Case Study Solution

Close Procurement
Contract Pricing
Lecture #5
4/29/15

Case Study: Aviation Electronics

Company
Aviation Electronics Company specializes in designing and installing air traffic
control systems at airports. Aviations Electronics has the capability to
manufacture most of the hardware for the systems that they install. The
company was recently awarded a contract to design and install a new air traffic
control system for a major airport. Since the existing air traffic control system
has malfunctioned twice in the last month raising serious safely concerns, the
airport authority is interested in having the new system installed as soon as
possible. There is a $200,000 penalty if the system is not completed in less than
four months after contract award.
Since the Manufacturing Department for Aviation Electronics has most of its
resources committed to existing contracts, it is not certain of its capabilities to
supply the hardware for the new contract in accordance with contract schedule
requirements. The Manufacturing Department has suggested that certain key
hardware components be purchased from outside suppliers. The Vice President
and Project Manager for the new project must decide whether or not to accept
the recommendation from the Manufacturing Department. Answer the following
questions as if you are the Vice President or Project Manager.

Cast Study Context

Contract

has been awarded

$200,000 penalty if project takes
more than 4 months
Manufacturing Department is NOT
CERTAIN to meet the schedule
requirements
Internal suggestion to purchase
certain key hardware components
Meeting between Vice President &
Project Manager(s)

1 - What will you want to know about the

TECHNICAL CAPABILITIES of potential suppliers
of these components prior to reaching a
decision?

Production

Capacity & Interest

Past Performance
Interoperability with Aviation
Electronics' Equipment
Consistent Quality + Quality
Control
Lead Time + Delivery Time
(Optional)
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2 - What SCHEDULE INFORMATION will you

want from the Procurement Department prior
to reaching a decision?

Normal

Plan
Crashing
Fast-tracking
Based on different scenarios

3 - What ACTIONS MIGHT BE TAKEN with the

Manufacturing Department to allow them to
produce the components?
Finding

the exact amount of hardware that can be

manufactured internally under different scenarios

Normal
Crashing
Fast-tracking
Any other

Cost

& Time trade-offs

Over-time
Increased shifts etc.
Possible

plans based on different scenarios

Any possible incentives for Manufacturing Department
to produce required equipment as per schedule
In case of outsourcing, how to leverage the expertise
of Manufacturing Department
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4 - Is the cost of the components likely to more

or less if they are procured from suppliers?

Price

is more likely to be increased

One of the core activities of
Aviation Electronics
Higher probability that they would
be producing a good quality in a
cheaper price.
Otherwise they would have
subcontracted the manufacturing
part.
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5 - What factors would favor manufacturing the

components with your Manufacturing
Department?

Better

Control of:

Production
Lead Time
Quality
Confidential

Information
Cost Consideration

CLOSE
PROCUREMENTS

Close Procurements
The

process of completing each

project procurement
Involves verification that all of
the procurement work was
completed and accepted (Product
Verification)

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Inputs
Project

Management Plan
Procurement Documentation

The Contract
Supporting Schedules
Requested and approved changes
Technical Documentation
Performance Reports
Financial Reports

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Tools & Techniques

Procurement

Audits

A structured review of the

procurement process from Plan
Procurements to Control
Procurements
The objective is to identify the
successes & failures that warrant
recognition
Procurement

Negotiations
Records Management System
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Outputs
Closed

Procurement: Formal written

notice that the contract has been
completed
Organization Process Assets Updates
Contract File
A complete set of indexed contract documentation

Deliverable Acceptance
A formal written notice from buyer that the
contract has been accepted
Requirements should be defined in the contract

Lesson learned documentation

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Procurement contracts:
Fixed Price Vs. Cost Reimbursable
Fixed Price

Cost Reimbursable

Contractor assumes risk

Owner assumes risk

Contract includes anticipated

profits

Contractor is paid cost plus an

additional amount for
overhead and profit

Contractor is independent and Owner may direct work

performs the work as it sees fit
Scope of work is clearly
defined to enable an accurate
estimate

The scope of work/cost may

not be clearly defined

Change orders by owner

No change orders; work is
increase or decrease the value performed and paid on time
of the contract
and materials basis

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Contract Type Selection

LOW

HIGH
Buyers Risk

CPFF
Cost
Plus
Fixed
Fee

CPIF

FPI

Cost
Plus
Incentiv
e Fee

Fixed
Price
Incentiv
e

FFP
Firm
Fixed
Price

Sellers Risk
LOW

HIGH

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PROJECT
MANAGEMENT BASED
ON CONTRACT TYPE

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Project Management of Fixed

Price Contracts
Accurate

description of work

Prepare an accurate description of the

work, all of the technical and management
requirements in a comprehensive manner
Considerable

input from a number of

project groups
Adequate time allowed in the project
schedule for developing scope of work
Primary cost concern is controlling the
number and magnitude of changes
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Project Management of Fixed

Price Contracts (Contd)
Managing

any financial difficulties that

can affect the performance of contractor
Assign sufficient quality oversight
personnel to inspect the work performed
by a contractor
Perform quality oversight functions as
early as possible in a contractors
schedule
Strong schedule control program
Establish key milestone dates for contractor
Monitor actual schedule performance
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Project Management of
Reimbursable Contracts
Buyer

& seller prepare a detailed cost

estimate that can be used to establish
budgets
Establish cost control system that
compare actual to budgeted costs
Cost Incentive fee (if applicable) will be
based on this system
Owner approves
Personnel Levels
Overtime
Material Purchases
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Project Management of
Reimbursable Contracts (Contd)
Owner has flexibility for
Quality Program
Increase Quality Inspection
Detailed Quality Procedure
Training Programs

Schedule Performance

Schedule Acceleration
Personnel
Overtime
Shift work
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