IT Procurement Contracts - Report Example

Procurement Contract Types Table of Contents Procurement Contract 3 Project IT Procurement Contracts 4 Comparing and Contrasting 5 Planning 5 Scheduling 5 Costing 6 Budgeting 8 Evaluation and Performance Monitoring 9 Conclusion 10 References 11 Bibliography 12 Procurement Contract The procurement contract differs from one organization to another and each has their customized terms and conditions to the contract. The contract will describe the accurate way a procurement accomplishment need to be carried out with proper defining of responsibilities of the buyers and sellers. Basically there are two types of such contract, the fixed type contract and the cost reimbursable or cost plus contract (Association for Project Management, n.d.). In fixed type of contract, seller is vault by the conditions of such contracts to provide the products and services at a cost determined at the commencement of the agreement and decided to by the seller (OHIO University, n.d.). In cost plus contract, contracts specify all legitimate expenditure associated to creating the merchandise, deliver the service or other stuff of the procurement deed which will be reimbursed. There is a fixed charge added to that to cover up rational earnings of the seller and also incentive, if felt appropriate (OHIO University, n.d.). In T&M contracts, there is an agreement between the parties to unit rates that have been predetermined in advance by managers. In project management, the T&M contract comprises aspects of fixed as well as cost plus type of contracts. Project IT Procurement Contracts FFP (Firm Fixed Price): The procurement regard to this project is related to hardware, software and other related service that needs to be under the contract for getting advantage in it. When proposing a tender under a fixed price preference, it is anticipated that the contract will widen a rational and consistent complete budget. Once funded, it is projected that all expenses straight related with performing the assignment will be charged directly against the fixed price account. CPFF (Cost-Plus Fixed Fee): For the IT project it is a good measure but the profit margin is less compared to FFP, as the buyer assumes most of the risk of accomplishment of the project. The buyer agrees to reimburse the seller a predetermined amount of revenue for completing the project. The seller recommends an anticipated charge for the project, and the buyer bargain a revenue foundation on this estimated cost (Drury, 2008). The T&M contract has no explicit end like the cost-reimbursable contract and requires a lot of careful prediction in costs and assumptions. Comparing and Contrasting Planning Apart from the hardware and software, there are additional services related to the IT project with regards to maintaining and providing a better administrative support for performing the work. Planning needs to be developed related to the situation of economy with respect to IT purchases and supporting tools in accomplishment of the project work. Considering the future economic conditions for the IT products and its raw materials, planning need to be done in application of CPFF or FFP. The maximum advantage giving technique with respect to the market conditions needs to be analyzed with proper strategy which will help in increasing the profitability of the IT project. The hardware, software and supporting tools require analysis with regard to future prices and current state for designing plans to reap benefits from the development of such contracts. Scheduling Appropriate timing and action plan is required for implementing and coordinating the IT project. A work back schedule, commencing from the date of the project must be accomplished, and cataloging the tasks is also required according to the due dates for each need to be established. Scheduling is required as different resources might come under different category of contract, each one need to be given importance with their terms and conditions. The resource that comes under FFP and CPFF from different vendors needs proper analysis for extracting out the benefits from them. This is possible when proper scheduling is done. Inflation is the biggest cause that hampers many projects. In the IT industry, undertaking new projects is very risky as the resource availability is volatile. Preparations need to be made for such kind of situation for completing the project and use of CPFF or FFP conditions require better analysis in different kind of resources that will be required for accomplishment of the project work. Costing FFP The costing factor can be explained by the 0/100 Profit vs. Cost association provided in the graph. The revenue goes negative when the cost goes beyond $200,000. For this IT project, presume a negotiated contract price of $200,000, and a profit of $20,000, with the intended cost of $180,000 for the project. (Vanderbilt University, n.d.). Final project costs are: $160 K, $180 K, $200 K, $220 K and $240 K (Vanderbilt University, n.d.). CPFF It is opposite of FFP contracting, the Profit vs. Cost association for a CPFF contract is 100/0. For this IT project, presume a negotiated contract price of $15 M, and revenue of $800 K, or 5.3%. (Vanderbilt University, n.d.). Final project costs are: $5.0 M, $15.0 M and $25.0 M (Vanderbilt University, n.d.). Budgeting Budgeting of the FFP requires to be done with fixed-price contract economic price adjustment. These needs to be used as the market of IT industrial resources are volatile and unforeseen event can occur and it would be incorporated in the contract price and can be recognized and enclosed separately in the contract. FFP is of fixed pricing contract with the sellers before commencement of the project, thus it does not require much complication in development of the budget. Budgeting of the CPFF is difficult than FFP. CPFF budgeting is done through estimated cost plus fixed charges basis. The fixed charge for the project accomplishment requires analyzing and including them in the budget. The estimated cost is generated through various studies of financial statement of previous projects and current position of the organization. The FFP is done on a negotiation basis, as per negotiated with different vendors the budget need to be prepared and for CPFF both fixed cost and an estimated cost need to be added for budgeting purpose. In T&M contracts prior to budget, lots of factors are needed to be analyzed. Vendors’ stability, technological elements, product stability, costs and future expenses are few of the factors required to be considered along with the general analysis. Evaluation and Performance Monitoring Performance based contracting is ideal method of contracting for supplies and services. It is more result oriented and engages arrangement of all portions of an acquisition approximately for the reason of the project work to be performed. The performance of the contract needs to be evaluated on periodical basis. Evaluation of performance comparing the past and present will provide better understanding. Constant monitoring is required in FFP as well as CPFF because it would aid in rectifying the defaults immediately. If it is not monitored properly and performance are not evaluated, at the end of the project it might be found that the project work is in loss or with low profit margin. These are two different contract categories and the choice to employ one contract kind over the other is important to the overall achievement of a project. Before the submission of the contract in order to properly evaluate whether to use FFP or CPFF contract, both should be evaluated against each other for extracting maximum advantage from the agreement. The resource, hardware, software and tools for supporting the IT project need to be properly evaluated with association of different vendors for proving such facilities and their conditions and terms of profit margin associated with it. Both these contract types can be compared with the same evaluation techniques and variables and monitored in the same way. But for performance evaluation it might be different as FFP is based upon negotiation pricing model and CPFF is based upon cost plus fixed charges basis. Both deliver different output in terms of profitability and terms set by vendors. The T&M contract is not an easy one to evaluate the performance as it is involves both the contracts (FFP & CPFF). Conclusion It is not easy to choose in between the two contract types that will be applicable in the IT project. There are certain requirements like hardware which might be better if CPFF is applied but at the same time regarding software FFP would be better applicable in this case. A mixed or Hybrid type of procurement contracting is mostly suitable in this type of projects. It will provide the maximum advantage from both properly structured contracts in accomplishment of the IT project work. Management should reflect on matching the procurement approach with tools and people which will guide to successful program implementation. References Association for Project Management, (No Date). Contracts & Procurement. APM Body of Knowledge. Retrieved Online on October 4, 2010 from https://www.apm.org.uk/download.asp?fileID=684 Drury, L., (2008). Understanding IT Procurement Contracts. How to Evaluate IT Procurement Contracts. Retrieved Online on October 4, 2010 from http://www.computereconomics.com/article.cfm?id=1407 OHIO University, (No Date). Contract Types. Fixed Price Contracts. Retrieved Online on October 4, 2010 from http://www.ohio.edu/ptac/downloads/Contract_Types.pdf Vanderbilt University, (No Date). Contract Pricing. FFP & CPFF. Retrieved Online on October 4, 2010 from www.bme.vanderbilt.edu/design/ContractPricingHomeworkv2.doc Bibliography Fleming, Q. W., (2005). Project Procurement Management. FMC Press. Retrieved Online on October 4, 2010 from http://www.maxwideman.com/papers/procurement/procurement.pdf Miller, K., (2010). Challenges Facing Widespread Use of Firm-Fixed Price (FFP) Contracts in the Defense Sector. SLD. Retrieved Online on October 4, 2010 from http://www.sldinfo.com/?p=3223 UCAR, (2010). Procurement Guide. UCAR Contracts and Agreements. Retrieved Online on October 4, 2010 from http://www.fin.ucar.edu/contracts/contracts/guideline/cp_fguide.html Read More