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Contract
Acquiring software from external
supplier
This could be:
a bespoke system - created specially for the customer.
off-the-shelf - bought ‘as is’
What is Contract ?
A contract is an exchange of promises between two or more parties to do, or refrain from doing an act, which resulting contract is enforceable in a court of law
In the project or program context, contracts typically involve the exchange of money in return for goods or services.
Types of contract
fixed price contracts
time and materials contracts fixed price per delivered unit
Fixed price contracts
In this type of contract a specific price is agreed for the good or service being sold. In project terms, the buyer and seller will agree on a well-defined deliverable for a specific price.
In this type of contract the bigger risk is borne by the seller. They must make sure they make a profit even given some unknowns such as increasing costs or delays in creation of the deliverable.
Cont…
Fixed price contracts can be catastrophic for both buyer and seller if there isn’t a well defined deliverable.
Firstly, often the sellers profit is eroded as they compromise to meet the buyer’s demands.
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Fixed price contracts
Advantages to customer
Known customer expenditure: The customer has a known cost as long as requirements are not changed.
Fixed price contracts
Disadvantagessupplier will increase price to meet contingencies difficult to modify requirements
cost of changes likely to be higher:
When competing for work, there will be pressure on the suppliers to reduce prices. Once a contract has been won and signed, the contractor is in a stronger negotiating position when it come to negotiating the price of additional work as the customer is now locked in.
Time and materials contract
An arrangement under which a contractor is paid on the basis of (1) actual cost of direct labor, usually at specified hourly rates (2) actual cost of materials and equipment usage, and
(3) agreed upon fixed add-on to cover the contractor's overheads and profit.
Time and materials is a standard phrase in a contract for construction in which the buyer agrees to pay the contractor based upon the work performed by the contractor's employees and subcontractors, and for materials used in the construction (plus the contractor's mark up), no matter how much work is required to complete construction.
Unlike customers with other types of contracts, T&M clients are permitted to see invoices from vendors and subcontractors and can inspect employee timesheets if desired.
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Time and materials
Advantages to customer
easy to change requirements
Fixed price per unit delivered
This is often associated with function point (FP) counting.
Fixed-unit price, involves performing an estimated number of units of work at an agreed price per unit, with the total payment under the contract determined by the actual number of units delivered.
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Fixed price per unit delivered
FP count Design
cost/FP
implement-ation cost/FP
total cost/FP
to 2,000 $242
$725
$967
2,001-
2,500
$255
$764
$1,019
2,501-3,000
$265
$793
$1,058
3,001-3,500
$274
$820
$1,094
3,501-4,000
Fixed price/unit example
Estimated system size 2,600 FPs Price
2000 FPs x $967 plus 500 FPs x $1,019 plus 100 FPs x $1,058
i.e. $2,549,300
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Fixed price/unit
Disadvantages
difficulties with software size measurement - may need independent FP counter
With FPs, there can be disagreements about what the FP count should really be: in some cases, FP counting rules might be seen as unfairly favoring either the supplier or customer.
Users will almost certainly not be familiar with the concept of FPs and special training might be
needed for them.
Fixed price/unit
Advantages for customercustomer understanding of how price is calculated
Customer can see how the price is calculated and how it will vary with changed requirements.
comparability between different pricing schedules Pricing schedules can be compared.
emerging functionality can be accounted for
Supplier does not bear the risk of increasing functionality.
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The tendering process
Open tendering process:
any supplier can bid in response to the invitation to tender
The tendering process
Restricted tendering process
bids only from those suppliers who are specifically invited by the customer
can reduce suppliers being considered at any stage
Negotiated procedure
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Stages in contract placement
requirements analysis
invitation to tender
evaluation of proposals evaluation
Requirements document: sections
in a requirements document
introduction
description of existing system and current environment
future strategy or plans system requirements -
mandatory/desirable features deadlines
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Requirements
These will include
functions in software, with necessary inputs and outputs
standards to be adhered to
other applications with which software is to be compatible
Evaluation plan
How are proposals to be evaluated?
Evaluation plan consist of ways of checking Mandatory requirements are met
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Invitation to tender (ITT)
ITT is issued to prospective suppliers after producing requirements and evaluation plan
Note that bidder is making an offer in response to ITT acceptance of offer creates a contract
Customer may need further information
Memoranda of agreement (MoA)
Customer asks for technical proposals from potential suppliersTechnical proposals are examined and discussed
MoA is an acceptance by the customer that proposed solution offered by supplier meets the customer’s
requirement.
Tenders are then requested from suppliers who have signed individual MoA
Evaluation of Proposals
Methods could include: reading proposals interviews
demonstrations site visits
Scrutiny of the proposal documents
How would you evaluate the
following?
usability of an existing package
usability of an application yet to be built maintenance costs of hardware
time taken to respond to requests for software support
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Contracts
A project manager cannot be expected to be a legal expert – needs advice
Contract checklist
Definitions – what words mean precisely e.g. ‘supplier’, ‘user’, ‘application’
Form of agreement. For example, is this a contract for a sale or a lease, or a license to use a software application? Can the license be transferred?
Goods and services to be supplied – this could include lengthy specifications
Timetable of activities: this provides schedule of when the key parts of the project should be completed.
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Contract checklist - continued
Ownership of software
Can client sell software to others?
Can supplier sell software to others? Could specify that customer has ‘exclusive use’
Does supplier retain the copyright?
Where supplier retains source code, may be a problem if supplier goes out of business; to
Contract checklist - continued
Environment – for example, where equipment is to be installed, who is responsible for various aspects of
site preparation e.g. electricity supply?
Customer commitments – for example providing
access, supplying information and other facilities like telephone lines etc to suppliers
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Contract management
Contracts should include agreement about how
customer/supplier relationship is to be managed e.g. decision points - could be linked to payment
quality reviews