Contracting for Program
Managers
Don Shannon PMP CFCM/CPCM
Why do PM’s need to know about
contracts?
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Contracts form the basis (authority) for us to
do work and the assurance we will be paid for
doing it.
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Contracts define the scope of effort for our
project
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Statement of Work
Schedule
Deliverable items
Contracts provide a formalized means of
managing changes to our projects
What is the FAR and why do I need to know
about it?
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The Federal Acquisition Regulation (FAR) is the document that promulgates various federal laws and regulations that
concern contracting to federal agencies.
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The “Law” requiring the FAR is codified in Pub L. 93-400 or 41 USC 405 Sec 405a
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The FAR applies to all Federal agencies (except the Postal Service) but does not include specific departmental
guidance
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Departments (e.g. Defense) may publish supplementary regulations such as the Defense Federal Acquisition
Regulation (DFAR)
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The FAR is binding on Federal agencies and their employees and establishes procurement procedures and policy.
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The FAR contains specific provisions and contract clauses which are included in contracts with the government.
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Individuals (other than Federal employees) are not bound by the FAR, but they are bound to obey the underlying law
and comply with the specific contract provisions.
Short Definitions
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Contract : A legally enforceable agreement between two or
more parties consisting of
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An Offer (made by either the buyer or seller)
Acceptance (mutual agreement)
Consideration (Payment or acts to one’s determent)
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Unilateral Contract: Requires only acceptance to form a
contract – example: wanted poster
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Bilateral Contract: Requires both parties to agree
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Express Contract: Agreement is orally or in writing
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Implied-in-fact Contract: The seller must have furnished
some service or property to the buyer based on a
reasonable assumption the buyer has requested it.
Short Definitions (Cont)
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Unenforceable Contract: An otherwise valid
contract that is rendered unenforceable by
statute or law.
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Capacity: The legal right or ability to enter into
a contract such as “authority to bind” but also
includes being of age and mentally competent.
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Formal contract: A contract that requires a
special form or method of formation in order to
be enforceable – Real Estate contracts
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(Fully)Executed contract: A contract that has
been signed by both parties.
Is a Purchase Order a Contract?
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Yes – a very simple one
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Offer – The purchase order is our offer to the vendor to pay them if they provide
the requested item(s) or services.
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Acceptance – is signified by the seller signing and returning the PO or by the
seller’s performance.
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Consideration – the determent that the vendor experiences by doing the work
or the cost of the item they provide and the payment made by the buyer.
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Note: There are typically a simplified set of boilerplate terms and conditions
included with the PO (often in very small print on the back of the form) which
become binding upon both parties once the seller accepts the PO.
What happens if I don’t follow the
contract?
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It depends.
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Sellers who do not follow the contractual requirements may be deemed to have
breeched (defaulted on) the contract with potential civil penalties
 Sellers are responsible for the actions (or inaction) of their employees
The other party may forebear the incident or may require some additional
consideration to obtain their forbearance.
One remedy for breech (or repudiation) is termination of the contract for cause.
If the contractual requirement was implementing a law then the seller could be subject
to specific civil or criminal penalties
 Actual damages
 Liquidated damages
Sellers could be debarred and not allowed to compete for future contracts.
Contract Interpretation
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The key to contract interpretation is to give effect to the intent of the parties as
expressed in their agreement.
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Intent (what did the parties intend)
The Plain Meaning Rule (we all know the meaning of “is”)
Rules of Interpretation
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Contra Proferentem – literally “against the offeror” – ambiguous contract
language is interpreted against the party that drafted it.
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Christian Doctrine – Has nothing to do with scripture. Court decision stating if
the law requires a contract provision be included in a government contract, the
contract shall be read so as to include that provision even if it is not physically
included in the contract document.
Contract Changes
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Changes to the contract can only be made by an empowered (authorized) official such as the
Contracting Officer.
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The COR or COTR is NOT authorized to change the contract (terms, conditions, quantities,
delivery dates etc.) Their authority is limited to technical direction.
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If the CO directs a change we must immediately implement that change
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We may be asked to provide a change proposal prior to the actual change
If we don’t provide a change proposal then we seek an “equitable adjustment of the contract value”
If we perform work outside the scope of the contract there is no guarantee we will be paid for
that work
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“Constructive Change”
Unauthorized Procurement Action / Ratification
Negotiation (FAR Part 15)
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Used for both competitive and noncompetitive proposals
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Negotiations officially conducted through
“discussions” and may require a revised
proposal.
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Includes all contracts not awarded by sealed
bidding regardless of whether actual
negotiations took place.
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Soliciting document is a Request for Proposal
(RFP) or Request for Technical Proposal if a
Two-Step process is to be used.
Basic Contract Types
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Three Basic Types
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Fixed Price
Cost Reimbursement
Time and Materials
Each contract type has unique
characteristics that make it “right” for a
particular procurement
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Risk (Cost, Schedule or Quality) is a
primary consideration
Completeness / level of detail of
specifications or requirements.
Risk vs. Contract Type
As viewed across the program life
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Risk must be viewed from
both sides.
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Both parties seek to minimize
risks:
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Lowest overall cost
Technical/Performance Risk
Contract type is negotiable
and a quid pro quo exchange
is possible between contract
type and cost.
Risks
Buyer (Government)
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Price may exceed budget/funding
Work will not meet customer
requirements
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Seller (Contractor)
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Incomplete specifications / requirements (scope creep)
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Differing conditions
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Business Conditions
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Quality
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Workmanship
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Materials
Schedule
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Material costs
Labor
Laws or regulations
Weather
Force Majeure – Unforeseen events
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War
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Disaster
Failure by third party outside their control
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Fixed Price Contracts
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Several variations possible
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Buyer and seller agree to a price for
the work to be done
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The price does not (usually) change .
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Buyer transfers majority of cost risk
to seller
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Buyer still liable for cost risk from:
 Differing conditions
 Imperfect specifications
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Seller agrees to perform all
work/deliver all services for one
price.
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Seller assumes risks for cost
variations such as materials, labor
etc.
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Preferred contract type for most
Government agencies.
Firm Fixed Price – Lump Sum
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Price not subject to adjustment
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Often one (lump sum) payment
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Strong incentive for seller to control costs
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Buyer must accurately state requirements
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Buyer may still be at risk for quality and
schedule
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Often used for
 Construction
 Commercial items/services
Fixed Price – Economic Adjustment
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Allows revision of Contract price
keyed to a particular factor:
 Established prices
 Actual costs of labor or materials
 Published index
 CPI
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Adjustment is event driven e.g., the
CPI went outside a certain range
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Seller’s risk constrained in volatile
economy.
Fixed Price - Redetermination
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Usually applied to multi-year or long
term contracts
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Fixed price in initial year with either
(but not both) types of adjustments in
the ‘out years’
 Redetermination is at specific times
 Prospective (forward looking)
redetermination at some point.
 Fixed ceiling with retroactive (after
the fact) adjustment on completion
 Buyers risk is bound by ceiling
value but is at risk everything up
to that value
Fixed Price – Level of Effort (LOE)
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Fixed sum paid over time
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Contractor is limited to a “level of effort” such
as 2 FTE or some number of labor hours
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Contractor not bound to continue performance
beyond the stated LOE
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Contractor is required to provide essentially
100% of the stated hours (usually 95+%) to
declare completion.
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Cost is invoiced evenly over the period of
performance by dividing total value by the
number of billing periods.
Cost Reimbursement Contracts
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Contractor is paid (reimbursed) for allowable actual
costs
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Ceiling price is established (Price = cost + profit)
 Contractor may not exceed ceiling except at their
peril.
 When the money is gone .. the work stops
 Contractor only obligated to make a “best effort” to
complete
 Buyer may elect to exceed ceiling if initial cost
estimate will be exceeded
 If excess cost is due to poor management or
causes within the contractor’s control the excess
is declared an “overrun”
 Fee is generally paid on increased ceiling unless it
is declared an overrun
Cost Reimbursable Contracts
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Costs are only reimbursed if
“Allowable”
 Specifically allocatable to a contract
requirement or objective
 Cost must be “reasonable”
 Assumes arms length bargaining
 Price normally paid by prudent
buyer in the normal course of
business
 Not specifically excluded
 Political contributions
 Bribes
 Alcoholic beverages
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Most common is Cost Plus Fixed Fee.
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Non Profits use Cost Contract (no
fee)
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Cost Sharing Contracts (50-50)
Cost Plus Fixed Fee
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Contractor is reimbursed for their
actual costs
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Contractor is entitled to a negotiated
fixed (or set amount) fee Key point:
Fee is NOT a percent of cost.
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Contractor invoices for direct cost,
indirect cost and a pro-rata portion of
the fee.
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When the money is gone the work
stops. Period.
Incentivized Contracts
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Can be used with either cost or fixed price
contracts
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Provides added motivation for contractor to
control specific risk(s)
 Schedule
 Quality
 Performance
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Performance can be positively (bonus) or
negatively (liquidated damages)
incentivized.
Time and Materials
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Hybrid contract combining elements of
both fixed price and cost reimbursable
 Labor is billed per negotiated rates
‘wrap around rates”
 Labor cost
 Indirect costs/fringe
 Profit
 Materials and other direct costs are
billed at actual (allowable) cost
 May allow some burdens
 May allow some profit
Time and Material
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Seller is at risk for changes in internal
costs/rates
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Similar to FFP Level of Effort
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Obligated to provide level of effort
only.
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May stop work once LOE is reached
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Actual hours worked per period are
invoiced at the agreed billing rate.
Buyer is at risk for total cost of
materials or ODC.
Labor Hour Contract
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Same general idea as T&M Contract
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Only difference is no materials
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“Level of Effort”
Other Contract Devices
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Framework Pricing Agreement
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Performance Based Contract
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Includes all elements of the contract including a method for calculating the price using
an index, formula etc.
Defines the outcome of the contract in terms of desired results
Single Source Negotiation
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Contracting with single provider – non-competitive
Often requires seller to provide cost or pricing information to ensure price
reasonableness
May be used for contract extensions or modifications or when only one credible source
exists.
Other Contract Devices
Federal Supply Schedule
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Example is GSA purchasing schedules
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Allow the pre-negotiation of terms and conditions
(ordering agreement)
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Orders are placed against these agreements for
purchase
 Primary means is eBuy via GSA Advantage
 Credit card use is possible
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Typically a simplified acquisition action and is
used extensively for commercial products and
some Scientific and Engineering services
The Schafer GSA – PES Contract
Schafer Federal Supply Schedule
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Contract GS-23F-0176L
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Valid through May 8, 2016
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Professional Engineering Services (Schedule 871)
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… provides a streamlined approach for federal agencies to access qualified firms in
the engineering disciplines of mechanical, electrical, chemical, … and sub-disciplines
such as aerospace …
6 Special Item Numbers provide the following support:
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871-1 Strategic Planning for Technology Programs/Activity
871-2 Concept Development and Requirements Analysis
871-3 System Design Engineering and Integration
871-4 Test and Evaluation
871-5 Integrated Logistics Support
871-6 Acquisition and Life Cycle Management
What type of Contract is Appropriate?
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Contract type is primarily based on
risk
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With greater risk comes greater
reward.
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Normally the risk is shared by both
parties
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Equity – what’s fair?
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Government should not place
itself in position to make or break
an offeror.
Solicitation Devices
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Request for Proposal (RFP) – Seller is asked to submit a proposal typically for a
negotiated procurement.
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Multi-part document with cost and technical content
May be limited to a specific page length
Request for Quote (RFQ)
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Seller submits a document consisting of product information and cost.
Documents submitted are NOT an offer but may be acted upon without further
discussion or negotiation
Often used with GSA or Delivery Order contracts
Government may issue an order based on the quote which must be accepted by the
seller to form a binding contract
Solicitation Devices
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Request for Information (RFI)
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Unsolicited Proposal
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Sometimes used as part of Market Research to determine capabilities
Often times lead to submittal of Statement of Capabilities as a response
Submitted by offeror without a solicitation (Cold-Call selling)
Typically not acted upon unless they address a compelling need and offer new and
unique solutions
Sales Contract
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All elements of the transaction are determined at the time of the sale (buying a car)
Includes Mutual Assent, Consideration, capacity to contract and legal purpose
Other Solicitation Devices
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Prequalification
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Similar in some respects to the first stage in a two part sealed bid or proposal
Used to narrow the number of proposals to a manageable number by limiting
competition to those who are judged able to perform.
Broad Area Announcement
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Used (in R&D) to identify agencies interests to offerors
Technical proposals are solicited by issuing “Calls” against the BAA sometimes
narrowed by “Interest Areas” Responses are often called “White Papers”
White papers are rank ordered by agency and the most promising are requested
to propose.
Getting Practical – Contract Issues
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Q – What is Technical Direction?
A - The term “technical direction” is defined to include, without limitation:
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Providing direction to the Contractor that redirects contract effort, shift work emphasis
between work areas or tasks, require pursuit of certain lines of inquiry, fill in details, or
otherwise serve to accomplish the contractual Statement of Work.
Providing written information to the Contractor that assists in interpreting drawings,
specifications, or technical portions of the work description.
Reviewing and, where required by the contract, approving, technical reports, drawings,
specifications, and technical information to be delivered by the Contractor to the
Government.
Technical Direction must be in writing. If there is a question about it being in
scope, the direction is referred to the CO.
Getting Practical – Contract Issues
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Q – Can “Technical Direction” from the COR change the nature of the contract
from R&D to Personal Services?
A – It’s a fine line but the assumption is as contractors we either provide nonpersonal services (JTO, AMOS) or we do R&D. If Government personnel adopt
an employer/employee relationship with contract personnel they have crossed
the line into Personal Services. In general our work should be characterized by:
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Freedom to determine the means and methods to be employed to achieve a result
Assignment of a tasking as a generalized requirement with a due date. We should be
free to prioritize our work so as to meet the overall due date.
With some exceptions we should be able to establish schedules and the place where
the work is performed.
The customer is given a completed assignment which they may accept or reject. If
rejected they must specify why or how the work product is defective and allow for
its correction or resubmittal.
Getting Practical – How do we make a
profit?
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Profit = Revenue (what we bill) – our costs
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On CPFF contracts we negotiate a fixed profit (dollar value) which we are paid in
addition to our allowable costs
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On FFP contracts the revenue is pre determined and we keep whatever is left after
paying our costs.
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On T&M contracts it’s a little of both
Getting Practical – How do we make a
profit?
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Controlling cost is a key profit strategy.
What are our costs?
 Indirect Costs
 Fringe benefits (health insurance,
vacation, paid holidays, life
insurance)
 Supervision and Management
 Rent (if supporting several
programs)
 IT infrastructure & telephones
 Office furniture and computers
 Utilities
 Etc.
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Direct (attributable to the work
being done) costs
 Actual payment for labor (your
wages)
 Actual costs of materials used
 Travel, lodging, meals etc.
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The combination of the two costs
allows us to determine an overall rate
(cost x multiplier) for our services.
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The lower the multiplier, the more
competitive we are among our peers.
What are these “Rates” that keep
changing?
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The rates being referred to are our Indirect Rates (Overhead and G&A)
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These rates are estimated for the future by assuming a level of activity (number of employees, revenue, etc.) and by
estimating the costs associated with that level of activity.
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The sum of those costs is divided by the projected revenue to determine how much revenue will be needed to
recover the indirect costs.
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These are converted to a percentage such that for every dollar of direct cost (labor) we add x amount for overhead
and y amount for G&A expenses. These are then our projected rates.
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Those rates are submitted to the DCAA who reviews them and approves them for billing (Provisional Indirect Rates)
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At the end of the year we re-compute the rates using actual costs and actual revenue. If we were off in our estimate
of the indirect costs or the revenue we anticipated, we may need to adjust the rates
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At the end of the contract our costs are audited and the Provisional Rates are Finalized. This may be 5 – 7 years after
completion
What are these “Rates” that keep
changing?
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Rate adjustments only impact the customer on Cost Reimbursable (CPFF)
contracts.
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On Fixed Price and Time and Material contracts the contractor assumes the risk
for rate changes.
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Only exception is Materials or travel in a T&M contract may include some indirect
rates that could be subject to change
Increased rates reduce the dollars available for labor.
Questions?