Project Procurement Management

Answer Key

1. e. $24,000

Comparing actual costs with the target cost shows an $80,000 overrun. The overrun is shared 80/20 {with the buyer's share always listed first). In this case 20% of $80,000 is $16,000, the seller's share, which is deducted from the $40,000 target fee. The remaining $24,000 is the fee paid to the seller.

Hirsch 1986, 50

2. d. Offer

An offer is a key element of a contract. Without an offer, there can be no acceptance.

Corbin 1952, 16 and 17

3. c. Breach of contract

A breach of contract is a failure to perform either express or implied duties of the contract. Either the buyer or the seller can be responsible for a breach of contract.

Jentz, Clarkson, and Miller 1984,203

4. c. Establishing the appropriate contract type

This activity is performed in the procurement planning phase of the contracting process.

PM11996, 126

5. d. Cost overrun

Cost overrun is the excess of allowable costs incurred by a seller on a cost-reimbursement contract over the estimated cost of the contract even though the scope of work did not change. This term is also used when more costs than predicted are incurred in the performance of fixed- price contracts.

ESI 1996a, TX5-4

6. a. Firm-fixed-price

Buyers prefer the firm-fixed-price contract because it places more risk on the seller. Although the seller bears the greatest degree of risk, it also has the maximum potential for profit. Because the seller receives an agreed- upon amount regardless of its costs, it is motivated to decrease costs by efficient production. Cavendish and Martin 1982, 18-21

7. a. Actual costs incurred based on the contractor's best efforts

A buyer is generally procuring a level of effort {that is, labor) in a cost- reimbursement contract and not a product or other tangible item. As long as the seller provides his or her "best efforts" in the performance of the contract, payment is guaranteed based on actual costs incurred.

Cibinic and Nash 1993,

8. Contract administration

The purpose of contract administration is to ensure that both buyer and seller perform in accordance with the terms and conditions of the contract. This objective is accomplished by monitoring contract performance and performing associated activities.

ESI 1996a, TXl-5

9. Direct

Direct costs are always identified with the cost objectives of a specific project.

Dobler and Burt 1996, 302 and 303

10. e. a, b, and c

All these factors should be considered in the make-or-buy analysis. By subcontracting one or more work packages, the project manager assumes the role of an integrator, contract negotiator, and contract administrator.

Martin, Teagarden, and Lambreth 1983, 31

11 .e. Counteroffer

A counteroffer is an offer that fully complies with all the requirements previously discussed but differs from the other party's original offer .

Corbin 1952, 137

12. c. Firm-fixed-price

In a firm-fixed-price contract, the seller receives a fixed sum of money for the work performed regardless of costs. This arrangement places the greatest financial risk on the seller and encourages it to control costs. Dobler and Burt 1996, 342

13. e. Cost-plus-a-percentage-of-cost

The cost-plus-a-percentage-of-cost is the most undesirable type of contract from the standpoint of the buyer. As the seller's costs grow, so do its profits.

Cavendish and Martin 1982, 19

14. a. Ensure that prospective sellers have a clear, common understanding of the buyer's requirements

The bidders' conference is designed expressly to ensure that all prospective sellers understand the buyer's requirements and have the same information from which to operate. These objectives serve both the prospective sellers, who start with an equal opportunity to win the contract, and the buyer, who is more likely to receive bids or proposals that are responsive to its needs.

PM11996,129

15. a. Design specification

Design specifications are used when specific design characteristics must be met. Requiring offerors to be responsive to design specifications allows award of the contract solely on the basis of price, provided the seller has the financial and technical capability to perform the contract.

16. b. Alternative dispute resolution

Alternative dispute resolution, or dispute resolution, is a relatively informal way to address differences of opinion on contracts. Its purpose is to address such issues without having to seek formal legal redress through the courts.

Bockrath 1986, 465

17. c. Contract privity

Contract privity is the legal relationship that exists between any contracting parties. For example, privity exists between the buyer and seller and between the seller and its subcontractors but not between the buyer and those subcontractors. Contract privity is a key concept of contract law.

ESI 1996a, TX2-4

18. c. Request for information Procurement documents are used to solicit proposals from sellers. A request for information is generally a tool to obtain source information

PM11996, 128

19. c. Unusually severe weather

Force majeure clauses can be used to protect either party from events that are outside their control and not a result of their negligence, such as acts of nature, war, civil disobedience, or labor disruption.

Garrett 1997, 37

20. b. Payment is based solely on the delivery of goods and services. Cost-reimbursement contracts shift the financial risk from the seller to the buyer. Because all allowable and allocable costs are reimbursed, the seller has little financial risk. Therefore, the seller becomes less concerned about controlling costs, and the buyer becomes more concerned about seller performance. However, payment is based on the contractor's best efforts and not on the delivery of goods and services.

Hirsch 1986, 135

21. b. Negative

Liquidated damages are considered negative incentives because they result in a loss of revenue for the seller if it fails to perform rather than a gain in revenue if it performs well.

22. d. Subcontractors, laborers, and suppliers of material

Payment bonds, which are required by the buyer, are issued by guarantors to prime contractors. The buyer wants to ensure that subcontractors of the prime contractor receive payment so that work is not disrupted.

Martin, Teagarden, and Lambreth 1983, 36

23. b. Punitive damages

Punitive damages are designed to punish a guilty party and as such are considered penalties. Because a breach of contract is not unlawful, punitive damages are not awarded. The other remedies listed are available to compensate the buyer's loss.

Jentz, Clarkson, and Miller 1984, 207

24. e. All the above The decentralized contracting function becomes appropriate as an organization's contracting needs become more diversified.

Cavendish and Martin 1982, 9 and 10

25. e. a, b, and c

According to PMBOK, all contracts are classified as fixed, cost, or unit.

PM11996, 126

26. d. Pricing structure

Pricing structure is a sub-element of consideration.

Jentz, Clarkson, and Miller 1984, 82

27. a. Make-or-buy analysis, expert judgment, and contract type selection

Make-or-buy analysis is a technique used to determine whether a product can be produced cost-effectively by the performing organization; expert judgment is used to assess the input to the procurement planning process; and contract type selection relates to the level of detail used by the buyer to describe its requirements.

PM11996, 126

28. d. $39,000

To calculate the fee that the buyer must pay, actual costs are compared with the target cost. If actual costs are less than the target cost, the seller will earn profit that is additional to the target profit. If actual costs are more than the target cost, the seller will lose profit from the target profit. The amount of profit is determined by the share ratio {with the buyer's share listed first). In this example, the seller is under target cost by $30,000. That amount will be split 70/30. So the buyer keeps $21,000, and the seller receives an additional $9,000 added to the target profit, which is the incentive. Total fee is $39,000.

Hirsch 1986, 55 and 56

29. c. Use standard clauses whenever possible

By using standard clauses, the buyer does not incur the additional contract development expense of drafting unique terms and conditions

Martin, Teagarden, and Lambreth 1983, 3 30. b. Cost growth

Cost growth is the excess of allowable costs incurred by a seller on a cost-reimbursement contract over the initial estimated cost of the contract as a direct result of increasing the scope of work.

ESI 1996a, TX5-5

31. e. a, b, and c

The purchasing agent plays an important role in addressing quality and other issues. By considering these potential problem areas during the procurement planning process, he or she can help to ensure that the procurement will be accomplished efficiently.

Ireland 1991, III-11

32. c. Developing the procurement documents

This activity is the only one listed that takes place during solicitation planning, which is the process of preparing the documents needed to support solicitation. All the other activities occur in other phases of project procurement management.

PMI 1996, 24

33. e. All the above

A post-negotiation critique provides an opportunity to identify the negotiation team's strengths and weaknesses and target specific areas for improvement. This process enables the project manager and the contracting unit to improve future negotiations and the project manager to better carry out activities specified by the provisions of the contract.

Cavendish and Martin 1982, 34 and 35

34. a. Provide assurance of the level of quality to be provided

A warranty is one party's assurance to the other that goods will meet certain standards of quality, including condition, reliability, description, function, or performance. This assurance may be express or implied.

Martin, Teagarden, and Lambreth 1983, 29 and 30

35. c. Indirect

The nature of an indirect cost is such that it is neither possible nor practical to measure how much of the cost is attributable to a single project. Dobler and Burt 1996, 303

36. e. All the above

A technique used for contract closeout, the procurement audit is a structured review of the procurement process from procurement planning through contract administration.

PM11996, 133

37. c. Unilateral

The purchase order is a unilateral (one signature) offer that includes a promise to pay upon delivery.

ESI 1996a, TX3-3

38. d. Waiver

Under the doctrine of waiver, a party can relinquish rights that it otherwise has under the contract. If the seller offers incomplete, defective, or late performance and the buyer's project manager knowingly accepts that performance, the buyer has waived its right to strict performance. In some circumstances, the party at fault may remain liable for provable damages, but the waiver will prevent the buyer from claiming a material breach and, thus, from terminating the contract.

Martin, Teagarden, and Lambreth 1983,34

39. a. Contract

The requirements are always defined in the contract; they mayor may not be described in the procurement management plan or the overall project plan. For contract closeout to occur, formal acceptance of the product or service must be completed. Acceptance is based on the inspection and acceptance criteria in the contract document.

PMI 1996, 133

40. d. Performance specification

Performance specifications tell the seller what the final product must be capable of accomplishing rather than how the product is to be built or what its measurements, tolerances, or other design characteristics must be.

Dobler and Burt 1996, 1970