Contracting Best Practices - MESC 2014

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Contracting Best Practices

MESC 2014 Presentation

Tim Masse, Principal, BerryDunnBill Brown, Principal, BerryDunn

• What if….

• “Not So Good” Practices

• “Smart” Practices and Best Practices

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Discussion Overview

• … all the states were mandated to undertake 60-70 new large-scale projects all at once with the exact same go-live dates?

• … minimum funding for the projects was $5B, with many of the projects ranging in costs from $50M to $300M?

• … must build systems that largely have never been built before for state governments?

• … must build necessary systems and implement them in 12 to 18 months on average?

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What if

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“Not So Good” Practices

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• The RFP document typically becomes the foundation for, and part of the final contract along with vendor response and written communications

• Inadequate RFPs typically leads to bad contracts

• RFPs not being used

• Rushed procurements, contract development, and review processes due to mandated deadlines

Requests for Proposals (RFP)

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• Lack of project funding results in Project Manager serving as Contract Manager

• Combined project management and contract management processes and personnel reduces project controls and “checks and balances”

• Contract management is a discipline, good project managers aren’t necessarily good contract managers

• Contract negotiation skills and experience are needed

Project Management vs. Contract Management

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• Greater reliance on sole source contracts to meet mandated legislative deadlines. Sole source contracts traditionally have been established for “emergency” procurements

• Project and system requirements are often not well specified

• Typically does not provide best value to the state compared to competitive procurements

• Generally does not support federal Code of Federal Regulations (CFRs) for system procurements

Sole Source Contracts

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Waterfall vs. AgileSoftware Development Life Cycle (SDLC)

• Traditional waterfall SDLC based projects typically tie payments to completion of major project phases; requirements, design, development, testing, training

• Agile SDLC combines phases into software release “sprints” based on predetermined dates or duration

• Payments tied to “sprint” completion is challenging when percent of functions delivered in each sprint is unknown until it is completed

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• States establish blanket contracts to streamline and expedite IT procurements

• Allows agencies to more quickly request a statement of work (SOW) from select number of prequalified firms

• SOWs too often lack detail and specificity in requirements which can cause problems later in project life cycle

Pre-qualification Contracts and SOWs

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Accounting and Reporting Complexity

• Multiple funding sources for a project

• Complexity is unavoidable, but is a constant challenge to project reporting

• Risks of overly complex or simplistic reporting process

• Obtaining data, summarizing information and reporting results

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Project (Dis)Incentives

Vendors not being paid in approximate correlation with their costs start losing resources and may perform worse

Adversarial relationship with vendor, not a partner

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“Smart” Practices & Best Practices

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Deliverables and Milestones

• Deliverables should not be the same as Milestones

• In large scale projects deliverables should roll into milestones, and milestone payments are made when all associated deliverables are accepted

• Smaller projects can tie payments directly to acceptance of deliverables. Depending on project duration, 10 deliverables or less

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Approving Invoices

• Establish milestone and payment schedule that correlates with vendor project costs

• Plan for, and require project hold back

• Hold backs range from 5% to 25%

• Establish invoice format and process up front in RFP

• Performance bonds, penalty provisions, service levels

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Financial Management

• Determine financial reporting needs as early as possible, so that data collection procedures can be designed accordingly

• Determine key metrics and level of detail for each level of financial reporting, with focus on decision makers needs.

• Distinguish reporting needs for compliance from those for decision making

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Cost Allocation

• Determine granularity required for compliance and funding purposes, leaving flexibility to adapt to project changes

• Align cost allocation methodology with existing project progress measurements and metrics

• Give explicit consideration to balancing the risk of insufficient justification with that of burdensome complexity in the design

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Contract Terms & Conditions and RFPs

• Put required contract terms and conditions into RFP

• Provide for question and response process

• Update terms and conditions to final and require all RFP respondents to comply with final version

• Utilize federal CFRs for contract management processes in your projects

• Provide timely and adequate contract review process by involving and communicating with reviewers early

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Dedicated Contract Managers

• Dedicate a Contract Manager to your projects. Request funding for both state and vendor Contract Management staff

• Contract Managers do not necessarily need to be full-time on the project

• Contract Managers are usually not legal experts, therefore, ensure you provide your Contract Manager with adequate and timely legal support

• Not CPAs either, ensure Contract Manager has adequate financial management and cost allocation support

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Integrate Contract Manager into Projects

Contract Manager meet regularly with 

PMs and CMs

Contract Manager works with Project Change Control 

Process

Project Manager should send approvals for Deliverables

Contract Manager should send approvals for Milestones

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Scalability

• Create contracting practices that make sense for the contract size

• PMOs typically scale project management methodologies based on project size

• Establish scalable contracting practices for $1M, $10M, $50M, $100M+ projects for example

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Change Control

• Reserve minimum of 10% contingency fund for project change orders, scale based on nature of project

• Establish effective change control project processes from project inception

• Spec out, review, and approve change orders in two to six weeks

• Establish policy up front for “work at risk”

THANK YOU - QUESTIONS

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Bill Brown, CPA, CFE, MAFFPrincipal, BerryDunn [email protected]

Tim Masse, MBAPrincipal, BerryDunn [email protected]