cost, FTE, and wage rate data available at a process group level 49 What 10 Things World Class Procurement Organizations Do Strong and Lean STRONG LEAN STRONG & LEAN Spend Cost Savings Procurement Cost as a % of Procurement ROI spend Savings/Cost 7.68% 3.39% 0.72% 12.70x 0.60% 4.72x Peer Group World Class Peer Group World Class Peer Group World Class 50 What 10 Things World Class Procurement Organizations Do 2. Clear and Valued Mission/Vision and “Service Portfolio” Which of the following athletes are world- class? They ALL are, but their value propositions are different 51 What 10 Things World Class Procurement Organizations Do 3. 360 Degree Alignment Shareholders, Board of Directors, Regulators Protect Supply & profits Customers “Improve “Hit Suppliers “Free up Joint My My “Get it Get it Awarded Joint cost Joint Budget” Increasing influence e-PO Strategic business” Targets” Cheaply Quickly Business reduction Business & value Develop-ment improvement A paycheck Expedite Basic A decent job Self-Service Training Ground Guided Buying Career in procurement Requisitioners Career in business Employees 52 What 10 Things World Class Procurement Organizations Do 4. Early Involvement & Influence (Varies with Spend Category) 94% Percentage of companies with different 89% procurement influence models by indirect spend category, 2010 2% 76% 20% 9% 64% 19% 46% 35% 43% 26% Sales and Marketing General Equipment and Indirect Materials Indirect Services Supplies Authoritatively Controls Sourcing Influences Sourcing Via Team Peer Group World Class Advises Others Uninvolved with others 53  What 10 Things World Class Procurement Organizations Do 5. Steward for Supply Risk vs. Reward And in a Volatile Global Environment Supply Risks that Actually Impacted Large Organizations Purchase Price Escalation High Tier 1 Supplier Shortages Non Competitive Severity of Adverse Event Regulatory Logistics Events Compliance Disruptions Environmental Tier 2 Hazard Supplier Disasters Shortages Supplier 1. Crude Oil in Middle East Bankruptcy 2. Rare Earth Metals in China (97% of Market) Bad Publicity from Supplier 3. Shortages Japan Disaster Adverse Geo-Political Inability Supplier Issues To Scale Behavior & Innovate Low Low Frequency of Adverse Event High 54  What 10 Things World Class Procurement Organizations Do 6. Optimized Procurement Service Delivery Model (SDM) Appoint global process owners (e.g. P2P) Example: Degree to which third-party risk/governance is aligned with enterprise stakeholder objectives Information Perform Self-funded data rationalization for supplier master, Governance Payment terms, item master, etc. Service & Placement Example: Standardized & optimized supplier payment items. Organization Single scorecarding system linking KPIs/targets from business to Service supply chain, categories, suppliers, and items/sites Delivery Skills and Components Process Set up Centers of Excellence for eSourcing, analytics, MI, etc. Talent Sourcing Example: Use of COEs (including virtual) to allow specialization without bureaucracy Enabling Process Technology Design Consider emerging PBPO areas (e.g. Market Intelligence) Example: Selective Outsourcing & Offshoring of non-core categories and processes 55  What 10 Things World Class Procurement Organizations Do 6. Optimized Procurement Service Delivery Model (SDM) Apply Lean/Six Sigma to Procurement processes Information Example: Standardization of Strategic Sourcing Processes & documents to enable Automation & COEs Governance Service & Placement Organization Separate Customer Management, Category Management and Service Tactical Sourcing Delivery Components Example: Degree by which Talent Management processes have Skills and Process Talent Sourcing been conducted in Procurement Enabling Process Use Software-as-a-Service (e.g. hosted spend viz tools) Technology Design Example: Degree to which P2P Processes are “Hands-Free” & e-sourcing/SRM processes are automated 56 What 10 Things World Class Procurement Organizations Do 7. Managing Talent & Knowledge Bring in the Right Talent Develop Talent Retain the Talent Annual Turnover Number of training hours % of Firms with a High Degree Annually per employee Of Formal Retention Plans with High Potential/Critical Staff 36% 43.00% 36.00% 25.00% 28% 15.00% 11.74% 400% 5.00% Peer Group World Class Peer Group World Class Peer Group World Class Axis Title 57 What 10 Things World Class Procurement Organizations Do 8. Maximizing ROI of IT Investments “Certified Technology Capabilities” 1. Spend/Contract visibility Investment IT Efficiency 2. E-sourcing automation Technology 3. Supply base integration Investment 4. P2P automation IT Effectiveness Labor Investment 1. This is what really matters! 2. Correlated to World-Class Procurement Outsourcing 3. performance Investment Higher Economic returns Sourcing and Supplier Management 1. Spend Savings Customer Sourcing and Procurement Processes: Supplier 2. Labor Savings Sourcing Managemen Supply Base Execution Management & 3. Reduced Risk / non t Strategy Development compliance 4. Higher Cust. Sat. Procurement Operations 5. Shorter cycle times Requisition & Receipt Compliance Supply Data Effectiveness PO Processing Management Management & Efficiency Processing Supplier Scheduling 58  What 10 Things World Class Procurement Organizations Do 9. Opportunism and Deliberation in Expanding its Influence % of procurement organizations that used the recession to make themselves stronger Influenced new spending areas and put in place New policies that were not possible before 73% Brought additional attention, focus, and resources to supply risk as an enterprise risk issue 57% Added higher-value procurement 'services' to your service portfolio and increased your brand to the business. 53% Added higher-value metrics to your scorecard beyond cost savings 47% Extricated procurement staff from low-value processes, but also increased resources in high-value 40% Helped critical suppliers through the downturn and garnered their goodwill and commitments 23% in preparation for the market upturn Freed up working capital without undue stress on your suppliers (e.g. use of supply chain financing) 13% 59 What 10 Things World Class Procurement Organizations Do 10. Tapping the Full Capabilities of Supply Markets 1. How well do you tap supplier capabilities to enable objectives beyond purchased cost reduction? 2. Do you enjoy innovation advantages from your suppliers compared to your competitors? 3. What are you doing to become a “customer of choice” 4. How do you systematically enable this in your category management and SRM processes? 5. Do you have strategic SRM – or just basic supplier measurement and compliance Management? 60 What 10 Things World Class Procurement Organizations Do Category Value Objectives Reduce TCO Increase Revenue Other Goals Improve Improve Reduce External Improve Quality Material/Service Flexibility/Responsiv Costs Performance eness Reduce Working Improve Delivery Manage Risks Accelerate NPI Capital Performance Enable New Reduce Internal Improve Delivery Cut Order Lead Business Process Costs Performance Times Capabilities Reduce Fixed Other Other Other Assets 61 What 10 Things World Class Procurement Organizations Do Get Suppliers Involved Earlier Degree of early Supplier Involvement in New Product Development 80% 60% 40% 20% None/Low Medium/High Peer Group World Class 62 What 10 Things World Class Procurement Organizations Do Summary/Conclusions 1. World-class can be defined and attained by anyone 2. Manage yourself as a world-class “service provider” 3. The mega-practice: alignment. Reconcile stakeholders’ definition of value, then move to performance and capabilities 4. Focus on supply/business outcomes, not procurement 5. Design your procurement services value chain like you’d design your core supply chain. Be deliberate 6. The mega capability is knowledge/intelligence 7. Focus in IT-enabled procurement ROI, not just IT ROI 8. Use “organizational judo” to self-fund your transformation 9. At the end of the day, it’s about safely tapping supply market power to support/advance the enterprise mission 63 Notes 64 Notes 65 END Procurement (Bid) Process & Rules Module 4 Procurement (Bid) Process and Rules UNIT 1: The Sourcing Life-Cycle: Learning to Dance Together 68 Procurement (Bid) Process and Rules The Sourcing Lifecycle – Learning to Dance Together In both the public and private business sectors, buyers are far more knowledgeable about their rights, have higher expectations regarding the quality of products and services, have little tolerance for poor performance, are quick to change their minds, and frequently complain if they do not get what they want when they want it. Just like dancing, partner feedback is critical. You must know the difference between a partner's needs and desires. You must know how to treat your partner, so you do not start out or end up on the wrong foot. Business partners, must work together to achieve success, otherwise, one or both will stumble and fall. 69 Procurement (Bid) Process and Rules Creating Customer Value Supply Chain Management On-Time Delivery Quality of Service Availability of Resources Trust Speed Best in Class Service CUSTOMER LOYALTY VALUE Best Value Deal Best in Class Products Price Quantity Supply Chain Breakthrough Discounts Payment Terms Management Technology Financing Type of Contract Capacity Reliability Relationship Trust Trust Maintainability Third Parties On-Time Delivery 70 Procurement (Bid) Process and Rules The Sourcing Lifecycle Buyer & Seller Step 7: Buyer Step 1: Contract Procurement Buyer & Administration Planning Seller Step 6: & Closeout Seller Step 1: Contract Pre-Sales Negotiation Activities & Formation Pre-bid/ Post-bid/proposal proposal phase phase Seller Step 5: Buyer Step 2: Oral Presentation Solicitation & Response to Planning Questions The Sourcing Lifecycle Buyer Step 5: Buyer Step 3: Source Selection Solicitation Evaluation Preparation Seller Step 4: Seller Step 2: Bid/Proposal Bid/No Bid Reviews & Decision- Approvals Buyer Step 4: Making Source Seller Step 3: Selection Bid/Proposal Bid/proposal Development Planning phase 71 Procurement (Bid) Process and Rules Procurement Planning Procurement Planning Process Inputs Tools & Techniques Outputs 1. Similar past Performance 1. Outsource Analysis 1. Procurement Work Statements (PWS), 2. Expert judgment Management Plan Statement of Objectives 2. Seller participation and 3. e-Procurement and (SOO), or Solicitations feedback Contracting Methods 2. Procurement Resources 4. Contract type or pricing 3. Market Conditions arrangements 4. Business Constraints 5. Business Assumptions 72 Procurement (Bid) Process and Rules Competitive Bidding vs. Two-step Bidding Competitive Bidding Two-Step Bidding Seller submits technical proposal Buyer makes solicitation for firm and management and company bids qualification information Buyer evaluates everything except One After deadline, buyer pricing information to determine Step evaluates bids which sellers are qualified Two Steps Buyer requests pricing information from qualified sellers Buyer chooses seller based on Buyer chooses seller qualifications and bid price (usually lowest bidder) 73 Procurement (Bid) Process and Rules Comparison of Contracting Methods Competitive Bidding Requirement Sellers Award of contract Planning Sealed bids Performance Market Research Bid opening Evaluation or two-step Invitation for bids evaluation 74 Procurement (Bid) Process and Rules Comparison of Contracting Methods Competitive Negotiations Requirement Sellers Discussions/negotiation Planning Proposals Final evaluation and selection Technical Cost Market Research proposal proposal analysis analysis Award of contract Results Results Invitation for proposals Performance Short list 75 Procurement (Bid) Process and Rules Comparison of Contracting Methods Non-competitive Single- Source or Sole-Source negotiation Requirement Discussions/negotiation Planning Award of contract Market Research Performance Proposal 76 Procurement (Bid) Process and Rules Competitive Bidding The most widely used method of procurement for larger value procurements in commercial and industrial settings In the Federal Sector, the method is referred to as "Competitive Proposals.“ The method contemplates the seeking of competition (either on a full and open basis) or among firms that are considered "preferred", "partnered", "certified", or "prequalified" suppliers 77 Procurement (Bid) Process and Rules Competitive Bidding Generally Appropriate in Adequate competition on the procurement IS EXPECTED There is sufficient time for the solicitation, evaluation, and award processes The description of requirements is sufficiently definite to allow offerors to bid without a great deal of pricing contingency The decision to award a fixed price contract can be readily arrived at based upon prices submitted and other price-related factors 78  Procurement (Bid) Process and Rules Negotiation 1. IT IS SOMETIMES appropriate and/or necessary to deviate from the strict firm-fixed-price competitive bidding mode of selection and to engage in some degree of negotiation, either on technical qualifications, cost of performance, or both 2. When the organization desires to award a contract to the supplier with the highest affordable technical quality, but that desired quality cannot be defined in the statement of requirements, use of a "Best Value" evaluation approach must be employed 3. "Best Value" permits the organization to request technical (and other) proposals, from which the level of quality can be inferred 79 Procurement (Bid) Process and Rules “Best Value” Selection In many procurements, it is highly appropriate to use a logical mix of technical/management and price/cost/business evaluation criteria in selecting a firm Typically, the more technical the work, the more weight that is given to the technical criteria Procurements of research and development services, for example, often warrant consideration of price/cost only if offerors are otherwise equally technically qualified (as a "tie-breaker") Consultants are almost always selected on technical qualifications (as long as the rate of compensation doesn't exceed pre-established policy parameters) 80 Procurement (Bid) Process and Rules “Two Step” Bidding – In Step One and Two STEP 1 STEP 2 1. The buyer solicits technical 1. The buyer solicits priced offers proposals (only) from potential (no cost proposals required) suppliers from the firms which have 2. Buyer team evaluates technical submitted technical proposals in proposals, conducts technical either of the first two categories negotiations as necessary, and 2. The award decision is similar to places proposals in three the decision made in competitive categories: bidding (i.e., the lowest, a) Acceptable responsive, responsible firm normally gets the award) b) Subject to Being Made Acceptable c) Unacceptable 81 Procurement (Bid) Process and Rules The Three Inputs of Knowledge 02 Knowledge of your company 01 Knowledge of OPPORTUNITY your customer Knowledge of your competitors 03 82 Procurement (Bid) Process and Rules Sweet Spot – Sour Spot Analysis Sweet Spot – Sour Spot Analysis A Bidder’s Dozen: Golden Rules for Winning Work David G. Pugh, Ph.D., - Lore International Institute Sour Spot Strategy Strategy Our Competitor Mitigate our Weaknesses Strengths Neutralize Weaknesses their strengths CUSTOMER NEEDS Highlight our Ghost their strengths weaknesses Our Competitor Strengths Weaknesses Strategy Sweet Spot Strategy 83 Procurement (Bid) Process and Rules Opportunity & Risk Management (ORM) Model 1. Identify opportunities and risks Opportunity/Risk 2 Analyze opportunities and risk Assessment 3 Prioritize opportunities and risk 4. Develop opportunity and risk action plans Opportunity/Risk 5. Implement opportunity and risk action plans Action Plans 6. Evaluate project results 84  Procurement (Bid) Process and Rules Source Selection – 7 Best Practices Checklist 1. Cycle-time Targets – The buyer establishes a target of 90 days or less from issuance of the RFP to contract award 2. Greater Pre-Solicitation Efforts – The buyer actively encourages more definitive procurement planning, bidders conferences with prospective sellers, and circulation of the draft RFPs to prospective sellers 3. Proposal Page Limitations – The buyer provides that pages in proposals over a specified number will not be read, but will be returned to the seller 4. Reduced Number of Evaluation Factors – The buyer uses only essential evaluation factors 5. Small Source Selection Teams – The buyer uses a small number of evaluators, each reading all of their specialization/section (technical, management, past performance, or cost) for the proposals 6. Oral Presentations – T =he buyer requires the sellers to make oral presentations to the source selection team in the early stages of evaluation of the proposals 7. Limiting the Competitive Range – The buyer require rigorous exclusion of marginal sellers from the competitive range 85 Procurement (Bid) Process and Rules Preaward Checklist In File? Adequate? 1. Requisition and Attachments Justification for Noncompetitive Procurement (Sole Source 2. Justify) 3. Contract Type Determination 4. In-House Estimate 5. Advance Contracting Plan 6. Solicitation/RFP Technical Evaluation/Cost-Price Analysis Team Designation 7. Memos 8. Bidders List 9. Jobwalk/Pre-solicitation Conference Minutes 10. Addenda to solicitation/RFP 11. Bids/Offers 12. Bid/Offer Tabulation 13. Technical, Management, & Business (Cost) Proposals 86 Procurement (Bid) Process and Rules Preaward Checklist In File? Adequate? 14. Representations and Certifications 15. Technical Evaluation of Technical/Management Proposals 16. Business/Cost Proposal Evaluation 17. Technical Analysis of Supplier Business (Cost) Proposals 18. Pre-negotiation Plan 19. Negotiation Notification Letters 20. Negotiation Response(s) 21. Final Offer Request Letter 22. Final Technical/Management Offers 23. Source Selection Memorandum 24. Results of Site Visit 25. Negotiation Memorandum 26. Contract Routing Guide (Internal Review, including Legal) 87 Procurement (Bid) Process and Rules Summary/Conclusions The procurement/bidding process requires internal planning and considerable teamwork The goal is to find out whether a supplier meet the organization’s requirements at a fair and reasonable price Your project management and diplomatic skills will be tested in large, complex procurements Procurement methods and plans must be flexible to accommodate inevitable changes Procurement technical and price competition are normally desired objectives to be strived for 88 Notes 89 Notes 90 END Understanding the Tender Process Module 5 Understanding the Tender Process Tender Definition Initiating step of a competitive tendering process in which qualified suppliers or contractors are invited to submit sealed bids for construction or for supply of specific and clearly defined goods or services during a specified timeframe. Also called request for tenders. 93 Understanding the Tender Process Types of Tender Open Limited Multi-Stage Tendering Tendering Tendering Public For panel of pre-qualified For service provider for a Request for contract for a Known advertisement service providers for singe contract single contract service for tender future providers Tendering opportunities. invited to tender Evaluation of tenders Public advertisement for Public advertisement for Public advertisement for received interested partners to expression of interest for Respondents to provide a Evaluation apply Parties meeting minimum preliminary proposal. of tenders To join list if they meet criteria. received the minimum criteria Shortlist of service providers Shortlist of service providers Best preliminary proposals Best meeting criteria established Selected pre-registered established Tenderer list established and Shortlisted service providers maintained Shortlisted service providers Invited to tender for a single For future tender Invited to tender for a single Contract or obtain a best Appointments contract and final offer from the shortlisted providers. Evaluation of tenders Evaluation of tenders Evaluation of tenders received or each received provided contract. 94 Understanding the Tender Process The three primary bonds that are purchased on construction projects are: Bid bonds Payment bonds Performance bonds and 95 Understanding the Tender Process Bid Bonds Performance bonds Bid bonds, Payment bonds … and ABC School District has put out a Request for Proposals for a new roof on their high school building. Contractors X, Y and Z submit bids to perform the work listed in the RFP. The School District requires each of the contractors to submit a bid bond with their bid. The bid bonds are purchased by the three contractors from sureties. The School District decides to accept Contractor Y’s bid. Contractor Y determines that they have underbid the project and decides not to execute the contract and not to perform the work. In this instance, the School District can make a claim against the bid bond due to Contractor Y’s failure to abide by its bid. Thus, a bid bond is a type of bond designed to protect the owner in the event that the bidder refuses to enter into a contract after the contract is awarded or the bidder withdraws his bid before the award. 96  Understanding the Tender Process Performance Bond performance bonds Bid bonds, Payment bonds … and Municipality 123 retains Contractor AB to construct a municipal swimming pool at its recreation center. Contractor AB enters into a written contract and begins performing the work. During the performance of the work, Contractor AB goes out of business leaving the work about 50% finished. Additionally, some of the work that was performed was defective. Contractor AB has provided Municipality 123 with a performance bond. Municipality 123 can assert a claim against Contractor AB’s performance bond for the cost to perform the unfinished work and the cost to correct the defective work. Thus, a performance bond protects the owner from the contractor’s failure to perform in accordance with the terms of the contract. A performance bond does not provide protection against subcontractor or suppliers who have not been paid. 97  Understanding the Tender Process Payment Bond performance bonds Bid bonds, Payment bonds … and Public Water District QQ has retained Contractor ZZ to install a new water tower. Because the project was over $25,000, Contractor ZZ was required by the Water District to provide a payment bond. Contractor ZZ completed the work, but failed to pay Subcontractor X for its work. Subcontractor X cannot pursue any claim against the Water District. However, Subcontractor X can assert a claim against the payment bond for the amount owed to it for its work on the project. Thus, a payment bond is designed to provide security to subcontractors and materials suppliers to ensure payment for their work, labor and/or materials on the project. 98 “e-bid submission” 99  Understanding the Tender Process Salient Features of e-Procurement 1. Tender notices are up-loaded and available on web-site 2. Firms to get registered at portal free of cost 3. Bidders/Indenters to obtain Digital Signature Certificates (DSC) from any certified agency 4. The tender offers are submitted on-line 5. Tenders are opened on-line 6. All accompanying documents are scanned and submitted on-line after certification by digital signature 100 Understanding the Tender Process Advantages of e-Procurement 1. All the documents pertaining to work will be available on portal for ready reference to contractors 2. Wide publicity of Works, because the moment the work is uploaded, it becomes Global 3. No chances of biasing of officials of municipality towards any agency 4. Maximum participation of agencies 5. Due to maximum participation, rates will be reasonable and compatible 6. No need to visit the office 7. Less agency flow towards the office, will reduce the congestion in the office 101  Understanding the Tender Process Modules of e-tendering Award of Contact Registration Bid Evaluation Tender Management Bid Opening Bid Management 102  Understanding the Tender Process Procurement Functionalities Tender Bidding Bid Opening & Evaluation Tender Creation Tender Search Bid Opening & Decryption Tender Uploading Tender Document Download Technical Evaluation (Offline) SOR based Financial Tender Publishing Payment of Tender Fee/ EMD Evaluation (Works Tender) Bid Signing, Encryption & Communication & Publication Corrigendum Submission of Award Information 103  Understanding the Tender Process Registration B A Contractors/ Bidders C Departmental Digital Signature User Certificates 104 Understanding the Tender Process Departmental User B A Contractors/ Bidders C Departmental Digital Signature User Certificates 1. Created by the administrator 2. Password sent by mail 3. Roles are defined as required – Tender Creator, Publisher, Bid Opener & Evaluator 105  Understanding the Tender Process Contractor/Bidder B A Contractors/ Bidders C Departmental Digital Signature User Certificates 1. Done online by filling up the form 2. DSC is attached if available/later 3. Password by mail 106 Understanding the Tender Process Tender Management Tender Creation Tender Publishing Provide Clarifications Corrigendum creation & publications 107  Understanding the Tender Process Tender Creation 1. Preparation of tender documents 2. Finalization of dates 3. Formation of committees 4. General information such as a) Tender type-open/limited/EOI b) Class of contractor: Validity period, Duration 108 Understanding the Tender Process Tender Documents 1. Forms 2. Instruction to Bidders 3. Declaration by the Bidder 4. Conditions of the Contract 5. Technical Specs 6. Drawings 7. Spl & Addl Terms & Conditions 8. Spl & Addl Conditions of the Contract 9. Qualification Criteria 10. BOQ (item rate % rate tender) 11. Financial Bid 12. Proforma for Documentary Evidence 109 Understanding the Tender Process Tender Committees 1. BID opening 2. Technical Evaluation 3. Financial Evaluation 4. Tender Committee 5. All the members involved in publishing/bid opening should have DSC 110  Understanding the Tender Process Tender Publications 1. Current tenders with documents 2. Tender & Processing fees 3. May be online/offline & exemption with proof 111  Understanding the Tender Process Pre-Bid Clarifications 1. Raise query as defined before the last date of bid submission 2. Reply given one-one basis 3. Pre bid meeting as applicable 4. Summary of queries collected & replies are furnished which is also posted in the site for a tender 112 Understanding the Tender Process Corrigendum Dates of tender Technical Specs Documents required BOQ (Bill of Quantity Rates) Instruction to bidders Qualification criteria Issued as necessary before the Bid Conditions of the contract submission start date 113 Understanding the Tender Process Bid Management for Bidders 1. Tender document downloading 2. Bid preparation 3. E-payment 4. Bid submission 114 Understanding the Tender Process Bid Submission 1. Bidder must be registered in the site 2. Selects the tender he wants after logging in 3. Tender gets moved to my tender section 4. Get clarifications as required 5. Bid submission by paying the fees as online/ offline with exemption if possible 6. Fill up the forms & signs digitally & uploads 7. The documents are encrypted & stored 8. Bidder gets a receipt after submission 9. Bidder can withdraw online 115  Understanding the Tender Process Receipt for Bids 1. Bid information remain encrypted till the opening of bids 2. Cannot be opened by any means 3. Once submitted, it cannot be cancelled/ modified/taken back 4. After the bid submission date, no one can submit his bid 116 Understanding the Tender Process Bid Evaluation Technical bid Financial bid Bid Opening evaluation evaluation 117 Understanding the Tender Process Bid Opening 1. Opened by designated officials 2. Bidders need not be present 3. Each activity is time stamped with server time Bid Opening 4. After opening, as per the criteria, bidders are selected for technical evaluation. The summary of proceedings are updated 5. Offline bids can also be updated if received 118 Understanding the Tender Process Technical Bid Evaluation 1. The bids are printed & given for evaluation manually 2. After evaluation the recommendations are updated for technical bids Technical bid 3. The selected bidders are informed of the financial bid opening evaluation dates 4. Financial bid opening 119 Understanding the Tender Process Financial Bid Evaluation 1. Bids are printed & given for manual evaluation 2. Recommendations are updated Financial bid 3. The bidders are informed of the results evaluation 120 Understanding the Tender Process Award of Contract After financial evaluation, the bidder is selected The award of the contract is published in the site 121 Notes 122 Notes 123 END Contract types Module 6 Contract Types At the completion of this class, students will be able to 1. Define the available contract types 2. Discuss how the appropriate type is Learning Objectives selected 3. Illustrate how contract administration is affected by the contract type selected 4. Show how other aspects of the acquisition process depend on the selection made 126  Contract Types What is Meant by “Type of Contract”? 1. Nature of the work to be performed (Supply Contracts versus Construction Contracts)? 2. Method of procurement? 3. Compensation arrangements between the Contracting Organization and the Supplier? 127 Contract Types Major Classifications Fixed Price Cost Hybrid Reimbursement 128 Contract Types Fixed Price Contracts 1. Supplier is required, as a condition of payment, to successfully complete the work 2. Differences among fixed price contracts may include: a) The certainty of the final amount which will be paid (i.e., some fixed-price contracts do allow for adjustments in the price) b) The time at which the final amount is determined 3. Every fixed-price contract contains within it the guarantee of successful performance as a condition of payment 129 Contract Types Cost Reimbursement Contracts 1. Supplier is required, as a condition of payment, to make a good faith attempt (provide its "best efforts") AND TO DO SO within a certain limit of expenses 2. As long as the effort is made, the Supplier will be reimbursed for the money spent trying to meet that goal 3. Successful performance is NOT a condition of payment although it may have an effect on the amount of profit which a SUPPLIER earns as a result of the contract 4. Differences among types relate to profit (which is called "fee") 130  Contract Types Risk Allocation There is always a chance that something can go wrong during contract performance In the fixed-price contract, the Supplier’s side is the Requirements If something goes wrong, the Supplier must still meet the need as defined in the specifications The majority of the risk falls on the Supplier 131  Contract Types Risk Allocation In a cost-reimbursement contract, the Supplier’s side is "Efforts" If something goes wrong, the Supplier will continue to make an effort Thus, even if the problem is not corrected (or cannot be corrected), the Supplier has fulfilled its side of the bargain and the Contracting Organization must make payment The majority of the risk thus falls on the Contracting Organization 132  Contract Types Fixed-Price Family – Firm Fixed Price 1. An agreement to pay a specified price for successful completion of the work 2. The price will not change regardless of the Supplier’s costs to perform 3. Places the maximum risk on the Supplier 4. Supplier has full responsibility for all costs incurred and reaps the benefits of cost savings or suffers the detriments of added costs without participation by the Contracting Organization 5. The price is determined at the time of contract award. The price will not be adjusted – It is, as the name says, firm 133 Contract Types Firm Fixed Price 1. A firm-fixed-price may be a lump sum which is payable for completion of all aspects of the technical requirements or it may be a unit price payable on an item-by-item basis 2. There is a basic economic formula which can be used to illustrate how various types of contracts work. That formula is: COST + PROFIT = PRICE 3. In a firm-fixed-price contract the PRICE is constant 134  Contract Types Firm Fixed Price – Example Estimated Actual 1 Actual 2 Cost $10,000 $9,000 $11,000 Profit 1,000 2,000 0 Firm-fixed price $11,000 $11,000 $11,000 (No matter what the costs are, the PRICE portion is firmly fixed at award. In Case 1, the Supplier makes more profit than anticipated; in Case 2, the Supplier makes less. If the costs ballooned to $20,000 the price would still be fixed at $11,000 so the "profit" would be A Negative $9,000 – I.e., the negative profit means a loss in that amount) 135  Contract Types Firm Fixed Price Application May also be used when there are technological risks provided that: 1. "Performance uncertainties” can be identified 2. Reasonable estimates of their cost impact can be made, and 3. The Supplier is willing to accept a firm-fixed-price representing assumption of the risks involved 136  Contract Types Firm Fixed Price Advantages 1. There are no legal or regulatory limitations on its use 2. Places the least cost risk on the Contracting Organization of all contract types (none!) 3. Used with either Competitive/Sealed Bidding or Negotiated Contracting 4. Imposes the minimum administrative burden 5. Contracting Organization can be assured of the budgetary impact of the contract 6. Conducive to effective price competition 137  Contract Types Firm Fixed with Economic Price Adjustment (FP/EPA) 1. Provides for adjustments to the agreed fixed-price based on whether certain contingencies identified in the contract occur 2. These adjustments may be either upward or downward 3. This type of contract sets up a mechanism for sharing some of the cost risks of performance 4. Sometimes called "Fixed-Price Escalation”. 138 Contract Types Economic Price Adjustments May be based on any of three types of contingencies Actual costs of labor and materials Cost indexes of labor Established AND/OR material prices B A C 139  Contract Types Fixed Price with Economic Price Adjustment – Example Estimated Case 1 Case 2 Base Cost $200,000 $200,000 $200,000 Fuel $40,000 $60,000 $30,000 Profit $25,000 $25,000 $25,000 Final Price $265,000 $285,000 $255,000 ("Base cost" means the total cost of performance EXCLUDING the contingent item (fuel in this example) for which an adjustment is provided.) 140  Contract Types Fixed Price with Economic Price Adjustment – Benefits 1. The estimated final price is what the contract is expected to cost the Contracting Organization if the adjustable item (fuel) costs exactly what was estimated – this is the "base price" 2. In Case 1, the cost of fuel was $20,000 more than expected – so the price went up by that amount. Note that the Supplier’s profit was not changed. In Case 2, the cost of fuel was $10,000 less than expected – so the price went down by that amount 3. Supplier’s profit was not changed. But it is important to note that the Base Cost used in both Cases was exactly what was estimated 141  Contract Types Fixed Price with Economic Price Adjustment – Example2 Estimated Case 3 Case 4 Base Cost $200,000 $240,000 $180,000 Fuel $40,000 $60,000 $30,000 Profit $25,000 ($15,000) $45,000 Final Price $265,000 $285,000 $255,000 The Supplier still bears a significant cost risk – When the costs of performance (other than the one item for which adjustment was provided) are higher than estimated, the Supplier suffers the loss 142  Contract Types Fixed Price with Economic Price Adjustment 1. When the adjustment is based on established prices or an index for the item being acquired, the mechanics of the adjustment are different 2. In such cases, the entire price is typically subject to adjustment – not merely some element thereof 3. Raw commodities are often bought on this basis 143  Contract Types Fixed Price with Economic Price Adjustment – Advantages 1. Mitigates the effects of pricing contingencies which would otherwise be used to protect the seller from market fluctuations 2. Primary risks of performance fall on the Supplier 3. Since the effect of a Contracting Organization-determined adjustment clause will be the same regardless of who holds the contract, it is possible to have effective price competition eventhough the final price may be different from that initially offered 144 Contract Types Fixed Price with Economic Price Adjustment – Disadvantages The total price is not known until some point during performance which makes budgeting difficult There are administrative costs adjustments which may be required during the life of the contract 145 Contract Types Fixed Price Incentive (FPI) The Supplier’s profits depend directly on cost efficiency – so there is a clear incentive. But the Contracting Organization also accepts a share of the cost risks Fixed-price incentive contracts are often used in combination with performance incentives 146  Contract Types Fixed Price Incentive (FPI) 1. Requires negotiation of a) target cost, b) target profit, c) a price ceiling, and d) a sharing formula 2. When the contract is completed, the Contracting Organization and the Supplier negotiate a final cost (based on an audit of costs incurred during performance) 3. The final price to be paid by the Contracting Organization is then determined by applying the sharing formula to the differences between the target cost and the final cost 147 Contract Types Fixed Price Incentive (FPI) If costs were substantially higher than those targeted, the ceiling price may be reached In that case, the Contracting Organization no longer shares in the increased expenses and the contract is effectively converted to a firm-fixed-price at the ceiling amount 148 Contract Types Fixed Price Incentive (FPI) – Example (in 000's of dollars) Case 1 Case 2 Case 3 Case 4 Target Cost (TC) 500 500 500 500 Target Profit 50 50 50 50 Ceiling Price 625 625 625 625 Share 50/50 50/50 50/50 50/50 Final Cost (FC) 500 450 550 700 FC – TC 0 50 (50) (200) Final Profit 50 75 25 (75) Final Price 550 525 575 625 Ceiling 149 Contract Types Fixed Price Incentive (FPI) – Example In Cases 1 through 3, the Final Price paid by the Contracting Organization is the sum of the Final Cost plus the Final Profit The Final Profit is determined by taking the Target Profit and adding the Supplier's share times the difference between Final Cost and Target Cost: Final Profit = Target Profit + Supplier’s Share Ratio x (FC - TC) 150  Contract Types Fixed Price Incentive (FPI) – Example In Case 1, the Final Cost equals the Target Cost – The Final Profit therefore equals the Target Profit since the Supplier's share of 50% times the zero difference leaves no adjustment to be made In Case 2, the Final Cost is $50,000 less than the Target Cost. This is a $50,000 savings of which the Supplier's share (at 50%) is $25,000. This is added to the Target Profit so that Final Profit equals $75,000. The Supplier clearly benefits from the cost savings realized. But the Contracting Organization also benefits In Case 3, the Final Cost is $50,000 more than the Target Cost – The Supplier's share of this added cost is still 50% – Using the formula, the adjustment is a negative number (minus $25,000) so that the Final Profit is only $25,000 – The Supplier made less profit than targeted. But the Contracting Organization also shares in the expense since the Final Price of $575,000 is $25,000 more than anticipated 151  Contract Types Fixed Price Incentive (FPI) – Example Cont’d 1. In Case 4, the application of the formula would yield a Final Profit calculated as: (625-700) Final Profit = -75 2. If this were to be applied, the Final Price would be $650,000 (Final Cost of $700,000 "plus" the loss of $50,000 for profit) 3. THE ceiling price which will not be exceeded was $625,000 4. Where the formula would produce a result that exceeds the ceiling, the Contracting Organization ceases to share in the additional costs – the Supplier’s share of added expense becomes 100% just as it is in a firm-fixed-price 5. Final Profit is a loss of (i.e., minus) $75,000 6. Case 4 illustrates that a fixed-price incentive contract is really fixed-price 7. The Supplier must successfully complete the work in order to be paid 8. If events go very badly, the Supplier must ultimately assume all of the cost risk 152  Contract Types Fixed Price Incentive (FPI) – Limitations 1. The level of costs which brings the total Contracting Organization payment to the ceiling amount is sometimes called the "Point of Total Assumption“ 2. After this level, the Supplier must assume all of the cost risks without further participation by the Contracting Organization 3. The Supplier’s accounting system must be adequate for the determination of final costs 4. There must be adequate pricing information to establish reasonable targets 153  Contract Types Fixed Price Incentive (FPI) – Advantages 1. Provides a means for giving the Supplier a positive incentive to control costs in a situation where neither a firm-fixed-price or fixed-price with economic price adjustment is possible 2. Despite the Contracting Organization’s share of risk the maximum Contracting Organization obligation is known (i.e., the ceiling price) 154  Contract Types Fixed Price Incentive (FPI) – Disadvantages 1. The Contracting Organization assumes cost risks not limited to specified areas of uncertainty 2. If the Supplier is simply inefficient in performance, the Contracting Organization must bear some of the additional cost 3. In addition, there is an administrative burden involved in the audit and negotiation of final contract costs 4. Only appropriate when there are significant technological uncertainties (i.e., when it is not really known how much effort will be required t