PMP Exam Preparation Course: 11 Project Procurement Management

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B. M. Shahrier Majumder, PMP
PMP® Exam Preparation

Project Procurement
Management

Learning Objectives
Upon completion of this topic you will learn about
– The processes, activities and documentation items for Project
Procurement Management
– Elements (and deliverables) for Project Procurement
Management
– Tools and techniques of the key activities of the Project
3

Includes the processes necessary to purchase or acquire
products, services or results needed from outside the project team.
4

Key Activities of Procurement Management
 Plan Procurements: The process of documenting project purchasing
decisions, specifying the approach, and identifying potential sellers.
 Conduct Procurements: The process of obtaining seller
responses, selecting a seller, and awarding a contract.
 Administer Procurements: The process of managing procurement
relationship, monitoring contract performance, and making
changes, and corrections as needed.
 Close Procurements: The process of completing each project
procurement.
5

Plan Procurements | Data Flow Diagram

Plan Procurements
Inputs Tools & Techniques Outputs
Scope baseline
Requirement documentation
Teaming agreement
Risk register
Risk related contract
decisions
Activity resource
requirements
Project schedule
Activity cost estimates
Cost performance baseline
Enterprise environmental
factors
Organizational process assets
Make-or-buy analysis
Expert judgment
Contract types
Procurement management
plan
Procurement statement of
work
Make-or-buy decisions
Procurement documents
Source selection criteria
Change requests

Plan Procurements > Tools and Techniques
• Make-or-buy Analysis
• Is a general management technique used to determine
whether particular work can be best be accomplished by the
project team or must be purchased from outside sources.
• Budget constrains may influence make-or-buy decisions.
• Example: You are trying to decide whether to lease or buy an item
for your project. The daily leas cost is $100. To purchase the
item, the investment cost is $1000 and daily cost is $20. How long
will it take for the leas cost to be the same as the purchase cost?
8

• Answer
Let D equal the number of days when the purchase and leas cost
are equal.
$100D = $1000 + 20D
$100D – 20D = $1000
$80D = $1000
D = 12.5
This calculation helps a project manager decide whether it is better
to lease or buy. The calculation says that the costs are the same
after 12.5 days. Therefore, if you are planning to use the item for
fewer than 12.5 days, you should lease. If you are planning to use it
for more than 12.5 days, it would be cheaper to buy the item.
9

• Contract Types
Mainly 3 categories of contract types:
• Fixed priced contract (FP)
• Cost reimbursable contract (CR)
• Time and material contract (T&M)
10

Fixed Price Contract
– Fixed Price Contract is inappropriate, if
• Seller may not have the details 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.
– If Statement of work is incomplete in FP
• The seller is forced to accept a high level of risks
• The seller would need to add a huge amount of services to
their price to cover their risks and the buyer, therefore, pays
more than they might otherwise have
• The seller can more easily try to increase profits by cutting
scope or claiming that work the buyer wants is outside the
contract and thus requires a change.
11

Fixed Price Contract
– Fixed Price Incentive Fee (FPIF)
• Example: Contract is $1,000,000. For every month the early
the project is finished, an additional $5,000 will be paid to the
seller.
– Fixed Price Award Fee (FPAF)
• Example: Contract is $1,000,000. For every month
performance exceeds the planned level by more than 15% an
additional $5,000 will be awarded to the seller, with a
maximum award of $50,000.
– Fixed Price Economic Price Adjustment (FPEPA)
• Example: Contract price is $1,000,000 but a price increase will
be allowed in year two to account for increase in specific
material cost.
12

Cost Reimbursable Contract
– Cost Price (CP)
• Contract = Cost. There is no profit.
• Appropriate for non-profit organization
– Cost Plus Fee (CPF)
• Contract = Cost plus 10% of cost as fee
– Cost Plus Fixed Fee (CPFF)
• Contract = Cost plus a fee of $10,000
– Cost Plus Award Fee (CPAF)
• Contract = Cost plus $5,000 for every month production
exceeds 10,000 units with maximum award of $50,000.
13

Time and Material Price Contract
• The buyer pays per item or per hour basis
• Example: Contract is $100 per hour plus expenses or
materials at cost.
14

Risk and Contract Type
15

Plan Procurements > Outputs
• Procurement management Plan
• Types of contracts to be used
• Risk management issues
• Evaluation criteria
• Standardize procurement document
• Any constrain and assumption
• Identifying prequalified sellers
• Procurement Documents
• Request for Information (RFI)
• Invitation for Bid (IFD)
• Request for Proposal (RFP)
• Request for Quotation (RFQ)
16

Conduct Procurements | Data Flow Diagram

Conduct Procurements
Project management plan
Source selection criteria
Qualified seller list
Seller proposals
Project documents
Make-or-buy decisions
Teaming agreement
Organizational process
assets
Bidder conference
Proposal evaluation
techniques
Independent estimates
Expert judgment
Advertising
Internet search
Procurement negotiations
Selected sellers
Procurement contract
award
Resource calendars
Change requests
updates
Project document updates

Contract Procurements > Outputs
• Procurement Contract Award
• Statement of work or
deliverables
• Schedule baseline
• Performance reporting
• Roles and
responsibilities
• Pricing
• Payment terms
• Place of delivery
• Acceptance criteria
• Warranty
• Product support
• Insurance and
performance bond
• Penalties
• Change request
handling
• Termination and
alternative dispute
resolution mechanism
19

Administer Procurement | Data Flow Diagram

Administer Procurement
Contract
Performance reports
Approved change requests
Work performance
information
Contract change control
system
Procurement performance
review
Inspections and audits
Performance reporting
Payment system
Claims administration
Record management
system
Procurement
documentation
assets updates
Change requests
updates

Close Procurements | Data Flow Diagram

Close Procurements
Procurement audit
Negotiated settlements
Record management
system
Closed procurements
assets updates

Questions
24
• [mail.shahrier@gmail.com]
• http://bd.linkedin.com/in/shahrier

PMP Exam Preparation Course: 11 Project Procurement Management

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PMP Exam Preparation Course: 11 Project Procurement Management