Project Management - Chapter 12

Request for Quote (RFQ)

(RFQ) is a document used to solicit quotes or bids from pro- spective suppliers.

make-or-buy decision

An impor- tant output of this process is the make-or-buy decision, in which an organization decides whether it should make certain products and perform certain services inside the organiza- tion, or if it is better to buy those products and services from an outside organization.

procurement

Procurement means acquiring goods and services from an outside source. The term pro- curement is widely used in government; many private companies use the terms purchas- ing and outsourcing.

termination clause

a contract clause that allows the buyer or supplier to end the contract. Some ter- mination clauses state that the buyer can terminate a contract for any reason and give the supplier only 24 hours' notice.

bid

also called a tender or quote (short for quotation), is a document prepared by sellers to provide pricing for standard items that the buyer has clearly defined.

time and material (T&M) contracts

are a hybrid of fixed-price and cost-reimbursable contracts. For example, an independent computer consultant might have a contract with a company based on a fee of $80 per hour for services, plus a fixed price of $10,000 for providing specific project materials.

constructive change orders

are oral or written acts or omissions by someone with actual or apparent authority that can be construed to have the same effect as a written change order.

sellers

are providers, contractors, or suppliers who provide goods and services to other organizations.

unit pricing

can also be used in various types of contracts to require the buyer to pay the supplier a predetermined amount per unit of product or service.

contract

contract—a mutually binding agree- ment that obligates the seller to provide specified products or services and obli- gates the buyer to pay for them—can clarify responsibilities and sharpen focus on key deliverables of a project. Because contracts are legally binding, there is more accountability for delivering the work as stated in the contract.

project procurement management

includes the processes required to acquire goods and services for a project from outside the performing organiza- tion. Organizations can be either the buyer or seller of products or services under a con- tract or other agreement.

fixed-price contract

involve a fixed total price for a well-defined product or service. The buyer incurs little risk in this situation because the price is predetermined. The sellers often pad their estimate to reduce their risk, although they realize their price must still be competitive.

lump-sum contract

involve a fixed total price for a well-defined product or service. The buyer incurs little risk in this situation because the price is predetermined. The sellers often pad their estimate to reduce their risk, although they realize their price must still be competitive.

cost-reimbursable contracts

involve payment to the supplier for direct and indirect actual costs.

statement of work (SOW)

is a description of the work required for the procure- ment. Some organizations use the term statement of work for a document that de- scribes internal work as well. If a SOW is used to describe only the work required for a particular contract, it is called a contract statement of work.

Request for Proposal (RFP)

is a document used to solicit proposals from prospective suppliers.

proposal

is a document prepared by a seller when there are different approaches for meeting buyer needs.

cost plus percentage of costs (CPPC) contract

the buyer pays the supplier for allowable costs (as defined in the contract) along with a prede- termined percentage based on total costs. From the buyer's perspective, this is the least desirable type of contract because the supplier has no incentive to decrease costs.

cost plus award fee (CPAF) contract

the buyer pays the supplier for allowable costs (as defined in the contract) plus an award fee based on the satisfaction of subjective performance criteria.

cost plus incentive fee (CPIF) contract

the buyer pays the supplier for allowable costs (as defined in the contract) along with a predetermined fee and an incentive bonus.

cost plus fixed fee (CPFF) contract

the buyer pays the supplier for al- lowable costs (as defined in the contract) plus a fixed fee payment that is usually based on a percentage of estimated costs.

Point of Total Assumption (PTA)

which is the cost at which the contractor assumes total responsibility for each additional dollar of contract cost. Contractors do not want to reach the PTA because it hurts them finan- cially, so they have an incentive to prevent cost overruns.