Procurement Management Slides

Project Procurement
Management
Sections of this presentation were adapted
from A Guide to the Project Management
Body of Knowledge 4th Edition, Project
Management Institute Inc., 2008
Procurement
Acquisition of goods/services.
Procurement (& contracting)
is a Process that involves
-Two Parties with:
Different objectives
Who Interact in
a given market segment.
2
Good Procurement Practices

includes
Corporate profitability by:
Taking advantage of:
1. Quantity discounts,
2. Minimize Cost/Financial
Problems,
3. Seeking out Quality Suppliers.
3
As Procurement
Contributes To Profitability
Procurement is Often
Centralized,
-Results in Standardized
practices
-Lower Paper work Cost
4
Project Quality Management

The processes to purchase or acquire the
products, services, or results needed from
outside the project team to perform the
work
Why Procurement Management?

Most all projects will need to acquire some
resources from outside
Not understanding the different ways to
contract could result in unnecessary risk for
the project
Note for Test Takers: PMI Procurement questions are from the
BUYERS perspective unless noted otherwise
How Do We Manage Procurement?

Four processes
Plan Procurements
Conduct Procurements
Administer Procurements
Close Procurements
Plan
Procurements
Conduct
Procurements
Administer
Procurements
Close
Procurements
Plan Procurements
Scope Baseline
Tools & Techniques
Requirements
Documentation
Make or Buy Analysis
Teaming Agreements
Expert Judgment
Risk Register
Risk-Related Contract
Decisions
Inputs
Procurement
Management Plan
Contract Types
Outputs
Procurement
Statements of Work
Make or Buy
Decisions
Activity Resource
Requirements
Procurement
Documents
Project Schedule
Activity Cost Estimates
Cost Performance Baseline
Source Selection
Criteria
Enterprise Environmental
Factors
Change Requests
Organizational Process
Assets
Plan
Procurements
Conduct
Procurements
Administer
Procurements
Close
Procurements
Types of contract selection

based upon following:
1.
2.
3.
4.
5.
6.
7.
8.
Overall degree of Cost & Schedule Risk

Type & complexity of Requirement (technical Risk)
Extent of Price Competition
Cost/Price Analysis
Urgency of Requirements
Performance period
Contractor's Responsibility (and Risk)
Contractor's Accounting System (Report Earn Value
reporting?)
9. Concurrent Contract (contract take A back seat to existing
work?)
10. Extent of Subcontracting (how much work contractor out
source?)
9
Contract Types
Fixed Price (Lump Sum) Contracts
Cost-Reimbursable Contracts
Cost Plus Fee (CPF)

Cost Plus Percentage of Cost (CPPC)
Cost Plus Fixed Fee (CPFF)

Cost Plus Incentive Fee (CPIF)
Time and Material (T&M) Contracts

Which type of contract is the highest risk for the Buyer? Seller?
WORSHOP
Describe advantage and
disadvantage of each
type as well as the best
scenery to use it
11
First Category
Fixed-price or
Lump-sum contract
12
Contractor carefully Estimate

Target Cost.
Contractor required to Perform
work at negotiated Contract
Value.
13
If Estimated target cost is

low then Total Profit
reduced & may vanish.
Contractor may not be able to
underbid competitors So
Contractor assumes a Large
risk.
14
Lump-sum
Provides Max Protection to
Owner for ultimate Cost of
Project.
Disadvantage:
Requiring a Long Period For
Preparation & Adjudications of
Bids.
15
Because of a Lack of
knowledge of
Local conditions,
all contractors Include
Excessive
Contingency.
16
Chang Requested
By owner after Award of
contract Lead to
Troublesome &
Sometimes Costly
extras
17
2 Category
Cost-PlusFixed-Fee
(CPFF)
nd
18
Cost Plus Fixed Fee (CPFF)

If Accurate Pricing Not Possible in Any Other
way.
So we use CPFF, so Cost may vary but Fee
remains same.
Contractor agrees only to use Best Efforts to
Performance
Good/Poor Performance
Rewarded equally.
19
Total Rs/$ Profit likely To

Produce Low Rate of Return
reflects Small Amount of
Risk By contractor.
Fixed Fee - small % Age Of
Tot/true Cost.
CPFF Required Company books
be audited.
20
3: Cost-PlusPercentage
fee Contract
21
Provides Maximum flexibility

to owner Permits Owner &
Contractor to work
together cooperatively on
All Technical, Commercial,
Financial Problems.
-No Financial Assurance of
Ultimate Cost.
22
No financial incentive to
contractor this because of High
building cost (Compared with
other forms).
Only meaningful Incentive can be:
1. Inc competition &
2. Prospects for
Follow-on contracts.
23
4 Category of
Contracts
Guaranteed
Maximum-Share
Savings
th
24
Contractor-Gets Fixed Fee for his

Profit and Reimbursed for the
Actual Cost of Engineering,
Materials, Construction Labor, all
Other Job Costs,
But only up to Ceiling figure
established as Guaranteed
maximum"
25
Savings below the" Guaranteed

Maximum are Shared between
Owner & Contractor, where
as Contractor Assumes the
Responsibility
For any Overrun beyond
Guaranteed Maximum Price.
26
Contract form Combines

advantages as well as
disadvantages of Both Lump
Sum & Cost-Plus
Contracts.
Best form for Negotiated
Contract as it Establishes a
Maximum Price At Earliest
Possible Date
27
Though contract awarded

without Competitive
Tenders.
-Yet Protects owner
Against being
Overcharged,
28
Unique in that Owner &

Contractor share Financial
Risk & Both have Real
incentive To Complete
Project At lowest Possible
Cost.
29
5 Category of Contract
th
Fixed-PriceIncentive-fee
Contracts
30
These are Same as FixedPrice contracts Except have

some Provision for
Adjustment of the Total
Profit by a formula.
This Formula Depends on
Final Total Cost at
Completion of Project
31
Formula Agreed to in
advance By Owner &
Contractor.
To use this Both Project
or Contract Requirements
Must be firmly established
32
Provides An incentive to
Contractor To:
a) Reduce Cost
b) Increase profit
Both Owner & Cost Share in
Risk & Savings.
33
6 Cat.
Cost-PlusIncentiveFee Contracts
th
34
Same as: Cost Plus Contracts, Except

have Provide for Adjustment of Fee
as Determined By a Formula:
Compares Total Project Cost to Target
Cost.
Formula agreed to in advance by Owner
& Contractor. Used for Long
Duration or R&D Type Project.
35
5. Contract Admin Cycle

Contract Administrator is
Responsible for Compliance
By the Contractor to Contract's
Terms & Conditions
To Make Sure Final Product is
Fit for Use.
36
Functions of contract administrator Include:

Change Management
Specification interpretation
Adherence to Quality
Warranties
Subcontractor Management
Production surveillance
Waivers
Contract breach
Resolution of disputes
Project Termination
Payment Schedule
Project Closeout
37
Conduct Procurements
Tools & Techniques
Project
Management Plan
Procurement
Documents
Bidder Conference
Inputs
Outputs
Proposal Evaluation
Techniques
Selected Seller
Independent Estimates
Procurement
Contract Award
Expert Judgment
Resource Calendars
Qualified Sellers List
Advertising
Change Requests
Seller Proposals
Internet Search
Project Documents
Procurement Negotiations
Project Management
Plan Updates
Source Selection
Criteria
Project Document
Updates
Make-or-Buy Decisions
Teaming Agreements
Organizational Process
Assets
Plan
Procurements
Conduct
Procurements
Administer
Procurements
Close
Procurements
Types of Scopes of Work

Performance
What the project wants, how accomplished

and project needs defined by seller
Functional or Detailed
Defines what end product should be as well

as minimum requirements
Design
Defines exactly what is required and how to

accomplish it
Procurement Documents
Request for Proposal (RFP)
Asks for the price and how/who will do the

work
Invitation for Bid (IFB)
One simple price to do the work
Request for Quotation (RFQ)
Price per unit quote
Negotiating Tactics
Attacks Argue a point
Personal Insults Attack
other sides negotiator
Good Guy/Bad Guy
Deadline The offer
stands until
Lying
Limited Authority I need
to check with ____
Missing Man She is out
today, I will have to get
back tomorrow
Fair and Reasonable

Delay Tabling issues
important to the other
side
Extreme Demands
Withdrawal Feigning
interest
Fait Accompli Done
Deal, this is how we have
to do it.
These are all tactics, but not necessarily good tactics!
Administer Procurements
Tools & Techniques
Procurement
Documents
Contract change control

system
Project
Management Plan
Procurement performance
review
Inputs
Contract
Performance
Reports
Approved Change
Requests
Work Performance
Information
Plan
Procurements
Procurement
Documentation
Outputs
Performance reporting
Organizational
Process Assets
Updates
Payment systems
Change Requests
Claims administration
Project Management
Plan Updates
Inspections and audits
Records management
system
Conduct
Procurements
Administer
Procurements
Close
Procurements
Contract Closure
Inputs
Tools & Techniques
Project
Management Plan
Procurement audits
Procurement
Documentation
Records management
system
Plan
Procurements
Outputs
Closed Procurments
Negotiated Settlements
Conduct
Procurements
Organizational
Process Assets
Updates
Administer
Procurements
Close
Procurements
Procurement Terms
Arbitration Third party dispute resolution
Breach/Default When a contract provision is not
met
Force Majeure Riots, wars, weather, or other Acts
of God
Indemnification Who is liable
Liquidated Damages Estimated damages for
specific types of defaults as defined in the contract
Material Breach A violation of the contract of
sufficient magnitude that the contract cannot be
completed
Procurement Terms Continued

Retainage Monies withheld to ensure performance at
the end of the contract
Termination Stopping the work before it is completed
Waiver Statements in the contract that indicate that
rights cannot be ignored or modified without written
agreement between the two parties
Time is of the essence Seller is placed on notice that
delivery agreements are strictly binding
Work for Hire At the end of the contract the work
product generated will be owned by the buyer

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Project Procurement

Good Procurement Practices

Project Quality Management

Why Procurement Management?

How Do We Manage Procurement?

Tools & Techniques

Make or Buy Analysis

Types of contract selection

Overall degree of Cost & Schedule Risk

Cost Plus Fee (CPF)

Cost Plus Fixed Fee (CPFF)

Time and Material (T&M) Contracts

Contractor carefully Estimate

If Estimated target cost is

Cost Plus Fixed Fee (CPFF)

Total Rs/$ Profit likely To

Provides Maximum flexibility

Contractor-Gets Fixed Fee for his

Savings below the" Guaranteed

Contract form Combines

Though contract awarded

Unique in that Owner &

These are Same as FixedPrice contracts Except have

Same as: Cost Plus Contracts, Except

5. Contract Admin Cycle

Functions of contract administrator Include:

Qualified Sellers List

Types of Scopes of Work

What the project wants, how accomplished

Defines what end product should be as well

Defines exactly what is required and how to

Asks for the price and how/who will do the

Invitation for Bid (IFB)

One simple price to do the work

Request for Quotation (RFQ)

Price per unit quote

Fair and Reasonable

These are all tactics, but not necessarily good tactics!

Contract change control

Inspections and audits

Tools & Techniques

Procurement Terms Continued

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