for proposal (RFP). Through the RFP, the customer asks individuals or contractors to submit proposals on how they might solve the problem, along with the associated cost and schedule. A couple who needs a new house may spend time identifying requirements for the house—size, style, number of rooms, location, maximum amount they want to spend, and date by which they would like to move in. They may then write down these requirements and ask several contractors to provide house plans and cost estimates. A company that has identified a need to upgrade its computer system might document its requirements in an RFP and send it to several computer consulting firms. Not all situations involve a formal RFP, however. Needs are often defined informally during a meeting or discussion among a group of individuals. Some of the individuals may then volunteer or be requested to prepare a proposal to determine whether a project should be undertaken to address the need. Such a scenario might be played out when the management of a hospital wants to establish an on-site daycare center for the children of its employees. The management team or a specific manager may write down the requirements in a document and give it to an internal project team, who in turn will submit a proposal for how to establish the center. In this case, the contractor is the hospital’s own internal project team, and the customer is the hospital’s manager or, possibly, board of directors. It is important to accurately define the precise need. For example, is the need to provide an onsite daycare center, or is it merely to provide child care hospital employees? In other words, is it necessary for the daycare to be “on-site”?
The second phase of the project life cycle is the development of a proposed solution to the need or problem. This phase results in the submission of a proposal to the customer by one or more individuals or organizations (contractors) who would like to be hired by the customer for paid implementation of the proposed solution. In this phase, the contractor’s effort becomes dominant. Contractors interested in responding to the RFP may spend several weeks developing approaches to solving the problem, estimating the types and amounts of resources that would be needed, and estimating the time it would take to design and implement the proposed solution. Each contractor documents this information in a written proposal. All of the contractors then submit their proposals to the customer. For example, several contractors may submit proposals to a customer to develop and implement an automated invoicing and collection system. After the customer evaluates the submissions and selects the winning proposal, the customer and the winning contractor negotiate and sign a contract (agreement). In many situations, a request for proposal may not involve soliciting competitive proposals from external contractors. A company’s own internal project team may develop a proposal in response to a management-defined need or request. In this case, the project would be performed by the company’s own employees rather than an external contractor.
The third phase of the project life cycle is the implementation of the proposed solution. This phase begins after the customer decides which of the proposed solutions will best fulfill their need and an agreement is reached between the customer and the chosen individual or contractor. This phase, sometimes referred to as performing the project, involves detailed planning for the project and implementation of that plan to accomplish the project objective. During the course of the project, different types of resources will be utilized. For example, if the project is to design and construct an office building, the project effort might first involve a few architects and engineers who can draw up the building plans. Then, as construction gets under way, the resources needed will substantially increase to include steelworkers, carpenters, electricians, painters, and the like. The project will wind down after the building is finished, and a smaller number of different workers will finish up the landscaping and final interior touches. Once this final phase is completed, if the customer is satisfied that the full scope of work was completed on time, within budget, and in a quality manner, then the project can be said to be completed and the goal accomplished. For example, the third phase is complete when a contractor has completed the design and installation of a customized automation system that satisfactorily passes performance tests and is accepted by the customer or when an internal project team within a company has completed a project, in response to a management request, which consolidated two of its facilities into one.
The final phase of the project life cycle is terminating the project. When a project is completed, certain close-out activities need to be performed, such as confirming that all deliverables have been received and accepted by the customer, all payments have been collected, and all invoices have been paid. An important task during this phase is evaluating performance of the project team in order to learn what could be improved if a similar project were to be carried out in the future. This phase should include obtaining feedback from the customer to determine the level of the customer’s satisfaction and whether the project met the customer’s expectations. Also, recommendations and feedback from the project team will help improve performance of similar projects in the future.
Project life cycles vary in length from a few weeks to several years, depending on the content, complexity, and magnitude of the project. What’s more, not all projects formally go through all four phases of the project life cycle. If a group of community volunteers decides that they want to use their own time, talents, and resources to organize a food drive for the homeless, they may get right into phase three— planning the event and carrying it out. The first two phases of the life cycle would not be relevant to such a project. Likewise, if a company’s general manager determines that changing the layout of equipment in the factory will increase efficiency, he or she might simply instruct the manufacturing manager to initiate such a project and to implement it using the company’s own people. In this case, there would be no written request for proposal from external contractors.
In other situations, such as a home remodeling project for which a contractor will likely be hired, a customer may go through the first two phases of the project life cycle in a less structured, more informal manner. He or she may not write down all of the requirements or ask several contractors for estimates. Rather, they may call a specific contractor who has been recommended by a friend or neighbor, explain what the job is, and ask that contractor to provide some sketches and a cost estimate.
In general, the project life cycle is followed in a more formal and structured manner when a project is conducted in a business setting. It tends to be less formal when a project is carried out by a private individual or volunteers.
Types of Contracts
Contract type is an important consideration. Different types of contracts can be used in different situations. Two broad categories of contracts are fixed price or lump sum, cost reimbursable, and unit price.
Fixed price or lump sum contracts involve a fixed total price for a well-defined product or service. The buyer incurs little risk in this situation. For example, a company could award a fixed price contract to purchase 100 laser printers with a certain print resolution and print speed to be delivered to one location within two months. In this example, the product and delivery date are well defined. Fixed price contracts may also include incentives for meeting or exceeding selected project objectives. For example, the contract could include an incentive fee paid if the laser printers are delivered within one month. A firm-fixed price contract has the least amount of risk for the consumer, followed by a fixed price incentive contract.
Cost reimbursable contracts involve payment to the seller for direct and indirect actual costs. Direct costs are costs that are related to a project and can be traced back in a cost-effective way. Indirect costs are costs related to the project that cannot be traced back in a cost-effective way. For example, the salaries for people working directly on a project and hardware or software purchased for a specific project are direct costs, while the cost of providing a work space with electricity, a cafeteria, and the like are indirect costs. Indirect costs are often calculated as a percentage of direct costs. Cost reimbursable contracts often include fees such as a profit percentage or incentives for meeting or exceeding selected project objectives. These contracts are often used for projects that include providing goods and services that involve new technologies. The consumer absorbs more of the risk with cost reimbursable contracts than they do
