PMGT401-12 Project Procurement Management-04

PMGT- 401: Project Management Fundamentals © 2009 Bob Xourafas, P.Eng, PMP, Proprietary 12 Project Procurement Management

12 Project Procurement Management12 Project Procurement Management

PMGT- 401:Project Management Fundamentals


Reading Materials

Text:• Chapter 12

References:• PMBOK: Chapter 12


12 Project Procurement Management:Definition

Processes:

• 12.1 Plan Procurements - Planning

• 12.2 Conduct Procurements - Executing

• 12.3 Administer Procurements – Monitoring and Controlling

• 12.4 Close Procurements - Closing

• 12.1 Plan Procurements - Planning

• 12.2 Conduct Procurements - Executing

• 12.3 Administer Procurements – Monitoring and Controlling

• 12.4 Close Procurements - Closing

Definition:Project Procurement Management includes the processes to purchase or acquire the products, services, or results needed from outside the project team to perform the project work

You have to remember the

definition

PMGT- 401: Project Management Fundamentals © 2009 Bob Xourafas, P.Eng, PMP, Proprietary 12 Project Procurement Management PMGT- 401: Project Management Fundamentals Bob Xourafas, P.Eng, PMP04 Project Integration Management

11 Project Risk Management

Initiating

4.1 Develop Project Charter

10.1 Identify Stakeholders

Planning

4.2 Develop Project Management Plan

5.1 Collect Requirements

5.2 Define Scope

5.3 Create WBS

6.1 Define Activities

6.2 Sequence Activities

6.3 Estimate Activity Resources

6.4 Estimate Activity Durations

6.5 Develop Schedule

7.1 Estimate Costs

7.2 Determine Budget

8.1 Plan Quality

9.1 Develop HR Plan

10.2 Plan Communications

11.1 Plan Risk Management

11.2 Identify Risks

11.3 Perform Qualitative Risk Analysis

11.4 Perform Quantitative Risk Analysis

11.5 Plan Risk Responses

12.1 Plan Procurements

Executing

4.3 Direct and Manage Project Execution

8.2 Perform Quality Assurance

9.2 Acquire Project Team

9.3 Develop Project Team

10.3 Distribute Information

10.4 Manage Stakeholder Expectations

12.2 Conduct Procurements

Monitoring & Controlling

4.4 Monitor and Control Project Work

4.5 Perform Integrated Change Control

5.4 Verify Scope

5.5 Control Scope

6.6 Control Schedule

7.3 Control Costs

8.3 Perform Quality Control

9.4 Manage Project Team

10.5 Report Performance

11.6 Monitor and Control Risks

12.3 Administer Procurements

Closing

4.6 Close Project or Phase

12.4 Close Procurements


12 Project Procurement Management: Overview

Process Buzzword What Do You Have When You Are Done?

1. Plan Procurements

What to buy, when, how much, make or buy, lease or rent

Contract type selected; procurement scope of work; contract documents; seller section criteria; Procurement Management Plan

2. Conduct Procurements

Bidders conference (Question and Answers); Pick Sellers

Seller’s response to the proposal completed and submitted; responses evaluated; contract negotiations completed; contract signed

3. Administer Procurements Manage the Seller Delivery as per the contract

substantially completed

4. Close Procurements Close contract

Settlement of open issues, procurement closure and records archiving

Easy-to Remember Steps



• During the planning phase of projects a determination is made of what work is contracted and under what contractual arrangement (contract type)

• This determination is prepared consistent with identification of work within the level 3 of the WBS.

• Procurement or outsourcing means acquire goods and services from outside the organization

• Organizations that procure services are call “Buyers”

• Organizations or individuals who provide procurement/outsourcing services are referred to as:• Suppliers, Vendors, Contractors, Subcontractors and Sellers

(most frequently term used)


12 Project Procurement Management:

Overview

• Under Vehicle Structure at level 2, we have four major subdivisions of work: two of which will be performed in-house (the Frame and Suspension), and the other two will be procured from outside the company (the Transmission and Engine).

ProjectData

TransportationVehicleProject

VehicleStructure

VehicleTesting

Level 1

ProjectManagement

Frame

Suspension

Engine

Transmission Test Plans

QA Tests

Road Tests

Design Data

Test Manuals

Management Data

Project

Systems

Quality

Level 2

Critical “Buy”Items

Level 3



Why Contracting?

Many organizations are turning to procurement (outsourcing) to:• To reduce both fixed and recurrent costs

• Outsourcing suppliers are often able to use economies of scale that may not be available to the client alone.

• To allow the client organization to focus on its core business• Most organizations are not in business do projects. Organizations

perform better if they concentrate on their core functions such as marketing, customer service, new product design, etc.

• To access skills and technologies• Organizations can gain access to specific skills and technologies when

they are required by using outside resources

• To provide flexibility• Outsourcing to provide extra staff during periods of peak workloads can

be much more economical than trying to staff entire projects with internal resources

• To increase accountability• Because contracts are legally binding, there is more accountability for

delivering the work as stated in the contract.


12 Project Procurement Management: Centralized / Decentralized Procurement

Centralized Contracting:Separate office handles contracts for all projects

Advantages Disadvantages

Increased expertise in contracting Difficult to gain access to contracting expertise

Standard company practices One contract person works on many projects

Clearly defined career path for staff

Decentralized Contracting:A Contract Administrator assigned to each project

Advantages Disadvantages

Easy access to contracting expertise

No home – after project is completed

Increased loyalty to project Difficult to maintain contracting expertise in company; duplication of expertise, inefficient use of resources

Little / no standardization of contracting practices from one project to next


12.1 Plan Procurements

12 Project Procurement Management


12.1 Plan Procurements:Definition

Plan Procurements is the process of:

Identifying which project needs can be best met by procuring products or services outside the project organization and how the procurement will be managed

The determination should be done during scope definition and involves consideration of:

• whether to procure, how to procure, what to procure, how much to procure, and when to procure.

• types of contracts most appropriate to the project’s needs

• determining the selection criteria for selecting sellers

• identifying potential sellers

• development of procurement documents


12.1 Plan Procurements:Inputs-Tools & Techniques-Outputs

Inputs

1. Scope baseline

2. Requirements documentation

3. Teaming agreements

4. Risk registry

5. Risk-related contract decisions

6. Activity resource requirements

7. Project schedule

8. Activity cost estimates

9. Cost performance baseline

10. Enterprise environmental factors

11. Organizational process assets

Tools & Techniques

1. Make or Buy Analysis

2. Expert Judgment

3. Contract Types

Outputs

1. Procurement Management Plan

2. Procurement Statement of Work (SOW)

3. Make or Buy Decisions

4. Procurement documents

5. Source selection criteria

6. Change requests


12.1 Plan Procurements:Inputs

• Scope baseline – 5.3 Create WBS Output• Project scope statement

• The project scope statement lists the deliverables and the acceptance criteria for the product or service of the project. You must consider these when thinking about procuring goods and services.

• You’ll also want to consider the constraints (issues such as availability and timing of funds, availability of resources, delivery dates, and vendor availability) and assumptions (issues such as reliability of the vendor, assuming availability of key resources, and adequate stakeholder involvement).

• The product scope description is included in the project scope statement as well and might alert you to special considerations (services, technical requirements, and skills) needed to produce the product of the project.

• Work breakdown structure and WBS dictionary• The WBS and WBS dictionary identify the deliverables and describe

the work required for each element of the WBS. It is used to develop the contractual statement of work



• Requirements documentation• Requirements with contractual and legal implications such as

health, safety, security, environmental, insurance, intellectual property rights, labour related (equal employment opportunities), licenses and permits



• Teaming agreements• These are project procurements which are executed strictly in

accordance with an overriding corporate legal contract typically called a teaming agreement or alliance or arrangement.

• The executives of one or more companies agree to combine their assets, facilities, people, shared risks, etc., and go after a new segment of work, typically in the form of some new project.

• Characteristics• Teaming agreements are typically created to enhance a firm's

competitive position• The teaming agreement defines the buyer-seller roles for each

party and the accountability for each part of work• Whenever a teaming agreement is in place the procurement

planning process for the project is significantly impacted.• The procurements must be executed in accordance with the

overriding corporate teaming agreement. The corporate teaming arrangement is the supreme governing document.



• Risk register – 11.2 Identify Risks output

• Risk-Related Contractual Agreements - 11.5 Plan Risk Responses: Outputs

• If you’re planning on using risk response strategies such as transference or sharing, for example, you might need to purchase services or items from third parties. You can prepare the contracts for those services now and discuss them with the appropriate parties.

• Activity resource requirements – 6.3 Estimate Activity Resources

• Project Schedule – 6.5 Develop Schedule

• Mandated timelines for project deliverables that should be incorporated in contracts

• Activity Cost Estimates - 7.1 Estimate Costs

• Costs for procurement activities are used to check the “reasonableness” of bids or proposals received form potential sellers

• Cost performance baseline - 7.2 Determine Budget

• The cost baseline is used to measure, monitor and control the overall actual cost performance of the project against the project cost requirements. The cost of the contract is included in the cost baseline



• Enterprise Environmental Factors• Marketplace conditions are the key element of enterprise environmental

factors you should consider for this process.

• The procurement planning process must consider what products and services are available in the marketplace, from whom, and under what terms and conditions.

• Organizational Process Assets• The organization’s procurement guidelines, policies, procedures, standard

forms (nondisclosure agreements, standardized contracts, and so on) are the elements of the organizational process assets

• It’s important for the project manager to understand organizational policies because they might impact many of the Planning processes, including the Procurement Planning processes.

• For example, the organization might have purchasing approval processes that must be followed. Perhaps orders for goods or services that exceed certain dollar amounts need different levels of approval

• If the buyer does not have a formal contracting group, then the project team will have to supply both the resources and the expertise to support project procurement activities.


12.1 Plan Procurements: Tools & Techniques

• Make-or-buy Analysis

• Determining whether a particular product or service should be made or performed inside the organization or purchased from someone else.

• Often involves financial analysis that must include the life cycle costs.

• Costs should include both direct costs-in other words, the actual cost to purchase the product or service-and indirect costs, such as the salary of the manager overseeing the purchase process or ongoing maintenance costs.

• Make-or-buy analysis is considered a general management technique and concludes with the decision to do one or the other.

• Reasons for “Make” Decision

• An idle workforce; Want control of the product; Product is proprietary

• Reasons for “Buy” Decision

• Workforce does not have expertise to produce; Producing product costs more if it is not your primary line of business



• Make-or-buy Analysis… • Once the decision is made to “make” you must decide

whether to “lease/rent or purchase”

• For example, perhaps your project requires using a specialized piece of hardware that you know will be outdated by the end of the project.

• In a case like this, leasing might be a better option so that when the project is ready to be implemented, a newer version of the hardware can be tested and put into production during rollout.


12.1 Plan Procurements:“Make” or “Buy”- Exercise #1

You need to decide whether to lease or buy an item for your project. The daily lease cost is $100. To buy, the item investment cost is $3,000, and daily maintenance cost is $50. • How long will it take for the lease cost to be the same as purchase cost?

Solution:

Set up an equation so the “lease” is equal to the “buy”

Direct and indirect expenses = Cost of product + Daily Maintenance X # of Days) = $3,000 + ($50/day) x Days

Lease cost = Daily Lease Cost X # of Days = $100/day x Days

Thus,

$3,000 + $50 Days = 100 Days 3,000 = 50 Days

D = 3,000/50 = 60 Days


12.1 Plan Procurements:“Make” or “Buy”- Exercise #2

• You can lease an item you need for a project for $150/day. To purchase the item, the investment cost is $1,000, and the daily cost would be another $50/day.• If you need the item for 12 days, should you lease it

or purchase it?

Solution:

• Set up an equation so the “buy/leasing” is equal to the “make/purchase”

• Let D be the number of days to use the item.

• $150D = $1,000 + $50D

• Solve for D: $100d = $1,000

d = 10 days

• If you need the item for 12 days, it would be more economical to purchase it



• Expert Judgment (concept already discussed)• Internal Experts

• May have experience with the type of procurement services

• May have procurement departments (centralized/decentralized)

• May know qualified sellers

• External experts

• Include potential sellers

• Include sellers with partnership arrangements with the buyer organization



Contract type selection is influenced by:

• The extent of work definition (how well the scope is defined) at time of award and urgency of project requirements

• The need for fast-tracking the work.

• The need for flexibility to make change after work begins.

• The level of effort and expertise that the buyer (owner) can dedicate to manage the seller (contractor).

• General marketplace conditions. Extent of price competition

• Overall degree of cost and schedule risk

• Type and complexity of requirements (technical risk)

• Contractor's responsibility (and risk)

• Contractor's accounting system (is it capable of earned value reporting?)

• Concurrent contracts (will my contract take a back seat to existing contracts?)

• Extent of subcontracting (how much work will the contractor outsource?)



Contract Type Selection is Influenced by…

• Another consideration relates to the future potential purchase of the product or service being acquired by the project team.

• Where such potential can be significant, sellers may be inclined or induced to charge prices that are less than would be the case without such future sale potential.

• While this can reduce costs to your project, there are legal ramifications if the buyer promises such potential and it is not, in fact, realized.


12.1 Plan Procurements:Tools & Techniques

Contract Types…• Contracts generally fall into one of following broad categories:

• Fixed-price or lump-sum contracts (FP)

• Cost-reimbursable contracts (CR)

• Time and Material contracts (T&M)

• Purchase Orders (POs)

• Objective of a good contract is to have reasonable distribution of RISK between the buyer and seller and the greatest incentive for the seller’s efficient and economical performance


12.1 Plan Procurements:Fixed Price (FP) Contracts

• Firm Fixed Price Contracts (FFP) -Most common form of contract

• The contractor is required to perform the work at the negotiated fixed contract value.

• If the estimated target cost is low (the contractor under estimated the cost), the total profit is reduced and may even vanish. Thus, the contractor assumes a large risk.

• This contract provides an incentive to the contractor to reduce costs and therefore increase profit.

• Buyer has least cost risk because the contract price is fixed and the risk of higher costs is borne by the contractor

• There is the possibility that, because of a lack of knowledge of local conditions, all contractors may necessarily include an excessive amount of contingency in their price. Thus, these contracts can be expensive in comparison to other type of contracts.

• Changes requested by the owner after award of a contract lead to troublesome and sometimes costly extras.

• FFP contracts are most appropriate when buyer can completely describe scope of work.

• Otherwise the buyer should never considered this type of contract


12.1 Plan Procurements:Variations of Fixed Price Contracts

• Fixed Price Incentive Fee (FPIF) Contracts • Are the same as FFP contracts except that there are incentives for

meeting or exceeding selected project objectives (for example, project schedule targets)

• The incentive formula has been agreed to in advance by both the buyer and the contractor.• Example: Finish project early and receive $10,000 per month for every

month below the contract finish date

• Another aspect of fixed-price plus incentive contracts is that some of the risk is borne by the buyer as opposed to the firm fixed-price contract, where most of the risk is borne by the seller.

• The buyer takes some risk, albeit minimal, by offering the incentive to, for example, get the work done earlier.• In our example, suppose the buyer really would like the product

delivered 30 days prior to when the seller thinks they can deliver. In this case, the buyer assumes the risk for the early delivery via the incentive.



• Fixed Price Incentive Fee (FPIF) Contracts • Point of total assumption

• The point of total assumption (PTA) is a price determined by a fixed price plus incentive fee contract (FPIF) above which the seller bears all the loss of a cost overrun.

• Thus at the Point of Total Assumption in a Fixed-Price-Incentive-Fee contract (FPIF) the cost risk shifts completely to the seller

• If costs go beyond the PTA, they are assumed to be due to mis-management rather than a worst-case set of difficulties. The seller bears all of the cost risk at PTA and beyond.

• In addition, once the costs on an FPIF contract reach PTA, the maximum amount the buyer will pay is the ceiling price.



• Fixed Price Incentive Fee (FPIF) Contracts • Point of total assumption…

• The FPIF contract is an agreement that says:• “We will sell you something where we think the costs will be $X. We

want to make a profit of $Y on this contract. We recognize that here are factors that will impact costs, so let’s agree to share that risk. If we bring it in under cost, we get a share of the savings; if we bring it in over costs you cover a share of the costs. However to protect you against unreasonable cost overruns we will set a maximum price for the whole shooting match.”

• Thus, FPIF contract specifies a target cost, a target profit, a target price, a ceiling price, and one or more share ratios.

• While costs are well below PTA there is little motivation to control costs. As costs approach PTA the motivation to control costs rises. And once costs surpass PTA the seller is strongly motivated to control costs.



• Fixed Price Incentive Fee (FPIF) Contracts • Point of total assumption…

• Target Cost (TC): this is the negotiated cost on which the contract is based and the point against which both profits and the ceiling price are calculated.

• Target Profit or Target Fee (TF): this is the negotiated profit assuming the target cost is met. (Note that the abbreviation TP is not used for Target Profit to avoid confusion with Target Price.)

• Target Price (TP): The combination of Target Cost and Target Fee• Ceiling Price (CP): this is the maximum price the buyer expects to

pay regardless of cost overruns. After the Ceiling Price is reached the seller is responsible for all remaining costs.

• Sharing Ratio (SR, BSR/SSR): this is the negotiated ratio for sharing cost over-runs or under-runs. This ratio is typically expressed as something like 70/30 or 80/20 where the buyer’s share is on the left and the seller’s share is on the right.

• PTA = ((Ceiling Price - Target Price)/Buyer's Share Ratio) + Target Cost

• PTA = ((CP - TP)/BSR) + TC (using the acronyms for the terms above).



• Fixed Price Incentive Fee (FPIF) Contracts • Example: Point of total assumption…

• Target Cost (TC): $1,000,000• Target Profit or Target Fee (TF):$100,000• Target Price (TP): $1,000,000 + $100,000 = 1,100,000 • Ceiling Price (CP):$1,150,000• Sharing Ratio (SR, BSR/SSR): 50/50• PTA = ((CP - TP)/BSR) + TC (using the acronyms for the terms

above)• PTA = ((1,150,000 - $1,100,000)/0.5) + $1,000,000 = $1,100,000

• Interpretation:• When costs are on target, the seller makes $100,000. As costs rise the

seller and buyer split them until the combination of cost and fee total $1,150,000 after which the buyers pays nothing further.



• Fixed Price Economic Price Adjustment (FPEPA)• Are the same as fixed-price contracts except that there are price

adjustments based on a formula that has been agreed to in advance by both the buyer and the contractor.

• This type of contact is used for multi year projects.• Example: EPA adjustment if the CPI goes over above a specific

value


12.1 Plan Procurements:Cost-Reimbursable (CR) Contracts

• Cost-reimbursable contracts are as the name implies.

• The allowable costs-allowable is defined by the contract-associated with producing the goods or services are charged to the buyer. All the costs the seller takes on during the project are charged back to the buyer; thus, the seller is reimbursed.

• Allowable cots can be direct or indirect

• Direct costs are costs that are related to a project and can be traced back in a cost-effective way.

• For example, the salaries for people working directly on a project and materials purchased for a specific project are direct costs

• Indirect costs are costs related to the project that cannot be traced back in a cost-effective way.

• For example the cost of providing a work space with electricity, a cafeteria, and so on.

• Indirect costs are often calculated as a percentage of direct costs.


12.1 Plan Procurements:Cost-Reimbursable (CR) Contracts

• Cost-reimbursable contracts carry the highest risk to the buyer because the total costs are uncertain.

• As problems arise, the buyer has to shell out even more money to correct the problems.

• However, the advantage to the buyer with this type of contract is that scope changes are easy to make and can be made as often as you want—but it will cost you.

• Cost-reimbursable contracts are used most often when the project scope contains a lot of uncertainty, i.e. not well defined, such as for cutting-edge projects and research and development.

• They are also used for projects that have large investments early in the project life.

• The contractor has little incentive to work efficiently or be productive-all costs are passed on to the buyer. To counterbalance this deficiency:

• Cost reimbursable contracts often include fees such as a profit percentage or incentives for meeting or exceeding selected project objectives.


12.1 Plan Procurements:Variations of CR Contracts

• Three types of cost-reimbursable contracts, in order of lowest to highest risk to the buyer:

1. Cost Plus Incentive Fee (CPIF)

• This is the type of contract in which the buyer reimburses the seller for the seller’s allowable costs and includes an incentive for exceeding the performance criteria laid out in the contract.

• Contract = Cost + Incentive Fee

• An incentive fee actually encourages better cost performance by the seller, and there is a possibility of shared savings between the seller and buyer according to a pre negotiated share of the incentive bonus formula if performance criteria are exceeded.

• The qualification for exceeded performance must be written into the contract and agreed to by both parties, as should the definition of allowable costs; the seller can possibly lose the incentive fee if agreed-upon targets are not reached.



1. Cost Plus Incentive Fee (CPIF) Example

• Suppose you have a CPIF contract with the incentive fee pegged on the final cost of the contract.

• The pre negotiated savings share of the incentive bonus formula is 85/15, (85 percent for the buyer and 15 percent for the supplier).

• The expected cost of a project is $100,000 and the fee is $10,000

• Suppose the final cost of the project is $80,000. What would be the total payment to the contractor?

• The final payment to the contractor will be:

$80,000 + 15% of $20,000 (100K-80K) + $10,000 fee = $93,000



2. Cost Plus Fixed Fee (CPFF)

• Cost plus fixed fee (CPFF) contracts charge back all allowable project costs to the seller and include a fixed fee upon completion of the contract.

• This is how the seller makes money on the deal; the fixed fee portion is the seller’s profit.

• The fee is always firm in this kind of contract, but the costs are variable.

• The seller doesn’t necessarily have a lot of motivation to control costs with this type of contract

• One of the strongest motivators for completing the project is driven by the fixed fee portion of the contract.

• Contract = Cost + Fixed fee



2. Cost Plus Fixed Fee (CPFF) Example

• Suppose the expected cost of a project is $100,000. The fixed fee to the contractor is $10,000. If the final cost of the project is $120,000.

• The final payment to the contractor will be:

$120,000 + $10,000 = $130,000



3. Cost Plus Award Fee (CPAF):

• The buyer pays all costs and an apportionment of a bonus based on performance.

• This is similar to the CPIF contract except the award amount is determined in advance and apportioned out depending on performance.

• Contract = Cost + Award Fee

• Example:

• The buyer may say that there is a $50,000 award fee available. It will be apportioned out at the rate of $5,000 for every month is the project surpasses certain monthly targets by an agreed amount.


12.1 Plan Procurements:Time and Material Contract (T&M)

• Priced on per hour or per item basis plus a fixed price for materials

• These types of contracts resemble cost-reimbursable type arrangements in that they are open ended.

• The full value of the agreement and the exact quantity of items to be delivered are not defined by the buyer at the time of contract award. Thus, T&M contracts can grow in value as if they were cost-reimbursable type arrangements.

• T&M arrangements can also resemble fixed-price arrangements. For example, unit rates can be preset by the buyer and seller when both parties agree on the rates for a specific resource category.

• The buyer bears the biggest risk in this type of contract.

• Most appropriate when:

• Buyer wants to be more in control; Scope of work is not known or incomplete; Contracts are for small dollar amounts and shorter length of time; Buyer wants to begin work immediately


12.1 Plan Procurements:Purchase Order Contract (PO)

• Normally unilateral contract (signed by one party)

• Usually used for simple commodity procurements

• The buyer pays the contractor a predetermined amount per unit of service

• The total value of the contract is a function of the quantities needed to complete the work

• Example: Contract to purchase 30 meters of wood at $9.00 per meter


12.1 Plan Procurements: Advantages & Disadvantages of Contract Types


12.1 Plan Procurements: Incentive Clauses

• Incentive clauses can be used to fine tune the contract to bring the contractors’ goals and objectives more nearly coincident with those of the buyer (synchronizing of objectives).

• Consideration should be given to applying the concept of partnering with external suppliers and contractors in situations where it is most cost effective to have an external organization provide long term support.

• The contract should produce an allocation of risk between the parties such that each risk is assumed by the party best positioned to manage it. This will result in risk sharing, and should influence the choice of contract type.

• Project risk is an uncertain event or condition that, if it occurs, has a positive or a negative effect on at least one project objective, such as time, cost, scope, or quality, etc.

• Contract preparation should be tailored to the circumstances of the project and should reflect both the owner and the contractor objectives.

• No single type of contract is best suited for all projects.


12.1 Plan Procurements: Contract language

• The language of the individual contract clauses merits careful attention, but of paramount importance is the total agreement between parties.• Contract inconsistencies and ambiguities breed

misunderstandings, delays and increased costs.

• Clauses related to work scope definition, changes and project control are the most frequent sources of disputes and poor project performance.• Contracts should include procedures to accommodate changes

to the contractual obligations.

• In a contract, the words in the contract take precedence over numbers. • Thirty (35) desks means 30 desks, not 35 desks


12.1 Plan Procurements: Points to Remember

• Cost Reimbursable: Seller’s costs are reimbursed, but buyer has most cost risk because total costs are unknown

• CPFF (Cost Plus Fixed Fee)• Client pays all costs + a fixed profit (fee)

• CPIF (Cost Plus Incentive Fee)• Costs + a bonus for beating the targets

• CPAF (Cost Plus Award Fee)• Costs + bonus based on performance

• T&M: Time and Materials• Used for small amounts or unknown total costs, short-term services,

used in emergency situations• FP:

• FFP Firm Fixed Price- Most common• FPIF (Fixed fee incentive fee): Fixed fee + incentive if beats the targets• FPEPA (Fixed price Economic Price Adjustment): Price increase for

multiple years• Purchase Order:

• Signed by one party only; used for simple commodity procurements


12.1 Plan Procurements: Points to Remember


12.1 Plan Procurements:Outputs

• Procurement Management Plan• The procurement management plan describes how the procurement

processes (from plan procurements to close procurements) will be managed.

• It includes the following:• The types of contract to use

• The authority of the project team

• How the procurement process will be integrated with other project processes

• Where to find standard procurement documents (provided the organization uses standard documents)

• How many vendors or contractors are involved and how they’ll be managed

• How the procurement process will be coordinated with other project processes, such as performance reporting and scheduling

• How the constraints and assumptions might be impacted by purchasing

• How multiple vendors or contractors will be managed

• The coordination of purchasing lead times with the development of the project schedule

• The schedule dates that are determined in each contract

• Identification of prequalified sellers (if known)



• Contract Statement of Work (CSOW)• CSOW is a SOW that has been formally agreed upon by both

parties and is therefore part of a Contract

• It contains the details of the procurement item in clear, concise terms. It includes the following elements:

• The project objectives

• A description of the work of the project and any post project operational support needed

• Concise specifications of the product or services required

• The project schedule, time period of services, and work location

• You prepared a SOW during the Develop Project Charter process.

• You can use that SOW as the contract SOW during this process if you’re contracting out the entire project. Otherwise, you can use just those portions of the SOW that describe the work for which you’re contracted.



• Contract Statement of Work (SOW)…• A good SOW gives contractors a better understanding of the

buyer’s expectations

• For internal projects the SOW is prepared by the Project Office because it is usually composed of staff with writing skills

• For external projects, the contractor may have to prepare the SOW for the customer because the customer may not have staff trained in SOW preparation.

• In such cases the contractor would submit the SOW to the customer for approval.

• The statement of work (SOW) should describe the procurement services in “sufficient detail” to allow prospective contractors to formulate a bid/no bid decision.

• “Sufficient detail” may vary, based on the nature the procurement service, the needs of the buyer, or the expected type of contract.


Statement of Work (SOW) Template Figure 12-3.

I. Scope of Work: Describe the work to be done to detail. Specify the hardware andsoftware involved and the exact nature of the work.

II. Location of Work: Describe where the work must be performed. Specify thelocation of hardware and software and where the people must perform the work

III. Period of Performance: Specify when the work is expected to start and end,working hours, number of hours that can be billed per week, where the work mustbe performed, and related schedule information.

IV. Deliverables Schedule: List specific deliverables, describe them in detail, andspecify when they are due.

V. Applicable Standards: Specify any company or industry-specific standards thatare relevant to performing the work.

VI. Acceptance Criteria: Describe how the buyer organization will determine if thework is acceptable.

VII. Special Requirements: Specify any special requirements such as hardware orsoftware certifications, minimum degree or experience level of personnel, travelrequirements, and so on.

Reference Text: Information Technology Project Management



• Make-or-Buy Decisions• The make-or-buy decision is a document that outlines the

decisions made during the process regarding which goods and or services will be produced by the organization and which will be purchased.

• This can include any number of items, including services, products, insurance policies, performance, and performance bonds.



• Procurement documents• Procurement documents are used to solicit proposals from

prospective sellers.

• The terms bid and quotation are generally used when the source selection will be based on price (as when buying commercial or standard items)

• The term proposal is generally used when other considerations, such as technical skills or technical approach, are paramount.

• The terms bid, quotation, proposal are often used interchangeably.

• Procurement documents should be detail enough to ensure consistent, comparable responses, but flexible enough to allow consideration of contractor for better ways to satisfy the requirements

• The procurement documents are issued according to the procurement policies of the organization



• Procurement Documents…• Types of procurement documents:

• Request for Proposal (RFP),

• Requests for Quotation (RFQ),

• Request for Information (RFI)

• Invitation for Bid (IFB)

• An IFB (information for bid) is a sealed document that lists the seller's price to complete the detailed work


Procurement Documents Contract Type

Specification of Work

RFP Request for Proposal

Cost Reimbursable (CR)

Performance or Functional

IFB (invitation for bid) Fixed Price (FP) Design

RFQ (Request for Quote)

T & M Any




Contract Specifications

• Specifications are written, pictorial, or graphic information that describe, define, or specify the services or items to be procured. There are three types of specifications:

• Performance

• They specify the measurable capabilities the end product must achieve in terms of operational characteristics (what the product of the project should be able to accomplish)

• The risk of performance is on the contractor.• Used mostly with cost reimbursable types of contract

• Functional• Convey end purpose, or result, along with essential characteristics, rather than

procedures• The risk of performance is on the contractor.• Used with any contract types

• Design• These detail what is to be done in terms of physical characteristics.• The risk of performance is on the buyer.• Used with fixed type of contracts

• Performance and Functional are commonly used in IT, hi-tech, and research projects• Design is mostly used in construction, equipment purchasing projects



Source Selection Criteria

• Used to rate or score proposals received from sellers. The criteria might be subjective or objective.

• Objective: (e.g. the proposed project manager must be a PMP certified professional)

• Subjective: (e.g. the proposed project manager needs to have documented previous experience with similar projects).

• Potential selection criteria:• Purchase Price

• Understanding of Need

• Overall or Life Cycle Cost

• Technical Capability

• Management Approach

• Financial Capacity

• Project Management Capability, etc.

• But Price is not necessarily the primary factor in selecting seller/contractor



• Requested Changes• Like many of the other processes we have discussed so far,

requested changes might come about as a result of the Plan Procurements process.

• Those changes, like all the others, should be administered through the Integrated Change Control process.


12.2 Conduct Procurements Definition

• This process consists of obtaining sellers responses/proposals, evaluating the proposals, selecting a seller, negotiating with the sellers and awarding a contract.

• The buzzwords for this step are "PICK ONE SELLER.“

• The proposal evaluation criteria:

• are used to assess the potential sellers' ability and willingness to provide the requested products or services.

• provide a basis for quantitatively evaluating proposals to minimize the influence of personal prejudices.

• Price may be primary determinant, but lowest price may not be lowest cost.

• Multiple sources (sellers) may be required for critical products.



• In this process:• A seller may simply be selected and asked to sign a standard

contract

• A seller may be asked to make a presentation and then, if all goes well, go on to contract negotiations

• The list of sellers may be narrowed down ("short-listed") to a few

• The short-listed sellers may be asked to make presentations and the selected seller then asked to go on to negotiations

• Or some combination of presentations and negotiations

• The choice of methods depends on the importance of the procurement, the number of interested sellers and the type of work to be performed.


12.2 Conduct Procurements: Inputs-Tools & Techniques-Outputs

Inputs

1. Project management plan


3. Source selection criteria

4. Qualified sellers list5. Seller proposals6. Project documents7. Make-or-buy

decisions8. Teaming

agreements9. Organizational

process assets

Tools & Techniques

1. Bidders conference

2. Proposal evaluation techniques

3. Independent estimates

4. Expert judgment5. Advertising6. Internet research7. Procurement

negotiations

Outputs

1. Selected sellers

2. Procurement contract award

3. Resource calendars

4. Change requests5. Project

management plan updates

6. Project document updates


12.2 Conduct Procurements: Inputs

• Project Management plan

• Procurement management plan – 12.1 Plan Procurements

• Procurement documents

• Request for Proposal (RFP), Requests for Quotation (RFQ), Request for Information (RFI) - 12.1 Plan Procurements

• Source selection criteria

• Refers to the method the organization will use to choose a vendor from among the proposals received- 12.1 Plan Procurements

• Qualified sellers list

• These are lists of prospective sellers who have been pre approved or prequalified to provide contract services (or provide supplies and materials) for the organization.

• Project managers are then required to choose their vendors from the qualified seller list published by the procurement department. However, not all organizations have qualified seller lists. If a list isn’t available, you’ll have to work with the project team to come up with your own requirements for qualifying vendors.



• Seller proposals

• Seller proposals are the seller-prepared documents that describe how the vendor intends to meet the needs of your project as described in the contract documents.

• These proposals will be used by an evaluation body to select the successful sellers.

• Project documents

• Risk register – 11.2 Identify Risks

• Risk-Related Contractual Decisions – 11.5 Plan Risk Responses

• Contain risk response strategies

• Make-or-buy decisions

• 12.1 Plan contracting

• Teaming agreements

• If there are teaming agreements, the procurements must be executed in accordance with the overriding corporate teaming agreement. The corporate teaming arrangement is the supreme governing document.

• In this situation, the seller and the buyer collectively prepare the SOW to met the project requirements and then negotiate the final contract for award.



• Organizational process assets

• List of prospective and prequalified sellers

• Information of pasts experience with sellers


12.2 Conduct Procurements: Tools & Techniques

• Bidder Conferences

• Also called: Vendor/contractor conferences, pre-bid conferences

• Q&A meeting with prospective sellers/contractors prior to submission of bids/proposals to ensure everyone has a clear understanding of procurement request and that no bidders receive preferential treatment

• PM to attend meeting, document Q&A

• Responses to the questions are incorporated as addendums to procurement documents and provided to all potential sellers/contractors

• Sellers may hesitate to ask questions in front of competition



• Proposal Evaluation Techniques• All techniques use some form of expert judgment and evaluation criteria—

whether it’s objective or subjective criteria.

• The evaluation committee will use the predefined proposal evaluation techniques to make its recommendation to management for approval prior to the contract award

• Proposal evaluation techniques are a combination of the techniques that follow:

• Screening system

• Screening systems use predefined performance criteria or a set of defined minimum requirements to screen out unsuitable vendors.

• Perhaps your project requires board-certified engineers.• One of the screening criteria would be that vendors propose project

team members who have this qualification.• If they don’t, they’re eliminated from the selection process.

• Screening systems are used together with two other tools and techniques of this process, weighting systems and independent estimates, to rank vendor proposals.



• Proposal Evaluation Techniques…• Weighting system

• Weighting systems assign numerical weights to evaluation criteria and then multiply them by the weights of each criteria factor to come up with total scores for each vendor.

• This tool and technique quantifies the qualitative data to keep personal biases to a minimum.

• Weighting systems are useful when you have multiple vendors to choose from because they allow you to rank the proposals to determine the sequence of negotiations.

• Key Steps:

• Weight – Assign a numeric weight to each evaluation criteria

• Rate – Assign a numeric rate for each evaluation criterion

• Multiply – Weight X Rating

• Total – Add all products for overall scoreWeighting System



• Proposal Evaluation Techniques…• Independent estimates

• Comparing the cost to an estimate created in-house or with outside assistance. This allows the discovery of significant differences between what the buyer and seller intend in the scope of work. Therefore, the buyer must have his or her own estimates to check reasonableness. The buyer cannot rely on the seller's cost estimates.

• If there are large differences between the independent estimate and the proposed vendor cost, one of two things is happening: the statement of work (SOW), or the terms of the contract, was not detailed enough to allow the vendor to come up with an accurate cost, or the vendor simply failed to respond to all the requirements laid out in the contract or SOW.

• Expert Judgment

• Expert judgment applies here as it has on many of the other processes we have discussed. Include experts from all areas of the organization when evaluating proposals and selecting vendors. Don’t forget your legal and financial folks, marketing, sales, engineering, and so on.



• Proposal Evaluation Techniques…• Seller Rating Systems

• Seller rating systems use information about the sellers—such as past performance, delivery, contract compliance, and quality ratings—to determine seller performance.

• The buyer organization might have seller rating systems in place, and you should check with the procurement department to see whether they exist for the bidders on your project.

• Part of the 12.3 Administer Procurement process (I’ll talk about this one later in this chapter) concerns gathering and recording this type of information.

• Don’t use seller rating systems as your sole criteria for evaluating vendors.



• Advertising• The company’s Internet site, professional journals, or newspapers

are examples of where advertising for procurements might appear.

• On government procurements, advertising is used extensively

• Internet Search• Internet search can be used to secure low value, low risk

procurements at a fixed predetermined price.

• This method is not used for complex, high risk procurements



Procurement Negotiations

• The objectives of negotiation are to:

• Obtain a fair and reasonable price

• Develop a good relationship with the seller

• The project manager must be involved during negotiation if for no other reason than to protect the relationship with the other side. Many projects go bad because of how negotiations were handled.

• If you press too strongly during negotiations and the negotiations turn from a win-win (preferable) situation to a win-lose situation.

• If negotiations are win-lose (in favor of the buyer):

• The seller will be less concerned with completing the work than with recovering what they lost in negotiation.

• The buyer's project manager will have to spend time making sure that the seller does not add extra costs, propose unnecessary work or initiate other activities to "win" back what they lost during negotiation.



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• Tactics Used in Negotiations• Attack – “If you don’t know the details, perhaps you should get out of the

business”

• Personal Insults – “If you don’t understand what you are doing, find another job”

• Good Guy / Bad Guy – One person is helpful to the other side, another difficult to deal

• Time targets, i.e. Deadlines – “In ninety minutes, I’m walking out of here, with or without an agreement!”

• Delay: “ Let’s revisit this issue the next time we get together”

• Limited Authority – “I can’t agree with this rate, I need to talk with my boss”

• Extreme Demands – “ We want a 20% hourly salary raise”

• Withdrawal – Either emotional withdrawal or physical withdrawal

• Take it or leave it- “this is my bottom line. Take it or leave it”

• Fait accompli- One party claims the issue under discussion has already been decided and can’t be changed.



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• Main Items to negotiate in contracts• Responsibilities

• Authority

• Applicable Law

• Technical and business management approaches

• Contract financing

• Price

• NOTE:

• Price may not be the primary selection criteria or the main negotiation item


12.2 Conduct Procurements: Outputs

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• The Select Sellers process has six outputs:• Selected sellers

• Procurement contract award

• Resource calendars

• Change requests

• Project management plan updates

• Project document updates

• The selected sellers output is obvious; you choose the seller (or sellers) to whom you’ll award the project.

• I’ll explain more about the procurement contract award


What is a Contract: A Contract is:

Legally binding document; terms and conditions must be met as specified

Obligates the seller/contractor to provide the specified product or service and obligates the buyer to pay for it

Changes in contract must be approved by both parties and a formal change to the contract issued in order to be effective

What you need to have a Contract:

• Mutual agreement: There must be an Offer and an Acceptance

• Consideration: A down payment or something of value, not necessarily money.

• Legal capacity: The contract must reflect the contractor’s legal obligation, or lack of obligation to deliver the end products

• Legal purpose: The contract must be for a legal purpose. You cannot have a contract for the sale of illegal goods / service

• Contract capability: The contract is binding only if the contractor has the capability to perform the work




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• Contract• The contract may be simple or complex, usually (but not

always) reflecting the simplicity or complexity of the product.

• Contracts may be called, among other names, a contract, an agreement, a subcontract, a purchase order, or a memorandum of understanding.

• Most organizations have documented policies and procedures specifically defining who can sign such agreements on behalf of the organization, typically called a delegation of procurement authority.


12.2 Conduct Procurements: Terms and Conditions

• Contract terms and conditions are used to reduce, distribute or eliminate potential risks on a project. Therefore, they are based on a risk analysis.


12.2 Conduct Procurements: Terms and Conditions

• Work for Hire

• Work or deliverable provided under contract, owned by the buyer

• Letter of Intent

• Letter (NOT a contract) without legal binding, that says the buyer intends to hire the seller

• Privity: The doctrine of privity in contract law provides that a contract cannot confer rights or impose obligations arising under it on any person or agent except the parties to it.

• Contractual relationship between seller companies

• Example:

• Company A hires company B. Company B hires Company C.

• Company A’s manager asks Company C to stop the work.

• What should Company C do?

• Answer:

• Ignore the request



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• Contract…• Once you have a contract, someone has to administer it.

• In large organizations, this responsibility will fall to the procurement department.

• The project manager should still have a solid understanding of administering contracts because that person will work with the procurement department to determine the satisfactory fulfillment of the contract.


Negotiating the contract in complex situations may require months of preparation.

If there is a need the work to begin immediately or if long-lead procurement is necessary, then the buyer may provide the contractor with a letter contract or letter of intent.

The letter of intent authorizes the contractor to begin work immediately without a contract award

12.2 Conduct Procurements: Letter of Intent



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• Resource Calendars• Quantity and availability of contracted resources

• Change requests• Change requests to the project management plan and its

subsidiary plans as result of procurement activities must be administered through the Perform Integrated Change Control process (Section 4.5)

• Project Management Plan updates• Cost baseline, schedule baseline, Scope baseline,

Procurement management plan

• Project Document Updates• Requirements documentation, requirements traceability

documentation, risk register


12.3 Administer Procurements



12.3 Administer Procurements: Definition

• The Administer Procurements process concerns with managing procurement relationships, monitoring contract performance ensuring that all the requirements of the contract are met and making changes and corrections as required .

• The buzzword for this step is “ADMIN”. Both the buyer and the seller must administer the contract ensuring that each party meet their obligations and protect their own legal rights.

• Project managers have a tendency to ignore the terms and conditions of a contract and focus on what the project manager knows best; the scope of work.

• When multiple vendors are providing goods and services to the project, Administer Procurements entails coordinating the interfaces among all the vendors as well as administering each of the contracts.

• If vendor A has a due date that will impact whether vendor B can perform their service, the management and coordination of the two vendors become important.

• You can see how this situation could multiply quickly when you have a number of vendors involved.



• Depending on the size of the organization, administering the contract might fall to someone in the procurement department. This doesn’t mean you’re off the hook as the project manager.

• You’ll be the one monitoring the performance of the vendor and informing them when and if performance is lacking.

• You’ll also monitor the contract’s financial conditions let the procurement department know it’s OK to pay the vendor.

• If the vendor violates the terms of the contract or doesn’t meet the agreed-upon deliverables, you must document the situation and provide this to the procurement department so that they can enforce or terminate the contract.

• You must integrate and coordinate:

• 4.3 Direct and Manage Project Execution

• 10.5 Report Performance

• 8.3 Perform Quality Control

• 11.6 Monitor and Control Risks

• 4.5 Perform Integrated Change Control



• Activities in Administer Procurements include:• Reviewing cost submittals

• Implementing change control

• Documentation

• Making and handling changes

• Authorizing payments

• Meetings

• Monitoring performance against the contract including all its components (terms and conditions, scope of work, etc.)

• Understanding the legal implications of action taken

• Correspondence

• Record keeping

• Disseminating changes to the appropriate parties

• Performance reviews

• Scope verification

• Identifying risks


12.3 Administer Procurements:Inputs-Tools & Techniques-Outputs

Inputs



3. Contract4. Performance

reports5. Approved

change requests6. Work

performance information

Tools & Techniques

1. Contract change control system

2. Procurement performance review

3. Inspections and audits4. Performance reporting5. Payment system6. Claims administration7. Records management

system

Outputs

1. Procurement documentation

2. Organizational process asset updates

3. Change requests4. Project

management plan updates


12.3 Administer Procurements: Inputs

• All the inputs have been discussed but I would like to highlight the Approved Change Requests and Work Performance Information

• Approved Change Requests• Sometimes as you get into the work of the project, you’ll discover

changes need to be made. This could entail changes to the contract as well.

• Approved change requests are used to process the project or contract changes and might include things such as modifications to deliverables, changes to the product or service of the project, changes in contract terms

• Contracts can be amended at any time prior to contract completion provided the changes are agreed to by all parties and conform to the change control processes outlined in the contract.

• If the seller’s work is unsatisfactory, then a decision to terminate the contract would also be handled as a change request.

• Contested changes, those where the seller and the project management team cannot agree on compensation for the change, are variously called claims, disputes, or appeals.


12.3 Administer Procurements: Inputs

• Work Performance Information• Work performance information concerns monitoring work results

and examining the vendors’ deliverables.

• This includes monitoring their work results against the project management plan and making certain activities are performed correctly and in sequence.

• You’ll need to determine which deliverables are complete and which ones have not been completed to date.

• You’ll also need to consider the quality of the deliverables and the costs that have been incurred to date.

• Vendors request payment for the goods or services delivered in the form of seller invoices.

• Seller invoices should describe the work that was completed or the materials that were delivered and should include any supporting documentation necessary to describe what was delivered.

• The contract should state what type of supporting documentation is needed with the invoice.


12.3 Administer Procurements: Tools & Techniques

• Contract Change Control System• A contract change control system defines the process by which

the contract may be modified.

• It includes the paperwork, tracking systems, dispute resolution procedures, and approval levels necessary for authorizing changes.

• The contract change control system should be integrated with the integrated change control system.

• In most contracts, another person controls the contract than the project manager. This person is called the contracting officer or contract administrator, and:

• IS THE ONLY ONE WITH AUTHORITY TO CHANGE THE CONTRACT

• The contract change control system must incorporate signatures/approvals from both the buyer and the seller.



• Procurement Performance Reviews• Procurement performance reviews examine the seller’s

performance on the contract.

• These reviews can be conducted at the end of the contract or at intervals during the contract period as specified in the contract.

• Items to be reviewed include:• Meeting project scope, meeting project quality, staying within project

budgets, meeting the project schedule, meeting all the contractual obligations.

• The performance reviews themselves might take the form of quality audits or inspections of documents as well as the work of the product itself.

• If the seller is not in compliance, action must be taken to either get them back into compliance or terminate the contract.

• The yardstick you’re using to measure their performance against is the contract SOW and the terms of the contract.

• When the RFP is included as part of the contract (which it usually is), you might also use it to determine contract compliance.



• Inspections and Audits• We talked about quality audits as part of the Perform Quality Assurance

process.• The idea is the same here.

• The buyer, or some designated third party, will physically inspect the work of the seller and perform audits to determine whether there are any deficiencies in the seller’s product or service.

• Performance reporting• Performance reporting provides management with information about how

effectively the seller is achieving the contractual objectives. Contract performance reporting should be integrated with the 10.5 Report Performance process already discussed

• Payment systems• Vendors submit seller invoices for payment and the payment system is the

tool and technique used to issue payment.• Payment systems include reviews and authorization to issue the check.

• The organization might have a dedicated department, such as accounts payable, that handles vendor payments, or it might fall to the project manager. In either case, follow the policies and procedures the organization has established regarding vendor payments.



• Claims Administration• Claims administration involves documenting, monitoring, and

managing contested changes to the contract.

• Changes that cannot be agreed upon are called contested changes.

• Contested changes usually involve a disagreement about the compensation to the vendor for implementing the change.

• You might believe the change is not significant enough to justify additional compensation, whereas the vendor believes they’ll lose money by implementing the change free of charge.

• Contested changes are also known as disputes, claims, or appeals.

• These can be settled directly between the parties themselves, through the court system, or by a process called Alternative Dispute Resolution (ADR), arbitration, or mediation.

• The contract must specify the method for resolving claims



• Claims Administration…• It is critical that project managers and team members watch for

constructive change orders

• Constructive Changes

• A constructive change occurs where a contractor performs work beyond the contract requirements without a formal change order, either by an informal order or due to the fault of the buyer.

• Since any constructive change may be disputed by one party and can lead to a claim against the other party, such changes are uniquely identified and documented by project correspondence.



• Records Management System• A records management system involves not just documentation,

but policies, control functions, and automated tools as part of the project management information system, PMIS (which is both a part of the enterprise environmental factors and a tool and technique of several processes) used to manage project documents as well as contract documents.

• Records management systems typically index documents for easy filing and retrieval.


12.3 Administer Procurements: Outputs

• Contract Documentation• This output includes (but isn’t limited to) all of the following:

• Contract

• Performance information

• Warranties

• Financial information (such as invoices and payment records)

• Inspection and audit results

• Supporting schedules

• Approved and unapproved changes

• The records management system we talked about earlier is the perfect place to keep all these documents.



• Organizational Process Asset Updates• Correspondence

• Correspondence is information that needs to be communicated in writing to either the seller or the buyer. Examples include changes to the contract, clarification of contract terms, results of buyer audits and inspections, and notification of performance issues.

• You would also use correspondence to notify a vendor that you’re terminating the contract because performance is below expectations and is not satisfying the requirements of the contract.

• Payment schedules and requests

• Many times, contracts are written such that payment is made based on a predefined performance schedule.

• You will verify that the vendor’s work (or delivery) meets expectations before the payment is authorized.

• the check gets sent to the seller.



• Organizational Process Asset Updates• Seller performance evaluation

• Seller performance evaluation is a written record of the seller’s performance on the contract.

• It should include information about whether the seller successfully met contract dates, fulfilled the requirements of the contract and/or contract statement of work, whether the work was satisfactory, and so on.

• Seller performance evaluations can be used as a basis for terminating the existing contract if performance is not satisfactory.

• They should also indicate whether this vendor should be allowed to bid on future work.

• Seller performance evaluations can also be included as part of the qualified sellers lists.



• Requested Changes• Requested contract changes are coordinated with the 4.3 Direct

and Manage Project Execution and 4.5 Perform Integrated Change Control processes so that any changes impacting the project are communicated to the project team and appropriate actions are put into place to realign the objectives.

• Contract changes will not always impact the project management plan, however.

• For example, late delivery of key equipment probably would impact the project management plan

• Changes in the vendor payment schedule probably would not impact the project management plan.

• It’s important that you are kept abreast of any changes to the contract so that you can evaluate whether the project management plan needs adjusting.



• Project management plan updates• As result of procurement the following documents may require

updating:

• Procurement management plan is updated to include any approved changes that affect procurement management including impacts to costs and schedules

• Baseline Schedule : If there al any slippages to the schedule baseline, the schedule need to be upgraded to current expecations


12.4 Close Procurements


12.4 Close Procurements: Definitions

• The Close Procurements process is concerned with completing and settling the terms of the contract including resolving any open contract items

• It also involves administrative activities such as finalizing open claims, updating project records to reflect final results, and achieving project records.

• It supports the 4.6 Close Project or Phase process because the Close Procurements process determines whether the work described in the contract was completed accurately and satisfactorily.

• When projects under contract end prematurely, the 5.4 Verify Scope process is where the level of detail concerning the amount of work completed gets documented.


12.4 Close Procurements: Definitions

• Close Procurements is done:• When a contract ends

• When a contract is terminated before the work is completed (early termination)

• If a project involves a contract:• Close Procurements should occur before 4.6 Close Project or Phase

(administrative closure).

• Contracts might have specific terms or conditions for completion and closeout.

• You should be aware of these terms or conditions so that project closure isn’t held up because you missed an important detail.

• Depending on the terms of the contract, early termination (whether by agreement, via default, or for cause) might result in additional charges to the buyer.

• Be certain to note the reasons for early termination in your contract documentation.

• Generally, if there is no material breach, as the project manager, it is important to continue to make progress towards your objective (successful conclusion of the project).


12.4 Close Procurements: Inputs-Tools & Techniques-Outputs

Inputs Tools & Techniques

1 Procurement audits

2 Negotiated settlements

3 Records Management System

Outputs


2. Procurement documentation

1. Closed procurements

2. Organizational process assets updates


12.4 Close Procurements: Inputs

• Project management plan• Re: Procurement management plan

• Procurement documentation• Includes the contract itself along with all supporting schedules,

requested and approved contract changes, any seller-developed technical documentation, seller performance reports, financial documents such as invoices and payment records, and the results of any contract-related inspections, etc.

• This information along with all the other information gathered during the project is filed once the project is closed out so that anyone considering a future project of similar scope can reference what was done.


12.4 Close Procurements: Tools & Techniques

• Procurement audits• Procurement audits are structured reviews of the procurement

processes to determine whether they are meeting the right needs and are being performed correctly and according to procurement standards.

• Procurement audits are concerned with reviewing the procurement process, starting with the 12.1 Plan Procurements process all the way through to 12.3 Administer Procurements.

• Procurement audits examine the procurement process to determine areas of improvement and to identify flawed processes or procedures.

• Documenting the lessons learned—including the successes and failures that occurred—allows you to improve other procurement processes currently underway on this project or other projects. It also gives you the opportunity to improve the process for future projects.

• Procurement audits might be used by either the buyer or the vendor, or by both, as an opportunity for improvement.


12.4 Close Procurements: Tools & Techniques

• Negotiated Settlements• In all procurement relationships the final equitable settlement of all

outstanding issues, claims or disputes by negotiation is the primary goal.

• If direct negation does not work, some form of Alternative Dispute Resolution (ADR), arbitration, or mediation maybe used.

• If nothing else works, litigation through the court system is the only option left. This is the least desirable option.

• Records Management System• Described in 12.3 Administer Procurements


12.4 Close Procurements: Outputs

• Closed Procurements• One of the purposes of the Close Procurements process is to

provide formal notice to the seller that the contract is complete.

• This is formal acceptance and closure of the contract.

• It’s your responsibility as project manager to document the formal acceptance of the contract.

• Many times the provisions for formalizing acceptance and closing the contract are spelled out in the contract.

• If you have a procurement department that handles Administer Procurements, they will expect you to inform them when the contract is completed and will in turn follow the formal procedures to let the seller know the contract is complete.



• Organizational process updates• Procurement File

• At the end of each contract a concerted effort must be made to put all contract files, letters, addenda, change orders, correspondence and other records into an organized file.

• This file is stored for use as historical records and help protect the project in case of arguments or legal action regarding what was done and not done on the contract.

• Deliverables Acceptance• The deliverable acceptance portion of the organizational process updates

includes the formal written notice from the buyer that the deliverables are acceptable and satisfactory or have been rejected.

• If the product or service does not meet expectations, the vendor will need to correct the problems before you issue a formal acceptance notice.

• Deliverables acceptance/Validated deliverables is an input into the 5.4 Verify Scope process

• Ideally, quality audits have been performed during the course of the project, and the vendor was given the opportunity to make corrections earlier in the process than the Closing stage.



• Organizational process updates…• Lessons learned

• Lessons learned include information and documentation about what worked well and what didn’t work well regarding the procurement processes. You can use this information on future projects to improve performance and prevent inefficiencies.


4.6 Close Project or Phase vs. 12.4 Close Procurements

4.6 Close Project or Phase 12.4 Close ProcurementsDone at each “end of phase” and “end of project”

Done only at the end of the contract (if the contract is only for a phase, then at the end of the phase)

Uses lessons learned Uses procurement audits

Requires less documentation Requires more documentation

Done after Close Procurements Done first

• Close Procurements occurs first• All contracts would be closed out before the project is closed

out.• Therefore, at the end of the contract,

• the project manager would perform a procurement audit for each contract,

• administratively close out the contract, and then• administratively close out the project when the whole project is

completed.


Question and Answers

PMGT401-12 Project Procurement Management-04

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