# Summary of Important Points

## Summary of Important Points

Table 9-2 provides the highlights of this chapter.

Table 9-2: Summary of Important Points

Point of Discussion

Summary of Ideas Presented

Project contracts

• Contracts between suppliers and the project team are commonly employed to accomplish two objectives: change the risk profile of the project and implement policy regarding sharing the project opportunity.

• Five elements are required to have a contract: offer to do business, acceptance of offer, consideration, legal capacity, legal purpose.

Project and supplier risks

• Contracts do not eliminate risk.

• Contracts transfer risk among parties.

• All parties have a risk even after the contract is signed.

Contract vehicles

• Fixed price contracts transfer the cost risk to the supplier and require the contractor to "complete" the SOW.

• Cost plus or cost-reimbursable contracts transfer only a portion of the cost risk to the contractor (supplier) and require only a "best effort" toward completing the SOW.

• T&M contracts are minimum risk for the supplier and maximum risk for the project; however, if not managed properly, the supplier can lose money.

Fees in contracts

• The fee could be fixed by mutual negotiation (fixed fee).

• The fee could be variable depending on performance.

• CPIF formula: Contractor paid = AC + (TC - AC) * SRc + IF.

• FPIF formula: Contractor payable = (TC - AC) * SRc + AC + TF CPr.

• PTA formula: AC (PTA) = (CPr - TF - TC * SRc)/(1 - SRc).

# Index

### A

AC, see Actual cost

Acceptance of the offer, 246

Accomplishment, 174

Accounting balance sheet, 14–18, 25

Accrual method, 127–129

Accruals, 151

Actual cost (AC), 39, 153, 158–163, 167–171, 173, 174, 250–253

Actual Cost of Work Performed (ACWP), 159

Actuals to date (ATD), 82, 83

ACWP, see Actual Cost of Work Performed

Affinity diagram, 242

Allocation, 85, 87, 88, 90, 163

AND, 31, 32, 33

ANSI/EIA 748, 156, 158

Arithmetic average, 45, 47, 52, 56

Asset, 14, 15, 16, 17, 18, 126, 128, 131, 133, 134, 142, 146

ATD, see Actuals to date

Average, 45, 47, 52, 222

Award fee, 248, 249

# Index

### B

Backward path, 190, 191–192

Balance, 126, 127, 130

Balanced scorecard, 6, 22, 25, 125, 241

Balance sheet, 126, 130–131, 134, 135, 143, 146, 150, 182, see also Project balance sheet

Batch, 152

Bayes' Theorem, 115–117, 120, 123, 204

BCR, see Benefit/cost ratio

BCWP, see Budgeted Cost of Work Performed

BCWS, see Budgeted Cost of Work Scheduled

Bell curve, 44, 59

Benefit/cost ratio (BCR), 141

Benefit returns, 135

Best effort, 248

BETA distribution, 42, 44, 53, 54, 58, 59, 64, 65, 90, 91, 154, 187, 194, 200, 212

Bias, 86, 87

Binomial distribution, 46

Bottom-up estimating, 83, 84, 89–91, 98, 107, 182, 183

Break-even point, 141

Brooks Law, 205–206

Budget, 82, 149, 174

bottom-up, 89–91

similar-to, 88–89, 90

top-down, 85, 86–88

variance to, 80

Budgeted Cost of Work Performed (BCWP), 159

Budgeted Cost of Work Scheduled (BCWS), 159

Budgeting

capital, see Capital budgeting

work breakdown structure and, 76–79

Buffer, 188, 212, 213