Chapter 41 Chapter 13 ٠ Contract Types ٠ Supplier Management

2 1. Supplier Selection 2. Price 3. Contract Type The type of contract chosen is important because contracts by their nature: -Allocate risk -Influence supplier performance Three key decisions in procurement:

3 Three General Categories of Contracts 1. Fixed Price Contracts 2. Cost Reimbursable Contracts 3. Incentive Contracts to incentivize - Cost control - Technical achievement - Schedule - Other

4 The concept of Risk Risk is uncertainty Suppliers are risk averse Types of risk: - Technical risk - Cost risk - Schedule slippage Extremes in contract risk: FFP CPPC increasing risk to buyer increasing risk to supplier

5 FFP FP/Escalation FP/Redetermination FPI Example: TC= $1000 T  = 100 TP= $1100 CP= $1300 Share Ratios = 50/50 70/30 Contract Types by Risk Level to the buyer-firm

6 CPIF Just like a FPI but - No ceiling - Minimum and Maximum Profit amounts Time and Materials Contracts CPFF CPPC

7 Two other Contract Types Award Fee contracts Letter Contracts Award Fee is tied into another type of contract; e.g., CPIF + Award Fee

8 CPIF Contract Price 50/50 100/0 70/30 100/0 Cost TP TC R. I. E. Buyer/Contractor Share Ratios

9 For next class period... Submit your individual case analysis of Selection of a Pressure Vessel Manufacturer

10 Spot contracts (transactional) Short-term contracts (transactional) Evergreen Clauses (partnership) Long-term contracts need to reflect and guide a relationship (partnership or alliance) The Issue of Long-term Contracts Issues include: initial price, mechanisms for price adjustments, expectations, confidentiality agreement, special clauses on incentives, etc.

11 Supplier complacency Selecting the wrong supplier Downsides to long-term contracts from the buyer-firm’s perspective

12 Supplier Management Post-Award Activities “Once a contract has been negotiated and signed, the real work begins.” “It is the buyer’s responsibility to ensure that all of the terms and conditions of the agreement are fulfilled.” 

13 Starts with Pre-Award Conference All terms and conditions Specifications Milestones Delivery schedule Review buyer responsibilities Performance evaluation and feedback: Access, reports, conferences Supplier Management

14 Supplier Management Continues with either Routine or Special activities 1. Routine (Administrative actions for follow-up) 2. Special (Employ formal performance tracking) Gantt Charts CPM Earned-Value Accounting Site Visits and Weighted-Point Evaluations Recurring Reports (Cost, Schedule, Technical) Program Assessment Reviews (PARs) On-site Monitors (Buyer-firm co-location)

15 Earned Value (EV) Accounting Background: The Spend Plan Concept $ Time Plan Actual T Now

16 Earned Value Concept BCWS BCWP ACWP $1000 $800 Schedule Variance equals BCWP – BCWS = -$200 BCWS BCWP ACWP $1000 $800 $860 Cost Variance equals ACWP – BCWP = $60 In this example, the contractor has an unfavorable schedule variance (behind schedule) and an unfavorable cost variance (over budget)

17 Earned Value Concept BCWS BCWP ACWP $1000 $800 Schedule Variance equals BCWP – BCWS = -$200 BCWS BCWP ACWP $1000 $800 $860 Cost Variance equals ACWP – BCWP = $60 The “spend plan” analysis however has everything looking great. Budget to date is $1000 and expenditures to date are only $860!

18 Bendix Corporation’s performance on Contract AF Weeks into the Contract: ACWP = $220,440 BCWP = $216,000 BCWS = $214,440 Total Budget at Completion (TBC) = $660,000 Example Problem Evaluate Bendix Corporation’s performance by computing the cost variance and the schedule variance to date.

19 Evaluate Bendix Corporation’s performance on Contract AF Weeks into the Contract: ACWP = $220,440 BCWP = $216,000 BCWS = $214,440 Total Budget at Completion (TBC) = $660,000 SV = BCWP – BCWS = +1,560 CV = ACWP – BCWP = +4,440 Cost Performance Index (CPI) = ACWP/BCWP = Estimate at Completion (EAC) = CPI x TBC = $673,567 Example Problem

20 Punishment Bill backs Award Fee denial Downgrade a supplier Remove supplier from approved list Rewards Incentive fee Formal recognition Follow-on business Elevate level of relationship Motivation in Supplier Management

21 Supplier Surveys Are our buyers knowledgeable? Are we ETDBW? Do we “team” with you? Do we pay on time? Are our buyers and technical people available to you? Do we engage in any questionable or poor business practices? Are we a preferred customer? Supplier Roundtables Review company’s procurement program with key suppliers as a way to manage and improve relationships Relationship Management

22