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  1. 1. Project Management Challenge 2011 Managing Contract Growth or Understanding Contract “Scope” (It’s More Than Just a Mouthwash) John Baniszewski, NASA (retired)
  2. 2. How Contracts Grow <ul><li>The following is representative of what can happen in a complex development contract </li></ul><ul><li>$100M: Initial contract value (Government’s estimate is that the probable cost is $120M) </li></ul><ul><li>$20M: Cost overrun to get to probable cost </li></ul><ul><li>$10M: Cost overrun due to Contractor inefficiencies and mistakes </li></ul><ul><li>$10M: Cost growth due to “Scope Creep” </li></ul><ul><li>$25M: Cost of various contract specification changes to reduce technical risk or enhance technical performance </li></ul><ul><li>$10M: Cost growth due to inefficiencies caused by a forced stretch-out of the delivery schedule, due to budget cuts </li></ul><ul><li>$15M: Cost growth due to GFP being delivered late, or GFP not working like it is supposed to </li></ul><ul><li>$5M: Cost to add stuff that wasn’t originally planned to be done under this contract (example - extended post-launch engineering support from spacecraft & payload manufacturers) </li></ul><ul><li>$195M: Final contract value </li></ul>
  3. 3. What Is “Scope”? <ul><li>Dictionary definition - “extent or range of application, operation; aim or purpose” </li></ul><ul><li>Scope is a confusing concept </li></ul><ul><ul><li>Scope is a term that is used very loosely, but which has a very specific and important meaning in Government contracting </li></ul></ul><ul><ul><li>Pop Quiz: If you need to have your Contractor do some work that was not originally planned or budgeted to be done under the contract, are you: </li></ul></ul><ul><ul><ul><li>Adding scope? </li></ul></ul></ul><ul><ul><ul><li>Changing scope? </li></ul></ul></ul><ul><ul><ul><li>Increasing scope? </li></ul></ul></ul><ul><ul><ul><li>Modifying scope? </li></ul></ul></ul><ul><ul><ul><li>All of the above? </li></ul></ul></ul><ul><ul><ul><li>None of the above? </li></ul></ul></ul><ul><li>The issue of “scope” often dictates what a CO can or cannot do under your contract (it is tied to “authority”) </li></ul>
  4. 4. <ul><li>From the US Code </li></ul><ul><ul><li>(1) Contracting officers are the only authorized personnel to enter into, administer, or terminate contracts and make related determinations and findings. Contracting officers may bind the Government only to the extent of the authority delegated to them. Contracting officers shall receive from the appointing authority (see FAR 1.603-1) clear instructions in writing regarding the limits of their authority </li></ul></ul><ul><ul><li>(2) No contract shall be entered into unless the contracting officer ensures that all requirements of law, executive orders, regulations , and all other applicable procedures, including clearances and approvals, have been met </li></ul></ul><ul><li>Bottom Line </li></ul><ul><ul><li>Before a CO can buy what you need as a Project Manager, they have to be able to find something in writing in the procurement laws and regulations that allows them to buy it </li></ul></ul>Project Managers and Contracting Officers
  5. 5. <ul><li>The very nature of our Government (representative democracy) makes contracting unique </li></ul><ul><ul><li>We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America - Preamble </li></ul></ul><ul><li>Wikipedia - “Contracting with the United States Government” </li></ul><ul><ul><li>Government contracting involves the expenditure of public funds and as such it requires a great deal of transparency and accountability . The authority to enter into contracts begins with the authority given to the federal government through the constitution </li></ul></ul><ul><ul><li>The Federal Government gets its ability to act from the powers given to it by the people of the United States through the Constitution. The Constitution gives the Government specific enumerated powers in Article 1 Section 8. While the power to purchase is not explicit in the enumerated powers, it is understood to be implied as part of the specific powers granted </li></ul></ul><ul><ul><li>Every acquisition can be traced to legislation that permits the acquisition and that provides money for it </li></ul></ul><ul><ul><li>Unless specifically prohibited by another provision of law, an agency's authority to contract is vested in the agency head . Agency heads delegate their authority to Contracting Officers , who either hold their authority by virtue of their position or must be appointed in accordance with procedures set forth in the Federal Acquisition Regulation. </li></ul></ul>Procurement Authority
  6. 6. <ul><li>Federal Laws - The procurement process for executive branch agencies is governed by two primary laws - The Armed Services Procurement Act (applies to NASA) and the Federal Property and Administrative Services Act </li></ul><ul><li>Federal Regulations - Procurement regulations are included in the Code of Federal Regulations Title 48. Chapter 1 of Title 48 is commonly called the Federal Acquisition Regulation (&quot;FAR&quot;) </li></ul><ul><ul><li>The FAR is considered to have the force and effect of law , thus Contracting Officers have no authority on their own to deviate from the FAR </li></ul></ul><ul><li>Agency Regulations - Agencies may issue supplements to the FAR (such as the NASA FAR Supplement ), but these may not contradict, alter, or supersede the FAR </li></ul><ul><li>Center Policies & Procedures - Heads of NASA field installations may prescribe policies and procedures that do not have a significant effect beyond the internal operating procedures of their installations </li></ul><ul><li>The job of the CO - Understand and comply with all of the above while making sure the project gets what it needs </li></ul>Laws, Regulations, and CO’s
  7. 7. “ Work” Versus “Scope” <ul><li>It may be helpful to think in terms of “work”, rather than “scope” </li></ul><ul><ul><li>“ New Work” </li></ul></ul><ul><ul><ul><li>The work is not required under the existing contract (not “within the scope” of the contract) </li></ul></ul></ul><ul><ul><ul><li>The inclusion of the desired work into the contract is legally a new contract, although it may take the form of a contract modification </li></ul></ul></ul><ul><ul><ul><li>“ New Work” is the way commonly used to increase the number of deliverables, add new support functions, or increase a contract period of performance </li></ul></ul></ul><ul><ul><li>“ Changed Work” </li></ul></ul><ul><ul><ul><li>The work is not required under the existing contract, but the nature of the work is “within the general scope of the contract” </li></ul></ul></ul><ul><ul><ul><li>The inclusion of the work into the contract is legally not a new contract </li></ul></ul></ul><ul><ul><ul><li>“ Changed Work” is a way to change the performance requirements of existing deliverables, make alterations to GFP, or slip launch dates </li></ul></ul></ul><ul><ul><li>“ Overrun Work” </li></ul></ul><ul><ul><ul><li>The work is required under the existing contract, but was not planned for or budgeted by the Contractor (or the Government) </li></ul></ul></ul><ul><ul><ul><li>The inclusion of the work into the contract is not a change to the contract </li></ul></ul></ul><ul><ul><ul><li>Failure to do the work adds unacceptable risk to the contract </li></ul></ul></ul>
  8. 8. Authority for Changing Contract Value <ul><li>The CO must have “authority” to make any change to a contract, including changes to the estimated cost, fee, or fixed price </li></ul><ul><li>That authority is found in procurement laws or regulations </li></ul><ul><li>Within the regulations, that authority is found in standard contract clauses </li></ul><ul><li>In order to change the contract value, the CO’s authority normally is found in: </li></ul><ul><ul><li>For “new work”, it is FAR Subpart 6.3, which allows for “Other Than Full and Open Competition” (sole source procurements) under certain circumstances </li></ul></ul><ul><ul><li>For “changed work”, it is usually found in standard clauses </li></ul></ul><ul><ul><ul><li>Changes </li></ul></ul></ul><ul><ul><ul><li>Government Property </li></ul></ul></ul><ul><ul><ul><li>Stop Work </li></ul></ul></ul><ul><ul><ul><li>Launch Delays </li></ul></ul></ul><ul><ul><li>For “overrun work”, it is the “Limitation of Funds” clause </li></ul></ul>
  9. 9. Scope and “Fee Bears” <ul><li>The issue of “scope” is important in contract negotiations, especially to the Contractor </li></ul><ul><ul><li>If it is “new work” or “changed work”: </li></ul></ul><ul><ul><ul><li>In a cost plus contract, the estimated cost of the contract gets changed, and so does the fee </li></ul></ul></ul><ul><ul><ul><li>In a FP contract, the price of the contract gets changed (for both cost and profit) </li></ul></ul></ul><ul><ul><li>If it is “overrun” work: </li></ul></ul><ul><ul><ul><li>In a cost plus contract, the estimated cost of the contract gets changed, but not the fee </li></ul></ul></ul><ul><ul><ul><li>In a structured incentive contract, the “existing” fee gets decreased, using a formula tied to the size of the cost increase </li></ul></ul></ul><ul><ul><ul><li>In an award fee contract, the Government may decide to award less fee, if it thinks appropriate </li></ul></ul></ul><ul><ul><ul><li>In a FP contract, the price of the contract does not get changed, and the cost to do the work comes out of anticipated profit </li></ul></ul></ul>
  10. 10. The Challenge of Determining Scope <ul><li>If unplanned and unbudgeted work is necessary under a contract, it is often unclear if it is “changed work” or “overrun work” </li></ul><ul><li>Case Study - The contract requires delivery of ten gizmos. During pre-shipment testing, each gizmo is required to survive a destructive force of 500 units. Failure of a gizmo in the operational environment would almost certainly result in loss of mission and human life. The anticipated destructive force in the operational environment is expected to be 400, but this estimate could be inaccurate. Therefore, gizmos will be tested at much higher levels (up to 1,200) to determine if we can further increase the safety margin. Gizmos one through five each withstood a force of 1,200 units with no problems (the scale is arithmetic). Unit six suffered severe damage when exposed to 500.01 units. A very quick and simple investigation revealed that there were numerous workmanship errors in unit six that were clearly the Contractor’s fault. Units one through five did not have these errors. Should a more detailed investigation be done, including units seven through ten?” Is the cost of the investigation and the cost to repair unit six “changed work” or “overrun”? </li></ul><ul><li>The CO’s authority to direct the detailed investigation of units seven through ten, and the repair of unit six, is tied to this answer </li></ul><ul><li>The Contractor definitely wants the repair considered “changed work” (more fee or profit) </li></ul><ul><li>This issue “must” be resolved during negotiations, according to FAR theory </li></ul>
  11. 11. Technical Direction <ul><li>COTR’s can issue “Technical Directions”, because of NFS clause 1842.27 </li></ul><ul><li>Technical direction means a directive to the Contractor that: </li></ul><ul><ul><li>Approves approaches, solutions, designs, or refinements </li></ul></ul><ul><ul><li>Fills in details or otherwise completes the general description of work </li></ul></ul><ul><ul><li>Shifts emphasis among work areas or tasks </li></ul></ul><ul><ul><li>Requires studies and pursuit of certain lines of inquiry </li></ul></ul><ul><li>The COTR shall not issue any instruction that </li></ul><ul><ul><li>Constitutes an assignment of additional work </li></ul></ul><ul><ul><li>Constitutes a change </li></ul></ul><ul><ul><li>Constitutes a basis for changing the total estimated cost, fee (if any), or schedule </li></ul></ul><ul><ul><li>Changes any terms, conditions, or specifications of the contract </li></ul></ul><ul><ul><li>Interferes with the contractor's rights to perform the terms and conditions of the contract. </li></ul></ul>
  12. 12. Technical Direction Flow Chart Is the work necessary to meet the current contract requirements? No Initiate a Contract Change Request Yes Will performance of the work increase the overall contract cost? No Issue a Technical Direction Yes Are there funds available for the contract to pay for the work? Yes No Find funds, initiate waiver request, descope, etc. Have the CO direct the Contractor to perform the work Maybe Conduct discussions with Contractor and CO to determine if the work is necessary to meet the current contract requirements.
  13. 13. Scope Creep <ul><li>What is “Grass roots” scope creep </li></ul><ul><ul><li>Gradual growth to the work done under a contract, resulting from well-meaning people deciding that certain work not originally anticipated under the original contract needs to be done </li></ul></ul><ul><li>Who causes it? </li></ul><ul><ul><li>Well-meaning, working-level Government people interacting with their counterparts, to insure good quality and performance </li></ul></ul><ul><ul><li>Well-meaning working-level people who want to add enhancements </li></ul></ul><ul><li>What’s so bad about it? </li></ul><ul><ul><li>It causes the cost to complete the contract to go up </li></ul></ul><ul><ul><li>It usually occurs without the knowledge of the senior-level Project Managers </li></ul></ul><ul><ul><li>It doesn’t become apparent until it has grown very big [POES horror story] </li></ul></ul><ul><ul><li>There was no money budgeted for it, so it has to be paid for out of reserves or (lots of luck!) a supplemental appropriation </li></ul></ul><ul><li>How do you detect or prevent it? </li></ul><ul><ul><li>Thorough discipline at all levels of the project </li></ul></ul><ul><ul><li>Thorough and integrated cost & schedule performance analysis </li></ul></ul>
  14. 14. Scope Creep (cont.) <ul><li>“ Outside Influence” scope creep </li></ul><ul><ul><li>Gradual growth to the work done under a contract which was not originally anticipated under the original contract </li></ul></ul><ul><li>Who causes it? </li></ul><ul><ul><li>Well-meaning stakeholders and customers who would like enhancements or risk mitigations, in the interest of mission success </li></ul></ul><ul><li>What’s so bad about it? </li></ul><ul><ul><li>It causes the cost to complete the contract to go up </li></ul></ul><ul><ul><li>It can grow very big </li></ul></ul><ul><ul><li>There was no money budgeted for it, so it has to be paid for out of reserves or (lot’s of luck!) a supplemental appropriation </li></ul></ul><ul><li>How do you detect or prevent it? </li></ul><ul><ul><li>Thorough a disciplined approach to requirements and change management </li></ul></ul><ul><ul><li>Through insistence that it be accompanied by increased budget </li></ul></ul>
  15. 15. Contract Modifications <ul><li>“ New Work” can be added to a contract via a bilateral contract modification </li></ul><ul><ul><li>By regulation, adding “new work” is the same as awarding a new sole source contract </li></ul></ul><ul><ul><li>Requires a JOFOC and publicizing of procurement (which may result in challenges) </li></ul></ul><ul><ul><li>New Work cannot begin until the complete procurement process (solicitation, proposal evaluation, negotiation) is completed (can be a lengthy process) </li></ul></ul><ul><ul><li>The new requirements are added to the contract by a bilateral contract mod </li></ul></ul><ul><li>“ Changed Work” can be added to a contract via a bilateral or unilateral contract modification </li></ul><ul><ul><li>Does not require a JOFOC or publicizing </li></ul></ul><ul><ul><li>Changed Work can be authorized at any time in the procurement process, via a unilateral mod which changes the contract requirements (usually necessitated by schedule pressures) </li></ul></ul><ul><ul><ul><li>A unilateral mod should not be issued until some type of cost estimate and technical approach input is obtained from the Contractor (even at a very high level) </li></ul></ul></ul><ul><ul><li>Changed Work authorized unilaterally is called an “Undefinitized Contract Action (UCA); i.e., work is authorized before a definite price and/or schedule has been negotiated </li></ul></ul><ul><ul><ul><li>The preferred method is to complete the procurement process first (solicitation, proposal evaluation, negotiation), and authorize the work via a bilateral modification </li></ul></ul></ul><ul><ul><ul><li>UCA’s are thought to be undesirable, as a Contractor may not be incentivized to be cost efficient </li></ul></ul></ul>
  16. 16. Conclusion <ul><li>Before deciding if your Contractor should be directed to do any unanticipated and unbudgeted work, as a Project Manager you should: </li></ul><ul><ul><li>Understand the constraints your poor CO must operate under </li></ul></ul><ul><ul><li>Get mutual agreement between yourself, your CO, and your Contractor if the work is </li></ul></ul><ul><ul><ul><li>New Work </li></ul></ul></ul><ul><ul><ul><li>Changed Work </li></ul></ul></ul><ul><ul><ul><li>Overrun Work </li></ul></ul></ul><ul><ul><li>Utilize and enforce such tools as Earned Value Management and Configuration Management to insure that “scope creep” is detected as early as possible </li></ul></ul><ul><li>Good Project Management means Good Scope Management which results in good Contract Management </li></ul>