23 · Procurement & Contracts

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

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