The PMI Registered Education Provider logo

is a registered mark of the

Project Management Institute, Inc.

PMP® Certification Training

Lesson 14: Project Procurement Management

This course is based on the Project Management Institute, A Guide to the Project
Management Body of Knowledge (PMBOK® Guide)—Sixth Edition.
PMP, PMI, and PMBOK are registered marks of the Project Management Institute, Inc.
 Objectives

Define contract
Discuss key concepts, tailoring, trends, agile/adaptive
considerations

Differentiate between centralized and decentralized

contracting

Explain the different types of contract

Identify the key terms used in Procurement Management

Describe the Project Procurement Management processes

 Contracts

The definition of a *Contract is as follows:

A contract is a mutually binding agreement that obligates the seller to provide the specified
products, services, or results; obligates the buyer to compensate the seller; and represents a legal
relationship that is subject to remedy in the court.

The two parties involved in a contract are the buyer and the seller. A seller provides the goods and
services and the buyer buys these for a compensation.

*Definition taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Sixth Edition, Project
Management Institute, Inc., 2017, Page 489
 Characteristics of Contract

The characteristics of a contract are as follows:

A contract must be formal and in written form.

A contract must have legal remedies.

Changes to contracts must also be subject to the same checks as the contract itself.

A contract is created and managed by contract managers, also called the

procurement managers.
 Centralized vs. Decentralized Contracting

In centralized contracting, a single contract manager handles multiple projects, whereas in decentralized
contracting, a contract manager is assigned to a project full time and reports to the project manager.

The advantages and disadvantages of the two methods are as follows:

Method Advantages Disadvantages

Centralized • Difficult to get contracting help as the
• Increased expertise in contracting
Contracting contractors may be involved in
• Standardized company practices
multiple projects
• More focus and control on the
• Duplication of expertise
Decentralized project
• Less standardization of contracting
Contracting • Easier access to contracting
practices from one project to another
experience

If British Petroleum is starting a project of setting up a new refinery plant in Nigeria, they can
procure key machinery through centralized purchasing department and later have a full-time
contract manager to procure smaller equipment, locally.
 Types of Contract

Contracts can be of three types. They are as follows:

Cost Reimbursable (CR) or Time and Material (T and M) Fixed Price (FP) or Lump
Cost Plus or Unit Price Sum
This involves payments to the This is a hybrid type of This involves setting a fixed total
seller for all legitimate actual contractual arrangement with price for a defined product,
costs incurred for completed aspects of both cost- service, or a result to be
work, plus a fee representing reimbursable and fixed-price provided. It should be used
seller profit. It should be used if contracts. It is often used for when the requirements are well
the scope of work is expected to staff augmentation, acquisition defined and no significant
change significantly during the of experts, and any outside changes to the scope are
execution of the contract. support when a precise expected.
statement of work cannot be
Cost-based contracts can be quickly prescribed. Fixed price contracts can be
classified as: classified as:

• Cost Plus Fee (CPF) or Cost • Fixed Price Incentive Fee (FPIF)
Plus Fixed Fee (CPFF)
• Fixed Price – Economic Price
• Cost Plus Incentive Fee (CPIF) Adjusted (FP – EPA)

• Cost Plus Award Fee (CPAF) • Firm Fixed Price (FFP)

Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Sixth Edition, Project Management Institute, Inc., 2017, Page 471-472
 Business Scenario: Problem Statement

• Scott is the Project Manager for a global project, which is very demanding and critical to his
company. His project sponsor is confident in his team’s ability to finish the project under
budget and ahead of schedule.
• To manage the huge demand, Scott has to make a decision to procure additional resources.
• The additional resources would be responsible for activities requiring specific skills, which his
project team lacks.
• The customer has an incentive clause in the project’s agreement that yields a bonus for early
completion. Scott has a vision for the work the additional resources will complete, but there is
also an opportunity to expand their scope of work, especially if he runs into scheduling
problems that will require him to crash the critical path.
• What contract should Scott establish to procure the additional resources?
 Business Scenario: Solution

• Although Scott wants to complete his project early so that the team can receive the bonus
for early completion, he has to pick a contract that is less risky and based on the scope of
work.
• Out of the available contracts, the best choice for Scott is the Time and Material Contract,
which gives him more flexibility.
• Fixed Fee contracts require a well-defined scope of work, and Time and Material is the only
option that accommodates open-ended work arrangements.
 Types of Contract: Advantages and Disadvantages

The advantages and disadvantages of different types of contracts are as follows:

Type of Contract Advantages Disadvantages

• Requires auditing all the seller invoices and

• Less costly than fixed price because
Cost thus increases buyer efforts
seller does not have to account for
Reimbursement • Seller has less incentive to control cost and
the risk
thus these contracts are inefficient, i.e.,
• Simple to draft
riskier for the buyer or the project manager

• More efficient as the seller has • Seller may underquote initially and later try
strong incentive to control cost to make high margins on change requests
Fixed Price • Requires less effort by buyer to • Not having a proper Statement of Work
manage contracts as cost risk is (SOW ) can result in seller not providing
with the seller some of the deliverables

• Easy to create
• Seller has no incentive to control costs
Time and • Good for resource augmentation
• Requires monitoring of daily output
Material assignments, where cost risk is
• Can’t be used in big projects
shared by buyer and seller
 Key Terms

The following are the key terms used in Procurement Management:

Request for Information

Request for Information (RFI) is used to get potential sellers’ information to see their capability.

Request for Proposal

Request for Proposal (RFP) is used to get proposals from prospective sellers.

Request for Quotation

Request for Quotation (RFQ) is used to get quotation from prospective sellers for standard products or services.

Request for Bid

Request for Bid (RFB) is used by the buyer to get bids from the shortlisted sellers.

Purchase Order

Purchase Order (PO) is the simplest type of commercial contract. PO is generally issued for small purchases.
 Key Terms (Contd.)
Statement of Work

Statement of Work (SOW) defines the scope of the deliverables according to the contract.

Quotation

A Quotation is the submission of response by the vendor to a request from the buyer.

Non-disclosure Agreement
Non-disclosure Agreement (NDA) is signed between two parties to maintain the confidentiality of the
information of each other. They abide by the agreement and don’t disclose the information with any of the
competitors.

Letter of Intent

Letter of Intent (LOI) is issued by the buyer to indicate that he is interested to carry on work with the seller.

Terms and Conditions

A procurement agreement includes certain Terms and Conditions (T and C) and may incorporate other items
that the buyer specifies regarding what the seller should perform or provide.
 Key Terms (Contd.)

Force majeure
It is a clause in contracts that frees both business parties from obligation in case of unavoidable events or an
event described by the legal term as act of God (flood, hurricane, earthquake, and so on).

Doctrine of waiver

Doctrine of waiver is a voluntary act by a person or a party that surrenders a legal right.

Privity of contracts
The doctrine of Privity implies that the contract cannot confer rights or obligations to any party other than those
directly involved in the contract.

Dispute resolution

It is about taking action or finding a resolution in case of disputes..

Termination for convenience of buyer

This involves termination of the contract by the buyer under any circumstances.
 Key Concepts for Project Procurement Management

• Project manager need not be a trained expert in procurement management laws and regulations but should
be familiar enough with the procurement processes to make intelligent decisions regarding contracts and
contractual relationships. The project manager is typically not authorized to sign legal agreements binding
the organization; this is reserved for those who have the authority to do so.
• Project manager should understand the culture and local laws when dealing with international contracts.

Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Sixth Edition, Project Management Institute, Inc., 2017, Page 460-462
 Trends and Emerging Practices in Project Procurement Management

• Advances in tools: Online tools for procurement now give buyers a single point where procurements can be
advertised and provide sellers with a single source to find procurement documents and complete them directly online.
Information model (BIM) in software tools is used in construction/engineering/infrastructure field.
• More advanced risk management: An increasing trend in risk management is to write contracts that accurately
allocate specific risks to those entities most capable of managing them.
• Changing contracting processes: There has been a significant growth in megaprojects in the past several years,
particularly in the areas of infrastructure development and engineering projects. Multibillion-dollar projects are now
common.
• Logistics and supply chain management: As many large engineering, construction, and infrastructure projects are
done through multiple international contractors, the management of the flow of materials becomes critical to
successful completion.
• Technology and stakeholder relations: Publicly-funded projects are under increasing scrutiny. Use of Webcams to
improve communications and relations is in trend in infrastructure and commercial construction projects.
• Trial engagement: Not every seller is well suited for an organization’s environment. Therefore, some projects will
engage several candidate sellers for initial deliverables and work products on a paid basis before making the full
commitment to a larger portion of the project scope.

Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Sixth Edition, Project Management Institute, Inc., 2017, Page 463-464
 Tailoring Considerations

• Complexity of procurement: Is there one main procurement or are there multiple procurements at
different times with different sellers that add to the complexity of the procurements?
• Physical locations: Are the buyers and sellers in the same location, or reasonably close, or in different
time zones, countries, or continents?
• Governance and regulatory environment: Are local laws and regulations regarding procurement
activities integrated with the organization’s procurement policies? How does this affect contract auditing
requirements?
• Availability of contractors: Are there available contractors who are capable of performing the work?

Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Sixth Edition, Project Management Institute, Inc., 2017, Page 465
 Considerations for Agile/Adaptive Environment

• In agile environments, specific sellers may be used to extend the team. This collaborative working
relationship can lead to a shared risk procurement model where both the buyer and the seller share the
risk and rewards associated with a project.
• Larger projects may use an adaptive approach for some deliverables and a more stable approach for
other parts.
• A governing agreement such as master service agreement (MSA) may be used for the overall
engagement, with adaptive work being placed in an appendix or supplement.

Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Sixth Edition, Project Management Institute, Inc., 2017, Page 465
 Project Procurement Management

The definition of *Project Procurement Management is as follows:

Project procurement management includes the processes necessary to purchase or acquire

products, services, or results needed from outside the project team.

Project Procurement Management helps in determining the type of contract to be issued and guides
in managing the contracts with the sellers.

*Definition taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Sixth Edition, Project Management
Institute, Inc., 2017, Page 459
 Project Procurement Management Processes

Knowledge Areas Project Integration Project Scope Project Schedule Project Cost Project Quality Project Resource Project Project Risk Project Project
Management Management Management Management Management Management Communications Management Procurement Stakeholder
Management Management Management

Initiating 4.1 Develop 13.1 Identify

Project Charter Stakeholders

Planning 4.2 Develop 5.1 Plan Scope 6.1 Plan Schedule 7.1 Plan Cost 8.1 Plan Quality 9.1 Plan Resource 10.1 Plan 11.1 Plan Risk 12.1 Plan 13.2 Plan
Project 5.2 Collect Management Management Management Management Communications Management Procurement Stakeholder
Management Plan Requirements 6.2 Define 7.2 Estimate Costs 9.2 Estimate Management 11.2 Identify Risks Management Engagement
5.3 Define Scope Activities 7.3 Determine Activity Resources 11.3 Perform
5.4 Create WBS 6.3 Sequence Budget Qualitative Risk
Activities Analysis
6.4 Estimate 11.4 Perform
Activity Durations Quantitative Risk
6.5 Develop Analysis
Schedule 11.5 Plan Risk
Response

Project
Management
Executing 4.3 Direct and 8.2 Manage 9.3 Acquire 10.2 Manage 11.6 Implement 12.2 Conduct 13.3 Manage
Process Groups
Manage Project Quality Resources Communications Risk Response Procurements Stakeholder
Work 9.4 Develop Team Engagement
4.4 Manage 9.5 Manage Team
Project Knowledge

Monitoring and 4.5 Monitor and 5.5 Validate Scope 6.6 Control 7.4 Control Costs 8.3 Control Quality 9.6 Control 10.3 Monitor 11.7 Monitor Risks 12.3 Control 13.4 Monitor
Controlling Control Project 5.6 Control Scope Schedule Resource Communications Procurements Stakeholder
Work Engagements
4.6 Perform
Integrated Change
Control

Closing 4.7 Close Project

or Phase

Table 1-4. Project Management Process Group and Knowledge Area Mapping
Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Sixth Edition, Project Management Institute, Inc., 2017, Page 25
 Plan Procurement Management
“Plan Procurement Management is the process of documenting project procurement decisions, specifying
the approach, and identifying potential sellers.” It belongs to the Planning Process Group.

Project Charter PROJECT PROCUREMENT MANAGEMENT Procurement

Management Plan
Business Documents
Procurement Strategy
Plan Procurement
Project Management Management
Plan Bid Documents

Project Documents Procurement

Statement of Work
Expert Judgment Data Gathering
Enterprise Source Selection
Environmental Factors Source Selection Criteria
Data Analysis
Analysis
Organizational Process
Make-or-buy Decisions
Assets Meetings
Independent Cost
Legend Estimates
Input Figure 12-2. Plan Procurement Management: Inputs, Tools & Techniques, and Outputs
Output Change Requests
Tools & Techniques
Planning Process Project Document
Updates
Organizational Process
Assets
Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Sixth Edition, Project Management Institute, Inc., 2017, Page 466
 Conduct Procurements

“Conduct procurements is the process of obtaining seller responses, selecting a seller, and awarding
a contract.” It belongs to the executing process group.

PROJECT PROCUREMENT MANAGEMENT Selected sellers

Project management
plan
Agreements
Project documents
Change Requests
Procurement Conduct Procurements
documentation Project Management
Plan Updates
Seller proposals
Project documents
Bidder updates
Enterprise environmental Expert Judgment Advertising
factors Conferences Organizational process
assets
Organizational process Data Analysis Interpersonal and
updates
assets Team Skills

Figure 12-4. Conduct Procurements: Inputs, Tools & Techniques, and Outputs
Legend
Input
Output
Tools & Techniques
Executing Process

Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Sixth Edition, Project Management Institute, Inc., 2017, Page 482
 Control Procurements
“Control Procurements is the process of managing procurement relationships, monitoring contract
performance, and making changes and corrections to contracts as appropriate.” It belongs to the Monitoring
and Controlling Process Group.

Project Management Closed Procurements

Plan
PROJECT PROCUREMENT MANAGEMENT Work Performance
Project Documents
Information
Procurement
Agreements Documentation
Control Procurements updates
Procurement
Documentation Change Requests

Approved Change
Project Management
Requests
Claims Plan Updates
Work Performance Expert judgment Data analysis
administration
Data Project document
Updates
Enterprise Inspection Audits
Environmental Factors Organizational Process
Assets Updates
Organizational Process Figure 12-6. Control Procurements: Inputs, Tools & Techniques, and Outputs
Assets Legend
Input
Output
Tools & Techniques
Monitoring & Controlling
Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Sixth Edition, Project Management Institute, Inc., 2017, Page 492
 Key Takeaways
A contract is a mutually binding agreement that obligates the
seller to provide the specified products, services, or results and
obligates the buyer to provide the monetary or other valuable
consideration in return.

In centralized contracting, a single contract manager handles

multiple projects, whereas in decentralized contracting, a
contract manager is assigned to a project full time and reports
to the project manager.

The three types of contacts are Cost Reimbursable (CR) or Cost

Plus, Time and Material (T and M) or Unit Price, and Fixed Price
(FP) or Lump Sum.

Project Procurement Management includes the processes

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

There are three Project Procurement Management processes.

They are Plan Procurement Management, Conduct
Procurements, and Control Procurements.
 Quiz

1. What is the primary objective of negotiation?

Find a win-win proposition for both parties

Get the best deal

Define the exact responsibilities of each party

Clarify the contract scope

 Quiz

1. What is the primary objective of negotiation?

Find a win-win proposition for both parties

Get the best deal

Define the exact responsibilities of each party

Clarify the contract scope

The correct answer is: A

Negotiation should result in a positive feeling for both parties so that their commitment toward
the contract is assured.
 Quiz

You are in the process of selecting a seller from the shortlisted ones and
awarding a contract. The process involves receiving bids or proposals and
2. applying the defined selection criteria to select the seller who is qualified to
perform the work. Which of the following is not an input to this process?

Procurement documentation

Seller proposals

Bidder conferences

Project documents
 Quiz

You are in the process of selecting a seller from the shortlisted ones and
awarding a contract. The process involves receiving bids or proposals and
2. applying the defined selection criteria to select the seller who is qualified to
perform the work. Which of the following is not an input to this process?

Procurement documentation

Seller proposals

Bidder conferences

Project documents

The correct answer is: C

This is Conduct Procurements process. Bidder conferences is the tool for this process.
 Quiz

You have been asked to assist the contract manager in drafting the contract
3. for a large project with limited scope clarity. Which type of contract would
you suggest so that your organization does not incur any financial losses?

Time and material

Fixed price

Cost plus fixed fee

Cost plus incentive fee

 Quiz

You have been asked to assist the contract manager in drafting the contract
3. for a large project with limited scope clarity. Which type of contract would
you suggest so that your organization does not incur any financial losses?

Time and material

Fixed price

Cost plus fixed fee

Cost plus incentive fee

The correct answer is: C

In a cost plus fixed fee project, the seller can exercise control over the cost rather than getting
locked into a rate or a price. In a project with limited scope clarity, incentives are hard to define
and agree.
 Quiz

A Cost Plus Incentive Fee (CPIF) contract has an estimated cost of $150K with a
predetermined fee of $15K and a share ratio of buyer to seller equal to 70/30. The
4. actual cost of the project is $120K. How much savings did the seller make in total,
and out of total savings, how much did he make due to the incentive?

$30K, $9K

$55K, $30K

$32K, $27K

$15K, $3K
 Quiz

A Cost Plus Incentive Fee (CPIF) contract has an estimated cost of $150K with a
predetermined fee of $15K and a share ratio of buyer to seller equal to 70/30. The
4. actual cost of the project is $120K. How much savings did the seller make in total,
and out of total savings, how much did he make due to the incentive?

$30K, $9K

$55K, $30K

$32K, $27K

$15K, $3K

The correct answer is: A

The estimated cost of project is $150K, and the actual cost of project is $120K. This implies a net
saving of $30K. The sharing ratio is 30% for the seller which is $9K. The total value of the amount
received by the seller is $120K+$9K+15K = $144K (actual cost + incentive + fixed fee).
 Quiz

As a project manager of a construction project, you are inviting requests for

proposal from eligible vendors. On going through the list, you find the name of
5. your friend and ex-colleague from university. He was a methodical, sharp student
and excelled in his subjects. What should you do next?

Give him the contract as you are quite sure he would do a good job

Give him some inputs on how your organization awards the contract to improve his chances

Steer yourself away from the bidding process and inform your sponsor

Keep silent and continue with the procurement process

 Quiz

As a project manager of a construction project, you are inviting requests for

proposal from eligible vendors. On going through the list, you find the name of
5. your friend and ex-colleague from university. He was a methodical, sharp student
and excelled in his subjects. What should you do next?

Give him the contract as you are quite sure he would do a good job

Give him some inputs on how your organization awards the contract to improve his chances

Steer yourself away from the bidding process and inform your sponsor

Keep silent and continue with the procurement process

The correct answer is: C

This situation presents a potential conflict of interest. The best option for the project manager is
to discuss it with his project sponsor and then disassociate himself from the process.
 Quiz

6. Which of the following is not an advantage of a fixed price contract?

Less work for buyer to manage

Seller has a strong incentive to control costs

Buyer knows the total price at project start

Final cost may be more than that specified in a cost reimbursable contract because
contractors have to inflate the price to cover their risk
 Quiz

6. Which of the following is not an advantage of a fixed price contract?

Less work for buyer to manage

Seller has a strong incentive to control costs

Buyer knows the total price at project start

Final cost may be more than that specified in a cost reimbursable contract because
contractors have to inflate the price to cover their risk

The correct answer is: D

Inflating the price to cover risks will only result in increasing the price for the buyers. This is
definitely not an advantage.
 Quiz

As a project manager you arrange to have another company provide debris removal
services for a construction project. The owner of a small debris removal company is
7. ready to perform the service for half the costs of several companies that bid on the
service. You agree to use his services, and he offers his handshake as a contract saying
that’s how he has been operating for more than 40 years. What should you do?

Given the significant savings and the fact that the owner of the company has been in business
for 40 years, a handshake is enough to start doing business with the company.
Before you shake his hand, you clarify the specifics of the work that will be performed and
upon agreement, you can complete the contract with a handshake.
You explain that you require a written contract that can be reviewed and signed by both
parties and that provides clear descriptions of the services that will be rendered, the payment
received for the services, and legal remedies in the event of disagreements.
Check with your legal team to determine if you can accept a handshake as a formal contract.
 Quiz

As a project manager you arrange to have another company provide debris removal
services for a construction project. The owner of a small debris removal company is
7. ready to perform the service for half the costs of several companies that bid on the
service. You agree to use his services, and he offers his handshake as a contract saying
that’s how he has been operating for more than 40 years. What should you do?

Given the significant savings and the fact that the owner of the company has been in business
for 40 years, a handshake is enough to start doing business with the company.
Before you shake his hand, you clarify the specifics of the work that will be performed and
upon agreement you can complete the contract with a handshake.
You explain that you require a written contract that can be reviewed and signed by both
parties and that provides clear descriptions of the services that will be rendered, the payment
received for the services, and legal remedies in the event of disagreements.
Check with your legal team to determine if you can accept a handshake as a formal contract.

The correct answer is: C

As the project manager you need to ensure that all contracts are written and legally
binding.
 Quiz

You are managing a large construction project and are concerned about the risk
of completing the framing for the project which requires the purchase of a lot of
8. supplies. You decide to outsource this to a company that specializes in framing.
Which type of contract would be best for this service?

Fixed Price

Fixed Price plus early completion incentive

Time and Material

Time and Material with a cap

 Quiz

You are managing a construction project and are concerned about the risk of
completing the framing for the project which requires the purchase of a lot of
8.
supplies. You decide to outsource this to a company that specializes in framing.
Which type of contract would be best for this service?

Fixed Price

Fixed Price plus early completion incentive

Time and Material

Time and Material with a cap

The correct answer is: D

As the framing work requires a lot of supplies, you do not want to pay for any additional markups
on the materials used. Time and Material with a cap or ceiling would be the best contract for this
work.
 Additional Reading

(Refer to the exercises provided along with the handbook)

• Exercise 21

• Exercise 22
 The PMI Registered Education Provider logo
is a registered mark of the
Project Management Institute, Inc.

This concludes
“Project Procurement
Management.”
The next lesson is
“Project Stakeholder
Management.”

This course is based on the Project Management Institute, A Guide to the Project
Management Body of Knowledge (PMBOK® Guide)—Sixth Edition.
PMP, PMI, and PMBOK are registered marks of the Project Management Institute, Inc.