Back Charge: Cost of corrective action by purchaser and chargeable to the supplier under terms of the contract.
Bid Protest: allows an unsuccessful supplier an opportunity to protest the award of a government contract to another supplier.
Bill of Lading: A receipt issued by a carrier for merchandise to be delivered to a party at some destination.
Constructive change: occurs when the PM's conduct enables performance differing from that prescribed by the contract. The PM's conduct in effecting constructive change may either be affirmative or a failure to act. Not part of change control of contract: For instance, if final product performs better than standard specified in contract, or if the PM increases the quality over and beyond what's stated in the contract.
Contract: a legal document of purchase or sale which is binding on both parties. When entering into a contract, the people involved must have legal capacity to do so. (The definition of legal capacity varies from state to state). Consideration must be provided to both parties (in other words, there must be sufficient cause to contract). There must be mutual assent.
Invitation for Bid (IFB): Request for Proposal and recognizes that it may have a more specific meaning in certain application areas. (Appropriate for high dollar, standard items.)
Lowball: In order to get an award, a contractor may submit at bid that's unrealistically low.
Pink Team Review: A seller responds to an RFP by developing a proposal. For sanity purposes, the proposal is passed through the pink team once the outline is completed. The pink team looks at the outline through the perspective of the buyer. The purpose of the team is to catch problems with the proposal in the early stages.
Price Forecast: based on information gathered and analyzed about demand and supply. This forecast provides a prediction of short and long term prices and the underlying reasons for those trends.
Red Team Review: Once the proposal is in draft form, it passes through a red team which again looks at the proposal through the buyer's perspective.
Reformation: A judicial remedy by which a court interprets the contract so as to express the real intention of the parties (this is different from changes to the contract)
Request for Proposal (RFP): A type of bid document used to solicit proposals from prospective sellers of products or services. In some application areas, it may have a more specific meaning. (Appropriate for high dollar, non-standard items).
Request for Quotation (RFQ): PMBOK does not distinguish between RFQ and RFP. However, RFQ (appropriate for low dollar items such as supplies and materials).
Statement of Work (SOW): Describes the portion of the product to be contracted. In general, this is different from the product description (which tends to be broader). Under the circumstance where the seller is producing the entire product, the distinction between SOW and the product description becomes moot. Government terms: SOW is reserved for a procurement item that is a clearly specified product or service, and Statement of Requirements (SOR) is used for procuring an item that is presented as a problem to be solved.

1. Request for quotation (RFQ) from different suppliers
• Items are of relatively low dollar value such as supplies and materials
• A survey of potential suppliers is completed.
• The quotation request informing suppliers of the goods or services needed is sent to a scaled-down number of possible suppliers.

2. Request for proposal (RFP):
• Items or services are usually high dollar and non-standard.
• Examples: construction project, a research and development project; a made-to-order, highly complex piece of machinery.
• Blueprints, drawings, specifications, and other appropriate data should be included with proposal.

3. Invitation for bid (IFB): • Appropriate for high dollar, standard items.
• A perquisite to this process is a clear and accurate description of the supplies, equipment, and services required.
• Includes specifications, drawings, industry standards, performance requirements, etc.
• Must ensure fair competition among all bidders.
• Provisions should be stated in such a manner to avoid misinterpretation.
• Formal bids are submitted to the contracting department in sealed envelopes. All bids are opened at a specific time.
• In most cases, the contract award goes to the lowest responsible bidder. If not awarded to the lowest bidder, must document reasons, carefully.
• Type of contract is open to fraud, collusion, and other dishonest conduct. Hence, PM and contracting personnel must practice defined ethical business procedures.
Two principal types of contracts: cost and fixed

Unit Price:  Simple purchase order
 Fixed price per unit of goods or service

Cost-Plus-Award-Fee (CPAF): (from the Frame Book)
• An award pool is created. The level of award is determined by an award committee.
• Buyers have more flexibility than CPIF. Subjective judgments can be used to determine rewards (such as a contractor's attitude).
• Type of contract is gaining with popularity.
• Downside: administrative cost is high due to award committee.
The following contracts are ordered in increasing risk to the seller and decreasing risk to the buyer:

Cost-Plus-Percentage of Cost (CPPC):• Seller is reimbursed for allowable costs of performing the contract and receives as profit an agreed upon percentage of the costs.
• No limit on the seller's profit. If the seller's cost increases, so does the profit.
• Most undesirable type of contract from buyer's standpoint.
• Prohibited for federal government use. Used in private industry, particularly construction projects.
• Susceptible to abuse. No motivation for seller to decrease costs.
 The buyer bears 100% of the risk.
• The buyer project manager must pay particular attention to the control of the labor and material costs so that the seller does not purposely increase these costs.
• Bottom line: no limit on seller's profit!

Cost-Plus-Fixed Fee (CPFF):• Seller is reimbursed for allowable costs of performing the contract and receives as profit a fixed fee payment based on the percentage of the estimated costs.
• The fixed fee does not vary with actual costs unless the scope of work changes.
• Susceptible to abuse in that there is a ceiling on profit, but no motivation to decrease costs.
• Primarily used in research projects where the effort required to achieve success is uncertain until well after the contract is signed.
• Bottom line: limit on profit but no incentive to control costs.

Cost-Plus-Incentive Fee (CPIF):• Seller is paid for allowable performance costs along with a predetermined fee and an incentive bonus.
• If the final costs are less than the expected costs, both the buyer and seller benefit by the cost savings based on a pre-negotiated sharing formula.
• The sharing formula reflects the degree of uncertainty faced by each party.
• Primarily used when contracts involve a long performance period with a substantial amount of hardware development and test requirements.
 Risk is shared by both buyer and seller.
• Bottom line: provides incentive to seller to reduce costs by increasing profit potential.

Fixed Price-Plus-Incentive Fee (FPI):• Most complex type of contract.
• Consists of target cost, target profit, target price, ceiling price, and share ratio.
• For every dollar the seller can reduce costs below the target cost, the savings will be shared by the seller and buyer based on the share ratio.
• The share ratio is a negotiated formula which reflects the degree of uncertainty faced by each party.
• If the costs exceed the ceiling price, the seller receives no profit. Regardless of the actual costs, the buyer pays no more than the ceiling price.
 Risk is shared by both buyer and seller, but risk is usually higher for seller.
• Usually used when contracts are for a substantial sum and involve a long production time.
• Bottom line: provides incentive to decrease costs which in turn increases profits. If costs exceed a ceiling, then contractor is penalized.

Firm-Fixed Price (FFP):• Seller agrees to perform a service or furnish supplies at the established contract price.
• Will also be called lump sum.
 Seller bears the greatest degree of risk.
• Seller is motivated to decrease costs by producing efficiently.
• Best specifications are available and costs are relatively certain.
• Common type of contract. (Used by IBM)

Examples of Contract TypesCPPC: Cost-Plus-Percentage of Cost
 Estimated cost: $1,000K
 Percentage: 10% ($100K)
 Estimated total price: $1,100K (Estimated cost + 10%*Estimated cost)
 If cost increases to $1,100K the total price would be $1,100K plus 10% of the actual costs = $1,210K.

CPFF: Cost-Plus-Fixed Fee Estimated cost: $1,000K
 Percentage: 10% ($100K)
 Estimated total price: $1,100K (Estimated cost + 10%*Estimated cost)
 If cost increases to $1,100K the total price would be $1,100K plus 10% of the original estimated costs = $1,200K.

CPIF: Cost-Plus-Incentive Fee Estimated cost: $1,000K
 Predetermined fee: $100K
 Sharing formula: 85/15 (buyer absorbs 85% of the uncertainty and the seller absorbs 15% of the risk)
 Actual cost: $800K
 Savings: $200K
 Seller gets: $800K + $100K + $30K = $930K (Actual cost + Fee + 15%*Savings)
 Buyer saves: $170K

FPI: Fixed Price-Plus-Incentive Fee Target cost: $1,000K
 Target profit: $100K (Seller's fee)
 Target price: $1,100K
 Ceiling price: $1,200K (The maximum payout to the seller)
 Share ratio: 70/30

Example A: Actual cost: $800K
 Savings: $200K (Target cost - Actual cost)
 Seller gets: $800K + $100K + 60K = $960K (Actual cost + fee + 30%*savings)
 Buyer saves: $140K
Example B: Actual cost: $1,300K
 Seller gets: $1,200K (no profit and a $100K loss on costs)
 Buyer loses: $100K (the payout is $100K over Target price = Ceiling Price)

FFP: (Lump Sum) Firm-Fixed Price Price: $1,000K
Example A: Actual cost: $700K
 Seller makes a profit of $300K (Price - Actual Cost)
Example B: Final cost $1,100K
 Seller loses $100K on contract

Stages of Negotiation:
1. Protocol: Introductions are made, and the negotiators get to know each other. The atmosphere for the rest of the negotiations is determined in this stage.
2. Probing: The negotiators begin the search process. Each party identifies issues of concern. Strengths and weaknesses are identified and possible areas of interest.
3. Scratch Bargaining: This is the essence of the meeting. Actual bargaining occurs and concessions are made. Points of concession are identified.
4. Closure: The two positions are summed up and final concessions are reached. The agreements are summarized and documented.
5. Agreement: The main difficulty in this stage is ensuring both parties have an identical understanding of the agreements. This stage should establish the plans for recording the agreements in a written contract.
Negotiation Tactics:The PM should be aware of the following negotiation tactics.
• Imposing a deadline for reaching an agreement
• A powerful tactic because it implies a possible loss to both parties
• Other party does not have to accept deadline, but often does
• Surprise -- One party springs information such as a price change on the other party
• Stalling
• One party may claim that an agreement cannot be finalized because he has limited authority and cannot commit the company's resources.
• A party may claim that the person with final authority is absent. The "missing man" technique may also be used when the party does not have the information asked for by the other party.
• Fair and reasonable • Negotiator may claim the price for a computer is equitable because that is what another company is paying.
• Delays • Useful when tempers are beginning to flare, a team member is going astray, to divert from a subject, etc.
• Examples of delays: arrival of refreshments, request for recess, etc.
• Reasoning together
• Confusing the other party: deliberately distorting issues and figures. (If this is done, someone should speak up before agreeing to anything) • Withdrawal • Sometimes done to divert attention from an area of weakness
• One party may make an attack upon an issue, then retreat.
• Make the other party appear unreasonable by pointing out all the concessions made by the party
• Arbitration - a third party may be brought in when agreement cannot be reached.
• Fait accompli - a party may claim that what is being asked for has already been accomplished and cannot be changed.