Project Procurement Management

  • Processes required to acquire goods and services from outside the organization
  • Discussed from the perspective of the buyer
    • Terms and conditions of the contract is a key input to many processes
    • Buyer is the customer, thus a key stakeholder
    • Seller’s project management team must be concerned with all processes of project management, not just their knowledge area
  • Identify project needs that can best be met by acquiring resources
  • Consideration whether to procure, how to, how much, when to purchase
  • Subcontractor decisions may provide flexibility
    • Internal procurement does not involve formal solicitation and contract
Inputs to Procurement Planning
  • Scope Statement – boundary for needs and strategies
  • Product Description – broad technical issues, not to be confused with a statement of work
  • Procurement Resources – formal contracting group (RFP)
  • Market Conditions – supply and demand, what services are available 
  • Other Planning Outputs – preliminary cost and schedule, quality management plans, cash flow, WBS, risks, staffing
  • Constraints – factors that limit buying options
  • Assumptions 
Tools & Techniques for Procurement Planning
  • Make or Buy analysis – determine if the service can be provided from within
    • Include direct and indirect costs
    • Factor ongoing need for items vs. 1-time usage
  • Expert Judgment – assess input
  • Contract type selection
    • Fixed Price (lump sum) – incentives for meeting targets
    • Cost Reimbursable Contracts – Time and Materials basis
    • Unit Price – preset amount per unit of service 
Outputs from Procurement Planning
  • Procurement Management Plan – describes how procurement process will be managed
    • Type of contract
    • Independent estimates needed?
    • Autonomy of project team
    • Standardized documents
    • Multiple provider management?
    • Incorporate with other project aspects (scheduling and performance reporting)
  • Statement of Work (SOW) – describes the procurement in detail – clear, concise description of services
    • Can also be a Statement of Requirements for problem-solving activities
Solicitation Planning
  • Preparing documents needed
Inputs to Solicitation Planning
  • Procurement Management Plan
  • Statement of Work
  • Other Planning Outputs
Tools & Techniques for Solicitation Planning
  • Standard Forms and Procedures
  • Expert Judgment
Outputs from Solicitation Planning

  • Procurement Documents – used to solicit proposals from prospective sellers
    • Bids, Request for Proposal, Request for Quotation, Contractor Initial Response, etc.
    • Structure to receive complete and accurate responses
      • Description of desired form of response and any required contractual provisions (e.g. non-disclosure statements)
      • May be defined by regulation
      • Flexible to allow seller suggestions
  • Evaluation Criteria – rate proposals; objective or subjective (previous experience)
    • Price
    • Understanding of need by seller
    • Overall/Life Cycle cost (purchase plus operating cost)
    • Technical Capability
    • Management Approach
    • Financial Capacity
  • Statement of Work Updates

Solicitation
  • Obtaining information from prospective sellers
Inputs to Solicitation
  • Procurement Documents
  • Qualified Seller Lists – preferred vendors
Tools & Techniques for Solicitation
  • Bidder Conferences – mutual understanding meetings
  • Advertising – primarily with Government projects
Outputs from Solicitation
  • Proposals – seller prepared documents describing willingness and ability to provide the service
Source Selection
  • Apply evaluation criteria (seldom straight-forward)
    • Price (lowest price may not always result in lowest project cost)
    • Technical (approach) vs. commercial (price)
    • Multiple sourcing may be needed for same service
Inputs to Source Selection
  • Proposals
  • Evaluation Criteria
  • Organizational Policies 
Tools & Techniques for Source Selection
  • Contract Negotiation – clarification and mutual agreement on structure and requirements of contract prior to signature
    • Responsibilities and authorities
    • Applicable terms and law
    • Financing
    • Price
    • Technical and business management
  • Weighting – quantifying data to minimize personal prejudice of source selection
    • Assign numerical weight to evaluation criteria
    • Rating sellers
    • Multiply weight by rating and totaling overall score
  • Screening System – establish minimum performance criteria
  • Independent Estimates – “should cost” estimates 
Outputs from Source Selection
  • Contract – mutually binding agreement obligates seller provide goods and services and buyer to make payment.
    • Legal relationship
    • Legal review is most often necessary
Contract Administration
  • Ensuring that the seller’s performance meets contractual requirements
    • Project Team must be aware of legal ramifications of all actions taken
    • Apply project management processes to contractual relationships and integrate outputs within the project
      • Project Plan Execution (authorize work)
      • Performance Reporting (monitor cost, schedule)
      • Quality Control (verify contractor’s output)
      • Change Control
      • Financial Management
Inputs to Contract Administration
  • Contract
  • Work Results – seller’s deliverables, quality standards, actual costs
  • Change Requests – modify contract, or description of product/service
    • May result in disputes, claims, appeals
  • Seller Invoices 
Tools & Techniques for Contract Administration
  • Contract Change Control System – defines how a contract may be modified
    • Includes paperwork, tracking system, dispute resolution procedures and approval levels
  • Performance Reporting 
  • Payment System – Accounts Payable 
Contract Close Out
  • Similar to administrative closure; involves product verification and administrative paperwork
    • Early termination is a special case
    • Contract terms and conditions may prescribe procedures
Inputs to Contract Close Out
  • Contract Documentation – supporting schedules, documentation
Tools & Techniques for Contract Close Out
Procurement Audits – structured review of entire procurement process; identify successes and failures that warrant transfer to other procurement items

Outputs from Contract Close Out
  • Contract File – complete index of records
  • Formal Acceptance and Closure – contract administration responsibility to provide a formal notice that contract has been completed
Tips from Review Guide
  • Most questions are process oriented
  • Most questions are from the buyer’s perspective
  • Contracts are formal agreements
  • All requirements should be specifically stated in the contract
  • All contract requirements must be met
  • Changes must be in writing and formally controlled
  • US Gov’t backs all contracts by providing a court system
  • What forms a contract
    • An offer
    • An acceptance
    • Consideration - something of value
    • Legal Capacity – separate legal parties, competent parties
    • Legal Purpose – can not perform illegal goods or services
  • Project Manager’s role for procurement
    • Risk identification and evaluation
    • Work within the procurement process
  • Procurement Process
    • Procurement Planning = Make or buy
    • Solicitation Planning = Request for Proposal
    • Solicitation = Questions and Answers
    • Source Selection = Pick vendor
    • Contract Administration = Admin
    • Contract Closeout = Finish
  • Make or Buy: consider out of pocket costs and indirect cost of managing procurement
  • Buy – to decrease risk (cost, schedule, performance, scope of work)
  • Make
    • Idle plant or workforce
    • Retain control
    • Proprietary information/procedures
    • Buy vs. lease questions (use X = number of days when purchase and lease costs are equal)
  • Contract Type Selection – reasonable risk between the buyer and seller and greatest initiative  for seller’s efficient and economic performance
    • Scope – well defined?
    • Amount or frequency of changes expected after start date
    • Amount of effort and expertise the buyer can devote to manage the seller
    • Industry standards  
  • Cost Reimbursable (CR); seller’s cost are reimbursed; buyer bears highest risk (cost increases)
    • CPFF – cost plus fixed fee, buyer pays all costs – fee (profit) established
    • CPPC – cost plus percentage of costs; bad for buyers (seller not motivated to control costs)
    • CPIF – cost plus Incentive Fee; seller costs + fee + bonus for meeting/exceeding target (incentive clause)
  • Time and Materials; priced on per hour basis, elements of fixed price contract and cost reimbursable contracts – buyer has medium risk
  • Fixed Price (lump sum, or firm fixed price) - most common (1 price for all work), risk of costs is upon seller
    • FPIF – Fixed Price Incentive Fee
    • FPEPA – Fixed Price Economic Price Adjustment – long duration projects
  • Incentives – help bring seller’s objectives in line with buyer’s
  • Incentive Fee and Final Price Calculations
    • Must Have:
    • Target Cost
    • Target Fee
    • Target Price
    • Sharing Ratio (buyer/seller)
    • Actual Cost
    • Fee = (Target Cost – Actual Cost) x Seller Ratio (%) 
    • Total Fee = Fee + Target Fee
    • Final Price = Actual Cost + Total Fee
  • Procurement Documents, Contract Type and Scope of Work
    • Request for Proposal – Cost Reimbursable – Performance or Functional Scope (can be somewhat loosely defined)
    • Invitation for Bid – Time & Materials – Design Scope (moderately defined)
    • Request for Quotation – Fixed Price – Any Scope (must be detailed)
  • Terminology (Terms and Conditions)
    • Force majeure – act of God
    • Indemnification – who is liable
    • Liquidated damages – estimated damages as a result of contract breach
    • Material breach – a breach so large the project  may not continue
    • Special Provisions – provided by the Project Manager to contracts so that particular needs are addressed
    • Privity – contractual relationship
    • Single Source – contract directly with preferred seller
    • Sole Source – only one supplier available in market
  • Evaluation Criteria
    • Understanding of need
    • Overall or life-cycle cost
    • Technical ability
    • Management Approach
    • Financial Capacity
    • Project Management Ability
      • Invitation for Bids are usually not evaluated with entire criteria (lowest rate is chosen)
  • Solicitation
    • Bidder’s Conference
    • Benefit both buyer and seller
    • Watch out for
      • Collusion
      • Sellers not asking questions in front of their competition
      • Make sure all questions and answers are in writing and issued to all sellers (respond to same scope in work)
  •  Source Selection
    • Negotiation Objectives
    • Obtain a fair and reasonable price
    • Development a good relationship with seller
      • Project manager must be involved
    • Main Terms to negotiate
      • Responsibilities
      • Authority
      • Applicable Law
      • Technical and Business Management approaches
      • Contract Financing
      • Price
  • Contract Administration – assure that seller’s performance meets contractual requirements 
    • Project Managers must understand the contract and manage its completion
      • Sometimes contract is in conflict with Scope of Work
      • Only the contracting officer (CO) can change contract language
        • Often a source of conflict
        • Need to deal with a different company’s set of procedures
        • It is not as easy to “see” problems
        • Greater reliance on reports to determine if a problem exists
        • Greater reliance on relationships between buyer and seller’s project managers
  • Contract Closeout – more attention to documentation and completion of files
    • All documentation must be preserved and filed
    • Centralized vs. decentralized contracting
  • Contract Interpretation
    • Based on analysis of intent 
  • Fee = Target Cost – Actual Cost X Seller Ratio ($)
  • Total Fee = Fee plus Target Fee
  • Final Price = Actual Cost plus Total Fee
  • Contractor = seller
  • Purchasing Cycle – define need, prepare and issue purchase order
  • Functional Spec – delineates specific end-use capabilities that are tested in acceptance procedure
  • Measurable Capabilities = Performance Specifications
  • Requisition Cycle – review of specification completeness
  • Requirements Cycle – develops the statement of work
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