As I mentioned in my previous post, Fixed-Priced Contracts, there is no ONE best type of contract to manage. The risk the vendor and customer share is determined by the contract type. The best thing you can do is understand the risks and benefits of each. There are three categories of contracts: Fixed-Price, Cost-Reimbursable, and Time and Material (T&M). In this second installment of a 3 part series, I will define the contracts in the cost-reimbursable category. It will hopefully help you on the PMP exam and out in the real world.
Cost-reimbursable is a contract category involving payments (cost reimbursements) to the seller for all legitimate actual costs incurred for completed work, pus a fee representing seller profit. Cost-reimbursable contracts may also include financial incentive clauses whenever the seller exceeds, or falls below, defined objectives such as costs, schedule, or technical performance targets. Three of the more common types of cost-reimbursable contracts in use are Cost Plus Fixed Fee (CPFF), Cost Plus Incentive Fee (CPIF), and Cost Plus Award Fee (CPAF).
A cost-reimbursable contract gives the project flexibility to redirect a seller whenever the scope of work cannot be precisely known and defined at the start and needs to be altered, or when high risks may exist in the effort. Frankly put, if the buyer doesn’t know what they want, this type of contract allows the project to move forward without the risk to the seller.
- Cost Plus Fixed Fee (CPFF) reimburses the seller for all allowable costs for performing the contract work, and they then receive a fixed fee payment calculated as a percentage of the initial estimated project costs. The fee is paid only for competed work and does not change regardless of seller performance. The fee amounts do not change unless the project scope changes.
- Cost Plus Incentive Fee (CPIF) reimburses the seller for all allowable costs for performing the contact work and receives a predetermined incentive fee based upon achieving certain performance objectives as set forth in the contract. In CPIF contracts, if the final costs are less or greater than the original estimate costs, both the buyer and seller share costs from the departures based upon a prenegotiated cost sharing formula, e.g., an 80/20 split over/under target costs based on the actual performance of the seller.
- Cost Plus Award Fee (CPAF) reimburses the seller for all legitimate costs, but the majority of the fee is earned, based on the satisfaction of certain broad subjective performance criteria. This performance criteria is defined and determined by the buyer and and incorporated into the contact. The determination of the fee is based solely on the subjective determination of seller performance by the buyer, and is generally not subject to appeals.
Image courtesy of StaciJShelton on Flickr
Project Management | Derek Huether | December 2, 2009 | 
Comments (1)
Award, Contracts, Controlling, Cost, CPAF, CPFF, CPIF, Definition, Fee, Incentive, Planning, PMP, Reimbursable
The number one search on the Critical Path website is for a Critical Path and Float worksheet. Though you should be using software to calculate a critical path, if it is mission critical, it is important to understand the concept for the PMP exam.
Rather then go into the specifics on how to calculate the critical path and float in this post, I’ll merely say a free worksheet template and PowerPoint presentation are available and you can download them at any time. (see links below)
•Remember the Critical Path tells you the activities that can not slip a day without increasing the total duration of the project or moving the project completion date. It is the longest path of logically related activities through the network which cannot slip without impacting the total project duration, termed zero float.
[Click here to download the Critical Path and Float Calculation Worksheet]
[Click here to download the Critical Path Scheduling PowerPoint Presentation]
Also available in PDF
General | Derek Huether | July 21, 2009 | Comments (3)
CPM, Critical Path Method, Definition, EVM, Float, Free, PMP, PowerPoint, Presentation, Project Management, Schedule, Template, Worksheet
Before you begin designing and creating the next greatest iPhone application, it’s critical to define exactly what you plan your application to do, so says the iPhone Human Interface Guidelines. A great way to do this is to write a product definition statement. It is a succinct affirmation of your application’s core purpose and its intended audience. I believe Apple understands, in order to be successful, you have to have a plan. Developers of iPhone applications are not necessarily project managers. Perhaps Apple is giving them better odds of success, by encouraging them to write a project definition statement. I once worked with a very knowledgeable developer, Kent Lynch, who spoke out during a managers meeting saying, “People don’t plan to fail; they just fail to plan”. He could not have been more right.
A project mission statement is no different. No project should be attempted without first capturing a mission statement. Traditionally, mission statements contain:
- Project Name
- Description
- Purpose
- Primary stakeholders
- Responsibilities towards these stakeholders
- Products and services offered
If you can articulate a mission statement that satisfies these few bullets, you’re on you way to understanding what you need to do to have a successful project.
I recall a very positive meeting where we exposed several non project management team members to a Cost Performance Report (CPR) for the first time. A CPR addresses project performance through a defined period of time in relation to contractual requirements. The CPR details budgeted work scheduled and performed, actual cost work performed, and the variance in both schedule and cost. All of this is itemized per Work Breakdown Structure (WBS) element for both the current period and the cumulative to date. The last values you see are the budgeted, estimated, and variance at completion of the contract.
There were a lot of questions as to why one WBS element has a positive or negative cost variance and why it may have a positive or negative schedule variance. Trying to explain this to those without a project management background can be a challenge.
I was having a sidebar conversation with one team member who could not understand how the element that pertained to him could be both ahead of schedule and below budgeted cost. The answer came from across the room in the form of a question.
“Is there any way this report captures quality?” The answer was no.
That my friends is called Triple Constraint. We know the Scope, Time, and Cost within this report. What we don’t know is Quality, Risk, or Customer Satisfaction. That’s ok. This is the CPR, not a full Status Report.
By not committing the scheduled time and budgeted dollars to complete the task to a level of quality that meets the customer’s expectations, the contractor looks good only on paper.
Should all projects or programs utilize Earned Value Management?
Short answer: No
Long answer: The industry standard for project control systems described in American National Standards Institute (ANSI) EIA-748, Earned Value Management Systems, must be implemented on all projects with a total project cost (TPC) greater than $20M for control of project performance during the project execution phase.
Earned Value Management (EVM) is a systematic approach to the integration and measurement of cost, schedule, and technical (scope) accomplishments on a project or task. It provides both the contractee and contractor(s) the ability to objectively examine detailed schedule information, critical program and technical milestones, and cost data.
In layman’s terms, it quantifies the estimated value of the work actually accomplished.
