PMP - Chapter 12 – PROCUREMENT Management

 

Knowledge Areas	Major Processes	Primary Inputs	Tools & Techniques	Primary Outputs
PROCUREMENT	PPSSAC
Plan Purchases & Acquisitions	Determining what to procure and when   and how (make or buy)	1. Enterprise Environmental Factors 2. Organizational Process Assets 3. Project scope statement 4. WBS 5. WBS Dictionary 6. Project Management Plan	1. Make or buy analysis 2. Expert judgment 3. Contract types	1. Procurement mgmt plan 2. Contract Statement(s) of Work 3. Make or Buy Decisions 4. Requested Changes
Plan Contracting	Preparing the documents needed to do contracting. Document requirement and identify sellers	1. Procurement management plan 2. Contract Statement(s) of work 3. Make or Buy Decisions 4. Project Management Plan	1. Standard forms 2. Expert judgment	1. Procurement documents 2. Evaluation criteria 3. Contract Statement of work (updates)
Request Seller Responses	Obtaining quotations, bids, offers, or proposals   (answer questions)	1. Organizational Process Assets 2. Procurement Management Plan 3. Procurement Documents	1. Bidder conferences 2. Advertising 3. Develop qualified sellers list	1. Qualified sellers list 2. Procurement Document Package 3. Proposals
Select Sellers	Involves the receipt of bids or proposals and the application of evaluation criteria to select a seller. Also involves applying evaluation criteria.	1. Organizational Process Assets 2. Procurement Management Plan 3. Evaluation Criteria 4. Procurement Document Package 5. Proposals 6. Qualified Sellers List 7. Project Management Plan	1. Weighting system 2. Independent estimates 3. Screening system 4. Contract Negotiation 5. Seller Rating System 6. Expert Judgment 7. Proposal Evaluation Techniques	1. Selected Sellers 2. Contract 3. Contract Management Plan 4. Resource Availability 5. Procurement Management Plan (Updates) 6. Requested changes
Contract Administration	Ensuring that the seller’s performance meets contractual requirements	1. Contract 2. Contract Management Plan 3. Selected Sellers 4. Performance Reports 5. Approved change requests 6. Work Performance information	1. Contract change control system 2. Buyer conducted performance review 3. Inspections and audits 4. Performance reporting 5.Payment system 6. Claims administration 7. Records management system 8. Information technology	1. Contract Documentation 2. Requested Changes 3. Recommended Corrective actions 4. Organizational Process assets (Updates) 5. Project Management plan (updates)    * Procurement Management Plan    * Contract management plan
Contract Closeout	Product verification and administration closeout    (finish)	1. Procurement management Plan 2. Contract management plan 3. Contract documentation 4. Contract closure procedure	1. Procurement audits 2. Records Management System	1. Closed Contracts 2. Organizational process assets (Updates)

 

Procurement Processes Repetition - When the project obtains products and services (project scope) from outside the performing organization, the processes from procurement planning through contract closeout would be performed once for each product or service item.

 

Contract – Subjects covered include Responsibilities, authorities, law and terms, technical and management approaches, financing, schedule, payments and price. Contract negotiations conclude with a document that can be signed by both buyer and seller, that is contract. The final contract can be a revised offer by the seller or counter offer by the buyer.

 

PLAN PROCUREMENT (OP)

 

Procurement Management Plan – Describes how procurement will be managed till contract closure. It includes Type Of contract, who prepares independent estimates, standardized procurement documents, Constraints and assumptions, identifying seller list etc.

Contract SOW – Developed from Scope Statement, WBS and WBS Dictionary describes procurement item in sufficient detail to allow prospective sellers to determine if they are capable of providing it.

Type of Contract SOW:

1. Performance: what final product should be able to accomplish, car with a speed of 240 KM per hr (T&M, CR; IT, R&D)
2. functional: end purpose or result, car with 6 seats (T&M, IT, R&D)
3. design: what work is to be done, built car as per the design (T&M, FP, construction)

Make or buy decisions: Costs - Direct costs are costs incurred for the exclusive benefit of the project (e.g., salaries of full-time project staff). Indirect costs, also called overhead costs, are costs allocated to the project by the performing organization as a cost of doing business (e.g., salaries of corporate executives).

 

PLAN CONTRACTING (OP)

 

Procurement Documents – Common names for different types of procurement documents include: Invitation for Bid (IFB), Request for Proposal (RFP), Request for Quotation (RFQ), tender notice, Invitation for Negotiation, and Contractor Initial Response. Procurement documents are rigorous enough to ensure consistent, comparable responses but flexible enough to allow seller suggestions for better ways to satisfy the requirements. Seller is allowed to propose alternative solution in a separate proposal.

It has 1. Information for sellers 2. Contract SOW 3. Proposed terms and conditions of the contract (Legal & Business)

Evaluation Criteria

 

Proposal - technical approach, Bid, Tender and quotation – price

 

REQUEST SELLER RESPONSE

 

Bidder Conferences (TT) – Also called, as Contactor Conferences, Vendor Conferences and Pre-Bid Conferences are meetings with prospective sellers prior to preparation of bid or proposal, ensures clear and common understanding of procurement needs.

Procurement Document Package (OP) – Buyer prepared formal request sent to each seller and is the basis upon which a seller prepares a bid for the requested products, service or result.

Procurement Documents

1. Request For Proposal/Tender (RFP, RFT ) – Requests for Price and Detailed Proposal (CR)
2. Invitation for Bid/Request for Bid (IFB, RFB) – One Price (FP)
3. Request for Quotation – Price Quote per item (T&M)

 

Select Sellers – Tools & Techniques

1. Weighting System – Numeric Weight to each criteria, rating sellers, selection based on total weight
2. Independent Estimates – called “Should-Cost”, prepared by procuring organization.
3. Screening System – Establish minimum performance requirement for one or more criteria and use 1 & 2 methods
4. Contract Negotiation – Project Manager may not be the lead negotiator, PM team may be present during negotiations for providing any clarification of project’s technical and management requirements.
5. Seller Rating Systems
6. Expert Judgment
7. Proposal Evaluations techniques – Use some Expert judgment and evaluation criteria to rate and score proposals.

 

Output

 

Contract Management Plan – Lists documentation, delivery and performance requirements that the buyer and seller must meet. The plan covers the contract administration activities throughout the life of the contract. Part of PMP.

Selected Seller

Contract

Resource Availability

 

Contract Administration – Ensures the seller meets the performance requirements of the contract. Because of legal considerations many organizations treat contract administration as a separate administrative function from the project organization. Contract administration includes application of the appropriate project management processes to the contractual relationships(s) and integration of the outputs from these processes into overall management of the project.

Contract administration also has a financial management component. Payment terms should be defined within the contract and must involve a specific linkage between seller progress made and seller compensation paid.

 

TT:

Contract CC system

Buyer conducted perf review

Inspection and audits

Performance reporting

Payment System – Usually handled by accounts payable system of the buyer. It includes reviews & approvals by PM team.

Claims Administration – Contested Charges (claims, Disputes or appeals) are those where buyer and seller cannot agree. If both parties do not resolve a claim it is handled according to the resolution procedures established in the contract. Contract clauses can involve arbitration or litigation and can be invoked prior or after contract closure.

Records Management System – Set of procedures and automation tools that are consolidated as part of PMIS to manage contract documentation and records.

IT

 

OP:

Organization Process Assets (After Contract Administration) –

1.       Correspondence – In addition to documentation, it is a record of all the written and oral communication.

2.       Payment Schedules and Requests

3.       Seller Performance evaluation documentation

PMP updates – Procurement Management Plan and Contract Management Plan.

 

Contract Closure

Procurement Audit – Review of procurement processes from Plan purchases to Contract administration. Aims to identify successes and failures.

Records Management System

Contract closeout is similar to administrative closure in that it involves both product verification (Was all work completed correctly and satisfactorily?)

Administrative closeout (updating of records to reflect final results and archiving of such information for future use).

Administrative Closure (Internal)—generating, gathering, and disseminating information, to formalize a phase or project completion.

Contract Closeout—completion and settlement of the contract, including resolution of any open items. (External )

 

Difference between Contract Closeout and Admin Closure

1. Contract Closure comes first 2. AC is done at end of each phase or project, CC is done only once at the end of Contract 3.AC – Lessons learned   CC – Procurement audit    4. AC – Less Formal           CC – More Formal.

 

a contract, an agreement, a subcontract, a purchase order, or a memorandum of understanding.

Buyer(Give Order )----PO------------à Seller

Seller ----Invoice------à Buyer (Pay order)

 

Contract Types and Risk	1. Fixed Price 2. Cost-Reimbursable 3.Time & Material
CR	Buyer has risk, as total cost are unknownYou are buying “what to do” from seller.
Cost plus fee or Cost Plus Percentage of Cost (CPPC)	No valid for federal contracts. Sellers are not motivated to control cost, used when buyer can tell what is needed then what to do. Seller write SOW. Bad for buyer
Cost Plus Fixed Fee (CPFF)	Used for research and development contracts (which generally have low level of detail in the scope); fixed fee can change if there is a change to the contract (usually through change orders). The risk rests with the buyer. This is the most common cost reimbursable contract.
Cost Plus Incentive Fee CPIF)	Buyer and seller share in savings based on predetermined %s; long performance periods and substantial development and test requirements (incentive to the seller to perform on or ahead of time) Cost plus agreed fee plus a bonus for beating the objective
Cost plus Award fee	Similar to CPIF but award amount is amount is determined in advance and apportioned out depending on performance.
	·         In Cost plus contract, the only firm figure is the fee
T & M	Used for small amount contract. Good if the buyer wants to be in full control and/or the scope is unclear/not detailed or work has to start quickly. Profit factor into the hourly rate. Fixed rate but variable total cost. They are open ended.
Fixed price or Firm Fixed Price (FFP)	Buyer defines reasonably detailed specifications (e.g. SOW). Shift risk to seller. Good when deliverable is not a core competency. Fixed Price (FP) is the most common type of contract in the world. Seller is at risk.
Fixed Price Plus Incentive Fee (FPIF)	Incentives for fixed price contract. The inventive is same as CPIF. High-value projects involving long performance periods
Fixed Price Award Fee	“bonus” to the seller based on performance (e.g. 100K + 10K for every designated incremental quality level reached. Award fee is decided in advance.
Fixed Price Economic Price Adjustment (FPEPA)	Allow Price increase if the contract is for multiple years
Purchase Order	A form of contract that is normally unilateral and used for simple commodity purchases. It is simplest type of fixed price contract and is usually unilateral(Signed by one party instead of bilateral)
Contract type Vs Risk	FP – FPIF – FPAF – FPEPA – T&M – CPIF – CPAF – CPFF - CPPC Fixed Price – T&M - Cost Reimbursable Buyer’s risk from low to high Seller’s risk from high to low

Cost Reimbursable

Advantages	Disadvantages
Simpler contract SOW	Required auditing sellers invoices
Usually required less work to write the scope than FP	Requires more work for buyer to manage
Generally lower cost than PL because the seller does not have to add as much for risk.	Seller has only a moderate incentive to control costs
	Total price is unknown

T&M

Advantages	Disadvantages
Quick to create	Profit is in every hour billed
Contract duration is brief	Seller has no inventive to control costs
Good choice when you are hiring to augment your staff	Appropriate only for small projects
	Requires the most day to day oversight from the buyer

Fixed Price

Advantages	Disadvantages
Less work for buyer to manage	Seller may under price the wok and try to make up profits on change orders
Seller has a strong incentive to control cost	Seller may not complete some of the SOW if they begin to loose money
Companies have experience with this type	More work for buyer to write the CSOW
Buyer know the total price at the project start	Can be more expensive than CR is the CSOW is incomplete. The seller will add to the price for their increased risk.

 

Elements of a Contract
Offer	Assent to certain terms by both parties
Acceptance	Agreement, written or spoken
Consideration	Something of value
Legal Capacity	Able to contract
Legal Purpose	No violation of public policy

 

Stages of Contract Negotiation
Protocol	Introductions
Probing	Identify concerns, strengths, weaknesses
Scratch bargaining	Actual bargaining
Closure	Positions summed up
Agreement	Documenting

 

Specification - precise description of a physical item, procedure, or service.  The SOW supplements the specification in describing what must be done to complete the project.

Privity - legal relationship that exists between any contracting parties (e.g. if company “A” hires “B” and “B” subcontract to “C”, “C” is not legally bound by anything “A” can say; the privity is with “B”)

Waiver - a party can relinquish rights that it otherwise has under the contract. Forebearance can mature into waiver.

Force Majeure – Act of God, Floods, Fire etc  

Indemnification – Liability, who is liable

Retainage – withholding of funds under contract. Amount of money usually 5% to 10% withheld form each payment. This money is paid when work is complete.

Warranty - assurance of the level of quality to be provided

A contract ends by:
Successful performance
Mutual agreement	Last two are Termination
Breach of contract

Terms and Conditions – the project manager must uphold the Terms and Conditions of the contract, even if it meets the needs of the project, it has to also meet the requirement of the contract.

Liquidated damages -

Contract Control System vs. Project Control System – they both include procedures. The contract control system requires more documentation and more signoff.

Work Authorization Systems – can be used to coordinate/control what time and sequence work is done. It helps with integrating tasks into a whole.

Performance Scope of Work – describes the performance – not the functionality-- required by the customer

Independent Estimate – most concern with costs, comparing cost estimates with in-house estimates or with outside assistance (part of Source Selection)

Procurement Audit – structured review that flush out issues, and set-up lessons learned. Helps ensure problems are resolved for future projects. Identify successes and failures that warrant transfer to other procurements.

Beneficial Efficiency – when the work is being used for the intended purpose and has been certified

Terminating contract for Convenience – if a project is terminated before it is complete, the level of extent of completion should be established and documented.

Material Breach – Breach so large that it may not be possible to complete the work.

Sole Source (not Single Source) – Only one seller, it might be a company that owns a patent.

Contracting
Centralized	Decentralized
+ More economical	+ Project Manager has more control
+ Easier to Control	+ Contracting personnel are more familiar with project
+ Higher degree of specialization (expertise)	+ More flexible and adaptable to project needs
+ Orders can be consolidated	- Duplication of contracting efforts
- May become a bottleneck	- Higher costs
- Less attention to special needs	- No standard policies

 

Negotiating Tactics
Deadline	Strategic Delay
Surprise	Reasoning Together
Limited Authority	Withdrawal
Missing Man	Unreasonable
Fair and Reasonable	Suggesting Arbitration
	Fait Accompli (A done deal)

Notes: I am not the writter of this post, please thanks the anonymous writter