CONTRACTS &

REQUIREMENTS

Ronnie Goodin, CSP

“The law is reason unaffected by desire.” Aristotle, Politics, Book 3, Ch 16 (B. Jowett)

“By 1970 America had 1 lawyer for every 4.5 engineers. By 1995, . . . we had 1 lawyer for every 2.1 engineers.” Robert D. Putnam, Bowling Alone, p. 146

CONTRACTING OUTLINE

• Introduction– Give & take Aristotle, Nicomachean Ethics, Book 5

• Contract Risk Profile

• Statements of Work / Source Board Process

Requirements

“. . . a magistrate should be appointed to inspect contracts. . .”Aristotle, Politics, Book 6, Ch. 8, p. 1

Contract Definitions 1 of 2

• A judicial fact is either: Carley v. Wheeled Coach

(1) generally known within the territorial jurisdiction of the trail court or,

(2) capable of accurate & ready determination by resort to sources.

• A promise – A commitment to do or not do something in the future. – Two elements of a promise:

• Commitment • Future

– Course of dealings “by implication from other circumstances” – how parties have dealt with one another in the past. Uniform Commercial Code (UCC).

If a man vow a vow unto the Lord, or swear an oath to bind his soul with a bond; he shall not break his word, he shall do according to all that proceedeth out of his mouth. Numbers 30-2

Contract Definitions

• An agreement – An exchange of promises.– An agreement defined by the UCC – “the bargain of the

parties in fact as found in their language or by implication from other circumstances including course of dealing or usage of trade or course of performance.”

• Usage of trade – how other people like them usually act.• Course of performance – how they have acted in performing

their current agreement.

• A contract – A legally enforceable agreement.

4000 years ago, a contract was formed when 2 parties by divided a sacrifice & walked together between the halves. This was equivalent to going before a notary.

Contracts• Contracts serve 2 functions within the big

picture of society:– Dispute resolution for exchanges.– Demonstrates society’s commitment to freedom &

autonomy.

• Form contracts.

• Note: “Don’t wait to trademark your brand name, tag line, & logo, or to copyright your ads & manufacturing materials.”By the Seat of Your Pants, p 372, Tom Gegax

When ye deal with each other, in transactions involving future obligations in a fixed period of time, reduce them to writing . . . whether it be small or big. . . Koran Surah 2 verse 282

Contracting• Formation of the contract occurs through offer &

acceptance.

• Definiteness is important in contract formulation for 2 reasons:– Definiteness is evidence of consent.– A definite contract gives the court a better basis for dealing

with a breach.

• “In civil law systems. . . contracts tend to be much shorter & less specific [than common law systems], because many of the issues typically covered in a common law contract are already covered in a civil code.” Charles Hill, International Business, 3rd Ed. p. 46

• Caution: Consider worse case scenarios & devise solutions for each. Tom Gegax, By the Seat of Your Pants, p 371

“Another officer registers all private contracts.” Aristotle, Politics, Book 6, Ch. 8, p. 1

FFP

CPFF

FPI

Greatest Risk to Buyer

Shared Risk

CPAF

CPIF

Greatest Risk to Seller

FP/EPA

FP w/AF

Contractor Risk Profile

Undefined effortUnstable designMany unknowns

Well defined effortStable design

Contract Types• Firm-fixed-price (FFP). Self-explanatory.

• Fixed-price with economic price adjustment (FP/EPA) contracts allow for specific contingencies to labor & commodities. When market conditions are not stable, it is used to protect either the contractor or the government against significant fluctuations.

• Fixed-price incentive (FPI) contracts control profit based on a pre-agreed to formula. The specific contract ceiling price, target profit & profit adjustment formulas are agreed to at the outset.

• Fixed-price contracts with award fee (FP w/AF) contracts serve to motivate the contractor to perform above a set standard in the presence of results typically in quality, technical ingenuity or timeliness which normally can not be measured objectively.

Contract Types• Cost-plus-incentive-fee (CPIF) contracts are often

used in stable contracts with little uncertainty.

• Cost-plus-award-fee (CPAF) contracts provide incentives when finite performance measurements associated with incentive type contracts can not be established. Award fee is a fixed amount decoupled with performance.

• Cost-plus-fixed-fee (CPFF) contracts are used when changes in the services or products are expected. Because the fixed fee above the cost does not change, the contractor has no incentive to seek continual improvement.

Statement of Work (SOW) Types

• Design/detailed specification.

• Level of effort.

• Performance oriented (based).

“. . . most businesses relations – those, namely, that are voluntary – are regulated by contracts, & if these lose their binding force, human intercourseceases to exist.” Rhetoric by Aristotle (Richard McKeon), p. 4, Ch 15, Book 1

Historical QuestionsSource Board Process

1 of 2

• What type of contract is this?

• If there was an earlier procurement, did the type of contract change?

• Has this requirement been purchased before by your organization / or another organization?

• Did the contractor perform as expected?– Reorganization

Historical QuestionsSource Board Process

• Did the contractor deliver on time?

• What type of requirements document was used to describe the requirement? (design or performance)

• What monitoring does this type of requirements document require to ensure compliance?

• What would happen if requirement delivery was delayed?

Source Board Process

• Did the contractor deliver on time?

• What type of requirements document was used to describe the requirement? (design or performance)

• What monitoring does this type of requirements document require to ensure compliance?

• What would happen if requirement delivery was delayed?

RFP Response (the proposal)

Two Opportunities:(1) Strengths. (Opportunity for strength may not

be a response to a specific requirement)

(2) Weaknesses.

Note: Some RFP requirements appear to be neither opportunity for strength or weakness – however,do not underestimate that obscure requirementmay be the sole job of a source board member.

Getting Around the System

Working Without a Contract Mark H. McCormack, On Negotiating, p. 103-105,

• Pre-contract work binds associates & feelings of obligation develops.

• “A person’s word is a matter of honor. A contract is a matter of law.”

• “You can’t buy . . . goodwill – or mandate it in a contract.”

• “If they are honorable people, they’ll keep their word. If they’re not honorable, I doubt if any contract will bind them or fully protect you.”

“Successful organizations must shift from an age dominated by contract & litigiousness to an age of handshakes & trust.” Thriving on Chaos, p. 518, Tom Peters

˗ Jerry Greenberg, McDonalds, “We buy $12 -$14B/yr of food & paper without a contract.” Good Business, p. 160 Mihaly Csikszentmihalyi

Getting out of a Contract • Include a contract exit strategy. Tom Gegax, By the Seat of Your Pants, p 203

• Simply ask to be released.

• Mistakes.

• A condition of a duty not done.– Jacob & Youngs Inc. v. Kent (1921).

• Functionality vs. Owner satisfaction.

• Impossibility.– Taylor v. Caldwell (1863).

• Impracticability.

• Frustration of purpose.“. . . a contract unintentionally frustrated by unforeseen circumstances. . .” Plato, The Laws, p. 9-

10 of Book 11, Taylor (p. 313-314)

Getting out of a Contract

Background & Damages• Damages figured in present day $$$.

• No moral condemnation attached to breach so fault is less important than in torts.

efficient breach

• Mandatory arbitration clause.

Side Note: Contract Disputes Act. 41 U.S.C. § 601 et seq.

EARLY ETHICS NOTE: “. . . for this reason a prudent Prince neither can nor ought to keep his word when it is hurtful to him & the causes which led himto pledge it are removed.” Machiavelli, The Prince, p. 46 Also see Robert Green, The 48 Laws of Power, for a modern Machiavellian type reference

Security Checklist 1 of 2

• Proposals kept under lock & key – never unattended.

• Do not work on the RFP or review proposals in an area with work visible to anyone without a need to know.

• Do not discuss source board work where the discussion may be overheard.

• Avoid any behavior that could be interpreted as favoring one offeror over another.

Security Checklist

• Do not reveal information about another offeror’s proposed technical solution, proprietary information, or intellectual property.

• Do not reveal a competitor’s price although telling an offeror that its price is too high or too low with accompanying rationale is acceptable, as is providing the government’s reasonable cost or price estimate.

• Do not reveal sources of past performance information.

• Do not knowingly provide source selection information. (FAR 15.306)

Contracting Topics• Data Deliverables:

– Coding.– Scheduling.– Distribution.

• Dealing with Unsatisfactory Performance:– Metrics that only hammer the contractor invite

unsatisfactory communication.

• Surveillance Plans.

• RFP – Proposal Page Counting.

• Independent Government Cost Estimate.

Independent Government Cost EstimateS&MA Contract Government Estimate

Activity/Current Status Start Feb 06 Year 2 Year 3 Year 4 Year 5

Range Safety Support 0 3 3 3 3 4

LSP Safety 0 0 0 0 0 17

Industrial Safety 8 8 6 6 6 6

Independent Assessment 4.5 4.5 4.5 4.5 4.5 4.5

Agency Payload Safety 1.5 1.5 1.5 1.5 1.5 2

Management .5 .5 .5 .5 .5 1__________________________________________________________________

Totals 14.5 17.5 15.5 15.5 15.5 34.5

Job classifications: Industrial 1-SE, 3-SS, 2-DM, 1-SE Lead

Ind Assmt 4.5-S&MA EngineersAgency P/L 2-S&MA EngineerAgency RS 4-S&MA Engineer

Mgt 1Contract Support 2-SE, 4-S&MA Eng., 6-QE, 5-QAS

Labor Category

Labor Category – Year 1 Number of FTEs

Safety Engineer Level 2 3.5

Safety Specialist Level 2 1

Safety Engineer Level 1 1

Data Manager Level 2 2

S&MA Engineer Level 2 4.5

Manager (Engineer) Lev 1 .5

FTE – Full time equivalent

EVALUATION FACTORS Service Contract Ex.

• Understanding the Requirements 53%

• Qualifications 15%

• Management 16%

• Past Performance 10%

• Safety 3%

• Labor 3%

Section M of RFP

EVALUATION FACTORS Hardware Development Ex.

• Mission Suitability– Management Approach - 375 pts– Technical Approach – 575 pts– Small & Small Disadvantaged Business

Approach – 50 pts

• Price

• Past Performance

Consider addressing labor contract status: threat of strike before completion of contract.

FFP

CPFF

FPI

Greatest Risk to Buyer

Shared Risk

CPAF

CPIF

Greatest Risk to Seller

FP/EPA

FP w/AF

Contractor Risk Profile

Monitoring Planning

Undefined effortUnstable designMany unknowns

Well defined effortStable design

Monitoring Level Implementation – Required by FAR

Contract Type Need for Monitoring

Cost-

reimbursement Guard against paying for excessive cost & non-contract related reimbursement work.

Government responsible for planned expenses.

Fixed-price Contractor monitors its own costs to ensure sufficient

funds for meeting requirements.

No need for Government monitoring contractor

spending.

Warning: FFP – When Contractor underbid to get work, or you & your contractor has a cost-reimbursement contract AND your contractor has another fixed price contract with another organization that is in trouble, watch for cost-cutting effects.

Monitoring Level Example

Air Force B-2

Air Force F-15

Northrop Corporation cost plus contract radar

Hughes Aircraft Company

McDonnell Douglasfixed price contract radar upgrade

HUGHES AIRCRAFT COMPANY, PETITIONER v. U.S., US Supreme Court No. 95-1340 1997

Monitor Contractor Performance

• 100% inspection. (Preserve inspection records.)• Sampling, or statistical based sampling.• Audits & assessments. (Preserve audit reports as

a business record.)• Onsite visits. (Preserve trip reports as a business

record.)• Customer complaints/suggestions.• Conduct progress meetings or reviews. Formal

reviews often serve as the active external force that helps the contractor safety team within its own organization. (Record review/meeting minutes as a business record.)

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Monitor Contractor PerformanceSpecial notes

• Waivers requested by Contractor.

• Mishaps during an award fee period.

• Silence.

– When the contractor fails to meet a requirement & the government with knowledge remains silent, that silence is interpreted as a contract change.

• Landgraft vs. McDonnell Douglas Helicopter Co. (6th Circuit/1993)