Since most outsourced work on projects is contractual, this appendix discusses the

different kinds of contracts that are used, their strengths and weaknesses, and how

contracts shape the motives and expectations of different participants. Contract management

is a key element of any project procurement management system. It is beyond

the scope of this book to describe this system. However, the basic processes are listed

here to put contract management and related topics like Request for Proposal $($RFP$)$

in perspective. Procurement management consists of six main steps:

$$ Planning purchases and acquisitions involves determining what to procure, when,

and how. This entails the classic build$-$versus$-$buy analysis as well as determination

of the type of contract to use.

$$ Planning contracting involves describing the requirements for products or

services desired from outsourcing and identifying potential suppliers or sellers.

Outputs include procurement documents such as an RFP as well as selection criteria.

$$ Requesting seller responses involves obtaining information, quotes, bids, or

proposals from sellers and providers. The main outputs of this process include

a qualified sellers list and specific proposals.

$$ Selecting sellers involves choosing from potential suppliers through a process of

evaluating potential providers and negotiating a contract.

$$ Administering the contract involves managing the relationship with the selected

seller or provider.

$$ Closing the contract involves completion and settlement of the contract.

Most companies have Purchasing Departments that specialize in procurement.

Often purchasing agents will be assigned to project teams and they work with other

team members to come up with optimum solutions for the project. Even if project

teams are not directly involved in contract negotiations and the decision to outsource

project work, it is important that the team understand the procurement process and the

nature of different kinds of contracts.

CONTRACTS

A contract is a formal agreement between two parties wherein one party $($the contractor$)$

obligates itself to perform a service and the other party $($the client$)$ obligates itself

to do something in return, usually in the form of a payment to the contractor.

For example, an insurance firm contracted with a consulting firm to reprogram

segments of their information system to conform to the latest operating system.

A contract is more than just an agreement between parties. A contract is a codification

of the private law, which governs the relationship between the parties to it$.$ It defines the

responsibilities, spells out the conditions of its operations, defines the rights of the parties

in relationship to each other, and grants remedies to a party if the other party breaches

its obligations. A contract attempts to spell out in specific terms the transactional obligations

of the parties involved as well as contingencies associated with the execution of the

contract. An ambiguous or inconsistent contract is difficult to understand and enforce.

There are essentially two kinds of contracts. The first is the $$fixed$-$price$$ contract, in

which a price is agreed upon in advance and remains fixed as long as there are no changes

to the scope or provisions of the agreement. The second is a $$cost$-$plus$$ contract, in which

the contractor is reimbursed for all or some of the expenses incurred during the performance

of the contract. Unlike in a fixed$-$price contract, the final price is not known until

the project is completed. Within these two types of contracts, several variations exist.FIXED$-$PRICE CONTRACTS

Under a fixed$-$price $($FP$),$ or lump$-$sum, agreement, the contractor agrees to perform

all work specified in the contract at a fixed price. Clients are able to get a minimum

price by putting out the contract to competitive bid. Advertising an invitation for

bid $($IFB$)$ that lists customer requirements usually results in low bids. Prospective

contractors can obtain IFB notices through various channels. In the case of large

business organizations and government agencies, potential contractors can request to

be included on the bidder$$s list in the area of interest. In other cases, IFBs can be

found by scanning appropriate industry media such as newspapers, trade journals, and

websites. In many cases, the owner can put restrictions on potential bidders, such as

requiring that they be ISO $9000$ certified.

With fixed$-$price contract bids, the contractor has to be very careful in estimating

target cost and completion schedule because once agreed upon, the price cannot be

adjusted. If contractors overestimate the target cost in the bidding stage, they may lose

the contract to a lower$-$priced competitor; if the estimate is too low, they may win the

job but make little or no profit.

Fixed$-$price contracts are preferred by both owners and contractors when the scope

of the project is well defined with predictable costs and low implementation risks.

Such might be th