Video Description

This lesson focuses on the share aspect of procurement. In this lesson, the instructor offers an example on the whiteboard of a 60/40 share between the buyer and seller. Using the Fixed Price Incentive Fee, participants learn how the buyer absorbs some of the costs of the project. Finally, when procuring, it's important to know the different ways a company might ask you to bid on their project. Ways might include:

  • Request for information (RFI)
  • Request for Quote (RFQ)
  • Request for Proposal/ Request for Tender (RFP/RFT)
  • Invitation for bid/Request for Bid (IFB/RFB)

[toggle_content title="Transcript"] Another area we did on procurement is when they start talking about things like share. They can talk like a 60-40, 80-20, whatever that first percentage is, it is the buyer and the second percentage is going to be the seller. The way this works is you come up with an estimate. The estimate is $40,000. The actual cost for this project was $45,000. We go back to the 60-40 share. Where there is a variance between the actual cost and the estimate of 5000, this $5000 becomes that 60-40. 60 percent is the buyer, which if you take $5000, that is $3000 and $2000 will be the 40 percent which goes to the seller. You are trying to figure out how much to invoice the client or the buyer. If the actual cost is $45,000 you have the 60-40 share, it is going to cost, you are going to invoice $43,000 and unfortunately you are going to lose $2000 out of it as being the seller and its part of that 60-40 share. Whatever the variances is from your estimated cost is how that percentage is going to be applied. For the $5000 once again, $3000 of that $5000 through the buyer is responsible for that, 2000 the seller is responsible for that. That is how you come up with 43000 and the seller loses $2000 of that $45000. One thing you have to understand with fixed price [inaudible] there is a formula called point of total assumption. This is only dealing with the fixed price plus incentive fee. With this type of contract, the buyer agrees to pay for some costs overrun or costs under-run depending on whatever that price is negotiated. There is the target cost which essentially is fixed price part of the contract. In a firm fixed price, a $1000 is a $1000. With a fixed price with incentive fee, that is not entirely true. If you have the target profit, so is ten percent for that, selling price is ten percent of the total cost, so if the target cost is 1000, the selling price will be 20 percent so it's $1200. The share ratio work the buyer being first, so the buyer takes 60 percent, I take 40 percent. The way how a formula works is PTA equals, selling price minus target price divide by buyer share and then you are going to add, that to the target cost. In this scenario, 1200 which is the selling price, subtract the target price which is 1000, and you are going to divide that by the share ratio, for the buyer so .6. then you are going to add the target cost which is 1000. PTA equals, once you do the math, 200 divided by .6, plus 1000. So PTA equals $1333. That is the most the buyer will pay for a FPIF contract with the target cost being $1000 and the share ratio being 60 percent. Another thing in procurement is knowing how to a company or government is going to request you to bid on the contract. So there's RFI, which stands for request for information. This is a way of going out to see if anybody can do that type of ability or project. Its seeking to see that there's technology or companies out there that can actually perform what you are looking for. Request for quote...this is used if it's a small dollar amount. And generally its very little customization. This could be ordering something that is pretty standard and not too expensive. Request for proposal or request for tender. This is the common way. It's for the larger dollar amounts. It's for trying to figure out very customized. How you are going to perform this work, how much it's going to cost, how much time. Invitation for bid and request for bid are very similar. Actually have the government request for contract work to be done. Invitation for bid, request for bid is usually a sealed package sent to the government to assess based on time, cost quality and scope. [/toggle_content]

Course Modules

Project Management Professional (PMP) - PMI

Instructor Background