Procurement Management 12.1 Plan Procurements

Quick Link to Procurement Management

Procurement Management 12.1 Plan Procurements

Procurement Management 12.2 Conduct Procurements

Procurement Management 12.3 Administer Procurements

Procurement Management 12.4 Close Procurements

 

 

12.1 Plan Procurements

Procurement planning involves deciding which products or services should be procured from outside the organization, specifying the approach and identifying potential sellers. The questions to answer are whether, hoe, what, when and how much to procure. The process should consider the following:

·         Potential sellers (is a buy decision feasible?)

·         The desired schedule (best met through make or buy?)

·         The risks associated with make vs. buy.

·         The appropriate type of contract.

Plan Procurements
Inputs	Tools	Outputs
1.       Scope baseline 2.       Requirements documentation 3.       Teaming agreements 4.       Risk register 5.       Risk-related contract decisions 6.       Activity resource requirements 7.       Project schedule 8.       Activity cost estimates 9.       Cost performance baseline 10.   Enterprise environmental factors 11.   Organizational process assets	1.       Make-or-buy analysis 2.       Expert judgment 3.       Contract types	1.       Procurement management plan 2.       Procurement statements of work 3.       Make-or-buy decisions 4.       Procurement documents 5.       Source selection criteria 6.       Change requests

Eleven Key Inputs for Plan Procurements:

1.       Scope Baseline: Consists of the following components:

·         Scope statement: Includes information such as requirements, constraints, assumptions, list of deliverables, acceptance criteria, required delivery dates, and available resources.

·         WBS: Describes and organizes the work. Is a major factor in deciding what to outsource using contracts.

·         WBS dictionary: Provides the details for each work package and control account.

2.       Requirements Documentation: Some requirements may have contractual or legal implications; such as environmental, intellectual property rights, health and safety, etc.

3.       Teaming Agreements: Teaming agreements are legal contractual agreements that establish joint ventures. The agreements function exactly like contracts in that they establish terms, conditions and roles for each party in the agreement.

4.       Risk Register: Some contractual agreements are chosen as a risk mitigation strategy and, in any case, the risk register identifies specific risk concerns.

5.       Risk-Related Contract Decisions: May include purchasing insurance, a warranty, or outsourcing portions of the project to another party.

6.       Activity Resource Requirements: Identifies facilities, equipment, and people needed to handle the work. If these resources are not available in-house, the work may be outsourced using a contract.

7.       Project Schedule: Contains required timelines that may also become the rationale for entering into a contract (cannot meet the deadline with in-house sources) or may be needed to evaluate the ability of a prospective contractor to meet the schedule.

8.       Activity Cost Estimates: lf in-house costs are high, this may be a reason to outsource or, conversely, the information may be needed to evaluate proposals from prospective contractors.

9.       Cost Performance Baseline: Provides the details of planned spending throughout the project timeline.

10.   Enterprise Environmental Factors: Factors that may affect procurement planning includes:

·         Conditions of the marketplace:

o   Is the product or service available in the marketplace?

o   Are the services of a reputable contractor available at the right time?

·         Typical terms and conditions

·         Unique local requirements

11.   Organizational Process Assets: Organizational Process Assets may include:

·         Procurement policies and constraints:

o   Is there a buying department? lf not, members of the project team may have to conduct procurement activities themselves.

o   Are there any requirements that certain contracts be set aside for small and disadvantaged business?

·         Procedures for selecting contract type

·         Established supplier system and/or pre-qualified sellers

Three Key Tools for plan procurements:

1.       Make-or-Buy Analysis: Determining the cost effectiveness of producing an item in-house (make) versus procuring it from an outside organization (buy). The analysis should consider both the direct costs as well as the indirect costs (cost of monitoring the purchasing process).

This site also states that the analysis should consider not just the project needs and costs but the overall organization's needs and costs, as well. For example, it may not be cost effective to purchase certain equipment or build a new facility for an individual project. However, the equipment or facility may also support other work in the rest of the organization.

2.       Expert Judgment: Subject matter experts are needed to develop appropriate evaluation criteria and judge proposals that are received. Proposals often have financial, management, and technical considerations that are beyond the expertise of one individual. The expertise of lawyers is often required for non- standard procurements.

3.       Contract Types: several factors may influence which type of contract is appropriate. PMI recognizes three broad categories of contracts:

Fixed price (also called lump sum): Appropriate when the product is well-defined and the risks are generally felt to be low. Risk is borne by the seller because they are legally obligated to deliver the specified product even if they incur a loss in doing so.

Cost reimbursement: Appropriate when the product is initially difficult to define (e.g., product does not exist and must be developed) and when risk is high. Buyers agree to reimburse the seller's actual costs plus guaranteeing a profit. Risk is borne by the buyer. The costs include both direct costs and indirect costs.

Time and material: A hybrid arrangement with elements of both fixed price and cost reimbursement. On the fixed price side, the seller is paid a preset amount per unit of service ($50 per cubic yard of gravel delivered, $200 per hour for professional services, and so on). On the cost reimbursement side, the dollar value is based on how much material or time is actually used.

You must be familiar with seven specific types of contracts that fall under the umbrella of the first two categories above (fixed price and cost reimbursement).

Cost Plus Percentage of Cost (CPPC): Provides for reimbursement of allowable costs plus an agreed percentage of the costs (as the seller's profit). This type of contract is now illegal in the U.S. federal sector and does not provide the type of incentives that most buyers look for in a contractual arrangement.

Cost Plus Fixed Fee (CPFF): Provides for reimbursement of allowable costs plus a fixed fee paid proportionately as the work progresses- Risk mostly on the buyer; used for research and development in which risk is quite high at the beginning of the work. CPFF contracts usually have a ceiling price that establishes an upper limit on the buyer's financial obligation. There is no financial reward provided to the seller for keeping costs low.

Cost Plus Incentive Fee (GPIF): Provides for reimbursement of allowable costs plus a calculated fee based on performance. The seller has an incentive to control costs through a negotiated sharing arrangement. Minimum and maximum levels of profit are established at the outset. Again, there is often a ceiling price established by the contract.

Cost Plus Award Fee (GPAF): As always, legitimate and allowable costs are reimbursed and an additional fee is paid. In this case, qualitative performance criteria are defined in the contract and the fee is paid based on the buyer's subjective judgment of the seller's performance. The buyer's decision is not usually subject to appeal. Buyers like this arrangement because it gives them enormous leverage with their sellers.

Fixed Price with Economic Price Adjustment (FP-EPA): lf the performance period spans multiple years, concerns may exist about inflation and significant price changes for key materials or supplies. This type of contract allows adjustments to compensate for these uncertainties. An EPA clause ties pricing to an agreed financial index (e.g. consumer price index) and final prices are adjusted according to whether the index went up, down, or remained stable.

Fixed Price Incentive Fee (FPIF): Provides the seller with a fixed price plus a calculated fee based on performance. This contract type is similar in concept to CPIF in that there is a sharing arrangement that provides an incentive to control costs. However, in a CPIF arrangement, the seller is guaranteed a minimum profit. In an FPIF arrangement, it is possible for the seller to lose money. Therefore, risk is shifting onto the seller in this type of contract. FPIF contracts also have a ceiling price and a point of total assumption (PTA). The PTA is the level of cost at which the sharing arrangement ceases and any further costs come 100 percent from the seller's profit. The course slides show an example of how to calculate the PTA.

Firm Fixed Price (Lump sum): Contracted goods and services are furnished at an agreed fixed price. The seller bears all the risk but is potentially rewarded with a maximum profit potential. Best suited for situations in which risk is low and the product can be well defined.

You should also be familiar with the concept of contract incentives. Incentives provide a "carrot" aimed at bringing the objectives of the contractor in line with those of the buyer. Incentives can be used in conjunction with any contract type; real world experience has shown that incentives are extremely effective.

Six Key Outputs for Plan Procurements:

1.       Procurement Management Plan: Delineates the types of contracts to be used, whether independent cost estimates will be needed, how multiple providers will be managed, and the roles and responsibilities of contracting professionals.

The plan may include all or portions of the following:

·         Types of contracts

·         Whether independent estimates will be used

·         Constraints, assumptions, and supplier lead times

·         Risk management

·         Formats for the statement of work and WBS

·         Coordinating procurement with resource needs, schedules, costs, and lead times

·         Identifying pre-qualified sellers

·         Metrics for performance reporting

2.       Procurement Statements of Work: A narrative description of goods or services to be supplied under contract. Should contain enough detail so that prospective contractors can evaluate their own ability to meet the stated needs. Also called a statement of requirements or a statement of objectives in some areas. The use of an SOR or an SOO often refers to a procurement item presented as a problem to be solved (rather than a product to be purchased).

The SOW contains information such as the following:

·         Specifications

·         Quantity and quality

·         Period of performance and location

·         Required collateral services (management activities such as performance reporting, earned value, or change control)

3.       Make-or-Buy Decisions: Written documentation of these decisions with supporting rationale.

4.       Procurement Documents: Used to request proposals from prospective sellers. Key points include:

·         When the procurement is price driven, the terms bid and quotation are used.

·         When the procurement is influenced by technical considerations and other non-financial concerns, the term proposal is used.

·         Procurement can be initiated as a unilateral contract, which usually means a purchase order for routine items at standard (catalog) prices. Purchase orders become enforceable at the time the supplier ships the requested items.

·         Alternatively, procurement can be initiated as a bilateral contract using one of four approaches:

o   Request for information (RFI): This approach is not actually an official request for a bid. Instead, it asks for "expressions of interest," solicits feedback regarding capacity and capability to perform the work, and so on. The RFI responses may be useful in developing the qualified sellers list.

o   Invitation for Bid (Sealed Bid): Used for routine, well-defined items. Buyer wants bids to get the best price. Does not usually involve negotiations and no discussion is allowed.

o   Request for Quotation: Used for relatively low dollar purchases of commodity items. Discussion between buyer and seller is permitted. This approach may be considered a "best value" search, which compares price to other factors such as schedule, technical merit and past performance of potential contractors.

o   Request for Proposal: used for complex, nonstandard items of high dollar value. Discussion and negotiation are usually involved.

5.       Source Selection criteria: Used to rate or score proposals. The criteria may be objective (the Pm must have a PMP) or subjective (the PM must have appropriate experience). Sample criteria include:

·         Understanding of need

·         Warranty

·         Life cycle cost

·         Technical capability

·         Management approach

·         Financial and production capacity

·         Past performance

·         Production capability

·         Proprietary rights

12.2 Conduct Procurements

This process obtains information such as bids and proposals from prospective sellers, selects the winning response and awards a legally binding contract. For the exam, one notable activity is the use of qualified seller lists. Procurement (contracting) specialists develop such lists from a variety of sources and determine who might have the ability to perform the needed work. These lists can also speed up the process. Another notable fact is that bidder conferences, if used, are performed as part of this step. Independent estimates may be important if the procurement is noncompetitive and you need to ensure that prices are fair reasonable.

For large, complex procurements, this process may be performed numerous times for multiple contracts. Also, a common practice is to screen the initial responses and create a list of competitors “in the competitive range” (known to many people as the “short list”). More detailed evaluations and negotiations are then conducted with sellers on the short list. Another practice is the use of the “BAFO” technique (best and final offer). The technique is used when procurement personnel want lower prices in the proposals. Other key points:

·         Proposals are often organized into different sections or volumes that are evaluated separately by different experts. For example, common sections evaluated separately are technical approach, price, schedule, management approach and past performance.

·         In some instance, organizations prefer (as a risk mitigation strategy or as a cost competition factor) to have multiple suppliers for certain products.

Conduct Procurements
Inputs	Tools	Outputs
1.       Project management plan 2.       Procurement documents 3.       Source selection criteria 4.       Qualified seller list 5.       Seller proposals 6.       Project documents 7.       Make-or-buy decisions 8.       Teaming agreements 9.       Organizational process assets	1.       Bidder conferences 2.       Proposal evaluation techniques 3.       Independent estimates 4.       Expert judgment 5.       Advertising 6.       Internet search 7.       Procurement negotiations	1.       Selected sellers 2.       Procurement contract award 3.       Resource calendars 4.       Change requests 5.       Project management plan updates 6.       Project document updates

Nine Key Inputs for conduct Procurements:

1.       Project management plan: Contains the procurement management plan which was an output of the previous process (section 12.1).

2.       Procurement documents: Describe in section 12.1.3.4, an appropriate document is chosen to request seller responses (IFB, RFQ and RFP).

3.       Source selection criteria: The criteria were developed as an output of the previous process (section 12.1.3.5) and are now used to actually evaluate and compare the various bids or proposals.

4.       Qualified seller list: A previously screened list of potential sellers who have the ability to perform the work probably already exists. If desired, this step would build on that list using the internet, trade catalogs, site visits or references from previous customers.

5.       Seller proposals: Prepared and submitted in response to the buyer’s procurement document package (PDP). A proposal constitutes a legal offer and should be constructed carefully by the seller. The PDP is sent by the buyer to prospective sellers (based on the qualified seller list) and contains:

·         A procurement document (IFB, RFQ, RFP)

·         The evaluation

·         A cover letter with instructions: due date for the proposal, table of contents or required format (if any), number of copies and so on.

6.       Project documents: Project documents that may be considered at this point include the risk and any risk-related contract decisions.

7.       Make-or-buy decisions: Described in section 12.1.3.3.

8.       Teaming agreements: When teaming has already begun, an interim agreement of some type may be guiding activities. This step would finish formalizing and negotiating any necessary contractual agreements.

9.       Organizational process assets: Organizational Process Assets that may be relevant include:

·         Qualified lists

·         Information on relevant past experience with specific sellers

Seven Key Tools for Conduct Procurements:

1.       Bidder conferences: Used to ensure all prospective sellers share a clear, common understanding of technical and contract requirements. Most organizations are careful to ensure that all potential sellers are given equal treatment and information.

2.       Proposal evaluation techniques: Most organizations that conduct major procurements have established source selection procedures. These procedures establish the approach for evaluating, comparing and selecting winning proposals.

3.       Independent estimates: Procurement organization prepares its own estimates as a cross-check or verification that the bids are fair and reasonable. Also called “should cost” estimates, this tool is especially important for non-competitive procurements (e.g. sole source).

4.       Expert judgment: A multi-disciplinary team of experts (financial, technical, management) is usually required to effectively evaluate proposals.

5.       Advertising: The use of general circulation sources such as newspapers and professional journals and newsletters to expand the potential pool of sellers.

6.       Internet search: The internet is of great help in the procurement of items readily available in the marketplace. Source and prices can be located quickly. However, the internet is often insufficient for complex, developmental procurements.

7.       Procurement negotiations: Clarification and mutual agreement on the structure and requirements of the contract prior to signing.

Common negotiation tactics:

Deadline: "We have to catch a flight at 5:00 p.m. and must complete the deal before we leave."

Good cop/bad cop: One person is helpful and understanding while the other is difficult and demanding.

Fait accompli: Pretending that some condition is essentially a "done deal" or not negotiable at all.

Missing man: "I'm sorry, only my boss can agree to that request and he or she isn't here. Let's agree to do___________ instead. I can agree to that."

Limited authority: "l can't agree to reduce the price by $100,000. I'm only authorized to offer $50,000."

Delay: "Let's handle that issue at the next meeting." May be a ploy leading to a deadline tactic. "Oops, we're running out of time, so let's sign this deal and work out any issues later."

Personal insults: Designed to intimidate you and/or undermine your confidence.

Fair and reasonable: A personal appeal that may be posed with a great deal of charm and "folksiness." "You and I know what's going on here. Let's be reasonable and work this out."

1.       Selected Sellers: Sellers who have been chosen as being in the competitive range and who have submitted a proposal that has been accepted. The proposal becomes the basis for the contract (subject to any last-minute negotiating of terms and conditions).

2.       Procurement Contract Award: A legal relationship subject to remedy in the courts. A contract is a mutually binding agreement that obligates the seller to provide the specified product and obligates the buyer to pay for it.

You must know the elements of a legally enforceable contract:

·         The agreement must be voluntary- There must be both an offer and an acceptance.

·         The agents must be legally authorized to enter into a legal commitment. (The authorization can be written or verbal). In business contracts, a delegation of procurement authority is often used to identify precisely who is authorized to enter into a contract.

·         There must be sufficient cause, which is also known as "consideration." An exchange of value must take place.

·         The contract must be for a legal purpose.

While there may be differences, the major components in most contracts include the following:

·         Statement of work or deliverables

·         Period of performance and schedule baseline

·         Required performance reporting

·         Place of performance and delivery

·         Pricing and payment terms

·         Warranty and product support

·         Penalties and incentives

·         Subcontractor approvals

·         Handling of change requests

·         Dispute resolution procedures

·         Termination procedures

3.       Resource Calendars: Specific quantity and availability of contracted resources.

4.       Change Requests: lf change requests are generated during the procurement, they must be handled using integrated change control procedures.

5.       Project Management Plan Updates: Elements of the plan that may be changed include:

·         Cost, schedule, and scope baselines

·         Procurement management Plan

6.       Project Document Updates: Documents that may be updated include:

·         Requirements documentation

·         Requirements traceability documentation

·         Risk register

12.3 Administer Procurements

The buyer and the seller both perform contract administration to ensure that the other party meets its contractual obligations. The process involves monitoring performance, managing interfaces if there are multiple providers, making changes and corrections, and processing interim payments (often called progress payments which are based on the seller's progress in completing the work). In some cases, contract administration involves managing the early termination of a contract (for cause, for convenience or for default). Several key project management processes are used to help accomplish these aims:

·         Direct and manage project execution (Section 4.3)

·         Report performance (Sectionl0.5)

·         Perform quality control (Section 8.3)

·         Perform integrated change control (Section 4.5)

·         Monitor and control risks (Section 11.6)

Administer Procurements
Inputs	Tools	Outputs
1.       Procurement documents 2.       Project management plan 3.       Contract 4.       Performance reports 5.       Approved change requests 6.       Work performance information	1.       Contract change control system 2.       Procurement performance reviews 3.       Inspections and audits 4.       Performance reporting 5.       Payment systems 6.       Claims administration 7.       Records management system	1.       Procurement documentation 2.       OPA updates 3.       Change requests 4.       Project management plan updates

Six Key Inputs for Administer Procurements:

1.       Procurement Documents: The contract and the SOW are two of the most important documents that would guide contract administration.

2.       Project Management Plan: contains the procurement management plan which describes how each procurement process is to be handled.

3.       Contract: Described in Section 12.2.3.2.

4.       Performance Reports: Seller performance documentation in the areas of technical achievement and performance reports (cost, schedule, resource variances and forecasts).

5.       Approved Change Requests: May include modifications to contract terms and conditions with the most important being any effect on the triple constraint (scope, schedule and cost). Verbally discussed but undocumented change requests should not be processed or implemented.

6.       Work Performance Information: Addresses whether quality standards are being met, what costs have been incurred, the completion status of deliverables, and what interim payments have been requested and/or paid.

Seven Key Tools for Administer Procurements:

1.       Contract change Control system: As always, establishes the procedures by which changes can be approved. Includes paperwork, tracking, approval levels and dispute resolution procedures.

2.       Procurement Performance Reviews: A structured review of the seller's progress (cost, schedule, scope, quality). The purpose of these reviews is to document successes and failures as well as demonstrate whether the seller is able to complete the work.

3.       Inspections and Audits: These quality management techniques are used to check for compliance with contract requirements. Inspections and audits are usually required by the buyer and supported by information from the seller.

4.       Performance Reporting: Documents the contractor's relative effectiveness in achieving contract objectives.

5.       Payment Systems: The payment system includes appropriate reviews and approvals so that interim and final payments can be made as appropriate. Payment systems are sometimes handled by the project (larger programs) but are frequently handled by the accounts payable department in the overall organization.

6.       Claims Administration: contested or constructive changes are those where the buyer and seller cannot agree on the terms (cost, schedule) for a change. In Some cases, a dispute arises over whether work item is a change in scope or is a legitimate part of the original scope.

7.       If the parties cannot resolve a claim themselves, the matter is then handled through whatever dispute resolution procedures were established in the contract. Dispute resolution can occur during project performance or after a project has been closed.

8.       Records Management System: Used to manage contract documents and records. Usually involves an index of contract documents with methods for retrieval, archiving and automation.

Four Key Outputs for Administer Procurements:

1.       Procurement Documentation: The contract itself and supporting documentation such as schedules, approved and unapproved change requests technical documentation, performance reports, invoices and payment records, the results of inspections and audits, and the status of deliverables.

2.       Organizational process Assets Updates: Key correspondence concerning audits, inspections, change requests, warnings for unsatisfactory performance, and key decisions. Information about payment schedules and how seller performance is documented would also be updated at this stage.

3.       Change Requests: Processed using integrated change control. Disputed changes are usually given special attention and documented separately.

4.       Project Management Plan updates: Elements of the plan that may be updated include:

·         Procurement management plan (to reflect approved change requests, especially those affecting costs or schedules)

·         Baseline schedule (to reflect any significant variances from the baseline or revisions to the baseline because of approved changes)

12.4 Close Procurements

Contract closure supports the close project or phase process (integration management, Section 4.6). It involves product verification (was the work completed correctly?) and administrative closeout (updating and archiving of records). Early termination is a special case of contract closure and can result from a mutual decision, from default by one of the parties, or for convenience of the buyer. The rights of the parties should be defined in a terminations clause in the contract.

Close Procurements
Inputs	Tools	Outputs
1.       Project management Plan 2.       Procurement documentation	1.       Procurement audits 2.       Negotiated settlements 3.       Records management system	1.       Closed procurements 2.       OPA updates

Two Key Inputs for Close Procurements:

1.       Project Management Plan: section 4.2.3.1.

2.       Procurement Documentation: All documentation is collected, indexed, and filed according to established procedures. The information can be used for lessons learned, estimating future contracts, and evaluating contractors for future procurements.

Three Key Tools for Close Procurements:

1.       Procurement Audits: Structured reviews of the procurement process to identify successes and failures. The information is used to improve the current project, future projects, and the overall organization. Procurement audits are also known as lessons learned in some areas.

2.       Negotiated Settlements: Final settlement of outstanding issues, claims, and disputes using negotiation if possible. Alternate dispute resolution is used only when necessary.

3.       Records Management System: Described in Section 12.3.2.7.

Two Key Outputs for Close Procurements:

1.       Closed Procurements: The buyer provides formal, written notice that the contract has been completed.

2.       Organizational Process Assets Updates: Should include the following:

·         Procurement file: An official, complete set of indexed contract documentation.

·         Deliverable acceptance: Formal, written notice that deliverables have been accepted or rejected. Instructions on how to handle non- conforming deliverables should be provided.

·         Lessons learned documentation: Post-project evaluation is important because it provides historical records that help in contractor selection on future contracts (a past performance database to support the select sellers process).