Procrement & Contracts

8/12/2019 Procrement & Contracts

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Lecture 45

Project Procurement,Contract Management,

andEthics

inProject Management


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Lecture 44 contents

What is Risk? Primary Components

Tolerance of Risk

Risk Management

Cat of Risk Risk Planning

Risk Assessment (identification and analysis)

Risk Handling Risk Monitoring

Qualitative Risk Rating


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Lecture 45 Procurement

Procurement Cycles Requirement cycle

Requisition Cycle

Solicitation cycle Award Cycle

Admin cycle

2. Type of contract Six Categories of Contract

Ethics in Project Management


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Self-p i ty is our wors t

enemy &

if we y ield to it ,

we can never do any th ing

wise in this world

- Helen Keller


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To be preparedis half thevictory.

Miguel de Cervantes Saavedra
http://en.thinkexist.com/quotation/to_be_prepared_is_half_the_victory/216213.htmlhttp://en.thinkexist.com/quotation/to_be_prepared_is_half_the_victory/216213.htmlhttp://en.thinkexist.com/quotation/to_be_prepared_is_half_the_victory/216213.htmlhttp://en.thinkexist.com/quotation/to_be_prepared_is_half_the_victory/216213.htmlhttp://en.thinkexist.com/quotation/to_be_prepared_is_half_the_victory/216213.htmlhttp://en.thinkexist.com/quotation/to_be_prepared_is_half_the_victory/216213.html


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Treat people as if they were

what they ough t to be,& you

help them to become

what

they are

capable of being

- Johann Wol fgang von Goethe


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The quality of a person'slife is in direct productionto their commitment to

excellence,

regardless of their chosenfield of endeavor.


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The race is not alwaysto the swift...

but to thosewho keep

on running.


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In three words,

I can sum up

everything I'velearned about

life: It goes on.- Robert Frost


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Action in Your Project

Actionmay no talways br ing

happiness,

bu t there is

no happ iness

wi thout Action

- Benjamin Disraeli


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Procurement

Acquisition of goods/services.Procurement (& contracting)

is a Process that involves

-Two Parties with:

Different objectives

Who Interact ina given market segment.


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Good Procurement Practices

includesCorporate profitability by:Taking advantage of:1. Quantity discounts,

2. Minimize Cost/Financial

Problems,3. Seeking out Quality Suppliers.


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As Procurement

Contributes To ProfitabilityProcurement is Often

Centralized,-Results in Standardized

practices-Lower Paper work Cost


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Objectives of Procurement

Planning are to select one offollowing for the Procurementof all Goods/Services:

1. From Single Source.2. From Multiple/source.

3. Procure only small portion ofGoods/Services

4. Procure none of Goods/Services


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Environment in which Procurement TakePlace is Critical factor.

There are two environments:1. Macro &2. Micro.

Macro environment includes General

external variables that can InfluenceHow & When we do Procurement andit Includes:

Recessions,

Inflation, Cost of borrowing money,

Unemployment.


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Micro environment is the internal to Firm IncludeProcurement /Contract Systemfive cycles:

Requirement Cycle: Defines boundaries ofProject

Requisition Cycle: analysis of sources

Solicitation Cycle:Bidding process

Award cycle: Contractor selection & ContractAward

Contract Admin Cycle:Managingsubcontractor until Completion of the

Contract.


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Several Activities of

Procurement Process thatoverlaps Several of Cycles.

These cycles are conductedIn parallel, especially

Requisition & Solicitation.


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1. Requirement Cycle

First Step in ProcurementProcess Definition of

Project SpecificallyRequirements


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Requirement Cycle Includes

1. Defining the need for the project2. Development of the statement of work,

specifications, and work breakdown

structure

3. Performing a make or buy analysis

4. Laying out the major milestones and the

timing/schedule5. Cost estimating, including life-cycle costing

6. Obtaining authorization and approval to

proceed


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Specifications

Written Pictorial or graphic Informationdescribe define or specifyservices/item to be procured:

1. Design (physical Characteristics)

2. Performance (measurable

capabilities)3. Functional Specification ( subset of

Functional , risk is on contractor)


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2. Requisition Cycle

Once the Requisitionidentification,

Requisition formsentto Procurement to begin

Requisition Process.


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Requisition cycle Include:

1. Evaluation confirming specification.2. Confirming sources

3. Reviewing past performance of

sources

4. Producing Solicitation Package (S/P)

Sol ic i tat ion Package sent to eachpossib le Supplier for Playing Field

is level.


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Specification Package Includes:

1. Bid documents (usually standardized)2. Listing of qualified vendors (expected to

bid)

3. Proposal evaluation criteria

4. Bidder conferences

5. How change requests will be managed6. Supplier payment plan


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3. Solicitation Cycle

Selection of Acquisition Methodisthe Critical Element in Solicitation

Cycle.

Three Acquisition Methods :Advertising

Negotiation Small Purchases (off supplies)


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Advertising company goes

out for sealed bids.

There are no negotiations.

Competitive market forcesdetermine the price and the

award goes to the lowestbidder.


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Negotiationis when the price is

determined through a bargainingprocess. In such a situation, thecustomer may goout for a:

Request For Information (RFI) Request For Quotation (RFQ)

Request For Proposal (RFP)

The request for Proposal (RFP) is themost costly endeavor for the vendor.


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Large proposals contains:

separate volumes for cost,

technical Performance,

Management History, Quality,facilities, subcontractor

Management, & Others.


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On Large contracts the Negotiation

Process mayAlso Includes Price,Quantity, Quality & Timing.

Vendor Relations are criticalduringcontract negotiations.

Can Shorten Process due to:

1. Integrity of relationship &2. Previous history


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Award Cycle (A/C)

Result in a signedcontract. Several types of

Contracts.So Negotiation process also

Include selection of theType of Contract.


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Objectives of Award Cycle is to

negotiate a contract:-Type & Price

-Result in reasonable Contractorrisk & Provide Contractor riskwith Greatest Incentive for

Efficient & EconomicPerformance.


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There are certain basic elements of most contracts.

Mutual Agreement:There must be an offer andacceptance.

Consideration: There must be a down payment.

Contract Capability:The contract is binding only if

the contractor has the capability to perform thework.

Legal Purpose:The contract must be for a legalpurpose.

Form Provided By Law:The contract must reflectthe contractor's legal obligation, or lack of obligation,

to deliver end products.


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The Two Most Common Contract Forms are

completion contracts and term contracts. Completion Contract:The contractor is

required to deliver a DEFINITIVE END

PRODUCT. Upon delivery and formalacceptance by the customer, the contract isconsidered complete, and final PAYMENT

CAN BE MADE.


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2. Term contract:

The Contract Is Required To Deliver A Specific"Level Of Effort," Not An End Product.

The effort is expressed in Woman/Man-days (Months

Or Years) over a Specific Period Of Time usingSpecified Personnel Skill Levels And Facilities.

When The Contracted Effort Is Performed, thecontractor is under no further obligation. Final

payment is made, irrespective of what is actuallyAccomplished Technically.


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Final Contract also called

Definitive contract,Follows normal Contracting

Procedures. E.g. Negotiation ofall Contractual Terms &

Condition on Cost & Schedule

prior to Initiation ofPerformance.


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Negotiating of contract and

preparing it for signaturesmayrequire months of preparation.If the customer needs the work to

begin immediately or if long-leadprocurement is necessary,

then:


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Customer may provide the

contractor with a let ter contract

or letter o f in tent (LOI). The letter

contract is a preliminary written

instrumentauthorizing thecontractor to begin immediately:

1. The Manufacture Of Supplies Or

2. The Performance Of Services.


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Final contract price

Must be negotiated

after performance begins,

Definitive contract

must

still be negotiated.


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Types of contract selectionbased upon following:

1. Overall degree of Cost & ScheduleRisk2. Type & complexity of Requirement (technical Risk)

3. Extent of Price Competition

4. Cost/Price Analysis

5. Urgency of Requirements

6. Performance period

7. Contractor's Responsibility (and Risk)

8. Contractor's Accounting System (Report Earn Valuereporting?)

9. Concurrent Contract (contract take A back seat to existingwork?)

10. Extent of Subcontracting (how much work contractor outsource?)


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General six types of contracts :

Fixed-price (FP),Cost -plus-fixed-fee (CPFF),

Cost-plus-percentage-fee (CPPF),Guaranteed Max-Shard Savings

(GMSS),

Fixed-price Incentive- Fee (FPIF),

Cost-Plus-Incentive-Fee (CPIF)


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First Category

Fixed-price or

Lump-sum cont rac t


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Contractor carefully Estimate

Target Cost.Contractor required to Perform

work at negotiated ContractValue.


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If Estimated target cost is

low then Total Profitreduced& may vanish.

Contractor may not be able tounderbid competitors So

Contractor assumes a Largerisk.


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Lump-sum

Provides Max Protection toOwnerfor ultimateCost ofProject.

Disadvantage:

Requiring a Long Period For

Preparation & Adjudications ofBids.


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Because of a Lack of

knowledge ofLocal conditions,

all contractors Include

ExcessiveContingency.


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Chang Requested

By owner after Award of

contract Lead to

Troublesome&Sometimes Costly

extras


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2nd

Category

Cost-Plus-Fixed-Fee

(CPFF)


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Cost Plus Fixed Fee (CPFF)

If Accurate Pricing Not Possible in Any Otherway.

So we use CPFF, so Cost may vary but Feeremains same.

Contractor agrees only to use Best Efforts toPerformance

Good/Poor Performance

Rewarded equally.


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Total Rs/$ Profit likely To

Produce Low Rate of Returnreflects Small Amount ofRiskBy contractor.

Fixed Fee - small % Age OfTot/true Cost.

CPFF Required Company booksbe audited.


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3: Cost-Plus-

Percentage

fee Contract


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Provides Maximum flexibility

to owner Permits Owner &Contractor to worktogether cooperatively onAll Technical, Commercial,Financial Problems.

-No Financial Assurance ofUltimate Cost.


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No financial incentive to

contractor this because of Highbuilding cost (Compared with

other forms).

Only meaningful Incentive can be:

1. Inc competition &

2. Prospects forFollow-on contracts.


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4thCategory of

Contracts

Guaranteed

Maximum-Share

Savings


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Contractor-Gets Fixed Fee for his

Profit and Reimbursed for theActual Cost of Engineering,

Materials, Construction Labor, all

Other Job Costs,

But only up to Ceiling figure

established as Guaranteedmaximum"


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Savings below the" Guaranteed

Maximumare Shared betweenOwner & Contractor, where

as Contractor Assumes theResponsibility

For any Overrun beyond

Guaranteed Maximum Price.


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Contract form Combines

advantages as well asdisadvantages of Both LumpSum & Cost-Plus

Contracts.Best form for NegotiatedContract as it Establishes a

Maximum Price At EarliestPossible Date


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Though contract awarded

without CompetitiveTenders.

-Yet Protects ownerAgainst beingOvercharged,


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Unique in that Owner &

Contractor shareFinancialRisk & Both haveReal

incentiveTo CompleteProject At lowest PossibleCost.


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5thCategory of Contract

Fixed-Price-

Incentive-fee

Contracts


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These are Same as Fixed-

Price contracts Except havesome Provision forAdjustment of the Total

Profitby a formula.This Formula Dependson

Final Total CostatCompletion of Project


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Formula Agreed to in

advance By Owner &Contractor.

To use this Both Projector ContractRequirements

Must be firmly established


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Provides An incentive to

Contractor To:a) Reduce Cost

b) Increase profit

Both Owner & CostShare in

Risk & Savings.


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6th

Cat.Cost-Plus-

Incentive-

Fee Contracts


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Same as: Cost Plus Contracts, Except

have Provide for Adjustment of FeeasDetermined By a Formula:

Compares Total Project Cost to Target

Cost.Formula agreed to in advance by Owner

& Contractor. Used for Long

Durationor R&D Type Project.


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5. Contract Admin Cycle

Contract Administrator isResponsible for Compliance

By the Contractor to Contract'sTerms & Conditions

To Make Sure Final Product is

Fit for Use.

Functions of contract administrator Include:


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Change Management

Specification interpretation

Adherence to QualityWarranties

Subcontractor Management

Production surveillanceWaivers

Contract breach

Resolution of disputes

Project Termination

Payment Schedule

Project Closeout


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Part Two

Ethics

Ethical Origins


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gSoc ietal Ethics:

Standards of Members ofSociety

use when dealing witheach other.

Based on

Values & standards Soc ietal Eth ics :


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Found in Societys

Legal Rules,Norm, & Mores.

Cod ified in the

Form of Law& Society Customer.

Norms dictate


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Norms dictate

how peopleShould behave.

Societal ethics vary basedOn a given Society.

Strong beliefs in onecountry

differ elsewhere.

P f i l Eth i


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Profess ional Ethics :

Values & standards used by

Group of Managers in workplace.

Applied when Decision

not Clear-Cut Ethically.

Physicians/Lawyers

Professional Associates

(PMA, Bar Council)


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Values

An individualsBasic

convictions ofWhat is Right &

Wrong

Values


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Values

Basic beliefs About whatoneshould or

should not do?& What is &

is not important?


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Ind iv idual Eth ics :

Values of an individual

resulting from theirfamily & upbringing.


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Behavior

not illegal,Yet People still

disagree

If notethical.

Ethi f t


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Ethics of top

Project Managerset the

tone for

Project


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Ethics Codes

& PoliciesProvide sign of top

Managements desiresin

Project BasedOrganizational culture

Why Behave Ethically?


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Why Behave Ethically?

Project Manager shouldbehave ethically

To Avoid Harming others.Managers Responsible forProtecting & Nurturing

Resources

In their Charge.


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Leadership, Culture,

IncentiveCompensation Plans help

ShapeIndividual Ethical

behaviorin Project Management

Promoting Ethics


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Promoting Ethics

EvidenceShowing Ethical

Managers

benefitover long term .


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Ethical Con tro l System in Project

Management

Formal System to encourage

Ethical Management.

Project Management Firms appoint anEth ics Ombudsman to monitor

practices. Communication

standards

To all employees.


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Ethical culture:firms

increasingly seek tomake good ethicspart of norm &organizationalculture.


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Ethical decisions involve

Normative Judgment impliessomething is good or bad,

right or wrong, better orworse.

Morality Societys acceptednorms of behavior

S


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Should you pay compensation pay

to laid of f workers?

May December StakeholderReturn.

Should you buy goods f romoverseas f i rms that hire

chi ldren?

If you dont Children may not earnenough money to eat.

Views of Ethical Decision-Making


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g

Decision makersseek to impose

and enforce rulesfairly andimpartially

Decisions made

solely on the basisof outcomes orconsequences

Decisions areconcerned with

respecting and pro-tecting basic rights

of individuals


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Code of Ethics

Professional organizationsProject Management Institute

(PMI)Taking a serious look at

developing

Requirements for a Professional

Project manager.

Ethics obligation matrix.


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ARTICLE I: Project Managers shall maintain high standards


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j g gof personal and professional conduct.

a) Accept responsibility for their actions.

b) Undertake projects and accept responsibility only ifqualified by training or experience, or after full disclosure totheir employers or clients of pertinent qualifications.

c) Maintain their professional skills at the state -of-the-art andrecognize the importance of continued personaldevelopment and education.

d) Advance the integrity and prestige of the profession bypracticing in a dignified manner.

e) Support this code and encourage colleagues and co-workers to act in accordance with this code.

f) Support the professional society by actively participatingand encouraging colleagues and coworkers to participate.

g) Obey the laws of the country in which work is beingperformed.

ARTICLE II: Project Managers shall in their


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ARTICLE II: Project Managers shall, in theirwork:

a) Provide the necessary project leadership to promotemaximum productivity while striving to minimize costs.

b) Apply state-of-the-art management tools and techniques toensure schedules are met and the project is appropriatelyplanned and coordinated.

c) Treat fairly all project team members, colleagues and co-workers, regardless of race, religion, sex, age or nationalorigin.

d) Protect project team members from physical and mentalharm.

e) Provide suitable working conditions and opportunities forproject team members.

f) Seek, accept and offer honest criticism of work, andproperly credit the contribution of others.

g) Assist project team members, colleagues and co-workers intheir professional development.

ARTICLE III: Project Managers shall in their relations


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ARTICLE III: Project Managers shall, in their relationswith employers and clients:

a) Act as faithful agents or trustees for their employers or clients inprofessional or business matters.

b) Keep information on the business affairs or technical processesof an employer or client in confidence while employed, and later,until such information is properly released.

c) Inform their employers, clients, professional societies or publicagencies of which they are members or to which they may makeany presentations, of any circumstances that could lead to aconflict of interest.

d) Neither give nor accept, directly or indirectly, any gift, paymentor service of more than nominal value to or from those having

business relationships with their employers or clients.e) Be honest and realistic in reporting project cost, schedule and

performance.


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ARTICLE IV: Project Managers shall, in

fulfilling their responsibilities to thecommunity:

a) Protect the safety, health and welfare of the

public and speak out against abuses inthose areas affecting the public interest.

b) Seek to extend public knowledge and

appreciation of the project managementprofession and its achievements.


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Part Two ends

Social Responsibility


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Social Power

Social Responsibility Concept

Project Management Organization

must behave ProactivelyBusiness has certain socialresponsibility because power it

wieldsBe a Good Corporate Citizen

Social Responsibility Pyramid


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Obey the Law

Make Enough Money To Survive

Good Corporate Citizen

Do What is Right, Just

Levels of Social Responsibility


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Levels of Social Responsibility

Reactive

(Obstruction)

ProactiveDefensive Accommodative

Level of Social ResponsibilityLow High

Social Responsiveness


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Accommodative Response:

Managers realize need for socialresponsibility.

Try to balance interests of all S/H.

Proact ive response:Manager activelyembrace social responsibility.

Go out of their way to learn about & help

Stakeholders Good Corporate Citizen

Why be Responsible?


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y p

Managers accrue benefits by being responsible. Workers & Society benefit.

Quality of Life in Society improve.

It is the right thing to do.

Whist leblowers:a per reporting illegal

or unethical acts.

Now protected by law

Social aud it :Managers specifically take ethics &

business into account when making decisions.

The Social Audit


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ProfitabilityNegative Low Medium High

Negative

Low

Medium

High

Favored

Strategies

SocialRet

urns

Arguments For


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gSocial Responsiveness

Business is

involved in

social issues

B i


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Business

resources to

tackle todayscomplex societal

problems

A better society means


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A better society means

a better environment fordoing business

Corporate social actionwill prevent

Government intervention

How Firms Can Improve Their SocialResponsiveness (Ethical Performance)


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Responsiveness (Ethical Performance)

Establish and publish their own Code of Ethics Ombudsmen - (committee, task force) to review the

corporate past behavior

Protect whistle-blowing - when an employeediscloses an illegal, immoral, or unethical action

committed by a member of the organization Training programs - ethical sensitivity training Controlling compliance - corporate social audit (or

ethics audit)

Leadership - demonstrate commitment fromleaders

Involve personnel at all levels


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Part Three

Recap of the course


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Management

Project Management

Project Manager

Project Proposal

Project Feasibility

Project Selection Method Project Planning

Scope

Charter Quality ( 3-4 )

Productivity


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Leadership Communication

Ethics

Costing Pricing

Risk Management

Procurement Close out Note


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Part Four Project Management Institute (PMI)


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Procurement Management Processes Project Procurement Management involves

engaging in a systematic process to purchase oracquire the needed products, services, or results

from an outside source which will perform thework. Procure Management encompassescontract management and control processesnecessary to administer contracts or purchaseorders. It also includes processes which assist in

administering a contract to assure thebuyer/seller relationships are properly managed.The procurement management processes are:


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Plan Purchases and AcquisitionsPlanPurchases and Acquisitions process

involves ascertaining what is needed, and

when it is needed. Then how to assureyou have what you need when you need it.

(Novel concept!) This is completed as a

part of the planning process group.


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Plan ContractingThe Plan Contractingprocess involves documenting the

products, services, and results

requirements and identifies potentialsellers. Plan Contracting is commonly first

engaged in the planning process group.


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Request Seller ResponsesRequestSeller Responses process obtains

information, quotations, bids, offers, or

proposals from sellers as appropriate. Thisis a part of the executing process group


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Select SellersThe Select Sellersprocess is where the offers are reviewed,

and a chosen vendor rises to the top of the

Analytical Hierarchy Process. Commonlynegotiations are started in written form.

This is commonly a part of the executing

process group.


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Contract Administration- The ContractAdministration Process manages allaspects of the contract and therelationship between the buyer and theseller including managing sellerperformance and changes, providing abasis for future work, and managing the

relationship with the projects buyer. Thisis a part of the monitoring and controllingprocess grouping.


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Contract Closure- The Contract ClosureProcess assures completion and settling

terms of any contracts including resolving

any open items and closing each contract.


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Each Procurement Management processresults in a specific deliverable which is

used as the foundations for the

subsequent process. Combined theprocurement management processes

provide a best practice pattern for

managing contracts and vendorrelationships on a project.

Procrement & Contracts

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