Monday, August 23, 2010

Contract concepts Part II

This is Part II of our series on contracts.

Today: The main ideas embedded in contracts, organized in three basic concepts:

1. Completion vs best effort:  It may seem strange to those outside the contracting community, but sometimes a contractor doesn't have to complete anything or everything--or at least there is no contractual obligation to complete anything or everything. Contracts for indefinite [to include agile or evolutionary] scope, uncertain requirements, basic research, exploratory risk reduction, and other such objectives only require a "best effort" from the contractor.  Obviously, the contractor is going to get a big "atta-boy" if they do complete something, but requiring a contractor to 'complete' the work requires a pretty good definition of the work in the first place.

On the other hand, if the scope is firm [or firm enough] then the contractor should be required to complete the work, and the contractor should have no reticence to accept the responsibility and obligation to complete the work.

2. Fixed price vs cost reimbursable: the contract price can be fixed [that is, made firm] if the contractor can be given a reasonable expectation of all that is required of performance and delivery; otherwise, it is unwise and impractical to 'fix' the price.  Contracts with elastic price are called 'cost reimbursable', although that is a simple label for a whole class of elastic contract vehicles. 

The chart below says the project can transfer 'all' the cost risk to the contractor in a fixed price contract.  That's not really the case since the project can't ever transfer all the risk--to wit: the contractor may still fail to perform.  So, if the project retains some of the performance risk, [and all of the performance responsibility] then the project retains some of the cost risk as well. 

Nevertheless, if the performance and delivery is fixed--in other words, the value proposition of the contract is known and fixed--then the cost [representing value] can be fixed for that contract instance.  [Next-Gen tanker aircraft, anyone?]

3. Time and materials: this is a pay-as-you go strategy; there's no commitment to completion, but a worthy contractor should commit to best effort.

Next: Contract concepts Part III
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