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Interactive Workshop 4:

Competitive Bidding, Contract Preparation


and Contract Management
Day 2

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Questions from Day 1?

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Session 4

Contract Management

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Session 4 Objectives
1. Explain the differences between fixed-price and
cost-plus contracts.
2. Develop contract terms to protect against
environmental uncertainty.
3. Outline a process for contract performance review
and compliance.
4. Compare alternative approaches at the point of
contract renewal and apply best practices in a
contract renewal situation at their organizations.

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Types of Contracts

Fixed-price
Cost-plus

Shared-savings

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Fixed-price
Fixed-price. A type of contract that generally provides for
a firm price (lump sum). It obliges the supplier to deliver a
defined product and/or service to the customer at a
predetermined price.
Risk, especially the risk of rising input (labour and/or
material) costs, is shifted from the buyer to the supplier.
Can be written to allow for adjustable pricing under
changing circumstances, e.g., with incentive, escalation
or or redetermination clauses.

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Escalation

Commencing on January 1, 2014 and on


every anniversary thereafter, the value of
the payment amounts shall be adjusted
upward by an annual rate of 2.50%.

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Price Adjustment
If any Unplanned Maintenance has a material effect on
the Work to be performed in connection with Planned
Maintenance Workscope, the Parties shall enter into good
faith negotiations in order to negotiate a pricing
adjustment to reflect the change in Planned Maintenance
Workscope.
If the Parties are unable to agree upon the adjustment,
then the dispute will be determined by arbitration in
accordance with Section XX Arbitration.

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Fixed-price variants
Fixed-price incentive. A fixed-price type of contract with
provision for adjustment of price based on supplier
performance, e.g., on-time or early delivery or superior
product or service quality.
Fixed-price with redetermination. A contract with an initial
negotiated fixed price and an agreement to adjust the price
under certain circumstances, e.g., a rise in input costs

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Cost-plus
Cost-plus. A contract in which payment to the supplier
covers total cost of completing the job (labour, material,
overhead) plus a negotiated percentage profit margin.
The risk shifts from supplier to buyer. In fact, technically,
the higher the total cost incurred, the greater the profit.
Cost-plus fixed-fee. A cost-type contract wherein the
supplier receives reimbursement for all relevant incurred
costs, plus a fixed fee for services rendered.
While the fixed fee does not vary with actual costs, it
may be adjusted due to subsequent changes in the
scope of work or services performed under the contract.

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Shared-savings
Shared-savings. A type of contract under which a
supplier installs an item (equipment, machine, or
system) at a customers premises free of charge,
but shares the subsequent savings realized as
compared with the period before the item was
installed. Title to the item is usually kept by the
supplier until its price is fully recovered from the

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Contract Types

Discussion Question # 1
What type of contract: fixed-price or cost-based,
is most commonly written at your organization?
What are the pros and cons of writing this type of
contract?
Dr. Trevor Brown

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Why contract management?


From the assigned reading Patel (2006), effective
contract management can:
Support assessment and mitigation of various risks,
such as price fluctuations and supply disruptions.
Facilitate validation of cost savings
Track compliance with regulatory requirements.

Patel, Vishal (2006), Contract Management: The New Competitive


Edge, Supply Chain Management Review, Vol. 10, No. 3, pp. 42-43.

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Obstacles to contract management


Patel (2006) cont
Fragmented, informal procedures
Labour-intensive, manual execution
Poor visibility into contracts
Inadequate performance analysis
Lack of common systems infrastructure
Patel, Vishal (2006), Contract Management: The New Competitive
Edge, Supply Chain Management Review, Vol. 10, No. 3, pp. 42-43.

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Responses to the challenge


Standardize policies and procedures
Adopt appropriate technology, e.g. ECM
Secure executive support
Identify contract management champions
Measure performance
Patel, Vishal (2006), Contract Management: The New Competitive
Edge, Supply Chain Management Review, Vol. 10, No. 3, pp. 42-43.

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Three domains of compliance


From the assigned reading Saxena (2005), contract
management should consider three domains of compliance:
Regulatory
governmental and legal
Procedural/Operational
within the functions of an organization

Contractual
between organizations
Saxena, Anuj (2005), Enterprise Contract Management:
The Vanguard of Sustained Compliance, ECM Solutions,
Alti, Inc. Available at: http://www.iaccm.com.

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Components of sustained compliance


Saxena (2005) cont
Defines ECM as:
enterprise-wide software plus professional services that
together give an organization the best practices and
technology to effectively and efficiently manage its
worldwide contractual agreements, thereby ensuring and
enforcing procedural, contractual and regulatory compliance
through all stages of the contract lifecycle.

Saxena, Anuj (2005), Enterprise Contract Management:


The Vanguard of Sustained Compliance, ECM Solutions,
Alti, Inc. Available at: http://www.iaccm.com.

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Consequences of poor contract management


Increased operational costs
Reduced revenues
Complications due to non-compliance

Poor contract management is costing organizations


millions of dollars each year!
Rick Conlin

Saxena, Anuj (2005), Enterprise Contract Management:


The Vanguard of Sustained Compliance, ECM Solutions,
Alti, Inc. Available at: http://www.iaccm.com.

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Group Work

In your groups, using examples from your


workplace, discuss each of the assigned
questions on the next slide.
Next, determine what is the Best Practice from
amongst your examples.
Groups will present their Best Practices

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Group Work

How are contracts managed at your organization?


How is compliance assured?
How is performance reviewed?
What key performance indicators (KPIs) do you
use?
List and briefly describe several ideas for
improving contract management and compliance
at your organization.

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Contract Renewals Mean Opportunity

Improve supply chain


performance/relationships
Reduce costs
Obtain enhanced service/quality
Saipe, Alan L. and Nicholas Seiersen (2008), 3PL Contract Renewals:
An Opportunity for the Taking, Supply Chain Management Review,
Vol. 12, No. 5, pp. 52+.

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To bid or not to bid?

How capable is the existing provider?


Have business conditions changed?
Do we like working with the
incumbent?
Are we getting good value for our
money?
Saipe, Alan L. and Nicholas Seiersen (2008), 3PL Contract Renewals:
An Opportunity for the Taking, Supply Chain Management Review,
Vol. 12, No. 5, pp. 52+.

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Contract Renewal Tips


1. Set a contract renewal agenda
2. Carefully assess the capabilities of the
incumbent, in light of changing conditions.
3. Estimate potential cost savings (and service
improvements) achievable in the new contract.
4. If you go out for bid, do it right
ImageNow
Saipe, Alan L. and Nicholas Seiersen (2008), 3PL Contract Renewals:
An Opportunity for the Taking, Supply Chain Management Review,
Vol. 12, No. 5, pp. 52+.

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Session 5

Candidate Presentations

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Group Work

Group to: Present (10 mins) Critique (5 mins)


3
4
2
5
4
6
1
7
5
3
6
1
7
2

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Session 6

Final Project Requirements

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Final Report
Your Organizations Request for Proposal
(RFP) Policy
2 options:
1) The final report is a statement of your
organizations RFP policy (creating, issuing
and maintaining RFPs). You should critique
the policy and suggest improvements

OR
2) If your organization does not have a policy,
briefly describe and RFP policy they should
adopt.
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Final Report
Marking will be as per the following guidelines:
Option 1

Executive Summary 15%


State and Describe Current RFP Policy 15%
Analyze Policy 30%
Plan of Action to implement changes 30%
Overall Professionalism 10%

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Final Report
Marking will be as per the following guidelines:
Option 2
Executive Summary 15%
State reasons why an RFP Policy should be adopted
15%
Describe RPP Policy 30%
Plan of Action to implement RFP policy 30%
Overall Professionalism 10%

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Prior Grade Results


Grade of 60% required to pass
Average Grade
= 80%.
Max Grade
= 92%
Min Grade
= 54%
# of grades between:
50 - 59
60 - 69
70 -79
80 -89
90 - 100
Total

1
5
11
13
5
35
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Prior Assignment Comments


Report was to include ORIGINAL work, not cut paste from
other policies. Actual RFP language or policy is OK to
reference but, if included in report, needs to be identified as
such and should be included in an appendix so as to not eat
into the word count.
More credit was given for an unpolished original assessment
of current policy than for textbook explanations or
regurgitation of existing mature RFP policy.
Run your spell check, no excuses for spelling errors.
Acronyms, make sure to define them at their 1st appearance
in your paper, the reader may not necessarily know what a
BATNA is.
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Prior Assignment Comments


Do not ignore the required elements of the assignment.
Some people gave very robust descriptions of the current
policy (worth 15 marks) but then were too brief in their
Analysis and Plan of Action, collectively worth 60% and
where the majority of reports words should be spent.
Like any change implemented, at any level (warehouse,
retail store, corporate office, power plant etc...) there needs
to be some thought given to specific steps required, who will
be responsible for these steps and rough timing as to when
these steps will take place. As this was worth 30% of the
assignment grade, you needed to supply some evidence of
consideration of this plan, although not anything as detailed
as a formal project execution plan.
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Prior Assignment Comments


Make sure all required elements are in your report and the
word count allocated accordingly. I dont try and outguess the
supplied grading rubric, nor should you.
Executive Summary

15%

State and Describe Current RFP Policy


OR
State reasons why an RFP Policy should be adopted

15%

Analyze Policy
OR
Describe RFP Policy

30%

Plan of Action

30%

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Final Report

Limited to 1,500 words


Worth 80% of Final Grade
Due @ 11:59pm, June 21, 2015
Email to: stephen.kelleher@sait.ca

Please remember to complete and hand in your SCMA


assessments, you will be receiving an additional electronic
assessment from SAIT

Thanks for your attention and best of luck!

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