CS-411W
VII – Resource Planning and
Allocation – Contracts and
Subcontracts
Definitions
• Contract - a legally binding exchange of
promises or agreement between parties
that the law will enforce
• Subcontract - a contract to perform part or
all of the obligations of another's contract.
Definitions (Continued)
• A Sales Contract is a contract between a Seller
and a Customer.
– The Seller promises to sell products and/or services
– The customer in return is agrees (is obligated) to pay for the
product/services bought.
• A Purchasing Contract is a contract between a
Buyer and a Supplier.
– The Buyer promises to procure products of services for an
agreed set of terms (price, delivery time, payment terms)
– The Seller promises to sell products and/or services and is
obligated to hold to the agreed terms
Contract – Why Important
• Legal binding document - between parties
• Identifies critical requirements
• List potential or known resources
• Establishes costs - contract fee
• Describes deliverables
• Establishes milestones - deliverable dates
• Describes potential methods of performance
Contract – Concepts
• Principle based on the Latin phrase pacta sunt servanda
(literally, promises must be kept)
• important feature of a contract is that one party makes an offer
for a bargain that another accepts
• Can be written (buying a house) or oral (ordering lunch) – both
equally binding – value of transaction typically dictates when
written form is necessity (any contract for sale of goods for
$500 or more must be in written form in the USA)
• Written form is binding in terms once signed – regardless of
whether is was read or understood by all parties (as long as the
agreement is legal)
Contract – Common Terms
• Terms and Conditions: The collection of Clauses which,
together, establish the basis and details of a contractual
agreement
• Venue - Establishes the Governing Law under which contract
disputes will be resolved
• Effectivity – the conditions dictating when or how the contract
will come into effect (date, action/milestone, etc.)
• Validity - contract is invalid and void if it is based on an illegal
purpose or contrary to public policy
Contract – Common Terms
• Breach of contract - a legal concept in which a
binding agreement not honored by one or more of
the parties to the contract
– by failure to perform or
– by failure to comply with the Terms and Conditions of the
contract.
• Liquidated Damages – defined by the contract as the
agreed schedule of compensation to be paid by one
party if the other party should breach the contract
Contract – Common Terms
• Force majeure (French for "greater force")
– A common clause in contracts which essentially frees one
or both parties from liability or obligation
– Invoked due to extraordinary events or circumstances
beyond the control of the parties, such as war, strike, riot,
crime, act of God (e.g., flood, earthquake, volcano)
– The occurrence of the event prevents one or both parties
from fulfilling their obligations under the contract.
Types of Contracts
• Fixed Price - you are paid a fixed amount to perform
– no matter what it may actually cost you (higher
risk, higher profit potential)
– Fixed price: $1,000,000
– Total Paid to Seller: $1,000,000
• Fixed Price with incentives - better-than-expected
performance (higher quality, faster delivery) is
rewarded with additional profit ($$)
– Fixed Price: $1,000,000
– Incentive Fee: 10%
– Maximum Paid to Seller: $1,100,000
Types of Contracts
• Cost Plus fixed fee – all of your costs are reimbursed
plus a fixed profit (little risk of loss, smaller profit
percentage)
–
–
–
–
Budgeted costs: $1,000,000
Budgeted Profit (10%): $100,000
Actual Costs: $1,500,000
Actual Profit: $100,000 (6.7%)
• Cost Plus fixed fee with incentives – more profit
possible for better-than-expected performance
– Same as above with Incentive fee: $10,000
– Maximum Profit: $110,000
Types of Contracts
•
Time and Materials – Fixed amount is paid for individual quantities of
time (labor) and materials – risk is in keeping labor and material costs
within fixed bounds. Saving labor/materials costs yields more profit
– Budgeted labor (with 10% profit): 10 hours @ $22/hour = $220
– Budgeted material (with 10% profit): $220
– Budgeted total profit: $40
– Contract value: $400
–
–
–
–
–
–
–
Actual Labor Cost at completion: 10 hours @$18/hour = $180
Actual Material Cost: $125
Total Cost: $305
Labor Costs reimbursed: 10 hours @ $22/hour = $220
Materials reimbursed (with 10% profit): $137.50
Total paid to seller: $357.50
Total profit: $52.50
• Labor: $40
• Material: $12.50
Types of Contracts
• Cost Plus fixed fee – all of your costs are reimbursed
plus a fixed profit (little risk of loss, smaller profit
percentage)
• Cost Plus fixed fee with incentives – more profit
possible for better-than-expected performance
External Resources (Subcontractors)
• Why Use Subcontractors:
– Lack of internal capability (subcontractor required
for unique expertise)
– Time limitations (availability of internal resources
insufficient to meet schedule)
– Cost limitations (sometimes using subcontractors
can save cost of internal training or skills
development)
– Better solution available via some outside
resources (no need to “reinvent”)
Subcontract Example
• Prime Contractor (Buyer): XYZ
Corporation
• Subcontractor (Seller): Greenwich
Limited
• Product/capability: Bubble Detector
and Popping Processor