Managing contracts

Software Project
 Agreements
• Avoid future misunderstandings

• Important for Project Managers to understand

• Internal / External

• Commitment to deliver to the client

 What do you need to have a
contract
1. An offer (Seller)
2. Acceptance (Buyer)
3. Consideration –something of value, not
necessarily money
4. Legal capacity –separate legal parties,
competent parties
5. Legal purpose –you cannot have a contract for
the sale of illegal goods.
6. A contract, offer or acceptance may be spoken
or written, though written is preferred.
 Contract
• Refers to the entire agreement between both
parties.
• Boilerplate contracts refers to preprinted or
standard contracts.
• Is a legally binding document. All Terms &
Conditions in the contract must be met.
• One cannot choose to not conform or to not
do something required in the contract.
• Any changes to the contract must be approved
formally by both parties.
 What is the purpose of a
contract?
• Contracts set the basic playing rules for the project
• Even negotiated contracts do not always strive for a
win-win situation - may need the help of experts.
• A contract apportions risk and reflects trust between
the parties.
• The wrong playing rules can be detrimental to the
success of the project.
• Bad rules can lead to unrealistic prices, time frames
or functional expectations.
 A few cautions
• Never, ever provide a single date for a project or a single
point for a budget without a range or a confidence level.

• Expect to iterate on the release date and on the budget,.

• provide the working product in the order in which the

managers want the work done, while the estimates can
keep refining.

• the definition of estimate is a guess.

 How to evaluate contract forms

• Commercial contracts can take many forms. For any

contract, one would look at:
• How is the contract structured? What are the basic
rules for delivering scope and invoicing revenue?
• How does it apportion Risk and Reward between
customer and supplier?
• How does it handle changes in requirements?
• What model of customer relationship does it foster:
competitive, cooperative, indifferent or dependent?
 Statement of Work (SOW)
• A statement of work is a description of the
work required for the procurement

• Many contracts, or mutually binding

agreements, include SOWs

• A good SOW gives bidders a better

understanding of the buyer’s expectations
 SOW
I. Scope of Work: Describe the work to be done to detail. Specify the hardware and
software involved and the exact nature of the work.
II. Location of Work: Describe where the work must be performed. Specify the
location of hardware and software and where the people must perform the work
III. Period of Performance: Specify when the work is expected to start and end,
working hours, number of hours that can be billed per week, where the work must
be performed, and related schedule information.
IV. Deliverables Schedule: List specific deliverables, describe them in detail, and
specify when they are due.
V. Applicable Standards: Specify any company or industry-specific standards that
are relevant to performing the work.
VI. Acceptance Criteria: Describe how the buyer organization will determine if the
work is acceptable.
VII. Special Requirements: Specify any special requirements such as hardware or
software certifications, minimum degree or experience level of personnel, travel
requirements, and so on.
 Solicitation Planning
Solicitation planning involves preparing of the
documents needed for requesting bids
(solicitation), and determining the evaluation
criteria for the award of a contract. Common
documents used in this process are:
– Request for Proposals: used to solicit proposals from
prospective sellers where there are several ways to
meet the sellers’ needs.
– Requests for Quotes: used to solicit quotes for well-
defined procurements.
– Invitations for bid or negotiation and initial
contractor responses are also part of solicitation
planning.
 Outline for a Request for Proposal
(RFP)
I. Purpose of RFP
II. Organization’s Background
III. Basic Requirements
IV. Hardware and Software Environment
V. Description of RFP Process
VI. Statement of Work and Schedule Information
VII. Possible Appendices
A. Current System Overview
B. System Requirements
C. Volume and Size Data
D. Required Contents of Vendor’s Response to RFP
E. Sample Contract
Procurement Process
 PM’s role in procurement
Project Manager must be involved in the creation of
contracts and fulfills the following key roles:
• Identify risks and incorporate mitigation and
allocation of risks into the contract.
• Help tailor the contract to the unique needs of the
project.
• Fit the schedule for completion of the procurement
process into the schedule for the project
• Be involved during contract negotiations
• Protect the relationship with the seller.
• Project Manager must be assigned before a contract is
signed!
 Contract types
• Important to understand the contract types
and be able to tell the difference.

• The objective of contract type selection is to

have reasonable distribution of risk between
the buyer and seller and

• the greatest incentive for the seller’s efficient

and economical performance.
 Contract types
• 4 types of contracts:
–FP –Fixed price
–CR –Cost reimbursable
–T&M –Time & Material
–Purchase Order
Contract Type Description
Fixed-Price Contracts Contract involves setting a fixed total price for a defined
product or service to be provided.
Subtype:
1.Firm Fixed Price Contracts (FFP)
2.Fixed Price Incentive Fee Contracts (FPIF)
3.Fixed Price with Economic Price Adjustment Contracts
(FP-EPA)
Cost-Reimbursable Contract involves payments (cost reimbursements) to the
Contracts seller for all legitimate actual costs incurred for
completed work, plus a fee representing seller profit.
Subtype:
1.Cost Plus Fixed Fee Contracts (CPFF)
2.Cost Plus Incentive Fee Contracts (CPIF)
3.Cost Plus Award Fee Contracts (CPAF)

Time & Material Time and material contracts are a hybrid of contractual
Contracts arrangements that contain aspects of both cost-
reimbursable and fixed-price contracts.
 Factors influencing the type of
contract selected:
• How well-defined the scope of work is or can
be
– The amount or frequency of changes
expected after project start
– The level of effort and expertise the buyer
can devote to managing the seller
– Industry standards of the type of contract
used.
 Cost reimbursable
• The seller’s costs are reimbursed but the
buyer has the most cost risk because the total
cost is unknown.

• This form of contract is often used when the

buyer can only describe what they need rather
than what to do.

• The seller will therefore write the detailed

scope of work.
 Types of Cost Reimbursable
• CPFF –Cost Plus Fixed Fee
– Most common form of CR contract.
– The buyer pays all costs, but the fee is fixed at a
specific Rupee/Pound/Dollar amount. Helps keep
the seller’s costs inline because a cost overrun will
not generate any additional fee or profit.
– Fees only change with approved change orders.
• Ex. Cost plus a fee of $100,000
 Types of Cost Reimbursable
• CPIF –Cost Plus Incentive Fee
– Pays all costs and an agreed upon fee, plus a
bonus for achieving certain performance
objectives set in the contract.
– Eg, cost plus a fee of $100,000. For every month
the project is completed sooner than agreed
upon, the seller receives an additional $10,000.
– Also called as -
• CPAF – Cost Plus Award Fee
– buyer to pay for all costs and an apportionment of
a bonus based on performance. Similar to CPIF
 Time and Material
• Time & Material is most appropriate when the
buyer wants to be more in control, when the
scope of work is not known or is incomplete,
and for short-term services.
• It is also used for emergency work to begin
immediately when a scope of work has not yet
been completed.
• Generally not suggested for long term project.
• Also referred to as Unit-Price Contract
 Fixed Price

• FFP-Firm Fixed Price

– Lump sum, Firm fixed price
– Most common form of contract
– One price is agreed upon for all the work
– Buyer has the least cost risk because the risk of
higher costs is borne by the seller.
– Seller is most concerned with the scope of work in
this type of contract.
– Most appropriate when the buyer can completely
describe the scope of work.
 Fixed Price
• FPIF-Fixed Price Incentive Fee
– Ex. Contract = $1,100,000 For every month you
finish the project early, you will receive $10,000.
• FPEPA –Fixed Price Economic Price Adjustment
– Fixed price contract allows for price increases if
the contract is for multiple years.
– Ex. Contract = $1,100,000, but a price increase will
be allowed in year 2 based on the CPI report for
year 1. Or to account for increases in specific
material costs.
 Purchase Order
• A form of contract that is normally unilateral
(signed by one party) instead of bilateral
(signed by both parties). It is usually used for
simple commodity procurements.
• Ex. Contract to purchase 30 Laser printers at
$499 per printer and its installation charges.
 Contracts
• Risk and Contract Type
– Who has the risk in a cost reimbursable contract, the
seller or the buyer?
– Who has the cost risk in a fixed price contract, the
seller or the buyer?
– Incentives –allows an incentive on top of the agreed
upon price for beating cost, time, performance,
scope of work or quality.
– An incentive helps bring the seller’s objectives in line
with those of the buyer. Ex. completing the project
on time
 Contract - Risk
Financial risk

Contract issuer
- Customer

Contract recipient –
Provider

Fixed Price Cost reimbursable

Contract Types Vs. Risk
 Legal Aspects
• Contractor and Customer’s names, authorized
signatories
• Statement of work
• Deliver or Performance Period
• Inspection and Acceptance terms
• Contract administration Data
• Special Provisions
• General Provisions
• Patent terms, ownership rights conditions
• List of required documents
 Contract negotiations
• Project Manager must be involved in the
negotiation to protect the relationship with
the seller.
• Objectives of negotiation
– Obtain a fair and reasonable price
– Develop a good relationship with the buyer /
seller
 Contract negotiations
• Customer’s request to
– lower the price
– Increase performance
• Contractor’s preparation
– Negotiating Strategy
– Good Plan
– Reputation of having prior commitments
– Management clearance on how much can be
given up
 Main items to negotiate

• Responsibilities
• Authority
• Applicable law –user whose law will the contract fall
• Technical and business management approaches
• Contract financing
• Penalty
• Price
– Price may not be the primary selection criteria or
the primary negotiation item.
 Contract Administration

• Contract administration ensures that the

seller’s performance meets contractual
requirements
• Contracts are legal relationships, so it is
important that legal and contracting
professionals be involved in writing and
administering contracts
• Many project managers ignore contractual
issues, which can result in serious problems
 Contract Close-out
• Contract close-out includes
– product verification to determine if all work was
completed correctly and satisfactorily
– administrative activities to update records to reflect
final results
– archiving information for future use
• Procurement audits identify lessons learned in
the procurement process
 Using Software to Assist in Project
Procurement Management
• Word processing software helps in writing proposals
and contracts, spreadsheets help in evaluating
suppliers, databases help track suppliers, and
presentation software aids in presenting procurement-
related information
• In the late 1990s and early 2000s, many companies
started using e-procurement software to do many
procurement functions electronically
• Companies such as Commerce One, Ariba, Concur
Technologies, SAS, and Baan provide corporate
procurement services over the Internet
• Organizations also use other Internet tools to help find
information on suppliers or auction goods and services
 Procurement Contract Award
• Standard contract –standard, preauthorized contacts. No
further legal review required.
• Special provisions (conditions). Approved alterations to
the standard contract to address project’s needs.
• Letter of intent –Not a contract but simply a letter,
without legal binding, that says the buyer intends to hire
the seller.
• Privity –a contractual relationship.
– Company A hires Company B to do some work.
Company B subcontracts to Company C. The Project
Manager for A is at the jobsite and tells Company C to
stop work. Generally, does C have to listen?
 Other types of Contracts
• Phases and Milestone Contract
• This contract type is used in order to settle
positions based on phases or milestones
according to the project's degree of
completion.
• Percentage accounting is possible, e.g. 50 %
when the order is place, 30 % with delivery
and 20 % after completion.
 Other types of Contracts
• Recurrent Invoicing Contract Enables the
periodic accounting of services, i.e. monthly or
quarterly. In addition, saving the contract
period is possible.
• Maintenance Contract Special kind of
recurrent invoicing contract which allows
setting up the contract position that has to be
calculated, for example, as percentage from a
software license price.
 Best Practice
• Build in broad based Business Outcomes early
and often.
• Hire a Partner not just a Provider
• More than a Contract it’s a Business
Relationship
• Leverage Gain-Sharing
• Assign a dedicated executive
• Focus relentlessly on Primary Objectives
 Agile Contracts?
• Fix 1 of the 3 – TIME, COST, SCOPE
• determine which of the three variables the
client would want to constrain
– If the client chooses to constrain Money, write
the contract to have a fixed budget
– If the client chooses to constrain Time, write the
contract to have a fixed length
– If the client chooses to constrain Scope, write the
contract to have a fixed scope
 Fixed Money
The engagement will begin at a mutually agreed
upon date on or around XXX. The hourly rate will
be $X/hr. Based on the hourly rate of $X, and
the estimate discussed, the total engagement is
estimated to cost approximately $XXX. The
budget for this Engagement will not exceed
$200,000 (the “Term”).

Fixed Money does not mean Fixed Price!!

 Fixed Time
The engagement will begin on October 1, 2014
and will end on January 1, 2015. The hourly rate
will be $X/hr. Based on the hourly rate of $X,
and the estimate discussed, the total
engagement is estimated to cost approximately
$XXX.
 Fixed Scope
"The engagement will begin at a mutually
agreed upon date on or around XXX. The hourly
rate will be $X/hr. Based on the hourly rate of
$X, and the estimate discussed, the total
engagement is estimated to cost approximately
$XXX. The agreed upon features for this
engagement are: XXXX.
• ICERTIS.com
– Contract Software provider.