Software Project Management PGCS-227
CHAPTER 10
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MANAGING CONTRACTS
ACQUIRING
SOFTWARE FROM EXTERNAL SUPPLIER
This could be: a bespoke system - created specially for the customer off-the-shelf - bought ‘as is’ customised off-the-shelf (COTS) - a core system is customised to meet needs of a particular customer
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TYPES
OF CONTRACT
Fixed
price contracts Time and materials contracts Fixed price per delivered unit Cost reimbursable contracts Cost plus incentives contract Cost plus fixed bonus contract Note difference between goods and services Often license to use software is bought rather than the software itself 3
FIXED
PRICE CONTRACTS
Customer pays fixed amount to the supplier No scope for extra income for the supplier Good for the customer if requirements are very clear Good for the supplier about the price from beginning This is often associated with function point (FP) counting. The size of the system to be delivered is calculated or estimated in LoC at the project start, but FPs can be more easily derived from requirement documents. A price per unit is charged. The final price is then the unit price multiplied by the number of units.
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FIXED PRICE PER UNIT DELIVERED Function point (FP) Count
Function design cost /FP
Implementation cost/FP
Total cost/FP
Up 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
$284
$850
$1,134
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FIXED
PRICE/UNIT EXAMPLE
-1
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
What would be charge for 3,200 FPs?
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FIXED
PRICE/UNIT EXAMPLE
-2
If the designed system was counted at 1,000 FPs the charge = 1,000 X $242 = $2,,42,000 If the design was then implemented, and the actual software delivered, then the additional charge = 1,000 X $725 = $7,25,000 If the scope of the system grows due to the new requirements of the user by extra100 FPs the charge for the extra work = 100 X $967 = $96,700
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FIXED
PRICE/UNIT EXAMPLE
-3
Example of additional charges for changed functionality Pre-acceptance Post-acceptance testing handover testing handover Additional FPs
100%
100%
Changed FPs
130%
150%
Deleted FPs
25%
50%
A contract stipulates that a computer application is to be designed, constructed and delivered at a cost of $600 per FP. After acceptance testing, the customer asks for changes to some of the functions in the system amounting to 500 FPs and some new functions which amount to 200 FPs. Using the table above calculate the additional charges. For changes FPs 500 X 600 X (150/100)=$ 4,50,000 For additional FPs 200 X 600 =$ 1,20,000 8 Total charge = $ 5,70,000
FIXED
PRICE CONTRACTS…CONTD.
Advantages to customer customer understanding on known expenditure that will vary with changed requirements Comparability on pricing schedules emerging functionality- supplier takes no risk on increasing functionality supplier efficiency- motivated to be cost-effective and deliver the required functionality life cycle range- the development contract can cover both analysis and design stages of the project 9
FIXED
PRICE CONTRACTS…CONTD.
Disadvantages supplier will increase price to meet contingencies difficult to modify requirements cost of changes likely to be higher threat to system quality
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TIME
AND MATERIALS
It is used if the requirements keep changing. It is advantageous to both customer and vendor. Advantages to customer easy to change requirements lack of price pressure can assist product quality
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TIME
AND MATERIALS
Disadvantages Customer liability - the customer absorbs all the risk associated with poorly defined or changing requirements Lack of incentive for supplier to be cost-effective Customer pays based on the number of resources working on the project. Customer also pays for the reqd. HW, SW packages and tools, and any other documents. 12
COST REIMBURSABLE CONTRACTS In case of Cost reimbursable contract the customer should know the vendor very well. The customer faces problem if the vendor increases the project expenses. In this type of contract, the customer pays all the expenses incurred by the performing vendor for the project purposes. This depends on the trust built between the customer and the performing organization.
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COST PLUS INCENTIVE CONTRACTS The customer makes sure that he is going to pay some incentives to the vendor based on the returns he may get on investment based on his profits or cost savings This incentive may vary and may not be fixed
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COST PLUS FIXED BONUS CONTRACTS The customer promises to the vendor that he is going to pay some fixed amount at the time of completion of the project. This payment may be based on the project success or failure . The vendor comes to know how much more he is going to get after the successful completion of the project.
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THE
TENDERING PROCESS
Open tendering any supplier can bid in response to the invitation to tender all tenders must be evaluated in the same way government bodies may have to do this by local/international law (including EU and WTO, World Trade Organization, requirements
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THE
TENDERING PROCESS
Restricted tendering process bids only from those specifically invited can reduce suppliers being considered at any stage
Negotiated procedure
negotiate with one supplier e.g. for extensions to software already supplied
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STAGES
IN CONTRACT PLACEMENT
requirements analysis evaluation plan invitation to tender evaluation18of proposals
REQUIREMENTS
DOCUMENT: SECTIONS
introduction description of existing system and current environment customer’s future strategy or plans system requirements –
mandatory desirable features
deadlines additional information required from bidders
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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 quality requirements e.g. response times
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EVALUATION
PLAN
How are proposals to be evaluated? Methods could include:
reading proposals interviews demonstrations site visits practical tests
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EVALUATION
PLAN -CONTD.
Need to assess value for money (VFM) for each desirable feature VFM approach an improvement on previous emphasis on accepting lowest bid Example:
A financial value could be placed on a link between the payroll and accounting applications. If we were to cost clerical effort at £20 an hour and knew that 4 hours of clerical effort a month went into inputting staffing costs into the accounting computer system, we could conclude that over a 4 year period (£20 an hour X 4 hrs in a month X 48 months) or £3,840 would be saved. If system A has this feature and costs only £1,000 more than system B which does not, this would give system A an advantage. 22
EVALUATION
PLAN -CONTD.
Example: In a pay-roll system Features
System X
System Y
Entry of scale points in each year (increments)
Automatic
It takes 20 hours of staff effort each year. It costs £20 an hour.
Produce bar charts of payroll expenditure per department. It is produced twice in a year. There is 50% chance that occurs during the expected 4 years life time.
Automatic Supplier charges £300 minimum.
It takes about 12hrs effort.
Cost of the system
£500 more than Y
WHICH SYSTEM APPEARS TO GIVE BETTER VALUE FOR MONEY?
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Solution: In a pay-roll system…Contd. Cost of system Y (a) Automatic scale adjustment : £20 X 20 hours X 4 years = £1,600 (b) Bar chart production : £20 X 12 hours X 2 times a year X 4 years = £1,920 (c) Total cost = £1,600 + £1,920 = £3,520 Cost of system X Vendor charge = £300 X 0.5 (probability) = £150 Cost of system extra = £500 Total cost = £650 System X gives a better value.
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INVITATION
TO TENDER
(ITT)
Note that bidder is making an offer in response to ITT acceptance of offer creates a contract Customer may need further information Problem of different technical solutions to the same problem
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MEMORANDA
OF AGREEMENT (MOA) Customer asks for technical proposals Technical proposals are examined and discussed Agreed technical solution in MoA Tenders are then requested from suppliers based in MoA Tenders judged on price Fee could be paid for technical proposals by customer
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CONTRACTS A project manager cannot be expected to be a legal expert – needs advice BUT must ensure contract reflect true requirements and expectations of supplier and client
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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 Payment arrangements – payments may be tied to completion of specific tasks
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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 circumvent a copy of code could be deposited with an escrow service
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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 Standards to be met
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CONTRACT
MANAGEMENT
Some terms of contract will relate to management of contract, for example, Progress reporting Decision points – could be linked to release of payments to the contractor Variations to the contract, i.e. how are changes to requirements dealt with? Acceptance criteria
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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 training
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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 changes to requirements
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