12 projectprocurementmanagement

1. 12 - Project Procurement Management
Project Management Training
Created by ejlp12@gmail.com, June 2010

2. 12. Project Procurement Management
Knowledge Area
Process
Initiating Planning Executing
Monitoring &
Contol
Closing
Procurement
Plan Purchases -
and Acquisitions
Plan Contracting
Request Seller -
Responses
Select Sellers
Contract -
Administration
Contract Closure
Enter phase/
Start project
Exit phase/
End project
Initiating
Processes
Closing
Processes
Planning
Processes
Executing
Processes
Monitoring &
Controlling Processes

3. Project Procurement Management
• The process necessary to process and acquire product or services, or result
needed from outside the project team.
• Involve planning, acquiring the product or services from sources, choosing a
source, administering the contract, and closing out the contract.
• Can be applied to internal work orders, formal agreements, and contracts
between organization units within single entity.

4. Project Manager’s Role in Procurements
• PM must be involved in the creation of contracts
• Key roles:
– Know the procurement process
– Understand contract terms and conditions
– Make sure the contract contains all project management requirements such as
attendance at meeting, reports, actions and communications deemed
necessary
– Identify risks and incorporate mitigation and allocation of risks into the contract
– Help tailor the contract to the unique needs of the project
– Align schedule of the contract and schedule of the project
– Involved in contract negotiation
– Make sure procurement process done smoothly
– Work with contract manager to manage changes to the contract
PM mustbeassignedbeforecontractsigned!

5. 12.1 Plan Procurements
• The process of obtaining seller responses, selecting a seller, and awarding a
contract.
Inputs
1. Scope baseline
2. Requirement documentation
3. Teaming agreements
4. Risk register
5. Risk-related contract
decisions
6. Activity resource requirements
7. Project schedule
8. Activity cost estimates
9. Cost performance baseline
10.Enterprise environmental
factors
11.Organizational process assets
Tools &
Techniques
1. Make-or-buy analysis
2. Expert judgment
3. Contract types
Outputs
1. Procurement
management plan
2. Procurement statement
of work
3. Make-or-buy decisions
4. Procurement
documents
5. Source selection criteria
6. Change requests

6. Make-or-buy analysis
• Determine whether an organization should make or perform particular
product or service by themselves or buy/acquire from others.
• Evaluate of the benefit and drawback
• Often involves financial analysis
• Make or buy analysis focus on:
– skills and resources
– cost
– time
– How critical is it that we retain detailed control over a certain area?
– proprietary information or trade secret
See decision analysis in “Project Risk Management”

7. Contract Types
• Fixed-price (FP) contracts
– Fixed Price (FP), or Lump Sum, or Firm Fixed Price (FFP)
– Fixed Price Incentive Fee (FPIF)
– Fixed Price with Economic Price Adjustment (FP-EPA)
– Purchase order : simplest type of fixed-price contract; unilateral (signed by one
party)
• Cost-reimbursable (CR) contracts
– Cost Plus Fixed Fee (CPFF) or Cost Plus Percentage of Cost (CPPC)
– Cost Plus Incentive Fee (CPIF) :
– Cost Plus Award Fee (CPAF)
– Cost Contract (No fee/profit e.g. contract in nonprofit organization)
• Time and Material Contracts (T&M)
Hybrid type of contractual arrangement that contain aspects of both cost-reimbursable and fixed-
price contracts

8. Fixed-price (FP) contracts
• Used for acquiring goods or services with well defined specifications or
requirements.
• Seller is most concerned with the SOW
• Sometime the buyer forces seller to accept a high level risk
• Seller would need huge amount of reserves
• Seller can try to increase profit by cutting scope
• Examples:
– FP: Contract = $1M
– FPIF: Contract = $1M + for every month added $1000
– FPAF: Contract = $1M + for every month added $1000 if performance exceed
– FPEA: Contract = $1M + additional pricing based on Government Center Bank
depreciation rate.
– PO: $1K per 1 metric ton

9. Cost Reimbursable (CR) contracts
• Used when work is uncertain and, therefore, costs cannot be estimated
accurately enough
• Requires the seller to have an accounting system that can track costs
• Buyer requires auditing seller’s invoice
• Example:
– CPF/CPPC: Contract = cost + fee (10% of cost)
– CPFF: Contract = cost + $1K
– CPIF: cost + additional fee based on performance
– CPAF: cost + additional fee bases on manager satisfaction (performance
criteria)

10. Time & Material (T&M) contracts
• Used for service efforts in which the level of effort cannot be defined at the
time the contract is awarded
• To make sure the costs do not become higher than budgeted, the buyer may
put a "Not to Exceed" and time limits clause in the contract.
• Often used for staff augmentation, acquisition of experts, outside support
• Example:
– Contract = $1K per day plus expenses or material cost.
– Contract = $1K per day plus material at $5 per linear meter of wood.

11. Contract Types vs. Risk
Fixed Price
FFP
FPIF
Time and Materials
Cost Reimbursable
CPIF
CPFF
CPF
CPPC
• Effect of contract type on buyer & seller risk
SELLER
RISK
High
Low
BUYER
RISK
Low
High
T&M can be a high risk for buyer
if contract does not include a
“total not-to-exceed” (NTE)

12. Plan Procurement Output
• Procurement Management plan
– Describe how procurement process will be managed
– Guidance for any procurement process
• Procurement Statement of Work (SOW)
– Develop from scope baseline
– Include only the portion will be included within the contract
– This can be revised/refined through the procurement process until signed
• Make-or-buy decisions
– The conclusion reach regarding what product/service/result will be acquired
from outside

13. Procurement Documents (output)
• May includes:
– Information for Sellers
– Contract statement of work
– Proposed terms & conditions of the contract
– Non-disclosure agreement (NDA) -- to disclose some confidential information
• Procurement documents, examples:
– Request for Information (RFI)
– Invitation For Bid (IFB)
– Request For Proposal (RFP)
– Request For Quotation (RFQ)
– Tender notice
– Invitation for negotiation
– Invitation for seller’s initial response
Procurement
document
Contract Type
RFP CR
IFB FP
RFQ T&M

14. Procurement Document
• Letter of Intent (LOI)
– It is not a contract, but a letter without legal binding, that says the buyer intends to hire
seller.
• Privity of contract
– A contractual relationship
– Example:
You hired a contractor A, and the contractor hires another sub-contractor B to deliver
part of your work. Even though B is performing your work, he/she is contractually not
bound to you, because B contractually bound to “A” only.
So you need to talk to A instead of B.
• Teaming Agreements (or a join venture)
– Two sellers join force for one procurement

15. Noncompetitive Form of Procurement
• Form used when only one seller awarded without a competitive procurement.
• Should keep follow rules of bidding process and laws
• Saving time on procurement process
• Would be implemented in the following condition:
– The project under schedule pressure
– A seller has unique qualification
– There is only one seller
– A seller hold a patent
– Other mechanism exist that seller’s prices are reasonable.
• Type of noncompetitive procurement
– Single source: contract directly to preferred seller.
– Sole source: there is one seller; might be a company owns a patent

16. Source selection criteria
• Some criteria for evaluating proposals and bids (due diligence):
– Understanding of need
– Technical Capability
– Past performance of sellers (experience)
– Project management approach
– Financial stability & capacity
– Intellectual & property rights
– Overall or life cycle cost
– Risk
– Warranty
– References

17. Important Terms
• Price, Profit (fee), Cost
• Target price: used to compare the end result of the project with what was
expected (the target price).
• Sharing ratio: Incentives take the form of a formula, usually expressed as a ratio,
e.g. 90/10 (buyer/seller)
• Ceiling price: This is the highest price the buyer will pay.
• Point of total assumption (PTA):
– This only applies to fixed price incentive fee contracts
– Refers to the amount above which the seller bears all the loss of a cost overrun.
– Seller usually monitor actual costs against PTA to make still having profit.
– Formula:
PTA = ((Ceiling price - Target price)/Buyer's share ratio) + Target cost

18. Exercise: Contract Calculation
In this cost plus incentive fee contract, the cost is estimated at $210,000 and the
fee at $25,000. The project is over, and the buyer has agreed that the costs were, in
fact, $200,000. Because the seller's costs came in lower than the estimated costs,
the seller shares in the savings: 80 percent to the buyer and 20 percent to the
seller. Calculate the final fee and final price.
Target cost
Target fee
Target price
Sharing Ratio
Actual cost
Final fee
Final price
210,000
25,000
235,000
80/20
200,000
210,000 – 200,000 = 10,000
10,000 x 20% = 2,000
25,000 (target fee) + 2,000 = 27,000
200,000 + 27,000 = 227,000

19. 12.2 Conduct Procurements
• The process of obtaining seller responses, selecting a seller, and awarding a
contract.
Inputs
1. Project management
plan
2. Procurement
documents
3. Source selection criteria
4. Qualified seller list
5. Seller proposals
6. Project documents
7. Make-or-buy decisions
8. Teaming agreements
9. Organizational process
assets
Tools &
Techniques
1. Bidder conferences
2. Proposal evaluation
techniques
3. Independent estimates
4. Expert judgment
5. Advertising
6. Internet search
7. Procurement
negotiations
Outputs
1. Selected sellers
2. Procurement contract
award
3. Resource calendars
4. Change requests
5. Project management
plan updates
6. Project document
updates

20. Proposal Evaluation (Tools & Techniques)
Proposal Evaluation or Bid or Price Quote
One or a combination of following process used for selecting seller:
– Weighting system
Evaluate by weighting the source selection criteria
– Independent estimate
Estimation created in-house or with outside assistance
– Screening system
Eliminate sellers who do no meet minimum requirement
– Past performance history

21. Procurement Negotiations (Tools & Techniques)
• PM may be involved during negotiation to clarify requirement, protect relationship.
• Objective of negotiation:
– Obtain fair and reasonable price
– Develop good relationship with the seller
• Main items to negotiate:
– Scope
– Schedule
– Price & payment
– Responsibilities
– Authority
– Applicable law
– Technical & business management approaches
– Contract financing

22. Contract Document
• Purpose of contract:
– To define role and responsibilities
– To make things legally binding
– To mitigate or allocate risks.
• Contract has many names and types from simple to complex document
– Agreement, subcontract, purchase order, memorandum of understanding (MOU)
• A legal contract will need..
– An offer
– Acceptance
– Consideration (Something of value, not necessary money)
– Legal capacity (Separate legal parties, competent parties)
– Legal purpose (We cannot have a contract for something illegal)

23. Contract Document
• Contract document usually includes:
– Statement of work or deliverables
– Schedule baseline
– Performance reporting
– Period of performance
– Role & responsibilities
– Seller’s place of performance
– Pricing
– Payment terms
– Place of delivery
– Inspection and acceptance criteria
– Warranty

24. 12.3 Administer Procurements
• The process of managing procurement relationship, monitoring contract
performance and making change and corrections as needed.
Inputs
1. Procurement
documents
2. Project management
Plan
3. Contract
4. Performance reports
5. Approved change
request
6. Work Performance
Information
Tools &
Techniques
1. Contract change control
system
2. Procurement
performance reviews
3. Inspections and audits
4. Performance reporting
5. Payment system
6. Claims administration
7. Records management
system
Outputs
1. Procurement
documentation
2. Organizational process
assets updates
3. Change request
4. Project Management
Plan updates

25. Contract Administration
• Assuring the performance of both parties to the contract meets contractual
requirement.
• Contract change controls system
– A process for modifying a contract
– Review the impacts
– Contract administrator is the only one with authority to change the contract
– There are potential conflict between project manager and contract administrator

26. 12.4 Close Procurements
• The process of completing each project procurement.
Inputs
1. Project Management
Plan
2. Procurement
documentation
Tools &
Techniques
1. Procurement audits
2. Negotiated settlements
3. Records management
system
Outputs
1. Closed procurements
2. Organizational process
assets updates

27. Negotiated Settlements
In all procurement relationships the final equitable settlement of all outstanding
issues , claims , and disputes by negotiations is a primary goal.
Whenever settlement cannot be achieved by direct negotiation , some form of
alternative dispute achieved by 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

28. Terms from International Chamber of Commerce
To make the same definition between seller and buyer used for export/import
• Group E Incoterms (departure)
– EXW (Ex works)
• Group F Incoterms (main carriage unpaid)
– FCA (Free carrier)
– FAS (Free alongside ship)
– FOB (Free on board)
• Group C Incoterms (main carriage paid)
– CFR (Cost and freight)
– CIF (Cost, insurance and freight)
– CIP (Carriage and insurance paid to)
• Group D Incoterms (arrival)
– DAF (Delivered at frontier)
– DES (Delivered ex ship)
– DEQ (Delivered ex quay)
– DDU (Delivered duty unpaid)
– DDP (Delivered duty paid)
INCOTERMS 2000

29. Thank You
.