• Estimating takes place at proposal time, and includes an estimate of:
– Time phased cost:
• Direct labor
• Direct material
– Overhead, G & A
– The sum of cost and G&A equals your cost through G&A
• The above defines your “breakeven point”
• Please note that this is based on your cost estimate, not what you end up spending on a project
– Actual cost can vary significantly from the estimate

• A final iteration of contract cost and fee is accomplished at a negotiation after the contract award
• The idea is to define the “cost” and the “fee” for the entire project
• The “price” of the contract equals cost plus fee
• There are a variety of incentives available based on the type of contract
• Cost reimbursable
• Fixed price
• Time and Material

• The term “Direct” implies that both the labor hours expended and the material utilized is incorporated into the deliverable product
• Direct Material and Labor do not include the cost of the contractor’s facilities, rent, utilities, etc.
– Included in the “Overhead” that is applied to the cost of
Direct Material and Labor
• The cost of direct material and labor does include employee benefits, the cost of buyer labor to procure material, etc.

• Direct Labor would include:
– Vacation pay
– Sick pay
– Insurance
– FICA
• Direct Material would include
– Cost of shipping
– Buyers to purchase the material and their overhead

• An accounting methodology that conforms to the Federal
Accounting Standards Board (FASB) for government contracts, and generally acceptable accounting practices for commercial companies
• The approach may vary from Company to Company
• Overhead does not include “Wheat Tax” or the cost of nondirect labor
– Supervisors, department heads, executives, etc.
– Also referred to as “Indirect” cost
• Overhead does include the “Cost of Doing Business”

• A “bilateral” agreement between two business entities to do something in the future for
“Consideration”
– Giving party is the “Customer” (or Buyer, or Client)
– Receiving party is the “Contractor” (or Seller)
• The contractor can subcontract work to other companies and individuals
– However, the contractor is still responsible for contract performance
• Governed by the Uniform Commercial Code

• Interactions between business entities are based on
Common Law
• Ultimately, contracts are administered by the
Federal and State Government if a dispute arises
– Court of Claims
• Settlement of Contract Disputes
– Court of Patent Appeals
• Settlement of Intellectual Property Disputes

• Consideration is provided to the contractor upon successful completion of the contract terms
• Consider the following scenario:
– Contractor builds a building, pays for all labor, subcontractors, and material suppliers
– Contractor delivers the finished building with a perfect title.
– Owner gives the contractor money as consideration
• All contracts and changes to contracts have consideration
• Consideration can take forms other than money, such as schedule relief, technical performance relief, etc.

• In order to establish a contract, a mutual understanding as to what each business entity will give and receive in return must be defined
– Consideration, ie. cost and fee
– Deliverable items and data
– Technical performance of deliverables
– Schedule
– Tasks (work) to be performed
• If you don’t have all of the above items defined, you do not have an executable contract

• The contractor makes an offer to the customer (Proposal)
– Can be a written or verbal offer, or an offer created by other acts of communication by responsible officers of the seller
• Fax, email?
– Contractor defines the period within which the proposal will be honored
• Customer enters into negotiations by issuing a letter of acceptance
• The offer must be revoked in writing if something happens that requires withdrawal of the offer prior to expiration
– The offer defines all cost, schedule, and technical requirements
• Factfinding then takes place with the customer team
• Negotiations are then held to clarify items in the proposal, and to state the customer’s perception of the “should cost”

• The customer then counteroffers to the seller to converge differences in understanding
– This can take multiple iterations
• Customer then generates a “Best and Final Offer,” or
BAFO
• This is then either accepted by the performer (seller) or the seller “takes a hike”
• If the offer is accepted, a contract is generated which incorporates all of the final changes, and everyone signs it
– The signators must be able to legally obligate the business
– Typically, signators would be officers of the company with a delegated signature authority greater than the value of the contract
• This could be many $100 Million

• Upon everyone’s signature, the project starts
– The seller is “under contract” to perform in accordance with the final negotiated document

• Things happen during the course of the project that change either the amount of work ($$$$), or the schedule
• A formal change process is incorporated into all contracts
– Unilateral Change
• Imposed by the Customer on the Contractor without concurrance
– Constructive Change
• Failure by the Customer to meet contractual requirement, ie. “Breach of Contract”
– Bilateral Change
• Mutually agreed to change between the Customer and Contractor
• Unilateral and Constructive Changes generally result in a
“Dispute”

• Unilateral changes are typically not acceptable to
Contractor
– Consideration is insufficient
• Need more money to do the additional work
– Impossible to perform to changed schedule, performance, etc.
• Breach of contract occurs when the Customer or
Contractor fail to meet the requirements of the contract
– Failure to provide Customer Furnished Equipment, Facilities, etc.

• Negotiations are required by all parties to resolve dispute
• Contract letters and supporting documentation are very important in order to document the situation and position of both parties
– Getting ready to go to trial
– Lawyers get involved
– Generally very unproductive and expensive
– Not worth the effort for less than $10K on a large job
• Disputes must eventually adjudicated by the Court of
Claims, which requires a legal trial

• Contract Termination is possible under certain prenegotiated conditions
– “Termination for Convenience of the Government”
• Termination is also possible for failure to meet Contract requirements
– Cost, Schedule, or Technical Performance
– Termination for “Cause”
– Termination for Default
• Termination clauses are always included as a part of the original Contract

• Termination for cause allows the customer to re-procure the item at the expense of the original contractor!
– This is extremely serious and can bankrupt a company
• Termination for convenience requires a “Termination
Proposal,” which is then negotiated like a new contract
– Material purchased is packaged and turned over to the customer
– Subcontracts must also be terminated
– Costs associated with early termination of employees are included
• Layoff notification, etc.

• Different contract types are available
• The contract type selected must be based upon a mutual understanding of the risk of success of the project
– If the customer is incorrect with regard to their perception of risk, than there should be no bidders on the contract
– Success is defined as the achievement of all contract objectives
Cost, Schedule, Performance
– Improper utilization of a contract type can, and does frequently result in project failure
• All contracts provide a concept of “Profit” or “Fee”
– Related to consideration
– Generally, the fee equals funds left over at contract completion, and after closeout

– Residual materials or equipment are not included in the final profit
• Sold as surplus and credited to overhead
• Delivered to Customer
– Profit percentage varies with the type of contract, ie. cost reimbursable or fixed price
The residual funds can be negative!!

• Fixed Price
• Cost Reimburseable
• Time and Material

• Highest risk to Seller. Used for low risk procurements.
• Three Types
– Fixed Fee (FFP)
– Incentive Fee (FPIF)
– Fixed Price with Redertimination (FPR)

• Fixed profit, no ceiling price
• Exceptions
– Constructive Changes
– Unilateral Changes
• Definition of “Change” subject to interpretation
– Generally used as negotiating tool
– Customer has upper hand by withholding of funds
• Can overrun! Can also have costs disallowed.

• Lower Risk to Seller, fee determined by targets
• Ceiling Price
• Cost/Profit Sharing
– Incentive Curve
• 30/70 Share for Underrunns
• 70/30 Share for Overruns
• Still subject to Changes Clause
• Can receive minimal or no profit and overrun!
• Customer can also disallow costs.

• Two types: Prospective and Retroactive
• Prospective FPR negotiates prices to be paid in a prospective period
– Similar to two FFP arrangements negotiated at stated times during contract performance period
• Retroactive FPR provides for adjusting price after performance
– Essentially like FPIF
• Maximizes Project Managers attention on happines of
Customer

• Lower Risk to Seller than Fixed Price Contracts
• Used for higher risk procurements
– Uncertainty of performance goals, etc.
• Three Types
– Fixed Fee (CPFF)
– Incentive Fee (CPIF)
– Award Fee (CPAF)

• Fixed profit, no renegotiation of contract allowed
• No ceiling price
• Exceptions
– Constructive Changes
– Unilateral Changes
• Definition of “Change” subject to interpretation
– Generally used as negotiating tool
– Customer has upper hand by withholding of funds
• All “Costs” are paid
– Subject to interpretation as to “Allowable” cost

• If project overruns at cost, no increase in fee
(lower profit margin)
• If project underruns at cost, higher profit margin achieved
• Can overrun, but will always make a profit

• Lower Risk to Seller
• Established Targets (Cost, Schedule, Performance)
• Cost/Profit Sharing
– Incentive Curve
• 30/70 Share for Underrunns
• 70/30 Share for Overruns
• Still subject to Changes Clause
• Can overrun and still make a profit subject to the
Incentive Curve

• Fee determined by Customer via award criteria
– No rules regarding Award Criteria
• Typical targets established
– “Responsiveness to Customer”
– Cost/Schedule Controls, etc.
• Completely dependent on “Grade” of Customer.
• Can receive $0 profit, but will always be reimbursed for costs
• Maximizes Project Manager’s attention on happiness of
Customer

• Lowest risk to Seller. Generally used for studies with indeterminate outcome, or support, operational or maintenance contracts.
• Not to Exceed Contract for labor and material
• Task orders from Customer are negotiated with
Seller
– Defines effort for small tasks
– Minimizes any cost uncertainty

• FFP
• FPIF
• CPFF
• CPIF
Note: In the following slides, the “price” to the customer equals the sum of the profit and cost.

• Contract Form
• Schedule
• Statement of Work (SOW)
– Deliverables
– Contract Data Requirements
– Contract Data Requirements List
– Specifications

• Document which provides all “contractual” details
– Type of Contract
– Total Cost
– Deliverables/Services and Prices
– Packaging and Marking
– Inspection and Acceptance
– Contract Clauses and Administration Data
– List of Documents, Exhibits
– Representations and Certifications

• Technically, Schedule and SOW are part of
Contract
– Generally referenced in body of Contract Form
• No Schedule or Technical Information. Cost only!

• Time phased tasks and deliverables which are detailed in SOW, Supplies List, and CDRL
• Generally identical to the proposed schedule, with modifications resulting from negotiations
• No Cost or Technical Information. Schedule only!

• Details all tasks and activities to be accomplished on
Contract
• References the following documents
– Contract Data Requirements
– Contract Data Requirements List (CDRL)
– Deliverable Items
– Specifications
• Defines all design activities, documentation, etc.
• No Cost or Schedule Information. Technical Only!

• Government Acquisition Regulations
– DARS/FARS
• Government Contracting vs. Commercial
Contracting
• Estimating/Scheduling Methodology
• Work Planning
• Specification Development and System
Engineering