Contracts used to convey the SOW from the project to the supplier fall into two broad categories:
■ Fixed price (FP) contracts that transfer both the cost and performance risk to the supplier. FP contracts require the contractor to "complete" the SOW. In this sense, FP contracts are "completion" contracts. FP contracts are appropriate when the scope of the SOW is sufficiently defined that a price and schedule can be definitely estimated and "fixed" for the required performance. FP contracts are inappropriate for many R&D activities where the scope of work is indefinite.
■ Cost plus (CP) or cost-reimbursable contracts that transfer only a portion of the cost risk to the contractor (supplier) and require only a contractor's "best effort" toward completing the SOW. CP contracts are not completion contracts. CP contracts are the appropriate vehicle for R&D and other endeavors where the scope is not defined to the point that definitive estimates can be made. Although CP contracts have an estimated scope of work, the contractor is only bound to perform in a reasonable and competent manner. The contractor is not bound to "complete" the SOW since the true scope is unknown. Projects with large "rolling wave" plans are best accomplished with CP contracts.
In addition to the FP and CP categories that broadly define which party has the cost and scope risk in the arrangement, there are categories for handling the amount of profit that a supplier can make on a contracted scope of work:
■ The profit (fee) could be built into the contract price and not visible to the project manager. Firm fixed price (FFP) contracts have only one dollar parameter: price. Only the supplier knows the potential profit in the deal; the profit is a combination of a risk premium to cover the supplier's assumed risk and a profit amount to earn the contractor's required return on cost.
■ The fee could be fixed by mutual negotiation (fixed fee, FF). FF is appropriately combined with cost-reimbursable contracts.
■ The fee could be variable depending on performance. Variable fees could be combined with either FP or CP contracts. Two fee types are typically employed: (1) an incentive fee that is paid according to a formula based on performance of either cost or schedule or both and (2) an award fee that is paid according to criteria of performance attributes. Award fee is not necessarily formula driven and the amount paid is always subject to the judgment and opinion of the award fee authority in the project.
flSole source: there is only one contractor known to have the ability to perform the SOW. Selected source: a contractor selected without competition to perform the SOW. Competitive source: a contractor selected from among a peer group of competent offerors on the basis of competition.
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What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.