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Types of Contracts in your Project and Procurement

Contracts are a legal agreement or relationship between two or more parties. An agreement might not involve a contract – if we’re making an agreement such as kicking off a project or initiating a project with a project charter that’s just an agreement, and it doesn’t necessarily involve a contract. However every contract we make will involve an agreement, and you’ll see these terms come up and be used in the PMBOK guide and PMP exam.

You’ll see agreements come up and the use of these contracts that we’re going to go over now. There are a few different types of contracts that you’ll see in use and you might have questions on these on the PMP exam.

Fixed Price Contracts

First of all we’ve got fixed price contracts, and within that we’ve got Firm Fixed Price (and you might see these abbreviated as well so just be ready for that) you’ve got FFP, firm fixed price. Fixed Price Incentive Fee (FPIF), Fixed Price with Economic Price Adjustments (FPEPA).

We also have cost reimbursable contracts, and for these we’ve got Cost Plus Fixed Fee (CPFF), Cost Plus Incentive Fee (CPIF) and Cost Plus Award Fee (CPAF) and then lastly we’ve got Time and Material contracts. Let’s go over them in a bit more detail.

Fixed price contracts are a total price, for a defined product. In other words, what are we delivering? We know exactly what we’re delivering and we also know exactly what it’s going to cost. This is used when the requirements are really well defined and no significant changes to the scope are expected. If the scope does change then obviously we would have to change the price under those scenarios. The most commonly used contract type is the firm fixed price or FFP. This won’t change unless the scope of works changes.

Fixed price incentive fee or FPIF, this allows for deviation from performance with financial incentives tied to achieving those agreed-upon metrics. If the project be done by our provider under a certain level of cost, then maybe we provide an incentive fee on top of whatever we’re paying them to get it done. For example if they can get it done in 20 days instead of 40 days and then maybe we would pay them a little bit of an incentive fee – especially useful if it’s an urgent project. With FPIF the price ceiling is set and all costs above that price ceiling are the responsibility of the seller. We might say we’re going to pay you 1 million dollars, but if it goes over that 1 million dollars then all of those costs are yours. But if it goes under 1 million dollars then that’s the incentive – they could have those costs or a portion of those costs given back to them.

Fixed price with economic price adjustments (FPEPA) is when we think that the project is going for a long time and the conditions might change over the project. If that project is going for a long time and the conditions actually change over time – most commonly you might see currency changes, or even price changes for some of the materials that you might be buying, maybe there’s the price of iron or commodities that will often change over time, and this builds in a contingency for those price adjustments.

Cost Reimbursable Contracts

Next we’ve got our cost reimbursable contracts. This type of contract involves payments or reimbursements to the seller for all legitimate actual costs incurred for completed work, plus a fee representing seller profit. So for our seller, what did it cost them to complete the work, and then the little bit extra is the profit associated to the seller. We what it cost them and then any extra is just the the cost of them doing business that’s what we’re paying them to provide all of that service. This is best used if the scope of work is expected to change significantly during the execution of a contract, because they’re obviously taking on all of that cost themselves and we simply pay the extra part on top of all of that cost.

Cost plus fixed-fee is cost of to provide all of the work, time and materials, and then it’s just a fixed fee on top of that.

We might have a cost plus incentive fee, where the seller is reimbursed for all allowable costs for performing the work, and receives a predetermined incentive fee based on achieving certain performance objectives. So it’s not just a fixed fee on top of what they’re doing, but maybe if they complete it early then they get a little bit extra as well – a performance fee or an incentive fee.

Cost plus award fee, or CPAF is where the seller is reimbursed for all of their legitimate costs and the majority of the fee is earned based on the satisfaction of certain subjective performance criteria. So again we pay them for the costs of doing their work, and then we say well how happy were we with that work? Were we really happy? And then we pay them a lot, or we only a little bit happy, and that might be a subjective or it could be an objective criteria that we lock in as part of the contract.

Lastly we’ve got time and materials or T&M. You might see a hybrid type of contractual arrangement with aspects of both cost reimbursable and fixed price contracts. This might be used for staff, for acquisition of experts or for any outside support where a precise statement of work cannot be quickly prescribed. You might need to have some costs assigned, maybe an incentive fee or maybe a fixed fee on top of that, or maybe it is just a flat fee fixed price contract that you’re seeing. Maybe there’s an incentive fee on top of that, it could be all of the different aspects that we’ve seen as part of the contract so far.

And those are all the different contracts that you’ll see in the PMP exam.

– David McLachlan

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Reserve analysis and burndown charts

What do we mean by reserve analysis? It is used to determine the amount of contingency and management reserves needed for the project or remaining for the project.

As you know, contingency reserves are within the cost baseline and each work package. So we’ve got all of our work packages and activities, the cost is added up to to give us that cost baseline and then in those activities we have any contingency reserves for any risks that we know about or have analyzed.

Management Reserves

Now on top of that we put the management reserves, and that might be a certain percentage or just a little bit extra depending on the organization that you’re working in. And that is for any unknown things that we might come across in our project, so we have not planned for these. It’s a little bit of a management reserve just in case those things happen. We need to know with those those reserves – do we have enough to complete our project?

Reserve analysis compares the amount of contingency reserves remaining to the amount of risk remaining at any time in the project, in order to determine if the remaining reserve is adequate. Now a contingency reserve for the project might include amounts of time, money or resources to be used, or people or systems or things that we need to get a project complete.

Communicating Our Remaining Risk

This might be communicated using various graphical representations, including a burn down chart. Here’s an example of a burn down chart, and the reason we’re showing this is we can clearly see the difference for the reserves that we need. The first one on the bottom here is what we had planned, and we would plan to get it in ten days time. But as you can see we’re tracking over here on the top a little bit later, so it’s quite likely if we keep going at this speed that we will be finished in 11 to 12 days instead. Now we know that there’s a bit of a gap there, and we might actually need to use some of our contingency reserve to get the project complete, and that’s the benefit of using a graphical representation, so that everyone can see what’s going on.

And that’s also the benefit of doing reserve analysis in your project.

– David McLachlan

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Qualitative Risk Analysis versus Quantitative Risk Analysis

The reason we’re looking at this is that Qualitative risk analysis and Quantitative risk analysis can be confused during your PMP exam or CAPM exam, so it’s best to ensure that you know the difference before going in to take the test, and that will help you during a few of the questions there and help you get a higher mark.

Let’s take a look at them. We’ve got Qualitative risk analysis which is the act of brainstorming risks, often based on existing risk categories which might be part of your Organizational Process Assets. You might have an existing list of categories that you can choose from or delve deeper into, and you’re subjectively assigning a probability and impact rating to them.

Using Ratings with Qualitative Risk Analysis

For example, is it a high? Or maybe a five out of five probability, and then a five impact. Then we’re multiplying those together which gives us a final score so those risks can be prioritized. In this case for example that 25 might be the highest. You could have any rating there, or any number assigned to those depending on the organization that you’re working in, which again might have existing ways of working, but under this circumstance that might be a high probability and impact and that would be prioritized quite highly as a result.

All project risks go through this process, through the process of Qualitative risk analysis, however all project risks do not go through Quantitative risk analysis. So only a few, as determined, or only if needed. This is the act of collating purely numerical data, often dollars or cost for the risks, first by risk and then combined as a whole.

Quantitative Risk Analysis

With our Quantitative risk analysis example we have a few risks here, you’ve got the dollars assigned to them and they can be collated up to a total project risk cost. It’s often used in finance, insurance, forecasting using large risk spreadsheets and Monte Carlo simulations, where you might be testing a thousand different runs of a simulation and then seeing the variations of cost in those different runs for example. It often that involves quite high computing power, and we want to see the range of possible cost impacts and use that to give you an idea of what you might be up against during your project, to basically see that range and maybe it’s a low range, maybe it’s a high range.

Not all risks will go through this process. I only use it as deemed necessary.

To summarize, for qualitative risk analysis we’re using the probability and impact assessment, and it’s used on every risk. We’re subjectively assigning a rating of probability and impact so that we can prioritize those risks. Quantitative risk analysis is most often the dollar impact, and certainly a numerical impact, and it’s not used on every risk.

And that is the difference between Qualitative and Quantitative Risk Analysis in your project.

– David McLachlan

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Decision Tree Analysis

What is decision tree analysis? Decision trees are used to support selection of the best of several alternative courses of action.

We might have a few different ways that we could go in a project, and we actually need to start analyzing that and which one is the best and which one is not the best, and to do that we look at alternative paths through the project which are shown in the decision tree using these branches, representing different decisions or events.

Each of these branches can have associated costs and related individual project risks assigned to them as well. Those risks could be both positive or negative as we know – we’ve got threats and opportunities.

Decision Tree Example Analysis

Here is an example of what that looks like. We’ve got the different branches of the tree and each one has a cost associated with it, and also the probability and impact of the risks associated with that decision path. That is a really handy thing to know, and we need to know what happens if something goes wrong – what’s the cost of that? And also what’s the cost to take that path?

The endpoints of the branches in the decision tree represent the outcome from following that particular path which, can be negative or positive, and the decision tree is evaluated by calculating the expected monetary value of each branch – which is quantitative analysis. So that’s where our qualitative and quantitative differences come into play. Quantitative analysis is the cost or the monetary value, and we want to know what that cost is going to be so we can follow the optimal path, avoiding additional costs where we can and making sure that we’re keeping our costs down while still providing that business value of the project.

And that is decision tree analysis.

– David McLachlan

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The Probability and Impact Matrix

What is a Probability and Impact Matrix? Well, it’s part of your qualitative risk analysis. It’s a grid for mapping the probability of each risk occurrence, and its impact on your project objectives if that risk occurs.

We ask, “What is the probability of it happening?” Maybe it’s 70 percent for example. And what’s the impact if that actually happens? Is it high, is it low? By giving it a rating, it allows project risks to be allocated into priority groups. So is it a high priority? Is there a high probability and a high impact? Then we probably want to be focusing on that, and the low ones we can maybe leave for later.

Using a Probability and Impact Matrix

So first of all, both opportunities and threats are rated, so we do want to find the strengths and our weaknesses of our project. And things like descriptive terms could be used if you want to – so it might have a “high impact”, medium, low, very low. Or more common is numeric values, where a 5 might be a high, and a 1 might be a low for example.

The reason we use numbers is if numbers are used they can be multiplied to give a probability impact score for each risk, and that’s a great way to prioritize those risks. Here’s an example of a probability of impact Matrix. As you can see, we’ve got the probability on one side, and its actually given descriptive terms and numbers just so you can see the difference. So we’ve got very low and very high, or 0.1 to 0.9. And then the impact as a negative impact for threats, or a positive impact for opportunities, and those are multiplied together to give us the outcome.

As you can see, we’ve got the high impact and high probability up in the top right, and low impact and low probability in the bottom left. And that’s the way that they’re prioritizing in this particular probability and impact matrix. Of course, you can lay it out in any way that you choose as long as you’re following those general guidelines that will help you the most during the qualitative analysis of the risks of your project.

And that is the Probability and Impact Matrix for reviewing Risk.

– David McLachlan

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Strategies for Threats and Strategies for Opportunities

Seeing the differences in strategy between Threats and Opportunities is important as this will definitely come up in your PMP exam, and being prepared for these in the real world will really help your career.

What do we mean by strategies for threats and opportunities? They are plans of action that are considered for dealing with risks, both negative and positive in a project. Opportunities being positive, and threats being negative.

Threats and Opportunities

Here are the broad differences and similarities between these two strategies that we’ll use for these particular risks.

Strategies for threats, we could escalate that threat. And it’s the same for opportunities, we might escalate that opportunity as well. We’ve also got Accept that threat, which is the same for opportunities as well.

Now the ones in between are different between the two approaches.

For threats we’ve got Avoiding the threat, Transferring the threat, and Mitigating that threat.

And strategies for opportunities we’ve got Exploiting that opportunity, Sharing that opportunity, and Enhancing the opportunity. Just remember Escalate and Accept are the same for threats and opportunities, or they’re both used for threats and opportunities, but the ones in between are different. Let’s look at them in a bit more detail.

Strategies for Dealing with Threats (Negative Risks)

There are five strategies considered for dealing with threats. Escalate, where we’re escalating that risk or proposed response to a higher level. And it’s the level that would be affected – for example the sponsor or an executive within the company that’s appropriate to escalate that risk to or the risk response to.

We might be Avoiding the risks, which is when we’re moving or changing the project objective to avoid the risk. We’re actually moving out of the way of that risk, maybe where we’re changing what we’re delivering because we just don’t want to be involved, we want to avoid it.

When we’re transferring a risk we might shift the ownership of a threat to a third party, for a price. For example that’s what insurance does. We pay a premium and that shifts the risk – maybe to the insurer instead of to us, and then they manage that risk and bear the impact if the threat occurs.

If we’re mitigating the risk, then we’re taking action to reduce the probability of the occurrence or the impact of that threat. So we’re using things like Prototyping, or more testing, or less complex processes to try and simplify things – we’re mitigating that occurrence, trying to reduce the probability of that threat occurring.

Lastly of course we’ve got Accept, and that’s where we simply acknowledge the existence of that threat but we don’t take any action. We just say “There it is.” Usually we do this for low impact or low probability risks, where it’s not going to bother us too much if it actually happens. We might say “Okay, we accept that that could happen.”

Strategies for Dealing with Opportunities (Positive Risk)

The five strategies considered for dealing with Opportunities – Escalate and Accept are the same. So we’ve got Escalate again when our opportunity is outside of the scope of the project, or would exceed the project managers authority, we might escalate that opportunity to a higher level.

If we want to exploit the opportunity, it might be selected for high priority. Opportunities that we come across in our project and the organization we might want to ensure that that opportunity is realized, so we’re exploiting the opportunity.

We might want to Share it as well, so that involves transferring the ownership of that opportunity to a third party so that it shares some of the benefit of the opportunity when the opportunity occurs. That might be within our organization or it might be to another organization or something similar.

If we’re Enhancing the opportunity, then it’s a strategy where we want to increase the probability or the impact of that opportunity occurring. We can focus attention on the causes of that opportunity and that way we can hopefully enhance it and take advantage of it.

Finally we might want to just Accept that an opportunity is there, so no proactive action is taken and this might be for low priority opportunities in the same way that we’ve got low priority threats, and we’re just taking no action for those as well.

And that is strategies for threats versus strategies for opportunities in your project.

– David McLachlan

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SWOT analysis

You might come across SWOT analysis being used for identifying risks, or weaknesses and strengths in a project and in your career. It’s a technique that examines the project from that perspective of Strengths, Weaknesses, Opportunities and Threats, which is SWOT.

This technique can broaden the scope of your risk identification. The steps for SWOT is firstly to brainstorm and identify the Strengths and Weaknesses of the project, product or organization. That’s where we need that “Expert Judgment”, usually from people in and around the area that we’re working in or delivering the project to.

Once we’ve got our strengths and weaknesses, we want to identify Opportunities from those Strengths and identify any Threats from the Weaknesses. It’s a very simple two step process.

Here’s an example you’ll see where we’ve got Strengths, Weaknesses, Opportunities and Threats and we’ve got our internal origin, what’s helpful. What’s harmful are our weaknesses and threats, while what’s helpful are our strengths and opportunities. As you know risks can come about as opportunities or positive risks, or they can come about as threats or negative risks, so it helps to identify both of those.

And that is SWOT analysis in your project.

– David McLachlan

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Risk Categories and Identifying Risks During your Project

What are risk categories? They’re described in the risk management plan, and they provide a means for grouping individual project risks for the project team to try and consider the full range of sources from which project risks might come about, or may arise.

It’s just a way of breaking down those risks and starting from a large source of risk, where maybe there’s a few different risks within that large source and in that way we’re finding the categories of risk that we can actually look to and reuse over time in other projects as well.

This also comes down to the organizational process assets, or the OPAs of the organization that you’re working in. Perhaps they already have a list available, but risk categories might be used differently depending on the organizational process assets in a company. One of the ways is a risk breakdown structure. In the same way that we’re talking about that we might have a large source and then delving deeper into that source of risk and finding the categories, a company might have just a simple list of categories based on project objectives that you can pick and choose from to give you or to prompt you, so that you understand or you can see in advance things that might come about.

Here’s an example of a risk breakdown structure or an RBS, as you can see there’s the high level view and then all of the smaller levels as we delve deeper into those risks, and that’s usually done by brainstorming, finding the large functions here and then getting together with expert users in particular areas and seeing what they think. They’ll usually have a good idea of the risks that might come about. There are other ways to find common categories of risks, and some of those are using frameworks – strategic frameworks that are more suitable for identifying sources of overall project risk.

Example Risk Frameworks

Some of those you might be familiar with: We’ve got PESTEL, which is Political, Economic, Social, Technological, Environmental and Legal. That’s just a framework that we can use or a lens that we can use to view the project risks through. So what might come about from political changes, what might come about from economic changes for example.

Next is TECOP, which is technical, environmental, commercial, operational and political – very similar to PESTEL.

Lastly VUCA, and you might have seen this one used in the Defense Forces or in government quite often, where we’re looking at Volatility, Uncertainty, Complexity (so what are the areas of complexity that might throw us off course), and Ambiguity – what is ambiguous about the project that we aren’t quite sure about? And that’s just another lens that we can view the project through, to try and identify those sources of risk.

And those are risk the categories and the RBS.

– David McLachlan

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Conflict Management

What is conflict management? Conflict is inevitable in a project environment, because there are many sources of conflict.

Sources of conflict can include: scarce resources, scheduling priorities and personal work styles – there are many things that people have to change as well as the change coming through from the project itself, and that drives conflict.

The success of a project manager often depends on their ability to resolve that conflict, and that’s where conflict management comes into it. There are five general techniques used for resolving conflict and you will see these on the PMP exam. Each technique has its place and its use.

We have withdraw or avoid, smooth and accommodate, compromise and reconcile, force or direct, and collaborate and problem-solve. Let’s look at them in a bit more detail.

If we’re withdrawing or avoiding the situation, we’re retreating from an actual or potential conflict situation – postponing that issue to be better prepared or to be better resolved by others. We’re not actually facing that particular issue at this time – maybe we want to face it later maybe, we want someone else to face it, but we are withdrawing or avoiding the situation.

Smoothing and accommodating for conflict is when we’re emphasizing areas of agreement rather than areas of difference. For example, “This is where we agree, isn’t that wonderful, oh and we’ve got one thing that we disagree on, can we work together on this?” Often we are conceding our position to the needs of others to maintain harmony and relationships. Sometimes we do need to smooth or accommodate, we need to give a little in order to get a little for this particular method.

Compromising and reconciling is when we’re searching for solutions that bring some degree of satisfaction to all parties in order to temporarily or partially partially resolve the conflict. This approach occasionally results in a lose-lose situation. It sounds nice, after all we’re compromising, however we’re giving up a little bit and someone else is giving up a little bit as well so you know maybe we’re not all winning here at all – we’re actually both losing a little bit that’s why it’s called a lose-lose situation. This is a good example where it sounds like a nice thing – we might say this is a positive thing on the exam however it can result in that lose-lose situation. So we have to be aware.

Forcing or directing is when we’re pushing one’s viewpoint at the expense of others, offering only win-lose solutions. We only want to win and we don’t care what happens to someone else – it doesn’t matter what requirements they want or or what they need from the project, so it’s usually enforced through a power position and they have to do it because you’re the manager for example. Or to resolve an emergency. This approach often results in that win-lose situation, again something to know for your PMP exam.

Collaborating and problem-solving is where we’re incorporating multiple viewpoints and insights from differing perspectives. It requires a cooperative attitude and an open dialogue. Typically this leads to a consensus and commitment from everyone involved, and this approach can result in a win-win situation – not always, but it’s one of the most common where problem-solving for everyone can result in that win-win situation.

There are lots of different factors that influence conflict and bring conflict. There is the importance and intensity of it, the time pressure, the relative power of people involved (so are we dealing with executive managers or people who we have to make sure that they are happy as part of this, or the project sponsor for example), the importance of maintaining a good relationship with people, and the motivation to resolve the conflict on a long-term or a short term basis. Maybe we have a short-term solution, and maybe we have a long-term solution for example and we can work within those boundaries.

Lastly things that can help conflict include our team ground rules, group norms and solid project management practices. This is very helpful – is there a process involved?

Communication planning, role definition and all of those also reduce the amount of conflict.

If the conflict escalates one thing that you may come across in the PMP exam and definitely in your project management career – conflicts should be addressed early and usually in private, using a direct and collaborative approach. So again we’re problem-solving here, trying for that win-win, collaborating with the other party but using a direct approach. We’re not hinting or you know going around in circles, we need to go directly to what the source of the problem is, go there and use a collaborative approach. And that is the approach recommended by the PMBOK guide.

And that is the idea of conflict management in your project.

– David McLachlan

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