Process - Task 5 of 10
GCHS buys most of what it builds. Roofing crews, HVAC installers, plumbing, custom accessibility fixtures, engineering reviews: almost none of it is done by staff. That makes procurement one of the highest-leverage skills in the organization, and a full task in the exam outline, because contracts create legally binding obligations that a change request cannot casually undo.
Every procurement starts with a decision: do it ourselves or buy it. Make-or-buy analysis weighs direct and indirect costs, available capacity and skills, schedule, risk transfer, control, confidentiality, and long-term strategy. Buying transfers some risk to a seller, but it never transfers accountability. If a subcontractor botches an accessibility ramp, the homeowner and the funder hold GCHS responsible, not the sub.
Watch for the trap in scenarios: a cheaper external quote is not automatically the right answer. If the capability is core to the mission, or if the vendor's quality history is poor, or if oversight cost eats the savings, the make option may win. Include the cost of managing the contract in the comparison.
Contract types come up again and again in procurement questions. Learn them as a spectrum of risk between buyer and seller.
| Contract type | How it works | Most risk borne by | Best used when |
|---|---|---|---|
| Firm fixed price (FFP) | One set price regardless of seller cost | Seller | Scope is clearly and completely defined |
| Fixed price incentive fee (FPIF) | Fixed price plus incentive tied to performance, with a price ceiling | Shared below the ceiling; seller above it | Defined scope where performance can be improved |
| Fixed price with economic price adjustment (FP-EPA) | Fixed price adjusted for defined index changes | Shared | Multi-year deals exposed to commodity or inflation swings |
| Cost plus fixed fee (CPFF) | Costs reimbursed plus a fixed fee amount | Buyer | Scope uncertain; fee does not grow with cost |
| Cost plus incentive fee (CPIF) | Costs reimbursed plus incentive on a sharing ratio | Buyer (shared) | Uncertain scope where cost control can be rewarded |
| Cost plus award fee (CPAF) | Costs reimbursed plus a subjective award fee | Buyer | Performance is judged qualitatively |
| Time and materials (T&M) | Hourly or unit rates, quantity open | Shared: buyer carries volume, seller carries rate risk | Small or urgent work; staff augmentation; scope not yet known |
The procurement statement of work (SOW) describes the work to be purchased in enough detail for sellers to price it: specifications, quantity, quality levels, performance data, period and place of performance, and acceptance criteria. A terms of reference (TOR) serves the same role for services. Get the SOW wrong and everything downstream is wrong.
Bid documents differ by what you are trying to learn:
Source selection criteria are defined before proposals arrive and may include technical capability, understanding of need, lifecycle cost, past performance, financial capacity, warranty, references, management approach, and increasingly sustainability credentials or local hiring commitments. Weight them in advance. Deciding criteria after seeing the bids invites bias and, on federal or state grant funding, audit findings.
A bidder conference (pre-bid or contractor conference) lets all prospective sellers ask questions at once, and the essential principle is fairness: every seller receives the same information at the same time. Answering one bidder's question privately compromises the process: the exam tests this directly.
Once bids arrive, apply the pre-defined criteria, often with a weighting system, independent estimates (sometimes called should-cost estimates), and proposal evaluation. A bid far below the independent estimate is a warning sign, not a bargain: it usually means the seller misunderstood the SOW and will pursue claims later.
The agreement itself may include the SOW, schedule, deliverables, performance reporting, pricing, payment terms, inspection and acceptance criteria, warranty, insurance and bonding, penalties, incentives, change request handling, and termination and dispute resolution provisions. A key point of law and of the exam: the contract governs. Contract changes require formal contract change control, which is more rigorous than internal change control and typically requires signatures from both parties.
Control procurements means managing the relationship, monitoring performance against the contract, making payments, and handling changes. Tools include performance reviews, inspections and audits, earned value on the contracted work, and claims administration.
A claim (also called a dispute or appeal) arises when buyer and seller disagree about whether a change occurred, who caused it, or what compensation is owed: a contested change. The preferred resolution is negotiation between the parties. If that fails, the escalation path defined in the contract applies, commonly mediation (a neutral facilitates, non-binding), then arbitration (a neutral decides, usually binding under ADR provisions), with litigation as the last and most expensive resort. On the exam, litigation is almost never the correct answer.
Also know termination: contracts can be terminated for cause (the seller breached) or for convenience (the buyer chooses to stop, typically compensating the seller for work completed). Termination for convenience is a legitimate buyer right when the clause exists.
Closure includes verifying all work is complete and accepted, resolving open claims, making final payments, updating records, and issuing formal written notice of contract completion. Procurement closure happens at the end of each contract, which may be well before the project itself closes. Do not carry an unclosed contract into project closure: unresolved claims and unreleased retainage become somebody's problem long after the crew is gone.
Agile work sits uncomfortably with firm fixed price, because FFP demands scope you cannot yet define. Alternatives include capacity-based or T&M-with-ceiling arrangements, incremental delivery contracts with fixed price per iteration, master services agreements with individual work orders per release, and graduated fixed-price contracts with early-termination-for-convenience clauses. The common thread is buying capacity and outcomes iteratively rather than buying a fully specified scope once. Emphasize collaboration terms, shared definition of done, and frequent acceptance points, because in adaptive work acceptance happens continuously rather than once at the end.
A subcontractor on a firm fixed price contract discovers the work is harder than they bid and asks GCHS to cover the overage. The trap answers are "pay it to keep the relationship" and "refuse and threaten default." Under FFP the seller carries cost risk, so absorbing it is not automatic, but the PM should first determine whether the added difficulty stems from a buyer-caused change such as an incomplete SOW or a differing site condition, in which case a legitimate change request and equitable adjustment may apply. Understand the cause, apply the contract, and negotiate. Do not decide from sympathy or from reflex.
1. Under a firm fixed price contract, who bears the MOST cost risk?
2. Under a cost plus fixed fee contract, who bears the MOST cost risk?
3. A time and materials contract is BEST characterized as:
4. GCHS needs 40 squares of a specific, fully specified shingle. Which bid document is MOST appropriate?
5. GCHS knows it needs a solution for tracking accessibility modifications but does not know the best approach. Which document should be issued?
6. While proposals are being prepared, one prospective seller phones the PM with a private clarifying question about the SOW. What should the PM do?
7. A CPIF contract has a target cost of 200,000 dollars, a target fee of 20,000 dollars, and a sharing ratio of 80/20 (buyer/seller). Actual cost comes in at 180,000 dollars, 20,000 dollars under target, and the fee stays within its minimum and maximum limits. What is the seller's final fee?
8. A vendor quote is significantly cheaper than doing the work in-house, but the vendor has a poor quality history and would require substantial oversight. What should the PM do?
9. Which document serves the same purpose as a procurement statement of work, but for services rather than goods?
10. A dispute arises between GCHS and a subcontractor over whether a change occurred. What is the PREFERRED first step toward resolution?
11. GCHS decides to stop a contract early for its own reasons, unrelated to any subcontractor fault, and compensates the seller for completed work. This is:
12. A bid comes in far below the independent (should-cost) estimate. What does this MOST likely indicate?
13. When should source selection criteria be defined?
14. Which procurement approach BEST fits an adaptive (agile) delivery environment?