9. Procurment Management

7/25/2017
Procurement Management
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• The project procurement management includes the processes necessary to purchase or acquire
products, services or results needed from outside the project team
• It includes contract management and change control processes required to develop and
administer or purchase order issued by authorized project team members
• Also includes controlling any contract issued by an outside organization (the buyer) that is acquiring
deliverables from the project from the performing organization ( the seller) and administering the
contractual obligations placed by the contract on the project team
Project Procurement Management
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• Depending on the application area: the seller may be identified as a contractor, subcontractor,
vendor, service provider, or supplier
• Depending on the buyer’s position: in the project acquisition cycle, the buyer may be called a
client, customer, prime contractor, contractor, acquiring organization, service requestor, or
purchaser
• The seller can be viewed during the contract life cycle first as a bidder, then as the selected
source and then as the contracted supplier or vendor
Project management team has to make certain that all procurements meet the specific needs of the
project while adhering to organizational procurement policies

Buyer and Seller Roles
CUSTOMER
ORGANIZATION
SERVICE
PROVIDER
ORGANIZATION

Procurement Management
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Start
Project /
Enter
Phase
Initiating Planning Executing Closing
End
Project /
Exit Phase
Monitoring and Control Process
Process Groups
Initiating Planning Executing Monitoring &
Control
Closing
Procurement
Management
Plan Procurement
Management
Conduct
Procurements
Control
Procurements
Close
Procurements
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Is the process of documenting project purchasing decisions, specifying the approach, and identifying
potential sellers
12.1 Plan Procurement Management

12.1 Plan Procurement Management->Process flow

What is a Fixed Price contract ?
• It involves a fixed total price for a well-defined product
• Scope of work is very well-known and provides complete and exact specifications
• Kind of projects that have been undertaken multiple times in the past e.g. construction projects
or most software development projects
ContractType Description
Fixed Price Plus Incentive Fee
(FPIF )
 The buyer pays the seller a fixed total amount plus an incentive bonus, if certain
performance objectives are met
Firm Fixed Price (FFP)
 The buyer pays the seller a fixed total amount, regardless of the seller’s costs
 This contract type poses the greatest risk for the seller, however, it also offers the
best opportunity for the seller organization to make increased profits by reducing
it’s costs
Fixed Price with Economic
PriceAdjustment
(FP-EPA)
 This type is used whenever the seller’s performance period spans a considerable
period of years as it is desired to with many long term relationships
 It is fixed price with special provision allowing for pre defined final adjustments to
the contract price due to changed conditions, such as “Inflation, specific
commodities etc.
Plan Procurement Management – Contract Types
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What is a Cost Reimbursable contract ?
• It involves payment or reimbursement to the seller for the seller’s actual direct costs,
plus a fee typically representing the seller’s profit
• Entire project scope is not clearly known but only the requirements are known,
typically in the kind of projects that have never been attempted before e.g. research and
development (R&D) projects
Cost Plus Fixed Fee
(CPFF)
 The seller’s fee is a fixed fee, calculated as a percentage of the estimated project costs and does
not change unless the project scope changes
Cost Plus Incentive Fee
(CPIF)
 The seller’s fee is a pre-determined fee plus an incentive bonus, if certain performance objectives
are met
 Such a contract often specifies a pre-negotiated sharing formula, for sharing the cost savings, if
the final costs are less than the expected costs
Cost PlusAward Fee
(CPAF)
 The seller is reimbursed for all legitimate costs, but the majority of the fee is only earned based
on the satisfaction of certain broad subjective performance criteria
 The determination of the fee is based solely on the subjective determination of seller
performance by the buyer and is generally not subject to appeals

Time & Material (T&M)
 It resembles CR contracts because the full value of the agreement and the exact
quantity of items to be delivered are not defined by the buyer at the time of awarding the
contract
 It resembles fixed-price contracts because the unit rates are preset by the buyer
and seller when both parties agree on the rates for a particular resource
 For instance, the per person hour $ rate might be pre-decided but the total effort
and hence, the total value of the project may not be known
What is aTime and Material contract ?
• It is a hybrid type of contract that contains aspects of both cost -reimbursable and fixed-price
type of contracts.

T&M CPFF CPAF CPIF FPEPA FPIF FFP
Buyer LowHigh
SellerLow High

• A general management technique used to determine whether it is more cost-effective for the
project team to produce a particular product or service or to purchase it from outside sources
• If a buy decision is to be made, then a further decision of whether to purchase or rent is also made
• Should consider direct costs (out-of-pocket costs to purchase the product) as well as
indirect support costs (costs involved in supporting the purchasing processes and the purchased
item).
• The long-range strategy of the performing organization is also a component of the make-or-buy
analysis, if it anticipates future requirements for those items
 When this occurs, the costs charged or allocated to the project might be less than the actual
costs, with the difference representing the organization’s investment for the
future
Make or Buy Analysis
Plan Procurement Management – T & T

1. Standardized procurement documents and types of contract to be used.
2. Risk management issues.
3. Whether independent estimates will be used and whether they are needed as evaluation criteria.
4. Those actions project management team can take unilaterally, if the performing organization has a
prescribed procurement, contracting and purchasing department.
5. Managing multiple suppliers.
6. Coordinating procurement with other project aspects, such as scheduling and performance
reporting.
7. Handling the make-or-buy decisions and linking them to EstimateActivity Resources and Develop
Schedule processes.
8. Setting the scheduled dates in each contract for the contract deliverables and coordinating with the
schedule development and control processes.
Procurement Management Plan
Plan Procurements Management - Output

Procurement Management Plan
9. Handling the long lead time to purchase certain items from sellers and coordinating the extra time
needed to procure these items with the development of the project schedule.
10. Identifying requirements for performance bonds or insurance contracts to mitigate some forms of
project risks.
11. Constraints and assumptions which could affect planned procurements.
12. Establishing the direction to be provided to the sellers on developing and maintaining aWBS.
13. Establishing the form and format to be used for the procurement / contract statement of work.
14. Identifying pre-qualified sellers, if any, to be used.
15. Procurement metrics to be used to manage contract and evaluate sellers.

Procurement Statement OfWork
• It is developed from project scope baseline
• It defines only that portion of the project scope that is to be included within the related
contract
• It describes the procurement item in sufficient detail to allow prospective sellers to
determine if they are capable of providing the products, services or results
• It includes a description of any collateral services required such as performance
reporting or post-project operational support for the procured item
• Each procurement item requires a Procurement SOW, but multiple products or
services can be grouped as a single SOW
• It can be revised and refined as required, as it moves through the procurement process until
incorporated into a signed contract award

Procurement Statement OfWork
• Specifications
• Quantity desired
• Quality levels
• Performance data
• Period of performance
• Work location
• Other requirements, if any

Procurement Documents (likeTemplates)
They include –
1. A description of the desired form of the response
2. Relevant procurement statement of work
3. Any required contractual provisions like NDA, a copy of the model contract, etc.
• Are used to solicit proposals from prospective sellers
• Are structured to facilitate an accurate and complete response from each prospective seller
• Are sufficient enough to ensure consistent, appropriate responses but flexible enough to allow
consideration of any seller suggestions for better ways to satisfy the same requirements
• Are structured to facilitate easy evaluation of the responses

Common terms Used For Procurement Documents
• RFI – Request For Information
• IFB – Information For Bid
• RFP – Request For Proposal
• RFQ – Request For Quotation
• Tender Notice
• Invitation For Negotiation
• Seller Initial Response
Specific procurement terminology used may vary by industry and location
of the procurement

Source Selection Criteria
• Understanding of need
• Overall or life-cycle cost (on the lower side)
• Technical capability
• Risk
• Management approach
• Technical approach
• Warranty
• Financial capacity
• Production capacity and interest
• Business size and type
• Past performance of the sellers
• References
• Intellectual property rights
• Proprietary rights

Make-or-By Decisions
• They are documented conclusions reached of what project products, services or results
will be acquired or developed internally by the project team
• If a decision to make is reached then the procurement plan may define processes and
agreements internal to the organization
• If a decision to purchase is reached then a similar process of reaching agreement
with the seller is defined and documented

Conduct Procurements is the process of obtaining seller
responses, selecting a seller, and awarding a contract
12.2 Conduct Procurements

12.2 Conduct Procurements->Process flow

• Can be in the form of a simple purchase order or a complex document
• Is a mutually binding agreement that obligates the seller to provide the specified products, services
or results and obligates the buyer to pay the seller for them
• Is a legal relationship subject to remedy in the courts
 Statement of work
 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 and retainer
 Penalties
 Incentives
 Insurance and performance bonds
 Subordinate contractor approvals
 Change request handling
 Termination clause
 Alternate Dispute Resolution (ADR) mechanism
Agreements
Conduct Procurements – Output

Process of managing procurement relationships , monitoring contract performance, and making changes and
corrections to contract
12.3 Control Procurements

12.3 Control Procurements->Process flow

• Both the parties meet their contractual obligations and that their own legal rights are
protected
• Managing interfaces among the various providers
• Monitoring payments to the seller and ensures that payment terms within the
contract are met and that seller compensation is linked to seller progress, as defined in the
contract
• Managing any early termination of the contracted work (for cause, convenience or
default) in accordance with the termination clause of the contract
• Agreements can be amended any time prior to contract closure by mutual consent,
in accordance with the change control terms of the agreement (such amendments are
captured in writing)
Control Procurements - Activities

• Includes the application of the appropriate project management processes to the
contractual relationship(s) and
• Integration of the outputs from these processes into the overall management of the project
 Direct and Manage ProjectWork to authorize the contractor’s work at the
appropriate time
 Control Quality to inspect and verify the adequacy of the contractor’s product
 Perform Integrated Change Control to ensure that changes are properly
approved and that all those need to know are aware of such changes
 Control Risks to ensure that all risks (vendor-related) are mitigated
Control Procurements - Activities

Procurement Performance Reviews
Are structured reviews of the seller’s progress to deliver project scope and quality,within
cost and on schedule,as mentioned in the contract
• Rates how well the seller is performing the project work
• Includes buyers inspections as well as quality audits
• Documents the seller’s ability to continue to perform work on the current contract
• Indicates if the seller can be allowed to perform work on future projects
• Can form the basis for early termination of the seller’s contract
• Can determine how contract penalties, fees or incentives are administered
Control Procurements – T & T

Claims Administration
• Contested changes (also called as claims, disputes or appeals) and potential
constructive changes are those requested changes where the buyer and the seller cannot
agree on compensation for the change or cannot agree that a change has occurred
• Claims are documented, processed, monitored and managed throughout the contract life-
cycle
• If the parties themselves do not resolve a claim, it may have to be handled in accordance
with the alternative dispute resolution (ADR) typically following procedures
established in the contract
• Settlement of all claims and disputes through negotiation is the preferred method

Process of completing each project procurement
12.4 Close Procurements (Contract Closure)

12.4 Close Procurements (Contract Closure)->Process flow

Records Management System
• It is a specific set of processes, related control functions and automation tools
that are consolidated and combined into a whole as part of the Project Management
Information System (PMIS)
• It is used by the Project Manager to manage contract and procurement documentation and
records
• It is used to maintain an index of contract and assist with retrieving and archiving contract
documentation and correspondence

• It involves verification that all of the seller’s work and deliverables were acceptable and
supports the‘Close Project or Phase’ process
• Early termination of a contract is a special case of contract closure and can result from a
mutual agreement of the parties or from the default of one of the parties
• Based upon the terms and conditions, the buyer may have the right to terminate the whole
contract or a portion of it, for cause or convenience, at any time
• It also involves administrative activities such as finalizing open claims, updating records to
reflect final results and archiving such information for future use
• Unresolved‘claims’ may be subject to‘arbitration’ or‘litigation’ after contract closure

7/25/2017
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9. Procurment Management

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