Project Procurement Management

A project typically would procure some deliverables, materials, items, equipment, etc. In some
occasions, the project team may decide to outsource some parts of the project work to external
sources or contractors. Procuring goods from suppliers and services from contractors require
proper management and planning. Project procurement management is the systemic and
planned process to manage the procurement and buying functions of a project.

Procurement management requires legal knowledge, negotiating skills, and an understanding of

the procurement process. If the organisation does not have a procurement department, the
project manager will be in charge of handling procurements.

When a decision has been made to procure goods or services from an outside source. the
project manager will facilitate the creation of a plan for the overall procurement process (a
procurement management plan), a plan for how each contract will be managed (a procurement
strategy), and a description of the work to be done by each seller (a procurement statement of
work).

The procurement department may review the scope of the work completeness. This
procurement statement of work should be combined with the contract terms to make up the
finalized bid documents (REP, RFI, or RFQ) that are sent to prospective sellers.

The procurement manager will determine what type of contract, bid document, and statement
of work should be used. The most common bid documents are request for proposal (RFP),
request for information (RFI), and request for quotation (RFQ).

At this point, the prospective sellers take action, and the buyer waits for their responses. The
prospective sellers review the bid documents and determine whether they are interested in
submitting a response or proposal to try to win the work. They may have the opportunity to
participate in a bidder conference or a pre-proposal meeting. As part of the procurement
process, prospective sellers may also have the opportunity to submit questions; buyer responses
are then shared with all prospective sellers. Sellers need to submit these questions to the buyer
before the submission deadline for bids or proposals.

The prospective sellers carefully review the buyer's statement of work and all the terms of the
proposed contract contained in the bid documents, including the selection criteria. During this
review, the sellers develop a full understanding of what the buyers wants and assess the risks
involved in the project. If the scope is incomplete or unclear, if a prospective seller is aware of
the buyer having a history of poorly managing projects, or if any other risks are identified, a
prospective seller may decide not to respond, or may adjust the price and/or schedule
submitted to the buyer to account for these risks. When a fixed-price contract is required, sellers
should include these risks in the total detailed cost estimate, as well as other costs, such as
overhead and then add profit to come up with a bid or quote. In any case, the risk of the project
is formally or informally assessed before sending the bid or proposal to the buyer.

Organizations may use several different methods to select a seller. These methods may be
dictated by law or internal politics. If a buyer receives competing submissions from many
prospective sellers, the buyer might ask for presentations from all the candidates. Another
option is to shorten the list of prospective sellers first and then request presentations. If
presentations will not add value for the buyer, the buyer may just move into negotiations with
the preferred seller or sellers. All terms and conditions in the proposed contract, the entire
procurement statement of work, and any other components of the bid documents can be
negotiated. Negotiations can take a Iot of time, and they require the involvement of the project
manager.

At the end of negotiations, one or more sellers are selected, and a contract is signed. The
procurement management plan and procurement strategy created earlier may also be updated.

Once the contract is signed, the procurement must be managed and controlled. This involves
making sure all the requirements of the contract are met. It also means keeping control of the
contract and making only approved changes.

When the procurement work is complete, the procurement will be closed. The required actions
to close each procurement need to be done soon after the final deliverables of the procurement
are accepted. This can happen within any phase of the project life cycle, as the contracted work
is completed. For example, in a project to renovate a house, a seller may be contracted to install
new plumbing, another may be contracted to install new landscaping, and still another may be
contracted to paint the house. Activities to close out a procurement include an analysis of the
procurement process to determine lessons learned (formally called a procurement audit). Final
reports are submitted, lessons learned are documented, and final payment is made.

The Plan Procurement Management process includes the following activities:

 Performing make-or-buy analysis

 Creating a procurement management plan
 Creating a procurement strategy for each procurement
 Creating a procurement statement of work for each procurement
 Selecting the appropriate contact type for each procurement
 Creating the bid documents
 Determining the source selection criteria

Make-or-Buy Analysis
The project team needs to decide whether the entire project scope will be completed internally,
or if any of the work, deliverables, materials, equipment, etc. will need to be outsourced. When
they are completed in-house, then we call it make decision and when we decide to buy them
from external sources, it is known buy or procurement decision. This analysis to decide between
these two alternatives are known as make-or-buy decisions.

During planning, you must decide whether the project team will do all of the project work, or if
some or all of the work will be outsourced.

Procurement Strategy

After identifying the goods or services to be acquired, a procurement strategy is developed for
each procurement. Procurement strategy has three basic elements: how goods or services will
be delivered to the buyer, what type of contract will be used, and how the procurement will be
carried out.

Procurement Contracts

To buy products and services for a project, different forms of contracts might be employed. For
example, Fixed-price (FP) contract, Time and material (T&M) contract and Cost-reimbursable
(CR) contract.

Fixed-Price Contract

In fixed-price contract, if the costs are more than the agreed-upon amount, the seller will bear
the additional costs. As the name implies, in a fixed-price contract, the price is fixed and seller
cannot ask for more money even there is increase in costs. In this type of contract, the buyer has
the least cost risk.

To consider a fixed-price contract, the seller will require a clearly defined statement of work.
Fixed-price contract is feasible for seller when the products, or services which have well-defined
specifications or requirements. Based on well-defined specification, the seller will quote a fixed
price.

The seller is most concerned with the procurement statement of work (SOW). Statement of work
helps seller to accurately estimate time and cost for the work involved. This will help the seller to
determine a price that includes a fair and reasonable profit.
Cost-Reimbursable Contract

A cost-reimbursable (CR) contract is used when the exact scope of work is not certain. This type
of contract is common in circumstances where costs cannot be estimated accurately enough.
The seller may provide an estimate to the buyer and the buyer can use the estimate for planning
and cost management purposes. Regardless of the estimate, it is the buyer's responsibility to
compensate the seller for legitimate costs for work and materials as described in the contract.
The contract requires the seller to have an accounting system that can track costs by project.
The buyer will pay the seller allowable incurred costs and also an additional fee or award profit
added to the cost to allow for seller profit.

Time and Material Contract

In time and material (T&M) contract, the seller is paid on a per-hour or per-item basis. Time and
material contracts are widely used in those procurement contracts where the level of effort
cannot be determined at the time the contract is awarded. It combines aspects of a fixed-price
contract (in the fixed price per hour) and a cost-reimbursable contract (in the material costs and
the fact that the total cost is unknown). Time and material contracts typically have simple terms
and conditions which allow quick negotiations so that work can begin sooner.

Payments

Each contract will state when payments are to be made to the seller. Different modes of
payments can be agreed between the project team and the seller. For example:

 Payments may be made as costs are incurred,

 Payments may be made as according to a payment schedule,
 Payments may be made as only after the successful completion or delivery of everything
in the contract.

The project manager needs to be well-aware of the payment mode so that he can accordingly
plan for making these payments. The project manager must also ensure that the funds are
available to make the payment on time.
Procurement Statement of Work (SOW)

The project manager facilitates the creation of a scope of work to be done on each
procurement. This is done by breaking down the project scope baseline into the work the
project team will do and the work that will be purchased from a seller(s). The work to be done
on each procurement is described in a procurement statement of work.

Each statement of work must be as clear, complete, and concise as possible, and it must
describe all the work and activities the seller is required to complete. This includes all meetings,
reports, and communications. It must also detail the acceptance criteria and the process of
gaining acceptance.

If you are buying expertise (such as software design or legal services), your procurement
statement of work will include a detailed description of functional and/or performance
requirements, a completion timeline, and evaluation criteria, in addition to required meetings,
reports, and communications.

If you are buying the construction of a building, your requirements will be extremely specific,
outlining things such as the materials to be used, the process that must be followed, and even a
work schedule. If you are hiring staff that you will direct (for example, a programmer to be
added to the team), your procurement statement of work will likely contain more details of what
you want the person to create or achieve.

The procurement statement of work may be revised during contract negotiation, but it should
be finalized by the time the contract is signed. The procurement statement of work becomes
part of the contract. If the procurement statement of work is not complete, the seller may
frequently need to request clarification or ask for change orders.

In general, contract change orders cost money or cause delay. Bad procurement SOWs can
result in overspending and delayed or failed projects. Simply put, the procurement SOW should
describe what you want, when you want it and how good it should be.

Source Selection Criterion

Source Selection Analysis

Determining the criteria that will be used to select a seller is an important part of procurement
planning. If the buyer is purchasing a commodity such as linear meters of wood, the source
selection criteria may be the lowest price. If the buyer is procuring construction services, the
source selection criteria may be price plus experience. If the buyer is purchasing services only,
the source selection analysis will be more extensive. In the latter case, source selection criteria
may include:

 Number of years in business

  Financial stability
 Understanding of need
 Price or life cycle cost
 Technical expertise
 Quality of past performance
 Ability to complete the work on time

Source selection analysis results in finalized source selection criteria. The criteria are included in
the bid documents to give the seller an understanding of the buyer's needs and to help the
seller decide whether to bid or make a proposal on the work. When the buyer receives the
sellers' responses during the Conduct Procurements process, source selection criteria such as
cost, quality, and expertise become the basis for the evaluation of the bids or proposals.

Bid Documents

After the contract type is selected and the procurement statement of work has been created, the
buyer can put together the bid document. Bid document describes the buyer’s needs to the
sellers.

The following are some types of bid documents.

 Request for proposal (RFP):

An RFP (sometimes called a request for tender) detailed proposal that includes
information on price, how the work will be accomplished, who will do it (along with
résumés, in some cases), and company experience.

 Invitation for bid (IFB):

An IFB, sometimes called a request for bid (RFB), usually requests a total price to do all
the work. Think of an IFB as a form of RFP where the work described in the procurement
statement of work is detailed enough for bidders to determine a total price.

 Request for quotation (RFQ):

RFQs request a price quote per item, hour, meter, or other unit of measure.

 Request for information (RFI):

An RFI might be used before bid documents are created. Responses to the RFI help the
buyer identify which companies are qualified to handle the procurement. Buyers can also
use RFIs to collect information on what work is possible, for later inclusion in RFPs or
IFBs. Remember that the purpose of an RFI is to get information, whereas the purpose of
an RFP or RFQ is to buy something.
To provide the seller with as clear a picture as possible of what needs to be done to win the
work and what the work involves, bid documents may include the following information for
sellers:

 Background information about why the buyer wants the work done
 Procedures for trying to win the work (such as whether there will be a bidder conference
when the responses are due, and how the winner will be selected)
 Guidelines for preparing the response (such as maximum length and topics to address in
the response)
 The exact format the response should be in (such as which forms must be filled out and
whether email submissions are allowed)
 Source selection criteria—the criteria the buyer will use to evaluate responses from the
sellers (such as number of years in business, quality of the response, or price)
 Pricing forms (forms to adequately describe the price to the buyer)
 Procurement statement of work
 Proposed terms and conditions of the contract (legal and business)

Standard Contract

The contract terms and conditions are most commonly created by the buyer, who may have
even put their terms and conditions into a standard format that is used over and over on similar
procurements. Standard contracts are usually drafted or at least reviewed by lawyers and
generally do not require additional review if used for the purpose for which they are intended.

Conduct Procurements

This process involves getting the bid documents, including the procurement statement of work
and other documents created in the Plan Procurement Management process to prospective
sellers, answering the sellers' questions, and receiving and evaluating sellers’ responses. You will
select a seller using the source selection criteria specified in the procurement management plan,
and then negotiate a contract.

Because the process to finalize procurements is ongoing throughout the project, the project
manager and team may be able to make use of lessons learned from prior procurements on the
current project. Lessons learned documentation may provide insight into the organization's
previous experiences with potential sellers. This information might enable the team to select a
seller based on the seller's past performance, eliminating the need for additional evaluation, and
making the process more efficient and effective. Bid documents to prospective sellers, you need
to know who those sellers are. A buyer may use techniques such as advertising to find possible
sellers or may send the bid documents to a select list of sellers preapproved by the organization
(an organization process asset).

Bidder Conferences

To make sure all the sellers' questions are answered, the buyer may invite the sellers to attend a
meeting - called a bidder conference, contractor conference, vendor conference or pre-bid
conference in which they can tour the buyer's facilities or attend an online forum and ask
questions about the procurement. The questions asked during the bidder conference, along
with the buyer's response, are documented and sent to all prospective bidders to make sure
they all have the same information. A bidder conference can be key to making sure the pricing
in the seller's response matches the work that needs to be done and is, therefore, the lowest
price.

Seller Proposal (or Price Quote or Bid)

This is a seller's response to the bid documents. A proposal is usually the response to a request
for proposal (RFP), a price quote is usually the response to a request for quote (RFO), and a bid
is usually the response to an invitation for bid (IFB). The proposal (or price quote or bid)
represents an official offer from the seller. RFPs and RFQs describe how the buyer will meet the
seller's request. A potential seller's response to an RFl provides information to help the buyer
better define their procurement need. Responses to a seller's request for information may
trigger the creation of an RFP or RFQ.

Proposal Evaluation

After receiving the proposals, the project procurement team may first use a screening system to
eliminate sellers who do not meet the minimum requirements of the source selection criteria.
Then, then team may assess the ability and willingness to provide the requested products or
services as per the source selection criteria.

To select a seller:

 The buyer may simply select a seller and ask them to sign a standard contract.
 The buyer may ask a seller to make a presentation, and then, if all goes well, move on to
negotiations.
  The buyer may narrow down ("short-list") the list of sellers to a few.
 The buyer may ask the short-listed sellers to make presentations, and then ask the
selected seller(s) to go on to negotiations.
 The buyer may negotiate with more than one seller.
 The buyer may use some combination of presentations and negotiations.

The choice of methods depends on the importance of the procurement, the number of
interested sellers, and the type of work to be performed.

Weighting System

The buyer will apply the selection criteria chosen in planning. But which is more important?
Price? Competence? Availability? Selection criteria are assigned values based on their relative
importance to procurement. For example, if price is more important, it will be given a higher
rating and weight. The buyer's evaluation committee then analyzes seller responses using the
weighted source selection criteria.

Past Performance History

The buyer may consider both their history with the prospective sellers and feedback from other
organizations who have done business with the sellers when determining which seller to award
the procurement to.

Independent Cost Estimates

The buyer should compare the seller's proposed cost with an estimate created in-house or with
outside assistance during procurement planning efforts. This allows the buyer to discover
significant differences between what the buyer and seller intend in the procurement statement
of work. The buyer must have their own estimates to check reasonableness and cannot rely
solely on the seller's cost estimates. Responses that are significantly different from what is
expected may indicate an issue with the seller's understanding of the procurement statement of
work.

Presentations

In many cases, some of the sellers will be asked to make presentations of their proposals. This is
often a formal meeting of the buyer's and seller's teams. During the presentation, the seller with
present their proposal, team, and approach to completing the work. The buyer has an
opportunity to see the team they may hire and to ask questions to assess the team's
competency. Presentations are used most often for procurements that have cost-reimbursable
contracts, but they can be used whenever there is a lot to assess.
Negotiations

Negotiations may not be needed in a fixed-price contract because the lowest bidder is already
selected based on price.

However, in a cost-reimbursable or time and material contract, there will likely be negotiations
to finalise the contract price and other issues.

The objectives of the negotiations are to obtain a fair and responsible price and develop a good
relationship between the buyer and the seller

Selected Sellers

After all the work of evaluating responses and negotiating with one or more prospective sellers
is complete, a seller is chosen for each procurement. This means that the buyer and seller have
agreed and signed off on all terms and conditions of the contract, and they will move forward to
create the product or service during the Control Procurements process.

Control Procurements

The Control Procurements process involves managing the legal relationship between the buyer
and seller, and ensuring that both parties perform as required by the contract and that each
contract is closed when completed or terminated. Throughout this process, the seller is focused
on completing the work while the buyer is focused on measuring the performance of the seller
and comparing actual performance to the contract, other procurement documents, and
management plans.

During this process, you may do the following:

 Review invoices. Were they correctly submitted? Do they have all the required
supporting information? Are the charges allowable under the contract?
 Evaluate whether a change is needed and is within the approved scope of the project.
 Submit changes through integrated change control as necessary.
 Document and record everything. This includes phone calls with the seller, emails,
requested changes, and approved changes.
 Manage and integrate approved changes.
 Authorize payments to the seller.
 Interpret what is and what is not in the contract.
 Interpret what the contract means.
  Resolve disputes.
 Make sure only authorized people are communicating with the seller.
 Work with the procurement manager on requested and approved changes and contract
compliance.
 Hold procurement performance review meetings with your team and the seller.
 Report on performance—this means your own performance as well as the seller’s
performance.
 Monitor cost, schedule, and technical performance against the contract, including all of
its components, such as terms and conditions and the procurement statement of work.
 Understand the legal implications of actions taken.
 Control quality according to what is required in the contract.
 Issue claims and review claims submitted by the seller.
 Authorize the seller’s work to start at the appropriate time, coordinating the seller’s work
with the work of the project as a whole.
 Communicate with the seller and with others.
 Manage interfaces among all the sellers on the project.
 Send copies of changes to the appropriate parties.
 Accept verified deliverables.
 Validate that the correct scope is being done.
 Validate that changes are giving the intended results.
 Perform inspections and audits.
 Identify risks to the completion of future work.
 Reestimate risks, costs, and schedules.
 Monitor and control risk.
 Perform contract closure for each contract as it is complete or terminated.
 Analyze the procurement process for lessons learned, and make recommendations to the
organization for movement.
 Accept final deliverables from the seller, and make final payments.

Performance Reviews

During the Control Procurements process, the buyer's project manager analyses all available
data to verify that the seller is performing as they should. This is called performance review. The
purpose of this review is to determine if changes are needed to improve the buyer-seller
relationship, what processes are being used, and how the work is progressing compared to the
plan. Formal changes to the management plans or the contract may be requested as a result of
this meeting.

Inspection
Inspections may involve walkthroughs of the project work site or reviews of deliverables
produced to verify compliance with the procurement statement of work.

Audits

An audit is performed by a team that includes representatives of both the buyer and the seller in
a procurement. The purpose of the audit is to confirm that the seller's activities are in
compliance with approved procurement policies and processes. Variances are identified, and
adjustments are made accordingly. The results of such an audit can be used to improve the
procurement process and to capture lessons learned.

Claims Administration

Conflict can also occur between the buyer and the seller, and may result in the seller submitting
a claim against the buyer. A claim is an assertion that the buyer did something that has hurt the
seller, and the seller is now asking for compensation. Another way of looking at claims is that
they are a type of seller-initiated change requests. Claims can get nasty. Imagine a seller that is
not making as much profit as they had hoped, issuing claims for every action taken by the
buyer.

Procurement Documentation Updates

Throughout the Control Procurement process, data on the contract and contract performance
by both the buyer and the seller is gathered and analyzed. This information needs to be
updated and archived.

Because a contract is a formal, legal document, thorough records relating to the contract must
be kept. A records management system may need to be used to keep procurement
documentation complete. For many projects, every email, every payment, and every written and
verbal communication must be recorded and stored.

On large or complex projects, a records management system can be quite extensive, with one
person assigned just to manage these records.

Closed Procurements

Closing procurements consists of tying up all the loose ends, verifying that all work and
deliverables are accepted, finalizing open claims, and paying withheld retainage for each of the
procurements on the project. The buyer will provide the seller with formal notice that the
contract has been completed. There may be some obligations, such as warranties, that will
continue after the procurement is closed.

The contract is likely to have provisions for termination. Procurements are closed when a
contract is completed or when a contract is terminated before the work is completed.
Sometimes the existing contract no longer serves the purposes of the project. When significant
changes to a procurement are required, one option is to terminate the contract and start fresh
by negotiating a new contract with the existing seller or by finding a new seller.

The buyer may terminate a contract for cause if the seller breaches the contract (does not
perform according to the contract). This illustrates another reason the contract should clearly
identify all the work required by the buyer. The buyer can also terminate the contract before the
work is complete if they no longer want the work done (termination for convenience).

A seller is rarely allowed to terminate a contract, but it could be appropriate on some projects.
In any case, termination can result in extensive negotiations on what costs the buyer will pay.
This is controlled by the language of the contract. In a termination for convenience, the seller is
usually paid for work completed and work in process. If the contract is terminated for cause due
to a default, the seller is generally paid for completed work but not for work in process. The
seller may also be subject to claims from the buyer for damages. In any case, termination is a
serious issue, and one that has lasting effects on the project. Termination negotiations can be
drawn out long after the work has stopped - highlighting yet another reason why details of the
project must be documented on an ongoing basis.

All procurements must be closed out, no matter the circumstances under which they stop, are
terminated, or are completed. Closure is a way to accumulate some added benefits, such as
lessons learned. It provides value to both the buyer and the seller and should not be omitted
under any circumstances.

Product validation: This involves checking to see if all the work was completed correctly and
satisfactorily. The product of the procurement should be the same as what was requested. The
product of the procurement should also meet the buyer's needs.

Procurement negotiation: The final settlement of all claims, invoices, and other issues may be
handled through negotiations or through the dispute resolution process established in the
contract.

Financial closure: Financial closure includes making final payments and completing cost
records.

Audit of the procurement process:

Audit of the procurement process is a structured review of only the procurement process. Do
not think of this as auditing costs, but rather as capturing lessons learned from the procurement
process that can help improve other procurements. which is usually done by the procurement
manager and project manager, but companies that want to improve their processes may also
involve the seller. Remember, this is talking about how the whole procurement process went.

Updates to records: This involves making sure all records of the procurement are complete and
accessible. This information could include whatever has been recorded to date on the project.
These records will become part of the procurement.

Final contract performance reporting: Think of this as creating a final report. First, you need to
analyze and document the success and effectiveness of the procurement and the seller, and
then turn that into a final report.

Lessons learned: Procurement lessons learned are received from everyone involved in the
project, even the seller, and become part of the lessons learned for the project. They often
include a discussion of what went right, what went wrong, and what can be done better next
time Lessons learned are created as a result of the audit. They then become part of the
organizational process assets. Lessons learned are documented and shared throughout the
organization.

Procurement file: Creating the procurement file involves putting all emails, letters, conversation
records, payment receipts, reports, and anything else related to the procurement into an
organized file. This file will be stored for use as historical records and will help protect the
project in case of arguments or legal action regarding what was done and not done according
to the contract. The project manager, with the help of the procurement manager, decides what
documents need to be kept.

When closure is completed and the seller has received formal sign-off from the buyer that the
products of the procurement are acceptable, the procurement is closed. Expect questions on the
exam that describe a situation and require you to determine whether the procurement is closed.
In gaining formal acceptance, the seller is also working to measure customer satisfaction. Often,
a formal customer survey may be included in a seller's closure records. The Close Project or
Phase process includes confirmation that contract closure has been done satisfactorily.