Project Procurement Management
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Transcript of 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
PROJECT PROCUREMENT MANAGEMENT February 2016
INPUTSINPUTS
1. Project management plan
� 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.
PROJECT PROCUREMENT MANAGEMENT February 2016
INPUTSINPUTS
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.
9. Organizational process assets
� 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.
PROJECT PROCUREMENT MANAGEMENT February 2016
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)
PROJECT PROCUREMENT MANAGEMENT February 2016
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)
PROJECT PROCUREMENT MANAGEMENT February 2016
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
PROJECT PROCUREMENT MANAGEMENT February 2016
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.
PROJECT PROCUREMENT MANAGEMENT February 2016
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)
PROJECT PROCUREMENT MANAGEMENT February 2016
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.
PROJECT PROCUREMENT MANAGEMENT February 2016
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
INPUTSINPUTS
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.
PROJECT PROCUREMENT MANAGEMENT February 2016
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
INPUTSINPUTS
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.
PROJECT PROCUREMENT MANAGEMENT February 2016
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.
INPUTSINPUTS
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.
PROJECT PROCUREMENT MANAGEMENT February 2016
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.
PROJECT PROCUREMENT MANAGEMENT February 2016
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,
INPUTSINPUTS
� 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
PROJECT PROCUREMENT MANAGEMENT February 2016
Fixed PriceFixed Price
(FP)(FP)
Time & MaterialTime & Material
“Seller” Contractor
“Seller” Contractor Risk
Risk
INPUTSINPUTS
Time & MaterialTime & Material
(T & M)(T & M)
Cost PlusCost Plus
(CP)(CP)
“Seller” Contractor
“Seller” Contractor
Remember, we are thinking from the BUYER’S point of view!)
PROJECT PROCUREMENT MANAGEMENT February 2016
INPUTSINPUTS
PROJECT PROCUREMENT MANAGEMENT February 2016
INPUTSINPUTS
PROJECT PROCUREMENT MANAGEMENT February 2016
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.
PROJECT PROCUREMENT MANAGEMENT February 2016
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Total Cost “in house”
$
Price of Contractor
Example of work
Fixed Cost
Variable Cost
225
310
Quantity100
PROJECT PROCUREMENT MANAGEMENT February 2016
TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES
(Operation)
Total Cost “of equipment”
$Cost of rent equipment
1.5 M
Example of resource equipment
(Asset)
1.5 M
Quantity100,000
PROJECT PROCUREMENT MANAGEMENT February 2016
TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES
� 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.
PROJECT PROCUREMENT MANAGEMENT February 2016
TOOLS AND TECHIQUESTOOLS AND TECHIQUES
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.
PROJECT PROCUREMENT MANAGEMENT February 2016
TOOLS AND TECHIQUESTOOLS AND TECHIQUES
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.
PROJECT PROCUREMENT MANAGEMENT February 2016
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
OUTPUTSOUTPUTS
� 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.
PROJECT PROCUREMENT MANAGEMENT February 2016
� 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").
PROJECT PROCUREMENT MANAGEMENT February 2016
3. Procurement documents
� 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.
4. Source selection criteria
� 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.
OUTPUTSOUTPUTS
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
PROJECT PROCUREMENT MANAGEMENT February 2016
5. Make-or-buy decisions
� 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.
PROJECT PROCUREMENT MANAGEMENT February 2016
� 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.
OUTPUTSOUTPUTS
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.
PROJECT PROCUREMENT MANAGEMENT February 2016
OUTPUTSOUTPUTS
� 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.
PROJECT PROCUREMENT MANAGEMENT February 2016
OUTPUTSOUTPUTS
� 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
YOU SHOULD KNOW
� 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.
PROJECT PROCUREMENT MANAGEMENT February 2016
OUTPUTSOUTPUTS
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.
PROJECT PROCUREMENT MANAGEMENT February 2016
OUTPUTSOUTPUTS
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.
PROJECT PROCUREMENT MANAGEMENT February 2016
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
2. Procurement documents
3. Source selection criteria
4. Seller proposals
5. Project documents
6. Make-or-buy decisions
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
5. Project management plan
updates
6. Project document updates
PROJECT PROCUREMENT MANAGEMENT February 2016
INPUTSINPUTS
1. Procurement management plan
� Describes how the procurement processes will be managed from developing
procurement documentation through contract closure.
2. Procurement documents
� Provide an audit trail for contracts and other agreements.� Provide an audit trail for contracts and other agreements.
3. Source selection criteria
� 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.
PROJECT PROCUREMENT MANAGEMENT February 2016
INPUTSINPUTS
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.
6. Make-or-buy 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.
PROJECT PROCUREMENT MANAGEMENT February 2016
INPUTSINPUTS
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.
8. Organizational process assets
� Listings of prospective and previously qualified sellers, and
� Information on relevant past experience with sellers, both good and bad.
PROJECT PROCUREMENT MANAGEMENT February 2016
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
TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES
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.
PROJECT PROCUREMENT MANAGEMENT February 2016
� 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:
TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES
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
PROJECT PROCUREMENT MANAGEMENT February 2016
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
TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES
� 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.
PROJECT PROCUREMENT MANAGEMENT February 2016
� 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.
TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES
PROJECT PROCUREMENT MANAGEMENT February 2016
� 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
TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES
� 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.
PROJECT PROCUREMENT MANAGEMENT February 2016
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
TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES
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.
PROJECT PROCUREMENT MANAGEMENT February 2016
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
TOOLS AND TECHNIQUESTOOLS AND 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.
PROJECT PROCUREMENT MANAGEMENT February 2016
7. Procurement negotiations
� 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
TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES
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
PROJECT PROCUREMENT MANAGEMENT February 2016
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.
PROJECT PROCUREMENT MANAGEMENT February 2016
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.
PROJECT PROCUREMENT MANAGEMENT February 2016
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
TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES
� 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
PROJECT PROCUREMENT MANAGEMENT February 2016
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.
PROJECT PROCUREMENT MANAGEMENT February 2016
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.
PROJECT PROCUREMENT MANAGEMENT February 2016
InputsTools and Techniques
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”
1. Project management plan
2. Procurement documents
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
3. Project management plan
updates
4. Project documents updates
5. Organizational process
assets updates
PROJECT PROCUREMENT MANAGEMENT February 2016
INPUTSINPUTS
2. Project management plan
� Describes how the procurement processes will be managed from developing
procurement documentation through contract closure.
2. Procurement documents
� 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.
PROJECT PROCUREMENT MANAGEMENT February 2016
INPUTSINPUTS
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.
PROJECT PROCUREMENT MANAGEMENT February 2016
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
TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES
� 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.
PROJECT PROCUREMENT MANAGEMENT February 2016
� 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.
TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES
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.
PROJECT PROCUREMENT MANAGEMENT February 2016
4. Performance reporting
� Performance reporting provides management with information about how effectively
the seller is achieving the contractual objectives.
5. Payment systems
TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES
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.
PROJECT PROCUREMENT MANAGEMENT February 2016
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.
TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES
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.
PROJECT PROCUREMENT MANAGEMENT February 2016
Claims Categorize
TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES
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.
PROJECT PROCUREMENT MANAGEMENT February 2016
TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES
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
PROJECT PROCUREMENT MANAGEMENT February 2016
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.
PROJECT PROCUREMENT MANAGEMENT February 2016
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 PROCUREMENT MANAGEMENT February 2016
4. Project documents updates
� 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
PROJECT PROCUREMENT MANAGEMENT February 2016
InputsTools and Techniques
Outputs
1. Project management plan
2. Procurement documents
1. Procurement audits
2. Procurement negotiations
1. Closed procurements
2. Organizational process
Close Procurements
“The process of completing each project procurement”
2. Procurement documents 2. Procurement negotiations
3. Records management
system
2. Organizational process
assets updates
� Procurements are closed:
1. When a contract is completed
2. When a contract is terminated before the work is completed
PROJECT PROCUREMENT MANAGEMENT February 2016
INPUTSINPUTS
1. Project management plan
� The project management plan contains the procurement management plan, which
provides the details and guidelines for closing out procurements.
2. Procurement documents
� 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.
PROJECT PROCUREMENT MANAGEMENT February 2016
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.
TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES
2. Procurement negotiations
� 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.
PROJECT PROCUREMENT MANAGEMENT February 2016
� 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
TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES
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
PROJECT PROCUREMENT MANAGEMENT February 2016
� 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
TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES
� 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.
PROJECT PROCUREMENT MANAGEMENT February 2016
TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES
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
PROJECT PROCUREMENT MANAGEMENT February 2016
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
TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES
Information System (PMIS).
� The system contains a retrievable archive of contract documents and
correspondence.
PROJECT PROCUREMENT MANAGEMENT February 2016
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.
PROJECT PROCUREMENT MANAGEMENT February 2016
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.
PROJECT PROCUREMENT MANAGEMENT February 2016
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.
PROJECT PROCUREMENT MANAGEMENT February 2016
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.
PROJECT PROCUREMENT MANAGEMENT February 2016
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.
PROJECT PROCUREMENT MANAGEMENT February 2016
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.
PROJECT PROCUREMENT MANAGEMENT February 2016
THANK YOU
PROJECT PROCUREMENT MANAGEMENT February 2016