Project Procurement Management

•          Project Procurement Management

–        Processes required to acquire goods and services from outside the organization

–        Discussed from the perspective of the buyer


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•          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

•          Procurement Planning

–        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

•          Tips from Review Guide

–        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

•          Tips from Review Guide

–        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