Project Procurement Management

PPROJECTROJECT PPROCUREMENT ROCUREMENT

MMANAGEMENTANAGEMENT

Hisham Haridy, PMP, PMI-RMPFebruary 2016

Plan Procurement Management

Conduct Procurements

Control Procurements

Close Procurements

The processes required to acquire goods and services, to attain project scope,

from outside the performing organization.

Procurement Management

Management Procurements Procurements Procurements

Getting the procurement

documents created in the plan procurement process to the sellers, answering the seller’s question, having them prepare responses, and reviewing the responses to select

seller.

Consist of tying up all the loose ends,

verifying that all work and deliverables are accepted, finalizing open claims, and paying withheld

retainage for each of procurements on the

project.

Determining what to purchase or acquire and determining when and

how.

Managing the relation between the buyer and seller and assuring that the

performance of both parties to the

procurement meets contractual requirements

PROJECT PROCUREMENT MANAGEMENT February 2016

InputsTools and Techniques

Outputs

1. Project management plan 1. Make-or-buy analysis 1. Procurement management

Plan Procurements Management

“The process of documenting project purchasing decisions, specifying the

approach, and identifying potential sellers.”

1. Project management plan

2. Requirements documentation

3. Risk register

4. Activity resource requirements

5. Project schedule

6. Activity cost estimates

7. Stakeholder register

8. Enterprise environmental factors

9. Organizational process assets

1. Make-or-buy analysis

2. Expert judgment

3. Market research

4. Meetings

1. Procurement management

plan

2. Procurement statements of

work

3. Procurement documents

4. Source selection criteria

5. Make-or-buy decisions

6. Change requests

7. Project documents updates


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� The project management plan describes the need, justification, requirements, and

current boundaries for the project.

�Scope statement.

�WBS.

�WBS dictionary.

2. Requirements documentation

� Requirements with contractual and legal implications that may include health,

safety, security, performance, environmental, insurance, intellectual property rights,

equal employment opportunity.

� Licenses, and permits.


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3. Risk register

� The risk register provides an understanding of risks uncovered to date.

� Risk analysis of the project should be completed before contracts are

signed.

4. Activity resource requirements

� Activity resource requirements contain information on specific needs such as

people, equipment, or location.people, equipment, or location.

5. Project schedule

� Project schedule contains information on required timelines or mandated

deliverable dates.

6. Activity cost estimates

� Cost estimates developed by the procuring activity are used to evaluate the

reasonableness of the bids or proposals received from potential sellers.

7. Stakeholder register

� Stakeholder register provides details on the project participants and their interests

in the project.PROJECT PROCUREMENT MANAGEMENT February 2016

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8. Enterprise environmental factors

� These factors are company culture and existing systems that your project will have

to deal with or can use.

� Marketplace conditions.

� Products, services, and results that are available in the marketplace.

� Suppliers, including past performance or reputation.

� Typical terms and conditions for products, services, and results or for the

specific industry.specific industry.

� Unique local requirements.


� Formal procurement policies, procedures, and guidelines.

� Most organizations have formal procurement policies and buying organizations.

� Management systems that are considered in developing the procurement

management plan and selecting the contract types to be used.

� An established multi-tier supplier system of pre-qualified sellers based on prior

experience.


Contract

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Contact;

� A contract is a mutually binding agreement that obligates the seller to provide the

specified product or service or result and obligates the buyer to pay for it.

YOU SHOULD KNOW CONTRACT TYPE

Cost reimbursable

(CR)

Percentage of Costs (CPPC)

Fixed Fee (CPFF)

Award Fee (CPAF)

Incentive Fee (CPIF)

Time and Material (T&M)

Fixed Price (FP)

Award Fee (FPAF)

Economic Price

Adjustment (FPEPA)

Incentive Fee (FPIF)


Cost Reimbursable (CR)

� A cost reimbursable contract is used when the exact scope of work is uncertain

and, therefore, costs cannot be estimated accurately enough to effectively use a

fixed price contract.

� This type of contract provides for the buyer to pay the seller allowable incurred

costs to the extent prescribed in the contract.

� This type of contract requires the seller to have an accounting system that can

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� This type of contract requires the seller to have an accounting system that can

track costs by project.

� Here the buyer has the most cost risk because the total costs are unknown.

� Example; Research and development or information technology projects in which

the scope is unknown are typical examples of cost reimbursable contracts.

Cost Contract

� A cost contract is one in which the seller receives no fee (profit).

� It is appropriate for work performed by nonprofit organizations.

� Contract = Cost. (without profit)


1. Cost Plus Percentage of Costs (CPPC) OR Cost Plus Fee (CPF)

� Requires the buyer to pay for all costs plus a percentage of costs as a fee.

� This type of cost reimbursable contract is not allowed for U.S. federal acquisitions or

procurements under federal acquisition regulations and is bad for buyers

everywhere.

� Sellers are not motivated to control costs because they will earn a profit on every

cost without limit.

� Contract = Cost + 10% of costs as fee.

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� Contract = Cost + 10% of costs as fee.

2. Cost Plus Fixed Fee (CPFF)

� Provides for payment to the seller of actual costs plus a negotiated fee that is

fixed before the work begins.

� The fee does not vary with actual costs, thus providing some incentive for the seller

to control costs.

� The fee may be adjusted as a result of changes to the procurement statement of

work.

� Contract = Cost + $100,000


3. Cost Plus Award Fee (CPAF)

� The buyer pays all costs and a base fee plus an award amount (a bonus) based

on performance.

� This is similar to the CPIF contract, except the incentive is a potential award, rather

than a potential award or penalty.

� The award amount in a CPAF contract is determined in advance and apportioned

out depending on performance.

� This is a type of incentive contract. In some instances, the award given out is

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� This is a type of incentive contract. In some instances, the award given out is

judged subjectively, Therefore, procedures must be in place in advance for giving

out the award, and a board is established to help make the decision fairly.

� As with a FPAF contract, the cost to administer an award fee program vs. the

potential benefits must be weighed in the decision to use this type of contract.

� Contract = Cost + $5,000 (for every month production exceeds 100,000 units).

Maximum award available is $50,000

� Contract = Cost + an award fee (to be determined) for each deliverable

completed at least 7 days early.


4. Cost Plus Incentive Fee (CPIF)

� Provides for the seller to be paid for actual costs plus a fee that will be adjusted

based on whether the specific performance objectives stated in the contract are

met.

� In this type of contract, an original estimate of the total cost is made (the target

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cost) and a fee for the work is determined (a target fee).

� The seller then gets a percentage of the savings if the actual costs are less than

the target costs or shares the cost overrun with the seller.

� Contract = Cost estimated + $100,000 (target fee)


Fixed Price (FP, or Lump Sum, Firm Fixed Price)

� Used for acquiring goods or services with well-defined specifications or

requirements and when there is enough competition to determine a fair and

reasonable fixed price before the work begins.

� This is the most common type of contract.

� If the costs are more than the agreed-upon amount, the seller MUST bear the

additional costs.

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� Therefore, the buyer has the LEAST cost risk in this type of contract, provided

the buyer has a completely defined scope.

� It could be said that the seller is most concerned with the procurement statement

of work (SOW) in this type of contract.

� Sellers in some industries may NOT have the detailed accounting records of past

project activities required to accurately estimate future projects.

� Buyers may NOT have the expertise to prepare a complete procurement

statement of work.

� Contract = $250M.


1. Fixed Price Award Fee (FPAF)

� The buyer pays a fixed price (which includes fee) plus an award amount (a bonus)

based on performance.

� This is very similar to the FPIF contract, except the total possible award amount is

determined in advance and apportioned out based on performance.

� In many instances, the award paid is judged subjectively. Therefore, procedures

must be in place in advance for giving out the award, and a board must be

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must be in place in advance for giving out the award, and a board must be

established to help make the decision fairly.

� The cost to administer the award fee program versus the potential benefits must be

weighed in the decision to use this type of contract.

� Contract = $110 M . For every month performance exceeds the planned level by

more than 15% , an additional $5,000 is awarded to the seller, with maximum

award of $70,000.


2. Fixed Price Economic Price Adjustment (FPEPA)

� If there are questions about future economic conditions (future prices) for contracts

that exist for a multi-year period, a buyer might choose a fixed price contract with

economic price adjustment.

� Future costs of supplies and equipment that the seller might be required to provide

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under contract might not be predictable.

� A similar type of contract is called fixed price with prospective price redetermination.

� Contract = $110 M, but a price increase will be allowed in year two based

on the U.S. Consumer Price Index report for year one.

� Contract = the contract price is $110 M but a price increase will be

allowed in year two to account for increases in specific material costs.


3. Fixed Price Incentive Fee (FPIF)

� Profits (or financial incentives) can be adjusted based on the seller meeting specified

performance criteria such as getting the work done faster, cheaper, or better.

� The final price is calculated by a formula based on the relationship of final negotiated

costs to the total target cost.

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costs to the total target cost.

� A variation on a FPIF is a FPIF successive target contract, in which the target for the

incentive is changed after the first target is reached.

� Contract = $110 M. An additional $10,000 or percentage/month early the

project is finished will be paid to the seller.


Time and Material (T&M) or Unit Price

� The buyer pays on a per-hour or per-item basis.

� It is frequently used for service efforts in which the level of effort CAN NOT be

defined at the time the contract is awarded.

� It has elements of a fixed price contract and a cost reimbursable contract.

� The seller's profit is built into the rate, so they have NO incentive to get the work

done QUICKLY or efficiently.

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� For these reasons, this type of contract is BEST used for work valued at small dollar

amounts and lasting a short amount of time.

� To make sure the costs do not become higher than budgeted, the buyer may put a

"'Not to Exceed" clause in the contract and thus limit the total cost they are

required to pay.

� The buyer has a Medium amount of cost risk compared with cost reimbursable and

fixed price contracts.

� Contract = $100 /hour + expenses or materials at cost.

� Contract = $100 /hour + materials at $5/L.M of wood.


Purchase Order (PO)

� A purchase order is the simplest type of fixed price contract.

� This type of contract is normally unilateral (signed by one party) instead of bilateral

(signed by both parties).

� It is usually used for simple commodity procurements.

� Purchase orders become contracts when they are "accepted by performance (e.g,

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� Purchase orders become contracts when they are "accepted by performance (e.g,

equipment is shipped by the seller-a unilateral PO).

� Though unilateral purchase orders are most common, some companies will require

the seller's signature on a purchase before the buyer will consider the purchase order

official.

� In that case, it is the signature that forms the "acceptance" needed to make a

contract.

� Contract to purchase 30 M.L. of wood at $9 per meter


Fixed PriceFixed Price

(FP)(FP)

Time & MaterialTime & Material

“Seller” Contractor

“Seller” Contractor Risk

Risk

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Time & MaterialTime & Material

(T & M)(T & M)

Cost PlusCost Plus

(CP)(CP)



Remember, we are thinking from the BUYER’S point of view!)


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TOOLS AND TECHIQUESTOOLS AND TECHIQUES

1.Make-or-buy analysis

� When the decision is made to complete a project, the company also makes a

decision about doing the work themselves or outsourcing some or all of the

work.

� The costs involved in managing the procurement should be considered.

� The direct costs of the product should be considered.

The cost savings of purchasing a product or service may be outweighed by the� The cost savings of purchasing a product or service may be outweighed by the

cost of managing the procurement.

� One of the main reasons to "buy" is to DECREASE risk to the project's constraints.

� It is better to "make" if:

� You have an idle plant or workforce.

� You want to retain control.

� The work involves proprietary information or procedures.


TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES

Total Cost “in house”

$

Price of Contractor

Example of work

Fixed Cost

Variable Cost

225

310

Quantity100



(Operation)

Total Cost “of equipment”

$Cost of rent equipment

1.5 M

Example of resource equipment

(Asset)

1.5 M

Quantity100,000



� Break-even analysis has other applications including the make-versus-buy decision,

and the lease-versus-rent decision.

� As an example of the lease-versus-rent decision, consider an organization that needs

to a piece of construction equipment for its projects. The equipment can be rented

for $1,000 per day. Alternately it can be leased for an initial one-time cost of $10,000

plus $600 per day for the duration of the lease. Using break-even analysis, we obtain:

� 1,000 X = 10,000 + 600 X� 10,000 - 600 X = 10,000� 10,000 - 600 X = 10,000� 400 X = 10,000� X = 10,000 / 400� X = 25 days

� Thus, if the piece of equipment is needed for less than 25 days, it would be more

economical to rent it.

� If it is needed for more than 25 days, it would be more economical to lease it.

� If it is needed for exactly 25 days, either renting or leasing would have the same

cost.



2. Expert judgment

� Expert technical judgment will often be used to assess the inputs to and outputs

from this process.

� Expert purchasing judgment can also be used to develop or modify the criteria that

will be used to evaluate seller proposals.

� Expert legal judgment may involve the services of legal staff to assist with unique

procurement issues, terms, and conditions.

� Such judgment, including business and technical expertise, can be applied to both

the technical details of the acquired products, services, or results and to various

aspects of the procurement management processes.



3. Market research

� Market research includes examination of industry and specific vendor capabilities.

� Procurement teams may leverage information gained at conferences, online

reviews and a variety of sources to identify market capabilities.

� The team may also refine particular procurement objectives to leverage maturing

technologies while balancing risks associated with the breadth of vendors who can

provide the materials or services desired.provide the materials or services desired.

4. Meetings

� Additional information interchange meetings with potential bidders.

� By collaborating with potential bidders, the organization purchasing the material or

service may benefit while the supplier can influence a mutually beneficial approach

or product.


1. Procurement management plan

� This plan will describe how the procurement process will be planned, executed,

controlled, and closed.

� A procurement management plan can be formal or informal, can be highly detailed

or broadly framed, and is based upon the needs of each project.

2. Procurement statements of work

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� The Statement of Work (SOW) for each procurement is developed from the project

scope baseline and defines only that portion of the project scope that is to be

included within the related contract.

� The work to be done on each procurement.

� It must describe all the work and activities the seller is required to complete.

� It must be as clear, complete, and concise as possible.

� Information included in a SOW can include specifications, quantity desired, quality

levels, performance data, period of performance, work location, and other

requirements.


� Types of Procurement Statements of Work

1. Performance: This type conveys what the final product should be able to

accomplish, rather than how it should be built or what its design characteristics

should be (e.g., "I want a car that will go zero to 120 kilometers per hour in 4.2

seconds").

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2. Functional: This type conveys the end purpose or result, rather than specific

procedures, etc. It is to be used in the performance of the work and may also

include a statement of the minimum essential characteristics of the product (e.g.,

"I want a car with 23 cup holders" [OK, why can't I try to be funny?]).

3. Design: This type conveys precisely what work is to be done (e.g., "Build it

exactly as shown on these drawings").



� Once the contract type is selected and the procurement statement of work has been

created, the buyer can put together the procurement document, which describes

their needs to sellers.


� Source selection criteria are included in the procurement documents to give the seller

an understanding of the buyer’s needs and to help the seller decide whether to bid

or make a proposal on the work.

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or make a proposal on the work.

� When the buyer receives the sellers' responses during the Conduct Procurements

process, source selection criteria become the basis by which the buyer evaluates the

bids or proposals.

� Understanding of need.� Overall or life-cycle cost.� Technical capability.� Risk.� Management approach.� Technical approach.� Warranty.

� Financial capacity.� Production capacity and interest.� Business size and type.� Past performance of sellers.� References.� Intellectual property rights.� Proprietary rights



� The conclusions reached regarding what project products, services, or results will be

acquired from outside the project organization, or will be performed internally by the

project team.

� This may also include decisions to require insurance policies or performance bond

contracts to address some of the identified risks. The make-or-buy decisions

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document can be as simple as a listing that includes a short justification for the

decisions.

� These decisions can be altered as subsequent procurement activities indicate a

requirement for a different approach.

6. Change requests

� Change requests are processed for review and disposition through the Perform

Integrated Change Control process.


� The different types of procurement documents

1. Request for Proposal (RFP, sometimes called Request for Tender): A detailed

proposal on how the work will be accomplished, who will do it, resumes, company

experience, price, etc.

2. Invitation for Bid (IFB, or Request for Bid, RFB): It usually just request a total

price to do all the work.

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YOU SHOULD KNOW

price to do all the work.

3. Request for Quotation (RFQ): A price quote per item, hour, meter, or other unit of

measure.

4. Request for Information (RFI): Used to get or collect information.

� RFI might be used before procurement documents are created. The information

received could help identify qualified companies to send an RFP or IFB to.

� An RFI could also be used to collect information on what work is possible for later

inclusion in a RFP or IFB.

� So in reality it is NOT part of procurement documents as consider by PMBOK.


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� Letter of intent

� Getting through contract negotiations and getting final contract signatures can take

time.

� In some instances, the seller may need to start hiring people or ordering equipment

and materials before the contract is signed in order to meet the contract

requirements.

YOU SHOULD KNOW

requirements.

� If the contract is not signed in time, the seller may ask the buyer to provide a letter

of intent.

� A letter of intent is NOT a contract, but simply a letter, without legal binding, that

says the buyer intends to hire the seller.

� It is intended to give the seller confidence that the contract will be signed soon and

to make them comfortable with taking the risk of ordering the equipment or hiring

the staff that will eventually be needed.


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� Contracts require formality.

� All product and project management requirements for the procurement work should

be specifically stated in the contract.

� If it is not in the contract, it can only be done if a formal change order to the

contract is issued.

If it is in the contract, it must be done or a formal change order must be approved

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� If it is in the contract, it must be done or a formal change order must be approved

by both parties.

� Changes must be submitted and approved in writing.

� Contracts are legally binding; the seller has no choice but to perform as agreed in

the contract.

� Contracts should help diminish project risk.

� Most governments back all contracts that fall within their jurisdiction by providing a

court system for dispute resolution.


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Price:

� This is the amount the seller charges the buyer.

Profit (fee):

� This is planned into the price the seller provides the buyer.

� Sellers usually have an acceptable profit margin in mind. However, how much profit

they actually receive is based on many factors, including the contract terms and

the seller's ability to manage the project.

OTHER TERMS TO KNOW

the seller's ability to manage the project.

Cost

� This is how much an item costs the seller to create, develop, or purchase.

� A buyer's costs can be a seller's revenue (and profits)

Target price:

� This term is often used to compare the end result of the project with what was

expected (the target price).

� Target price is a measure of success.

� Target cost + Target Fee = Target Price.


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Sharing ratio:

� Incentives take the form of a formula, usually expressed as a ratio, e.g., 90/10.

� This sharing ratio describes how the cost savings or cost overrun will be shared

with the buyer, the first number being the amount the buyer will keep and the

second number being the amount the seller will keep (buyer/seller).

Ceiling price:

� This is the highest price the buyer will pay.� This is the highest price the buyer will pay.

Point of Total Assumption (PTA)'

� This only applies to fixed price incentive fee contracts and refers to the amount

above which the seller bears all the loss of a cost overrun, Costs that go above the

PTA are assumed to be due to mismanagement.

� Sellers will sometimes monitor their actual costs against the PTA to make sure they

are still receiving a profit for completing the project.

� Formula: PTA = ((Ceiling price - Target price)/Buyer's share ratio) + Target cost.


Inputs Tools and Techniques Outputs

1. Procurement management 1. Bidder conferences 1. Selected sellers

Conduct Procurements

“The process of obtaining seller responses, selecting a seller, and awarding a

contract.”

plan



4. Seller proposals

5. Project documents


7. Procurement statement of

work

8. Organizational process

assets

2. Proposal evaluation

techniques

3. Independent estimates

4. Expert judgment

5. Advertising

6. Analytical techniques

7. Procurement negotiations

2. Agreements

3. Resource calendars

4. Change requests


updates

6. Project document updates


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1. Procurement management plan

� Describes how the procurement processes will be managed from developing

procurement documentation through contract closure.


� Provide an audit trail for contracts and other agreements.� Provide an audit trail for contracts and other agreements.


� Source selection criteria can include information on the supplier’s required

capabilities, capacity, delivery dates, product cost, life-cycle cost, technical expertise,

and the approach to the contract.


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4. Seller proposals (Price quote or Bid)

� A proposal is a seller's response to the procurement documents.

� A proposal is usually the response to a request for proposal (RFP), a price quote is

usually the response to a request for quote (RFQ), and a bid is usually the response

to an invitation for bid (IFB).

� The proposal (or price quote or bid) represents an official offer from the seller.

5. Project documents5. Project documents

� Risk register.

� Risk-related contract decisions.


� Organizations procuring goods or services analyze the need, identify resources, and

then compare procurement strategies when deciding to buy.

� Organizations also evaluate the need of buying products versus making the items

themselves.


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7. Procurement statement of work

� The procurement statement of work provides suppliers with a clearly stated set of

goals, requirements, and outcomes from which they can provide a quantifiable

response.

� The statement of work is a critical component of the procurement process and can�

be modified as needed through this process until a final agreement is in place.


� Listings of prospective and previously qualified sellers, and

� Information on relevant past experience with sellers, both good and bad.


1. Bidder conferences

� Once the prospective sellers have been identified and have received the procurement

documents, the buyer controls who can talk to the sellers and what can be said.

� This control allows the buyer to maintain the integrity of the procurement process

and to make sure all sellers are bidding or proposing on the same work.

� To make sure all the sellers' questions are answered, the buyer may invite the sellers

to attend a meeting in which they can tour the buyer's facilities (if relevant to the


to attend a meeting in which they can tour the buyer's facilities (if relevant to the

project) and ask questions about the procurement.

� The questions and answers are documented and sent to all prospective bidders to

make sure they all have the same information.

� The questions and answers asked during the bidder conference are also added to the

procurement documents as addenda.

� The bidder conference is also an opportunity for the buyer to discover anything

missing in the procurement documents.


� A bidder conference can be the key to making sure the pricing in the seller's

response matches the work that needs to be done and is, therefore, the lowest price.

� Bidder conferences benefit both the buyer and seller.

Things the project manager must watch out for in a bidder conference:


Things the project manager must watch out for in a bidder conference:

� Collusion

� Sellers not asking questions in front of the competition

� Making sure all questions and answers are put in writing and issued to all potential

sellers by the buyer as addenda to the procurement documents; this ensures that

all sellers are responding to the same procurement statement of work


2. Proposal evaluation techniques

� The buyer (represented by an evaluation committee) uses the source selection

criteria identified in the Plan Procurements process to assess the potential sellers'

ability and willingness to provide the requested products or services.

� The criteria are measurable; therefore, they provide a basis to quantitatively evaluate

proposals and minimize the influence of personal prejudices.

� The buyer may ask a seller to make a presentation and then, if all goes well, move


� The buyer may ask a seller to make a presentation and then, if all goes well, move

on to negotiations.

� The buyer may narrow down ("short-list") the list of sellers to a few.

� The buyer may ask the short-listed sellers to make presentations, and then ask the

selected seller to go on to negotiations.

� The buyer can negotiate with more than one seller.

� The buyer can use 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.


� The sellers proposals are usually reviewed, compared, or selected by the evaluation

committee using one or a combination of the following formal, structured processes:

� Weighting System:

� This allows the buyer's evaluation committee to select a seller by weighting the

� source selection criteria according to the evaluation criteria.

� You can then compare sellers to choose the one who best meets your criteria.



� Screening System

� A screening system eliminates sellers who do not meet the minimum requirements

of the source selection criteria.

� Past Performance History

� The buyer may consider their past history with the prospective sellers in

determining which seller to award the procurement to


� Presentation:

� Some of the sellers will be asked to make presentations of their proposals to the

buyer so the buyer can select the most appropriate seller.

� This is often a formal meeting of the buyer's and seller's teams.

� It provides the seller with an opportunity to present their proposal, team, and

approach to completing the work.


3. Independent estimates

� For many procurement items, the procuring organization may elect to either prepare

its own independent estimate, or have an estimate of costs prepared by an outside

professional estimator, to serve as a benchmark on proposed responses.

� Significant differences in cost estimates can be an indication that the procurement

statement of work was deficient, ambiguous, and/ or that the prospective sellers

either misunderstood or failed to respond fully to the procurement statement of


either misunderstood or failed to respond fully to the procurement statement of

work.

4. Expert judgment

� Expert judgment may be used in evaluating seller proposals. The evaluation of

proposals may be accomplished by a multi-discipline review team with expertise in

each of the areas covered by the procurement documents and proposed contract.

� This can include expertise from functional disciplines such as contracting, legal,

finance, accounting, engineering, design, research, development, sales, and

manufacturing.


5. Advertising

� To attract sellers, an advertisement may be placed in newspapers, in magazines, on

the Internet, or in other types of media.

� NOTE: The U.S. government is required to advertise most of its procurements.

6. Analytical techniques


� Analytical techniques can help organizations identify the readiness of a vendor to

provide the desired end state, determine the cost expected to support budgeting,

and avoid cost overruns due to changes.

� By examining past performance information, teams may identify areas that may have

more risk and that need to be monitored closely to ensure success of the project.



� Negotiation is a strategy of conferring with parties of shared or opposed interests

with a view to compromise or reach an agreement.

� The objectives of negotiation:

� Obtain a fair and reasonable price.

� Develop a good relationship with the seller.

� Main items to Negotiate

1. Scope


1. Scope

2. Schedule

3. Price

Others:

1. Responsibilities

2. Authority

3. Applicable law-If you are working with a seller from a different state, country, or

region, you need to agree upon whose law will apply to the contract.

4. Project management process to be used

5. Payments schedule


1. Selected sellers

� The sellers selected are those sellers who have been judged to be in a competitive

range based upon the outcome of the proposal or bid evaluation, and who have

negotiated a draft contract that will become the actual contract when an award is

made.

� Final approval of all complex, high-value, high risk procurements will generally

require organizational senior management approval prior to award.

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2. Agreements

� A procurement agreement includes terms and conditions, and may incorporate other

items that the buyer specifies regarding what the seller is to perform or provide.

� An agreement can also be called an understanding, a contract, a subcontract, or a

purchase order.


Contract:

� a contract is a mutually binding legal agreement that obligates the seller to provide

the specified products, services, or results, and obligates the buyer to compensate

the seller.

� A contract is a legal relationship subject to remedy in the courts.

� The major components in a contract document will vary, but will sometimes include

the following:

� Statement of work or deliverables,

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� Limitation of liability,� Statement of work or deliverables,� Schedule baseline,� Performance reporting,� Period of performance,� Roles and responsibilities,� Seller’s place of performance,� Pricing,� Payment terms,� Place of delivery,� Inspection and acceptance criteria,� Warranty,� Product support,

� Limitation of liability,� Fees ,� Penalties,� Incentives,� Insurance and performance bonds,� Subordinate subcontractor approvals,� Change request handling, and� Termination and alternative disputeresolution (ADR) mechanisms. TheADR method can be decided inadvance as a part of the procurementaward.


Term and conditions in Contract:

� Acceptance

� Agent

� Arbitration

� Assignment

� Authority

� Payment and performance Bonds

OTHER TERMS TO KNOW

� Invoicing

� Liquidated damages

� Management requirements

� Material breach

� Notice

� Ownership

� Payments


� Payment and performance Bonds

� Breach/Default

� Confidentiality

� Dispute resolution

� Force majeure

� Incentives

� Indemnification (Liability):

� Independent contractor

� Inspection

� Intellectual properly

� Payments

� Procurement statement of work.

� Reporting

� Retainage

� Risk of loss

� Site access

� Termination

� Waivers

� Warranties

� Work for hire


What Do You Need to Have a Legal Contract?

� An offer

� Acceptance

� Consideration (Something of value, not necessarily money)

� Legal capacity (Separate legal parties, competent parties)

� Legal purpose (You cannot have a contract for the sale of illegal goods or services)

� A contract, offer, or acceptance may be verbal or written, though written is preferred.

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� A contract, offer, or acceptance may be verbal or written, though written is preferred.

3. Resource calendars

� The quantity and availability of contracted resources and those dates on which each

specific resource can be active or idle are documented.

4. Change requests

� Change requests to the project management plan, its subsidiary plans, and other

components are processed for review and disposition through the Perform Integrated

Change Control process.


5. Project management plan updates

� Cost baseline,

� Scope baseline,

� Schedule baseline, and

� Procurement management plan.

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6. Project document updates

� Requirements documentation,

� Requirements traceability documentation, and

� Risk register.



Outputs

1. Project management plan 1. Contract change control 1. Work performance

Control Procurements

“The process of managing procurement relationships, monitoring contract

performance, and making changes and corrections as needed”



3. Agreements

4. Approved change requests

5. Work performance reports

6. Work performance data

1. Contract change control

system

2. Procurement performance

reviews

3. Inspections and audits

4. Performance reporting

5. Payment systems

6. Claims administration

7. Records management

system

1. Work performance

information

2. Change requests


updates



assets updates


INPUTSINPUTS


� Describes how the procurement processes will be managed from developing

procurement documentation through contract closure.


� Procurement documents contain complete supporting records for administration of

the procurement processes.

� This includes procurement contract awards and the statement of work.� This includes procurement contract awards and the statement of work.

3. Agreements

� Agreements are understandings between parties, including understanding of the

duties of each party.


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4. Approved change requests

� Approved change requests can include modifications to the terms and conditions of

the contract including the procurement statement of work, pricing, and description of

the products, services, or results to be provided.

� All changes are formally documented in writing and approved before being

implemented.

3.Work performance reports3.Work performance reports

� Seller-developed technical documentation and other deliverable information provided

in accordance with the terms of the contract, and seller performance reports.

� The seller’s performance reports indicate which deliverables have been completed

and which have not.

6. Work performance data

� Work performance data including the extent to which quality standards are being

satisfied, what costs have been incurred or committed, and which seller invoices

have been paid, are all collected as part of project execution.


1. Contract change control system

� A contract change control system defines the process by which the procurement

can be modified.

� It includes the paperwork, tracking systems, dispute resolution procedures, and

approval levels necessary for authorizing changes.

� These procedures must be followed, and all changes should be made formally.

� The contract change control system is integrated with the integrated change


� The contract change control system is integrated with the integrated change

control system.

2. Procurement performance reviews

� A procurement performance review is a structured review of the seller’s progress

to deliver project scope and quality, within cost and on schedule, as compared to the

contract.

� It can include a review of seller-prepared documentation and buyer inspections, as

well as quality audits conducted during seller’s execution of the work.


� The objective of a performance review is to identify performance successes or

failures, progress with respect to the procurement statement of work, and contract

non-compliance, which allow the buyer to quantify the seller’s demonstrated ability

or inability to perform work.

� Such reviews may take place as a part of project status reviews which would include

key suppliers.


3. Inspections and audits

� Inspections and audits required by the buyer and supported by the seller as specified

in the procurement contract can be conducted during execution of the project to

verify compliance in the seller’s work processes or deliverables.

� If authorized by contract, some inspection and audit teams can include buyer

procurement personnel.


4. Performance reporting

� Performance reporting provides management with information about how effectively

the seller is achieving the contractual objectives.

5. Payment systems


5. Payment systems

� Payments to the seller are typically processed by the accounts payable system of the

buyer after certification of satisfactory work by an authorized person on the project

team.

� All payments should be made and documented in strict accordance with the terms of

the contract.


6. Claims administration

� A claim is an assertion that the buyer did something that has hurt the seller and the

seller is asking for compensation.

� Another way of looking at claims is that they are a form of seller change requests.

� Claims can get nasty.

� Imagine a seller that is not making as much profit as they had hoped, issuing claims

for every action taken by the buyer.


for every action taken by the buyer.

� Imagine the number of claims that could arise if you were working with a fixed price

contract and an incomplete procurement statement of work.

� Claims are usually addressed through the contract change control system.

� The BEST way to settle them is through negotiation or the use of the dispute

resolution process specified in the contract.

� Many claims are not resolved until after the work is completed.


Claims Categorize


Contractual ClaimsExtra- Contractual

ClaimsEx gratia Claims

Have a basis in the contract

itself where provision can

be quoted giving rise to

entitlement

These claims have no basis

in the contract but

entitlement stems from the

governing law

Ex gratia (“Out of

Kindness”) claims are those

where a contractor is

seeking something more

7. Records management system

� A records management system is used by the project manager to manage contract

and procurement documentation and records.

� It consists of a specific set of processes, related control functions, and automation

tools that are consolidated and combined as part of the project management

information system .

� The system contains a retrievable archive of contract documents and

correspondence.

entitlement governing law seeking something more

tangible than sympathy.



NO Time extension & LD’s

Time Extension & Cost & NO LD’s

Case A:

Case B:

Contractor Delay

Employer Delay

Contractor Delay

Employer Delay

Others

Evaluation of Delay Claim

LD’s

Time Extension only due delays out of parties control

Time Extension & Cost For Employer’s delays

portion only

Case C:

Case D:

Employer Delay

Others

Contractor Delay

Employer Delay

Others

Contractor Delay

Employer Delay

Others


1. Work performance information

� Work performance information provides a basis for identification of current or

potential problems to support later claims or new procurements.

� By reporting on the performance of a vendor, the organization increases knowledge

� of the performance of the procurement, which supports improved forecasting, risk

management, and decision making.

� Performance reports also assist in the event there is a dispute with the vendor.

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� Performance reports also assist in the event there is a dispute with the vendor.

� Work performance information includes reporting compliance of contracts, which

provides procuring organizations a mechanism to track specific deliverables expected

and received from vendors.

� Contract compliance reports support improved communications with vendors so that

potential issues are addressed promptly to the satisfaction of all parties.


2. Change requests

� Change requests to the project management plan, its subsidiary plans and other

components, such as the cost baseline, project schedule and procurement

management plan may result from the Administer Procurements process.

� Requested but unresolved changes can include direction provided by the buyer, or

actions taken by the seller, that the other party considers a constructive change to

the contract.

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the contract.

� Since any of these constructive changes 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.

3. Project management plan updates

� Procurement management plan.

� Baseline schedule.



� Project documents that may be updated include procurement documentation that

include:

� The procurement contract with all supporting schedules,

� Requested unapproved contract changes.

� Approved change requests.

� Procurement documentation also includes any seller-developed technical

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� Procurement documentation also includes any seller-developed technical

documentation and other work performance information such as deliverables, seller

performance reports, warranties, financial documents including invoices and payment

records, and the results of contract-related inspections.

5. Organizational process assets updates

� Correspondence

� Payment schedules and requests

� Seller performance evaluation documentation



Outputs



1. Procurement audits


1. Closed procurements


Close Procurements

“The process of completing each project procurement”

2. Procurement documents 2. Procurement negotiations

3. Records management

system


assets updates

� Procurements are closed:

1. When a contract is completed

2. When a contract is terminated before the work is completed


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� The project management plan contains the procurement management plan, which

provides the details and guidelines for closing out procurements.


� To close the contract, all procurement documentation is collected, indexed, and filed.�

Information on contract schedule, scope, quality, and cost performance along with all

contract change documentation, payment records, and inspection results are

cataloged.

� This information can be used for lessons learned information and as a basis for

evaluating contractors for future contracts.


1. Procurement audits

� A procurement audit is a structured review of the procurement process

originating from the Plan Procurements process through Administer Procurements.

� The objective of a procurement audit is to identify successes and failures that

warrant recognition in the preparation or administration of other procurement

contracts on the project, or on other projects within the performing organization.



� In all procurement relationships the final equitable settlement of all outstanding

issues, claims, and disputes by negotiation is a primary goal.

� Whenever settlement cannot be achieved through direct negotiation, some form of

Alternative Dispute Resolution (ADR) including mediation or arbitration may be

explored. When all else fails, litigation in the courts is the least desirable option.


� The objectives of negotiation:

� Obtain a fair and reasonable price.

� Develop a good relationship with the seller.

� Main items to Negotiate

1. Scope

2. Schedule

3. Price


3. Price

Others:

1. Responsibilities

2. Authority

3. Applicable law-If you are working with a seller from a different state, country, or

region, you need to agree upon whose law will apply to the contract.

4. Project management process to be used

5. Payments schedule


� Guidelines For Successful Negotiations

� Commitment to negotiate for mutual gain

� Separate the people from the problem

� Separate the relationship from the substance; deal directly with people problems

� Don’t bargain over positions

� Focus on interest not positions

� Generate options for mutual gain

� Use objective criteria or standard


� Use objective criteria or standard

� Negotiation preparation

� Financial

�Minimal acceptable financial position given the schedule and deliverables

�Target financial position

�Maximum (opening) financial position

�Proposal team uses during negotiation the min, max and target as reference points

� Explore various positions

� Explore trade-offs.



Disputes Resolution Techniques

Amicable Amicable settlementsettlement

MediationMediation ConciliationConciliation

Disputes Disputes Review Board Review Board

(D.R.B.)(D.R.B.)

Disputes Disputes Adjudication Adjudication Boards ( Boards ( D.A.B.)D.A.B.)

ArbitrationArbitration

LitigationLitigation


3. Records management system

� A records management system is used by the project manager to manage contract

and procurement documentation and records.

� It consists of a specific set of processes, related control functions, and automation

tools that are consolidated and combined as part of the Project Management


Information System (PMIS).

� The system contains a retrievable archive of contract documents and

correspondence.


1. Closed procurements

� The buyer, usually through its authorized procurement administrator, provides the

seller with formal written notice that the contract has been completed.

� Requirements for formal procurement closure are usually defined in the terms and

conditions of the contract and are included in the procurement management plan.

� Formal Acceptance and Closure

� Once closure is completed and the seller has received formal sign-off that the

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products of the procurement are acceptable from the buyer, the procurement is

closed.

� Expect many questions on the exam that provide you with situations and require

you to determine whether the procurement is closed.

� In gaining formal acceptance, the seller is also working to measure customer

satisfaction.

� Often a formal customer satisfaction survey may be included in a seller's

closure records.


2. Organizational process assets updates

� Procurement file: A complete set of indexed contract documentation, including the

closed contract, is prepared for inclusion with the final project files.

� Deliverable acceptance: The buyer, usually through its authorized procurement

administrator, provides the seller with formal written notice that the deliverables have

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been accepted or rejected. Requirements for formal deliverable acceptance, and how

to address non-conforming deliverables, are usually defined in the contract.

� Lessons learned documentation: Lessons learned, what has been experienced, and

process improvement recommendations should be developed for the project file to

improve future procurements.


Refreshments

Q1: Once signed, a contract is legally binding unless:

A. One party is unable to perform.

B. One party is unable to finance its part of the work.

C. It is in violation of applicable law.

D. It is declared null and void by either party's legal counsel.

Q2: With a clear contract statement of work, a seller completes work as specified, but the

buyer is not pleased with the results. The contract is considered to be:

A. Null and void.

B, Incomplete.

C. Complete.

D. Waived.


Refreshments

Q3: A seller is working on a cost reimbursable contract when the buyer decides he would like

to expand the scope of services and change to a fixed price (FP) contract. All of the following

are the seller's options EXCEPT:

A. Completing the original work on a cost reimbursable basis and then negotiating a

fixed price for the additional work.

B. Completing the original work and rejecting the additional work.B. Completing the original work and rejecting the additional work.

C. Negotiating a fixed price contract that includes all the work.

D. Starting over with a new contract.


Refreshments

Q4: The sponsor is worried about the seller deriving extra profit on the cost plus fixed fee

(CPFF) contract. Each month he requires the project manager to submit CPI calculations and

an analysis of the cost to complete. The project manager explains to the sponsor that extra

profits should NOT be a worry on this project because:

A. The team is making sure the seller does not cut scope.

B. All costs invoiced are being audited.B. All costs invoiced are being audited.

C. There can only be a maximum 10 percent increase if there is an unexpected cost

overrun.

D. The fee is only received by the seller when the project is completed.


Refreshments

Q5: During project executing, your project team member delivers a project deliverable

to the buyer. However, the buyer refuses the deliverable, stating that it does not meet

the requirement on page 300 of the technical specifications. You review the document

and find that you agree. What is the BEST thing to do?

A. Explain that the contract is wrong and should be changed.

B. Issue a change order.B. Issue a change order.

C. Review the requirements and meet with the responsible team member to review the

WBS dictionary.

D. Call a meeting of the team to review the requirement on page 300.


THANK YOU


Project Procurement Management

Leadership & Management

Transcript of Project Procurement Management