Questions and Answers Project Procurement Management

1) A contractor is hired to construct a storage shed. The performance cost is $1,500, with $6,500 in materials, and a 50% incentive fee. The contractor completes the storage shed in 1 0 hours, with a materials cost of $6,!00. The contractor is paid $",#50 at completion. $hat t%pe of contract is &eing used for this pro'ect( a) )*++ &) )**) c) ++* d) )*,+ !) +i-ed price contracts have certain inherent advantages and ris.s. A fi-ed price contract is more ris.% to the seller &ecause/ a) the total contract ris. is shifted to the contractor &) the &u%er assumes total financial and technical ris. c) it re0uires formal change control procedures d) it offers the potential for higher profits to the contractor ) 1ou are the pro'ect manager for a software development pro'ect for an accounting s%stem that will operate over the ,nternet. 2ased on %our research, %ou have discovered it will cost %ou $!5,000 to write %our own code. 3nce the code is written, %ou estimate %ou4ll spend $ ,000 per month updating the software with client information, government regulations and maintenance. A vendor has proposed to write the code for %our compan% and charge a fee &ased on the num&er of clients using the program ever% month. The vendor will charge %ou $5 per month per user of the we&5&ased accounting s%stem. 1ou will have roughl% 1,!00 clients using the s%stem per month. 6owever, %ou will need an in5house accountant to manage the time and &illing of the s%stem, so this will cost an e-tra $1,!00 per month. 6ow man% months will %ou have to use the s%stem &efore it is &etter to write %our own code than to hire the vendor( a) months &) 7 months c) 6 months d) 15 months 7) A.ash is the pro'ect manager for 892 pro'ect. 6e needs to purchase e0uipment for the pro'ect. The finance department has informed him that he needs a unilateral form of contract. $hich of the following t%pe of contract is referred here( a) :3$ &) ;egal &inding contract c) *urchase order d) ,nvoice from the vendor 5) :uccessful contract negotiation strateg% and e-ecution are &est descri&ed as/ a) 2ringing together teams with opposing o&'ectives with the end of the negotiation process resulting in a winner and loser. &) :tic.ing firml% with %our o&'ectives, not giving ground, and forcing the other side to ma.e as man% concessions as possi&le. c) <sta&lishing a tough attitude at the start of negotiations and stic.ing with %our position even when it &ecomes o&vious that this stance is going to lead to the failure of the negotiations.

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d) <sta&lishing %our minimum needs and goals, understanding the needs of the opposing side, and moving the two sides towards a mutuall% &eneficial agreement. 6) $hen a pro'ect@s contract is not full% e-ecuted caused &% a direct fault of the seller, the owner is entitled to see. damages. $hat condition &est descri&es this occurrence( a) A contract that was not written according to laws governing the state or municipalit% where the contract was issued or performed. &) This condition descri&es a &reech of the contract. c) +orce ma'eure d) ,mplied warrant% ") )ontract t%pe selection is dependent on the degree of ris. or uncertaint% facing the pro'ect manager. +rom the perspective of the &u%er, the preferred contract t%pe in a low5ris. situation is ? a) +irm5fi-ed5price &) +i-ed5price incentive c) )ost5plus5fi-ed fee d) )ost5plus5a5percentage5of5cost #) $hen a seller &reaches a contract, the &u%er cannot receive ? a) )ompensator% damages &) *unitive damages c) ;i0uidated damages d) )onse0uential damages A) A &u%er has negotiated a fi-ed5price incentive contract with the seller. The contract has a target cost of $!00,000, a target profit of $ 0,000 and a target price of $! 0,000. The &u%er has also negotiated a ceiling price of $!"0,000 and a share ration of "0B 0. ,f the seller completes the contract with actual costs of $1"0,000, how much profit will the &u%er pa% the seller( a) $!1,000 &) $ 5,000 c) $ A,000 d) $51,000 10) ,n a) &) c) d) some cases, contract termination refers to ? )ontract closure &% mutual agreement )ontract closure &% deliver of goods or services )ontract closure &% successful performance )ertification of receipt of final pa%ment

11) $hich item is not a &asic element of a contract( a) 3ffer &) Acceptance c) )onsideration d) *ricing :tructure 1!) $hich of the following contract t%pes does not encourage the seller to control costs and as a result places the greatest ris. on the &u%er( a) )ost5plus5award fee &) )ost5plus5fi-ed fee c) )ost5plus5incentive fee d) )ost5plus5a5percentage5of5cost 1 ) $hich of the following statements concerning contract t%pe is correct( a) A fi-ed price contract contains the most ris. for the &u%er. &) )ost reim&ursa&le contracts offer sellers the highest profit potential. c) ;ump sum contracts offer sellers the greatest profit potential. d) Cnit price contracts are illegal in man% 'urisdictions.

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17) 1ou are negotiating with a contractor to provide the installation and integration of a computer s%stem with data lin.s. The data lin.s must access three different computer protocols and provide a common data communication. The integration of data protocols has never &een accomplished &efore. Attempting to avoid ris., %ou would li.e to award a DDDDD contract and the contractor will sign onl% a DDDDD contract. a) ;etter, formal &) +i-ed price, cost plus c) )ost plus, fi-ed price d) Eo5fault, no o&ligation 15) $hich is not another term for contract( a) Agreement &) *urchase 3rder c) *roposal d) 9emorandum of Cnderstanding 16) A seller has withdrawn from %our pro'ect. A new seller has &een selected and hisBher la&or forces are arriving at the 'o& site tomorrow. $hat is the +,F:T thing %ou should do( a) <sta&lish %ourself as the authorit% in charge &) 2ring %our team in for introduction and esta&lish a communications e-change c) Ta.e the new team on a tour of the site and show them where the% will &e wor.ing d) 2ring out the pro'ect plan 1") The primar% o&'ective of contract negotiations is to/ a) Get the most from the other side &) *rotect the relationship c) Get the highest monetar% return d) Hefine o&'ectives and stic. to them 1#) A routine audit of a cost reim&ursa&le contract determines that overcharges are &eing made on the contract. ,f the contract does not specif% corrective action, the &u%er should/ a) )ontinue to ma.e pro'ect pa%ments &) 6alt pa%ments until the pro&lem is corrected c) Ioid the contract and start legal action to recover overpa%ments d) )hange the contract to re0uire more fre0uent audits 1A) A seller is awarded a contract to &uild a pipeline. The contract terms and conditions re0uire that a wor. plan &e issued for the &u%er4s approval prior to commencing wor., &ut the seller fails to provide one. $hich of the following is the 2<:T thing for the &u%er4s pro'ect manager to do( a) +ile a letter of intent &) Hevelop the wor. plan and issue it to the seller to move things along c) ,ssue a default letter d) ,ssue a stop wor. order to the seller until a wor. plan is prepared !0) 1ou have 'ust started administering a contract when management decides to terminate the contract. $hat should %ou do +,F:T( a) Go &ac. to solicitation &) Go &ac. to solicitation planning c) +inish contract administration d) Go to contract closeouts

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!1) A seller is wor.ing on a cost reim&ursa&le contract when the &u%er decides he would li.e to e-pand the scope of services and change to a fi-ed price contract. All of the following are the seller4s options <8)<*T/ a) )ompleting the original wor. on a cost reim&ursa&le &asis and then negotiating a fi-ed price for the additional wor. &) )ompleting the original wor. and re'ecting the additional wor. c) Eegotiating a fi-ed price contract that includes all the wor. d) :tart over with a new contract !!) $ith a clear scope of wor. a seller completes wor. as specified, &ut the &u%er is not pleased with the results. The contract is considered to &e/ a) null and Ioid &) ,ncomplete c) )omplete d) $aived ! ) A pro'ect manger is in the middle of creating an F+*. $hat step of the procurement process is he in( a) *rocurement planning &) :olicitation planning c) :olicitation d) :ource selection !7) 3nce signed, a contract is legall% &inding unless/ a) 3ne part% is una&le to perform &) 3ne part% is una&le to finance its part of the wor. c) ,t is in violation of applica&le law d) ,t is declared null and void &% either part%4s legal counsel

Answers Project Procurement Management

1. d The contract is a )ost *lus ,ncentive fee contract the contractor receives the performance cost of $1,500 plus the cost of materials J$6,!00) plus 50% of the cost savings of $ 00. !. a . c )ash outla% for creating %our own code is $!5,000 and for vendor, it is Kero. The monthl% cost to maintain %our own code is $ 000. $hile for vendor, it is $",!00. Therefore the num&er of months it is &etter to use the vendor s%stem rather than creating %our own code is

Number of months =
7. c

25000 = 5.95 6 months 7200 - 3000

5. d The first three answers provide confrontational solutions, which in negotiations is strictl% for&idden. 6. & 9artin, Teagarden, and ;am&reth, )ontract Administration for the *ro'ect 9anager, p. " states, LAn% failure to perform a contract o&ligation constitutes a &reach of contract.L ,t can &e the &u%er or the seller that creates the situation that occurs in a &reach of contract. The Eature of )ontracts, Hefinitions, which states L,n the event the contract or promise is not met, then a &reach occurs, i.e., an% nonperformance of a contract is considered a &reach.L ". a. +irm5fi-ed5price 2u%ers prefer the firm5fi-ed5price contract &ecause it places more ris. on the seller. Although the seller &ears the greatest degree of ris., it also has the ma-imum potential for profit. 2ecause the seller receives an agreed5upon amount regardless of its costs, it is motivated to decrease costs &% efficient production. #. &. *unitive damages *unitive damages are designed to punish the guilt% part% and as such are considered penalties. 2ecause a &reach o contract is not unlawful, punitive damages are not awarded. The other remedies listed are availa&le to compensate the &u%er4s loss. A. c. $ A,000

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To calculate the fee that the &u%er must pa%, actual costs are compared with the target cost. ,f actual costs are less than the target cost, the seller will earn profit that is additional to the target profit. ,f actual costs are more than the target cost, the seller will lose profit from the target profit. The amount of profit is determined &% the share ratio Jwith the &u%er4s share listed first). ,n this e-ample, the seller is under target cost &% $ 0,000. That amount will &e split "0B 0. :o the &u%er .eeps $!1,000 and the seller receives an additional $A,000 added to the target profit, which is an incentive. Thus total fee is $ A,000. 10. a. )ontract closure &% mutual agreement A contract can end in successful performance, mutual agreement or &reach of contract. )ontract closure &% mutual agreement or &reach of contract is called contract termination. 11. d. *ricing structure *ricing structure is a su&5element of consideration. 1!. d. )ost5plus5a5percentage5of5cost The cost5plus5a5percentage5of5cost is the most undesira&le t%pe of contract from te standpoint of the &u%er. As the seller4s costs grow, so do its profits. 1 .) 17. 2 15. ) 16. A The &est answer here is to esta&lish roles and responsi&ilities for the pro'ect. Those arriving at the 'o& site do not .now who is how ? the% were pro&a&l% not part of an% negations for the contract. 2ased on what is written in this 0uestion, the +,F:T choice would &e A, followed closel% &% 2. 1". 2 As a pro'ect manager, %ou want to develop a relationship during negotiations that will last throughout the pro'ect. 1#. A )hoice H does not solve the pro&lem presented. )hoice ) is too severe and cannot &e done unilaterall%. Eotice that choice 2 is reall% sa%ing Mhalt A;; pa%mentsN. 6alting all pa%ments would &e a &reach of contract on the &u%er4s part. A choice that said, M6alt pa%ments on the disputed amountN would pro&a&l% &e the &est answer, &ut it is not offered. The &est answer is A. 1A. ) <-pect man% 0uestions on the e-am that re0uire %ou to .now in what step of the procurement process activities are done. !0. )

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As the pro'ect manger, %ou are the onl% one who .nows what the pro'ect ris.s are. 1ou need to ma.e sure that provisions are included in the contract to address these ris.s. !1. H The seller does not have the choice to start over. The contract that e-ists is &inding. 2oth parties could agree to start over, &ut this is a drastic step. !!. ) ,f the seller completes the scope of wor. specified, the contract is considered complete. That does not mean the same thing as contract closed. )ontract closure must still occur. 6owever, in this situation, the contract wor. is completed. Tric.%O ! . 2 ,n solicitation planning we create the documents that will &e sent out during solicitation. The re0uest for proposal is one of those documents. !7. ) 3nce signed, a contract is &inding. Generall% the ina&ilit% to perform, get financing or one part%4s &elie that the contract is null and void does not change the fact that the contract is &inding. ,f, however, &oth sides agree to terminate the contract, the contract can move into closure and it is considered completed.