Contract Issues in
Project Management
Kathy Daniels
Project Management
for ARA Engineers and Scientists
Desired Learning Objectives
 Understand the different considerations for commercial
and government customers
 Understand the different attributes (and cautions) of
T&M, CPFF, CPAF and Fixed Price contracts
 Be able to know what to look for in a contract and what
to avoid
 Know what it takes to work at risk and what it means
 Understand authority on both sides of the contract
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Overview
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Customers and Contracts – the good, the bad, the ugly
Types of contracts and their implications
What to look for in a contract and what to avoid
Working at risk and what it means
Authority on both sides of the contract
Ethics and standards of conduct reminder
How to get help
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Commercial Customers
 Do we know the customer and ability to pay?
• Financial Risk Assessment Procedure
• We can check DBS or customer’s bank
 Commercial contracts generally are fixed price…
 However, read the fine print
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Payment, when, by whom, based on what?
What are the deliverables?
Who accepts work and approves payment?
Are there intellectual property or liability issues?
 In some ways, riskier than government business
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Government Customers
 Must understand roles and authorities of customers
• Procuring Contracting Officer (PCO) can negotiate and sign
contract, approve changes and issue mods, terminate contract
• Administrative Contracting Officer (ACO) administers contract,
ensures delivery, oversees contract closeout
• Contract Auditor (DCAA) audits cost, payments, rates
• Technical Representative (COR, COTR, CTM) is performance
monitor, cannot make changes or authorize new work
 A contract must be signed before we start work
 Contracts range from simple to very complex
based on risk of completion and dollar value
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Contract Type Refresher
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CPFF – Cost Plus Fixed Fee
CPAF – Cost Plus Award Fee
T&M – Time and Materials
FFP – Firm Fixed Price
Type used depends on relative buyer-seller risk and
other considerations
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Cost Plus Fixed Fee -- CPFF
 R&D with high technical risk
 Buyer reimburses actual costs
• Contract modification required to exceed
not-to-exceed price
• ARA policy to avoid cost overrun
 Negotiated fixed fee amount paid
• Cost-plus-percent-of-cost illegal
 Must report costs incurred and notify Buyer before 75
percent point of completion
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Cost Plus Award Fee -- CPAF
 R&D with high technical risk
 Buyer reimburses actual costs (like CPFF)
 Maximum award fee percent specified in contract (may
be base and variable portions)
 Evaluation criteria spelled out in contract fee plan
 Customer determines fee percent earned usually every
six months
 Fee determination cannot be disputed
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Time and Materials – T&M
 Cost ceiling on labor, other direct costs (ODCs) or both
 Labor is reimbursed at fixed hourly rates
• Includes DL, OH, GA, Fee
 Quantity of hours estimated – can change
 Materials, travel, ODCs reimbursed at actual cost plus
negotiated – not actual – burden (e.g. 13% G&A or 4%
materials burden) if authorized in contract
• No fee on these non-labor costs
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T&M Cautions
 Limited to people/rates listed in contract
• May not be able to use a new person
• No changes allowed for pay raises
• Consider use of average vs. individual rates
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Can only bill labor unless ODCs specifically listed
Earned fee reduced by high materials or ODC ratio
Billed at negotiated vs. actual rates
Post Audit often reduced payments
Prefer CPFF or FFP as alternative
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Firm Fixed Price – FFP
 Buyer pays specified price for job
• No adjustment based on actual cost
 Seller (ARA) bears all risk (performance and cost)
 Warrants a higher profit percentage
 Profit is remaining residual when costs are paid (plus or
minus)
 Try to reserve for well defined task or requirement
 The “norm” in commercial contracting
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Profit or Fee
 Depends on:
• Contract type and relative risks
• Amount of competition
• Government or commercial
▪ Not restricted to government rates on commercial jobs
 General rules
• Cost Reimbursable – propose 10 percent
• Fixed Price – propose 15 percent – more on commercial jobs
 Will almost always be reduced in the final negotiations
 Profit is not a dirty word
• It’s how we stay in business and grow
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What to Look for in a Contract
 Subcontracts awarded to ARA by Government prime
contractors often attempt to pass liabilities or impose
conditions unfavorable to ARA
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Indemnification clauses that shield prime
Clauses that give IP ownership to prime
Clauses that prevent access to customer
Unreasonable review and approval requirements
Pay-when-paid clause
Refusal to recognize all costs (e.g. computer use)
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What to Look for in a Contract
 Government contracts
• Understand what is to be delivered and when (SOW, CDRLs,
other contract clauses)
• Contract value, funding, options are different
• Limitation of cost/funds notices are important
• Understand payment provisions
• Protect ARA intellectual property – assert rights otherwise
government has unlimited rights
• Adhere to security provisions, clauses requiring approval of
public releases, Government Property requirements
• If contract is greater than $550K, Small Business
subcontracting plan and reporting required
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Working at Risk – What Does it Mean?
 Working at Risk includes:
• Commencing work prior to contract award
• Continuing work prior to receipt of fund increment
• Continuing work beyond contract end date
 Sector Manager must approve working at risk
• PI sends request in writing documenting circumstances in
advance of the need date
• The SM approval will be included in the project file with copy
provided to COO
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Working at Risk – What Does it Mean?
 To commence work pending contract award
• Written authorization of the customer (pre-contract cost letter,
letter contract or notice to proceed signed by authorized
official). Authorization must state effective date and dollar
ceiling pending award. Equivalent documents if commercial.
 To continue work pending contract modification, adding
funding or extending end date
• Document the funding status or the request for time extension
including customer response in request to the SM
• PI insures timely notification has been given
under Limitation of Funds clause to include
estimate to complete contract
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ARA Proposal Signature Authority
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Division Manager (if corporate officer)
Sector Manager
Vice President, Contracts
Executive Vice President, CFO, CEO
Urgent – any ARA Vice President
Provide copy to corporate if signed elsewhere
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ARA Contract Signature Authority
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Vice President, Contracts (routine)
Executive Vice President, President, CEO
Urgent – any ARA Vice President
Provide copy to corporate if signed elsewhere
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Ethics and Standards of Conduct
 BOD policy statement updated on Feb. 10, 2009
• Frank, open and ethical dealings
• Corporate and individual acceptance of responsibility
• Ethics – behavior based on right conduct
 Managers create supportive work environment
• Demonstrate ethical behavior day to day
• Train staff and deal with issues forthrightly
• Report breaches and forbid retaliation
 Federal requirements for Disclosure and Training
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Ethics and Standards of Conduct
 Specific Requirements:
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Integrity in accounting and contracts
Full, accurate, timely disclosure
Avoidance of conflicts of interest
Avoid acceptance or giving of gratuities
Maintain confidentiality of information
Safeguard physical and intellectual property of ARA and its
clients
• Further details in Policy Guide #11 and #12
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Where to Find Help
 Spend time perusing the ARA Intranet
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http://intranet.ara.com/cont_purch
Forms and Formats
Policies and Procedures
Information to Prepare Proposals
http://intranet.ara.com/marketing/proposalsupport.html
 Call (505) 881-8074 or contact the key person as
identified on the corporate responsibilities list
• Contracts, subcontracts, purchasing, P-Cards, government
property, small business program, project set-up and
administration, proposals
• Ethics and Standards of Conduct guidance
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Phases of Project Management
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Elation
Disenchantment
Confusion
Search for the Guilty
Reprimand for the Innocent
Distinction for the Uninvolved
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