DAB301 Project Management

Analytics
Project Procurement Management Processes
Project procurement management
• Procurements involve a relationship between the buyer and the seller. You may see the seller referred
to as:
• Contractor
• Subcontractor
• Vendor
• Service provider
• Supplier
The buyer may be referred to as:
• Client
• Customer
• Acquiring organization
• Purchaser
• Service requestor
Project procurement management
• Project procurement management includes the processes necessary to purchase or
acquire products, services, or results needed from outside the project team.

• Procurement Management is the set of processes performed to obtain goods, services

or scope from out side of the organization.
• Includes management and control processes required to develop and administer
agreements , contracts or MOUs or SLAs.
Contracts
• A contract is a formal legally binding agreement between two or more parties,
individuals, businesses, organizations, or government agencies, by which the contracted
parties exchange goods or services of value to each other. Contracts also specify
restrictions on certain actions of the contracted parties during the tenure of the contract.
• There are three contract types – Fixed Price, Cost Plus and Time and Material. Each of
these have a different approach to how risk is shared between seller and buyer.

• For a contract to be valid, there must be mutual agreement between the parties. In other
words, you need an offer, acceptance of the offer, and consideration (in this context, the
fancy legal term for payment of money). Contracts must have a legal purpose, and must
be entered into by someone with capacity or delegated procurement authority, usually a
contracting officer.
Contract and its types

https://youtu.be/BsIJJs0X_7k
Fixed Price contract
• Also known as Lump Sum
• These contracts should be used when the requirements are well defined and no
significant changes to the scope are expected. (Used when scope of work is clear)
• This category of contracts involves setting a fixed total price for a defined product,
service, or result to be provided.
• Buyer doesn’t have time to audit invoices
• Most cost risk for seller - as the seller’s effort increases, the project cost remains
constant, but the seller’s profit continues to fall
Firm fixed price (FFP)
The most commonly used contract type is the FFP. It is favored by most buying
organizations because the price for goods is set at the outset and not subject to change
unless the scope of work changes.
A type of fixed price contract where the buyer pays the seller a set amount (as defined by
the contract), regardless of the seller’s costs
Price is firm
Most preferred by buyers around the world
Cost, performance and time are equally important constraints
Fixed Price Incentive Fee
Fixed price incentive fee (FPIF). This fixed-price arrangement gives the buyer and seller
some flexibility in that it allows for deviation from performance, with financial incentives
tied to achieving agreed-upon metrics.
Typically, such financial incentives are related to cost, schedule, or technical performance
of the seller.
Under FPIF contracts, a price ceiling is set, and all costs above the price ceiling are the
responsibility of the seller.
 Fixed Price Incentive Fee
Assume there is a contract with a target cost of $400,000, a price ceiling of $460,000, a target fee of $40,000, and
an 80/20 share ratio.
In this case, the price ceiling is the fixed price part.
Regardless of the total cost, the buyer won't pay more than $460,000.
However, if the seller delivers the scope for less than $400,000 (target price), the seller gets the target fee of
$40,000 plus 20 percent of the amount less than $400,000.
However, if the cost is greater than $400,000, the $40,000 fee is reduced by 20 percent of the amount over
$400,000.
If the actual cost is $425,000.The incentive fee would be calculated as follows:
[(Target cost–Actual cost)×Share ratio]+Target fee
[(400,000−425,000)×0.2]+40,000
(−25,000×0.2)+40,000=35,000
Therefore, the total price of the contract would be: $425,000+$35,000=$460,000
In this case, the price came in right at the ceiling. If the actual price had been more, the ceiling would have stayed at $460,000, and the seller would have
started to lose some of the fee.
Fixed price with economic price adjustments
This type is used whenever the seller's performance period spans a considerable period of
years, or if the payments are made in a different currency.
It is a fixed-price contract, but with a special provision allowing for predefined final
adjustments to the contract price due to changed conditions, such as inflation changes or
cost increases (or decreases) for specific commodities.
• Adjusts the contract prices for currency fluctuations, inflation, raw material cost, and
labor rate changes
• Used when contract spans multiple years
• Protects both buyer and seller
Cost-Reimbursable Contracts
This category of contract involves payments (cost reimbursements) to the seller for all
legitimate actual costs incurred for completed work, plus a fee representing seller profit.
This type should be used if the scope of work is expected to change significantly during the
execution of the contract

Cost-reimbursable contracts are used when the scope of work isn't well defined or is
subject to change.
This is useful for research and development work.
With this type of contract, the buyer must reimburse the seller for legitimate costs
associated with completing the work, plus a fee.
The buyer and the seller agree to a target cost up front, and fees are calculated from that
target cost.

Read more- https://www.upcounsel.com/cost-plus-award-fee

Cost plus fixed fee (CPFF).
The seller is reimbursed for all allowable costs for performing the contract work and
receives a fixed-fee payment calculated as a percentage of the initial estimated project
costs. Fee amounts do not change unless the project scope changes.

Project Final Cost Fixed Fee Total Price

Project 1 $280,000 $20,000 $300,000
Project 2 $300,000 $20,000 $320,000

Read more- https://www.pmlearningsolutions.com/blog/cost-

plus-contracts-pmp-concept-35
Cost plus incentive fee (CPIF)
The seller is reimbursed for all allowable costs for performing the contract work and receives a
predetermined incentive fee based on achieving certain performance objectives as set forth in the
contract.
Most appropriate if the buyer expects the product to be built with the best quality material available, in
the shortest possible time

Now look at the same scenario with a Cost Plus Incentive Fee with an 80/20 share ratio.

Project Final Cost Calculation Total Fee Total

Cost
Project 1 $280,000 $20,000 + [(300,000 – 280,000) × 20%] $24,000 $304,000
Project 2 $300,000 $20,000 + [(300,000 – 300,000) × 20%] $20,000 $320,000
Cost plus award fee (CPAF).
The seller is reimbursed for all legitimate costs, but the majority of the fee is earned based
on the satisfaction of certain broad subjective performance criteria that are defined and
incorporated into the contract.
The determination of fee is based solely on the subjective determination of seller
performance by the buyer and is generally not subject to appeals.
Advantages and
Disadvantages
of Different
Contract Types
Time and material contracts (T&M)
Time and material contracts (also called time and means) are a hybrid type of contractual
arrangement with aspects of both cost-reimbursable and fixed-price contracts.
They are often used for staff augmentation, acquisition of experts, and any outside support
when a precise statement of work cannot be quickly prescribed.
• Mainly used for staff augmentation
• Suitable when work needs to start soon
Salient
Attributes
of Different
Contract
Types
A typical project
procurement life
cycle
In the procurement process, a
prospective seller would be first
called a bidder, then as a selected
source, and finally a contracted
supplier.
Make or Buy Analysis
The make or buy analysis is used to determine whether a particular product can be
produced cost effectively by the performing organization or must be procured from outside
the performing organization.
The analysis includes consideration of
• the indirect and direct costs of in-house manufacture.
• any extra capacity or resources that may available within the performing
organization during the course of project execution.
• possible use of proprietary or business critical activity of the performing
organization that may represent its core business or core competency.
Make or Buy Analysis

CAPM/PMP Project Management Certification All-In-One Exam Guide, 4th Edition

Make or Buy Analysis
There are multiple reasons why an organization may choose to make or
buy.

CAPM/PMP Project Management Certification All-In-One Exam Guide, 4th Edition

Plan Procurement Management
• Plan Procurement Management is the process of documenting project procurement decisions,
specifying the approach, and identifying potential sellers.

• The process of documenting project procurement decisions, specifying the approach, and
identifying potential sellers.

• It determines whether the specific goods or services to be acquired from outside the project

• How to acquire, what to acquire

• Goods or services may be procured from other parts of performing organization or outside
sources.
PLAN PROCUREMENT MANAGEMENT
• Procurement plans aim to answer the following questions:

• What to acquire?
• When to acquire?
• How to acquire?
• How much to acquire?
Plan Procurement Management
Plan Procurement Management—Tools and
Techniques
Market Research
To Make or Buy
Source Selection Analysis
Procurement Management Plan
The procurement management plan contains the activities to be undertaken during the procurement
process. It should document whether international competitive bidding, national competitive bidding,
local bidding, etc., should be done.

Procurement Management Plan Contents

Procurement Strategy
• Delivery methods.
• Contract type.
• Procurement phases.
Bid Documents
• Request for Quotation (RFQ)
• Invitation for Bid (IFB)
• Request for Proposal (RFP)
Conduct Procurements
Conduct procurements is the process of obtaining seller responses, selecting a seller, and
awarding a contract.

• It selects the qualified seller and implements the legal agreement for delivery.
• It assigns the formal contracts to the seller
Conduct Procurements
Conduct Procurements—Tools and
Techniques
Advertising
Advertisements in newspapers or specialty trade publications can be used to invite more
sellers. Sometimes such advertisements are mandated for government contracts.
Bidder Conferences
Bidder conferences are meetings between the buyer and potential sellers to ensure that
sellers have a clear and common understanding of the technical and contractual
requirements, and all sellers are treated equal. Such meetings are conducted prior to
submission of responses by the sellers. The procurement documents may be amended as a
result of these meetings.
Proposal Evaluation
Proposals are evaluated to ensure they are complete and respond in full to the bid
documents, procurement statement of work, source selection criteria, and any other
documents that went out in the bid package.
Control Procurements
Control Procurements is the process of managing procurement relationships, monitoring
contract performance, and making changes and corrections to contracts as appropriate.
Control procurements is a process that involves managing the procurement relationships of
the project.
It also involves monitoring the contract performance as well as making the necessary changes
and corrections alongside it.
The benefit of control procurements is that it ensures that the performance
of seller and buyer meets the procurement requirements according to the terms set by a
particular legal agreement.
Under this process, it is crucial for the seller to meet the procurement requirements while the
buyer needs to perform according to the terms that are specified in the contract.
These include making timely payments and also creating a contract change management if
necessary.
Control Procurements
Control Procurements is the process of managing procurement relationships; monitoring
contract performance, and making changes and corrections as appropriate; and closing
out contracts.
The key benefit of this process is that it ensures that both the seller's and buyer's
performance meet the project's requirements according to the terms of the legal
agreement.
Control Procurements
Control Procurements—Tools and Techniques
An inspection is a structured review of the work being performed by the contractor. This
may involve a simple review of the deliverables or an actual physical review of the work
itself.
Audits are a structured review of the procurement process. Rights and obligations related
to audits should be described in the procurement contract. Resulting audit observations
should be brought to the attention of the buyer's project manager and the seller's project
manager for adjustments to the project, when necessary.
Control Procurements—Outputs
Procurements are closed as per the provisions defined in the contract. After all the work
on the contract is complete, deliverables accepted, payments made, and claims settled, the
buyer issues a formal written notice to the seller that the contract has completed.
Work performance information includes cost, schedule, and technical performance
information from the vendor. This information will be integrated with performance
information from in-house work or from other vendors to create the work performance
reports that are an output from the Monitor and Control Project Work process.