Chapter 12

Project Procurement
Management
Project Procurement Management
Plan Procurement Management

Input Tools &

Technology Outputs

1. Project Charter 1. Procurement management plan

2. Business documents 1. Expert judgment
2. Procurement strategy
3. Project management plan 2. Data Gathering
3. Bid documents
4. Project documents 3. Data Analysis 4. Procurement statements of work
5. Enterprise environmental 4. Source selection 5. Source selection criteria
factors analysis 6. Make or buy decisions
6. Organizational process 5. Meetings 7. Independent cost estimates
8. Change requests
assets
9. Project documents updates
10. Organizational process assets
updates

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Project Procurement Management
Conduct Procurements

Input Tools &

Technology Outputs

1. Project mangement plan

2. Project documents 1. Expert judgment 1. Selected sellers
3. Procurement 2. Advertising 2. Agreements
documentation 3. Bidder conferences 3. Change requests
4. Seller proposals 4. Data Analysis 4. Project management plan
5. Enterprise enviromental 5. Interpersonal and updates
factors team skills 5. Project document
6. Organizational process updates
assets 6. Organizational process
assets updates

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Project Procurement Management
Control Procurement

Input Tools &

Technology Outputs

1. Project management plan 1. Closed Procurements

2. Project documents 1. Expert judgment 2. Work performance
3. Agreements 2. Claims Information
4. Procurement documentation administration 3. Procurement
5. Approved Change requests 3. Data Analysis documentation updates
6. Work performance data 4. Inspection 4. Change requests
7. Enterprise environmental 5. Audits 5. Project management plan
factors updates
8. Organizational process 6. Project document updates
assets 7. Organizational process
assets updates

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Project • Plan Procurement Management includes the processes necessary to purchase or

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

Management • Including managing and controlling the processes required to develop and
administer agreements such as contracts, purchase orders, memoranda of
agreements (MOAs), or internal service level agreements (SLAs).

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Legal Contractual Relationships

Option 02
Option 01
Fixed Price Contract-lump
Purchase Order sum

Option 03 Option 04
Cost-reimbursable Time and Material (T&M) or
Contract Unit Price

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 Categories of Contracts

Fixed-price (FP) Time and material (T& M) Cost-reimbursable (CR

• used when the exact scope of Work
• Used for acquiring goods, • The buyer pays on a per-hour or
is uncertain, and, therefore costs
products, or services with per-item basis.
cannot be estimated accurately
well-defined specifications • Compared to other types of
enough to effectively use a fixed-
or requirements. contracts, this type typically has
price contract.
• The buyer has the least cost terms and conditions that are
• Such contracts also typically include
risk in this type of contract simpler, to allow for quick
an additional fee or award amount
because the scope is well- negotiations so that work can
added to the cost to allow for seller
defined. begin sooner.
profit.
• used for work valued at small
• The buyer has the most cost risk
dollar amount and lasting a
because the total costs are
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short amount of time.
unknown
 High Low

Fixed Price
FFP

Contract Seller FPIF Buyer

Types vs. Risk Time and Materials Risk
Risk Cost Reimbursable
CPIF
CPFF
CPF
CPPC

Low High 8
 Legal Contractual Relationships

Contract Types:

Contract is a mutually binding legal agreement that

obligates the seller to provide the specified
products, services or results, and obligates the
buyer to compensate the seller.
Tools &
• The contract may includes the following: An offer,
Techniques: Acceptance, Pricing, roles and responsibilities,
Contract penalties, warranty.
Types 1. Purchase Order: Contract to purchase 30 linear
meters of wood at $ 40 per meter.
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Legal Contractual Relationships
2. Fixed Price Contract-lump sum: setting a total fixed price for a
defined product or services

A.Firm Fixed Price Contracts (FFP ):

• Under this type of contract the buyer must precisely specify the
product or services to be procured, and any changes to the
procurement specification can increase the costs to the buyer.

• contract provides for a price that is not subject to any adjustment on

the basis of the contractor’s cost experience in performing the
Tools &
contract. Techniques:
Contract Types
• A fixed-price contract should be used for acquiring goods, products, or
services with well-defined specifications or requirements

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 Legal Contractual
Relationships

2.Fixed Price Contract-lump sum: setting a total

fixed price for a defined product or services

B.Fixed Price Incentive Fee Contracts (FPIF):

some flexibility in deviation from performance with
Tools & financial incentives with price ceiling, Contract
Techniques:
=1,100,000. For every month early the project is
Contract Types
finished, an additional 10,000 is paid to the seller.

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 Legal Contractual
Relationships
C.Fixed Price Economic Price Adjustment
(FPEPA): It is a fixed-price contract, but with a
special provision allowing for pre defined final
adjustments to the contract price due to changed
conditions, such as inflation changes, or cost
increases (or decreases) for specific commodities.

• Changes in labor, material or other resource costs

• General inflation
• Price fluctuations in commodities
• Changes in bank interest rates
• Fluctuations in currency markets
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 Legal Contractual
Relationships

Example

• PO: $1K per 1 metric ton.

• FP: Contract =$1M.

• FPIF: contract= $ 1M + for every month

added $1000.

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Legal Contractual
Relationships 3. Cost-reimbursable Contract:

The seller's cost are reimbursed, plus an additional

amount.(seller profit).
A. Cost plus Fixed Fee (CPFF): In this type, the
buyer pays all costs, but the fee (or profit) is fixed at
a specific amount.
Contract = Cost + Fee of 200,000; fee is not
changing due to seller performance.
B. Cost Plus Incentive Fee (CPIF): the seller is
reimbursed for all costs and receives a
predetermined incentive fee based on achieving
certain performance objectives set in advance in the
contract.
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Legal Contractual
Relationships

C. Cost Plus Award Fee Contracts ( CPAF):

The seller is reimbursed for all
legitimate costs , but the majority of
the fees is only earned based on the
satisfaction of certain broad subjective
performance criteria defined and
incorporated into the contract.

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 Legal Contractual Relationships

• CPF/CPPC: Contract= cost + fee.

• CPFF: Contract=cost+$1k.

• CPIF: Cost + additional fee based on

performance.

• CPAF: Cost + additional fee bases on

manager satisfaction (performance criteria).

Example
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 • Time and Material (T&M) or Unit Price

• Time and material contracts are a hybrid type of contractual

arrangement that contain aspects of both cost-reimbursable
and fixed-price contracts
Legal Contractual
Relationships • They are often used for staff augmentation, acquisition of
experts, and any outside support when a precise statement
of work cannot be quickly prescribed.

• Often used for staff augmentation, acquisition of experts,

outside support, and when scope is unknown or you don’t
know when to finish,

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Example:

• Contract=$ 1k per day plus

expenses or material cost. Legal Contractual
• Contract=$ 1k per day plus material Relationships
at $ 5 per linear meter of wood.

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Example:

• Contract=$ 1k per day plus

expenses or material cost. Legal Contractual
• Contract=$ 1k per day plus material Relationships
at $ 5 per linear meter of wood.

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Source Selection Analysis Methods

Least cost
01
Qualifications only ( when the value of the
02 procurement is relatively small)

03 Quality and cost-based

04
Fixed budget
05
Sole source

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 Project Procurement
Management: Inputs

• Statement of Work: describing the work contractor will do

can include the deliverables but not include the contract
type.

• It is can be extracted from project scope.

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 Project Procurement Management– Tools &
Techniques
Make-or-Buy Analysis

It is a general management technique used to determine whether particular work can best
be accomplished by the project team or must be purchased from outside sources.

You are trying to decide whether to lease or buy an item for

your project. The daily lease cost is $120. To purchase the
item investment cost is $1000 and the daily cost is $20.
How long will it take for the lease cost to be the same as
the purchase cost?
Let D equal the number of days when the purchase and
lease costs are equal.

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 Project Procurement Management
Example Tools & Techniques
Make-or-Buy Analysis
• QR 120 D = QR 1000 + QR 20 D
• QR 120 D - QR 20 D = QR 1000
• QR 100 D = QR 1000
• D = QR 1000 / QR 100
• D = 10.

The lease cost will be the same as the

purchase cost after ten days.

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 Make-or-Buy Analysis
• Assume you can lease an item you need for a project for $800/day; to purchase the item,
the cost is $12,000 plus a daily operational cost of $400/day.

• How long will it take for the purchase cost to be the same as the lease cost?

• Set up an equation so both options, purchase and lease, are equal.

• In this example, use the following equation; let d be the number of days to use the item:
$12,000 + $400d = $800d.

• Subtracting $400d from both sides, you get: $12,000 = $400d.

• Dividing both sides by $400, you get: d = 30.

• If you need the item for more than 30 days, it is more economical to purchase it.
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 Project
Procurement
Management-
Outputs

Communication
Methods

• Build the Procurement Strategy.

• The objective of the procurement strategy is to
determine
• Delivery methods
• Contract payment types
• Procurement phases.
 • Bid Documents: Bid documents are used
to solicit proposals from prospective sellers

• Request for information (RFI), Request for

proposal (RFP), request for quotation
Project (RFQ).
Procurement
Management-
Outputs

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 Elements of terms of
Reference (TOR)
• Tasks the contractor is required to perform as well as specified coordination requirements;

• Standards the contractor will fulfill that are applicable to the project;

• Data that needs to be submitted for approval;

• Detailed list of all data and services that will be provided to the contractor by the buyer for
use in performing the contract, if applicable

• Definition of the schedule for initial submission

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Management experience
Capability and capacity

Key staff’s qualifications,

availability, and
09 01 Product cost and life
competence;
08 Elements
02 cycle cost

Financial stability of of Source

Delivery dates
the firm
07 Selection
Criteria
03
Specific relevant 06 04 Technical expertise
experience; 05 and approach

Suitability of the knowledge transfer

program
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Conduct Procurements

It is the process of obtaining seller responses, selecting a

seller and awarding a contract.

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Project Procurement Management
Inputs
Seller Proposals
Seller proposals, prepared in
response to a procurement document
package, form the basic information
that will be used by an evaluation
body to select one or more successful
bidders (sellers).

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Project Procurement Management
Tools and Techniques
Advertising

Advertising is communicating with

users or potential users of a product,
service, or result.

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Project Procurement Management-
Tools and Techniques
Bidder Conferences
Bidder conferences (also called
contractor conferences, vendor
conferences, and pre-bid conferences)
are meetings between the buyer and
prospective sellers prior to proposal
submittal.

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Conduct Procurements: Outputs

Selected Sellers

The selected sellers are those who

have been judged to be in a
competitive range based on the
outcome of the proposal or bid
evaluation

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 Control Procurements

Control Procurements is the process of managing procurement relationships,

monitoring contract performance, and making changes and corrections to
contracts as appropriate.
Both the buyer and seller will administer the procurement contract.
Payments, Claims Administration, Inspection and Audit, procurement
closing

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Control Procurements – Tools & Techniques

Control Procurements
• Claims administration: A request, demand, or assertion of
rights by a seller against a buyer, or vice versa, for
consideration, compensation, or payment under the terms of
a legally binding contract, such as for a disputed change.
• Contested changes usually involve a disagreement about the
compensation to the vendor for implementing the change.
• Contested changes are also known as disputes, claims, or
appeals. These can be settled directly between the parties
themselves, through the court system, or by a process called
arbitration.
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 Control Procurements: Outputs

Closed Procurements
The buyer, usually through its authorized
procurement administrator, provides the seller with
formal written notice that the contract has been
completed. Requirements for formal procurement
closure are usually defined in the terms and
conditions of the contract and are included in the
procurement management plan.

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Control Procurements

• Inspection: Work and Deliverables

• Audit: Reviewing procurement process
• Even if the change on the contract is big; don’t
do new contract; just CONTROL THE CHANGE
• Force majeure like war, natural disaster, both
seller and buyer are excused from terms of
contract.
• Both seller and buyer should be satisfied.

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Questions
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 Questions
Once signed, a contract is legally binding unless:
A. One party is unable to perform.
B. One party is unable to finance its part of the work.
C. It is in violation of applicable law.
D. It is declared null and void by either party's legal counsel.
 Questions
With a clear contract statement of work, a seller completes work as specified, but the buyer is not
pleased with the results. The contract is considered to be:
A. Null and void.
B. Incomplete.
C. Complete.
D. Waived.
 Questions
In a fixed price (FP) contract, the fee or profit is:
A. Unknown.
B. Part of the negotiation involved in paying every invoice.
C. Applied as a line item to every invoice.
D. Determined with the other party at the end of the project.
 Questions
A project performed under a cost reimbursable contract has finally entered the Close
Procurements process. What MUST the buyer remember to do?
A. Decrease the risk rating of the project.
B. Audit seller's cost submittals.
C. Evaluate the fee he is paying.
D. Make sure that the seller is not adding resources.
 Questions
With which type of contract is the seller MOST concerned about project scope?
A. Fixed price
B. Cost plus fixed fee
C. Time and material
D. Purchase order
 Questions
During what part of the procurement process does procurement negotiation occur?
A. Plan Procurements
B. Close Procurements
C. Administer Procurements
D. Conduct Procurements
 Questions
The project team is arguing about the prospective sellers who have submitted proposals. One team
member argues for a certain seller while another team member wants the project awarded to a
different seller. What part of the procurement process is the team in?
A. Plan Procurements
B. Administer Procurements
C. Negotiate Contract
D. Conduct Procurements.
 Questions
A project manager is in the middle of creating a request for proposal (RFP). What part of the
procurement process is she in?
A. Conduct Procurements
B. Plan Procurements
C. Administer Procurements
D. Make-or- Buy Analysis
 Questions
Your program manager has come to you, the project manager, for help with a bid for her newest
project. You want to protect your company from financial risk. You have limited scope definition.
What is the BEST type of contract to choose?
A. Fixed price (FP)
B. Cost plus percent of cost (CPPC)
C. Time and material (T&M)
D. Cost plus fixed fee (CPFF)
 Questions
What type of contract do you NOT want to use if you do not have enough labor to audit invoices?
A. Cost plus fixed fee (CPFF)
B. Time & material (T&M)
C. Fixed price (FP)
D. Fixed price incentive fee (FPIF)