POSTER 23
Extension · Procurement & Contracts
Procurement & Contract Management
Procurement is acquiring goods & services from outside the organisation. The decisive lever is the contract type — because the contract is how risk is allocated between buyer and seller. Pick the type by how clear the scope is: well-defined → fixed price; uncertain → cost-reimbursable.
Visual Map — The Procurement Process
Plan
make-vs-buy · SOW · contract type · bid docs ▸ Conduct
solicit · evaluate · select & award ▸ Control
administer · performance · changes · claims · pay ▸ Close
verify · accept · close out
make-vs-buy · SOW · contract type · bid docs ▸ Conduct
solicit · evaluate · select & award ▸ Control
administer · performance · changes · claims · pay ▸ Close
verify · accept · close out
Bid documents: RFI (information) · RFQ (quote, price-led) · RFP (proposal, solution-led) · IFB (sealed bid). The SOW defines the work; source-selection criteria decide the winner.
Contract Types & Risk Allocation — The Spectrum
| Type | How it works | Cost risk on… | Use when |
|---|---|---|---|
| FFP — Firm Fixed Price | one fixed price, full stop | Seller (highest) | scope is well-defined |
| FPIF — FP Incentive Fee | target cost/price/profit + share ratio + ceiling | Seller, shared above target | defined scope + cost incentive |
| FP-EPA | fixed price + economic price adjustment | Seller (inflation-protected) | long-term / volatile inputs |
| T&M — Time & Materials | rate × time + materials; set a NTE cap | Shared | scope unclear · staff augmentation |
| CPIF — Cost Plus Incentive Fee | costs + fee that flexes with cost performance | Buyer, shared via ratio | uncertain scope + incentive |
| CPAF — Cost Plus Award Fee | costs + award fee at buyer's judgement | Buyer | performance is subjective |
| CPFF — Cost Plus Fixed Fee | costs reimbursed + fixed fee | Buyer (highest) | R&D / very uncertain scope |
Risk spectrum: FFP → FPIF → T&M → CPIF → CPFF — buyer's risk rises left→right; the seller's risk falls. Fixed price hides a risk premium; cost-plus keeps the buyer flexible but exposed.
Point of Total Assumption (PTA)
PTA = ((Ceiling − Target Price) ÷ buyer share) + Target Cost
Worked: target cost 100k, profit 10k, price 110k, ceiling 120k, share 60/40.
- PTA = (120−110)/0.60 + 100 = 116.67k
- Above 116.67k actual cost, the seller bears 100% of the overrun (FPIF only).
Know These Terms
- SOW — statement of work; NTE — not-to-exceed cap.
- Privity — contractual link; buyer isn't in privity with the seller's subcontractors.
- Liquidated damages — pre-agreed penalty for delay.
- Force majeure — excusable, uncontrollable events.
- Claims / disputes — administer per the contract; ADR before litigation.
Exam Concepts
- FFP = max risk on seller; CPFF = max risk on buyer; T&M = shared (cap it).
- Choose contract type by scope clarity & risk.
- PTA = cost above which the seller absorbs all overrun.
- The SOW defines the work; changes go through contract change control.
Executive View
- Contract type is your risk-allocation strategy.
- Fixed price transfers risk — at a premium.
- Incentives align behaviour; award fees reward subjective quality.
Industry Example
Defence
- Shipbuild: FPIF for series production (cost incentive + ceiling), CPIF/CPFF for early design & R&D (scope uncertain), T&M for surge engineering support.
Relationships
- Transfer is a risk response (Poster 12) — contracts are how you transfer.
- The PTA formula also lives on the Formulas Wall (Poster 21).
- Make-vs-buy is a needs-assessment / business-case decision (Poster 8).
Memory Hooks
- "Fixed = seller sweats; Cost-plus = buyer pays."
- Buyer-risk rising: FFP → FPIF → T&M → CPIF → CPFF.
- PTA = where the seller starts paying for everything.
60-sec Review
Plan-Conduct-Control-Close
Who bears risk: FFP vs CPFF
Order the risk spectrum
Compute a PTA
RFP vs RFQ vs IFB
PMI Visual Wall · Poster 23 · Procurement & Contract Management · original instructional design · A3 landscape