Procurement Flashcards
Who incurs the greatest financial risk in the Fixed Price Category
Seller
How much fee does a seller make on a Firm Fixed Price Contract
Only what’s built into the contract
If the seller has a cost overrun he takes a loss
What is lowest risk contract to buyer
FFP is lowest risk for buyer
Is a Cost Price Incentive Fee (CPIF) a fixed price contract?
No.
The final price of the contract is not fixed unless the seller’s cost reaches the price ceiling.
What are the elements of a FPIF contract?
CST3
Target cost
Target Fee
Target Price = target cost + target profit
Ceiling Price: Max amount buyer will pay
(protects the buyer)
Share Ratio: e.g.
70/30
Underrun
buyer gets 70% of the underrun
Overrun
Seller profit reduced by 30%
Profit = Target Profit + 30% underrun OR
Target Profit - 30% of overrun
What is the point of total assumption for a FPIF contract?
Point at which the seller assumes all the cost risk
How do you calculate PTA?
PTA =
Remember use the “P” in PMP to think Price although the “P” actually means “Point”
🎯Target COST+(Ceiling Price-🎯 Target Price)/ Buyer’s Share
- So you don’t need Actual Cost
- . PTA only works with FPIF contracts
- There is no PTA for CPIF contracts because there is no ceiling price
What is a Fixed Price with economic price Adjustment (FP-EPA
Some items are out of control of the seller (e.g. inflation, currency adjustments)
Who has more financial risk in the Cost Reimbursable CATEGORY
Buyer
Buyer pays for all legitimate costs + a fee
Not guaranteed a product
What is the Point of Total Assumption in a Cost Plus Incentive Fee (CPIF)
There is none.
There is no ceiling price thus no PTA
What are the elements of a CPIF contract
SM2T2
Target Cost
Target Fee
Minimum Fee
Maximum Fee
Share Ratio
No PTA (No Ceiling Price)
What is the Maximum Fee in a Cost Plus Award Fee (CPAF) contract?
Max Fee = Base Fee + 100% Award Fee
What are the key components of a CPAF contract?
Estimated Costs Base Fee Award Fee Fee determination period Fee criteria
What is the primary reason a buyer would use a CPAF contract
ensure the seller’s objective align with buyer’s objectives
What are the elements of a Cost + Fixed Fee Contract?
Target Cost
Fixed Fee
What is the Fee on a Cost Plus Fixed Fee contract?
% of ESTIMATED costs
(therefore a fixed #)
It Does not change regardless of seller’s legitimate costs
What are the elements of a Cost + Percentage Cost contract?
Estimated Costs
Fee: % of ACTUAL costs (not target costs)
Thus seller motivated to drive up costs
A TM contract is a hybrid of a fixed price and CR contract. What is the fixed price element?
Buyer will pay a fixed price/hr for labor
A TM contract is a hybrid of a fixed price and CR contract. What is the CR element?
Buyer pays for all material costs at cost even though total material cost is not known.
Buyer Risk from Low to High
CPCC CPAF CPIF CPFF FP-EPA FPIF FFP
What is seller risk from Low to High
CPPC CPAF CPFF CPIF FP-EPA FPIF FFP
Calculation for Rent versus Buy
Rental Cost * #Days =
Investment Costs +((cost to operate* #Days))
You can also solve for #Days with algebra
What are the two contract categories?
Fixed Fee
Cost Reimbursable
When is a Fixed Fee Contract used
Rqmts are well defined
No significant changes to scope expected
When is a Cost Reimbursable contract used?
When scope of work is expected to change significantly
5 types of Intent to Buy Documentation
C-SUMP Contract SLA Understanding MoA Purchase Order
What Knowledge area includes the processes to purchase or acquire products
Procurement Management
What are the 3 Processes of Procurement Mgmt
Plan Procurement Mgmt
Conduct Procurements
Control Procurements
What are the 5 TnTs for Plan Procurement Mgmt
SMED2 Source Selection Analysis (Planning how to conduct Source Selection) Meetings Expert Judgement Data Analysis (Make/Buy) Data Gathering
What are the 5 TnTs for Conduct Procurements
B-IDEA Bidders Conference Interpersonal Skills Data Analysis (Source Selection) Expert Judgement Advertising
What are the 5 TnTs for Control Procurements
C-IDEA Claims Inspections Data Analysis Expert Judgement Audits
Emerging Practices in Procurement Mgmt
Advances in Tools to manage contracts More advanced Risk Mgmt Changing Contracting Processes Logistics and Supply Chain Mgmt Technology and stakeholder relations Trial Engagements (Like a fly off)
What are the Inputs to Plan Procurement Mgmt
BEO-P3 Business Documents EEFs OPAs Project Charter Project Mgmt Plan Project Documents
Plan Procurement Mgmt Outputs
I-COMBSP4 *Independent Cost Estimates Change Requests OPAs *Make or Buy Decisions Bid Documents *Source Selection Criteria Procurement Mgmt Plan *Procurement Strategy *Procurement SoW Project Document Updates
Why is a Fixed Price contract the most commonly used contract type
Price of goods set at outset
Not subject to change (Unless scope changes)
Who is responsible for all costs above the price ceiling in a Fixed Price Incentive Fee contract
Seller
Why would you use a Fixed Price Incentive Fee Contract
Gives buyer and seller some flexibility
When you want financial incentives tied to Cost/ Schedule/Performance
When do you use a “Least Cost” Source Selection method
Procurements are of a standard or routine nature
Well-established practices and standards exist
PTA Calculation
PTA=
Total Cost+ (Ceiling PRICE-Target PRICE)/(Buyer’ s Share)
Total Fee
Total Fee=Target Fee+
(Target Cost-Actual Cost)*Seller’ s Share
What procurement process is EV analysis part of
Control Procurements (It’s the Data Analysis part)
Audit is a TnT of what process
a. Plan Procurement
b. Conduct Procurements
c. Control Procurements
d. Validate Procurements
Control Procurements
Tools and Techniques of Control Procurements
C-IDEA Claims Administration Inspection Data Analysis (EVM)? Expert Judgement Audits
Does seller start losing OWN $$ at TPA?
No.
Does seller START losing Profit at TPA?
Yes.
Remember the 183K TPA at $200K Ceiling Price—still made $17K Profit at TPA
What do we follow in In CONDUCT PROCUREMENTS
PMP
Inputs to CONDUCT PROCUREMENTS
PMP
Procurement Documents
*Seller’s Proposals
Project Documents
What is the term for something that represents bids, quotes and proposals
Seller’s Proposals
In CONDUCT PROCUREMENTS, what is an important project document
Updated risk register
Independent Estimates
3rd Party
When do we want an independent estimate
When we get only a few proposals
What is the term for when a bidder low-balls the price?
Buy In
Negotiations
Not just cost; e.g. Responsibility
Centralized Contracting
Procurement executed by corporate group
Volume Discounts
Better able to specialize
Decentralized Contracting
Procurement executed by team
More loyal to team and project
Quicker response to project requests
5 Elements of a Contract
C-COAL
1. Consideration (exchange something of value)
Other
2. Competent parties (2 legal entities)
3. Offer
4. Acceptance
5. Legality of Purpose (no illegal purchases)
If it’s in the contract, it needs to be completed
If it’s not in the contract, it should not be accomplished
What is Force majeure
Act of God or Environment
What is Fait accompli
Item is closed to further negotiation
Letter of Intent
If I buy, I buy from you
Not a commitment
Not a contract
What type of contract are used for purchase orders
FFP ??
Calculation for Total Fee
Total Fee = Target Fee +
(Target Cost - Actual Cost)*Seller’s Ratio
What contract poses the highest risk to the seller
Firm Fixed Price
In a FPIF contract, when do buyer and seller share the risk
When costs are below the PTA
In a FPIF contract, when does the share ratio become 0%/100%
At PTA
What contract types can’t be used if the contractor does not have an adequate cost accounting system
fixed price incentive contract
any cost reimbursable contract
because they require the seller to accurately report on costs
Ceiling Price vs. Total Price
Total Price must be <= Ceiling Price
That’s why it’s called a CEILING
Watch out for Acronyms
Difference between FFP and FPIF
Difference between CPAF and CPIF
Watch Out for “Seller” versus “Buyer”
You’re reading into the question!
What are the components of Total Fee
- Target Fee
- Adjustment based on how well the seller did wrt cost
(Target Cost-Actual Cost) * %Seller %
If the seller spent more than planned, the adjustment is negative but regulated by the Seller %
Can the equation for Total Fee be used for both a FPIF and CPIF?
Yes. But there are 2 caveats
- With a FPIF, you have a ceiling PRICE
PRICE = Actual Cost + Total Fee
PRICE <= Ceiling PRICE - With a CPIF, you have a Max And a Min
Total Fee >= Min Fee OR
Total Fee >= Max Fee
What characteristics do FPIF and CPIF contracts share
When the seller overruns, the seller’s profit is decreased
When the seller underruns, the seller’s profit is increased
There is a share ratio that represents how the buyer and seller will share cost overruns and underruns
What is the key differentiaters between CPIF contracts and FPIF contracts
In a CPIF contract, there is price ceiling to protect the buyer
In a Fixed Price Incentive Fee contract, there is a maximum fee the buyer will pay
Describe how the Fixed Fee in a Cost + FIXED Fee contract is determined
Buyer and Seller agree on ESTIMATED costs
Buyer and Seller agree on a reasonable fee
Fee is a % of ESTIMATED Costs so it become a number
Fixed Fee does not change, regardless of the seller’s actual costs
In Questions 11-20 you got
3x you should have gotten right if it was not for math or speeding through questions
13: Wrong because you added a fee based on an overrun instead of subtracting
What does PTA tell you
Are Seller’s COSTS on TARGET?
Buyer Risk Low to High
FFP FPIF FP-EPA TandM? CPAF CPIF CPFF CPCC
Need contract for R and D and don't want seller to be concerned about incentives: Which contract type FFP CPAF CPFF TandM
CPFF
Not FFP because scope changing
Not T&M because it’s long term work, not short term plug
Not CPAF because of focus on incentives
What is the point where the
actual cost plus the resulting profit
is greater than or equal to
the price ceiling?
PTA Remember zenBridge example; AC was 183 Target Fee = 30K So Actual PRICE = 213K Since Ceiling = 200K, payout was only 200K, so profit was 17K
AC+Profit = 183K+17K=200K ergo the Ceiling
Contract where buyer is not allowed to see seller’s accounting records
Firm Fixed Price
Why is buyer allowed to audit the seller’s accounting records on a FPIF, CPAF, and CPIF contract
Seller is reimbursed for actual legitimate costs
CPFF
CPIF
FPIF
FFP
Contract vehicles in INCREASING order of risk to SELLER
“Risky” means potential for overrun. Not “potential for profit.”
CPFF: ktr gets legitimate costs + Fixed fee
CPIF: ktr gets legitimate costs + a fee that may be higher or LOWER than the fixed fee
Fixed Price Incentive Fee: Gets legitimate costs + Incentive Fee that could be higher or lower than the fixed fee but also must DELIVER
On a FFP, the seller may take a loss if he miscalculated.
Least overall risk to Seller
Cost Plus Percentage Cost Contract
Fee based on % Actual, not estimated costs.
T or False. On a T and M contract, the seller is reimbursed for actual legitimate labor costs.
False. The seller is reimbursed for the agreed-to labor RATE, not COSTS.
Seller’s Risk from Low to High
CPCC
CPFF
CPIF
CPAF
TandM?
FP-EPA
FPIF
FFP
