Chapter 12:

Project Procurement
Management
Learning Objectives (1 of 2)

• Explain the importance of project procurement management and the

increasing use of outsourcing for information technology (IT) projects
• Describe the work involved in planning procurements for projects,
including determining the proper type of contract to use and
preparing a procurement management plan, statement of work,
source selection criteria, and make-or-buy analysis
• Discuss how to conduct procurements and strategies for obtaining
seller responses, selecting sellers, and awarding contracts
• Describe the process of controlling procurements by managing
procurement relationships and monitoring contract performance
Importance of Project Procurement
Management
• Project procurement management
• Acquiring goods and services for a project from outside the performing
organization
• Main processes
• Planning procurement management: determining what to procure and when
and how to do it
• Conducting procurements: obtaining seller responses, selecting sellers, and
awarding contracts
• Controlling procurements: managing relationships with sellers, monitoring
contract performance, making changes as needed, and closing out contracts
Importance of Project Procurement
Management (4 of 4)
Planning Procurement Management

• Identifying which project needs can best be met by using products or

services outside the organization
• Involves deciding whether to procure, how to procure, what to procure, how
much to procure, and when to procure
• An important output of this process is the make-or-buy decision
• If there is no need to buy any products or services from outside the
organization, then there is no need to perform any of the other procurement
management processes
Types of Contracts (1 of 3)

• Different types of contracts can be used in different situations

• Fixed price or lump sum contracts: involve a fixed total price for a well-
defined product or service
• Point of Total Assumption (PTA): cost at which the contractor assumes total
responsibility for each additional dollar of contract cost
• Cost-reimbursable contracts: involve payment to the seller for direct and
indirect costs
• Cost plus incentive fee, cost plus fixed fee, and cost plus percentage of costs
• Time and material contracts: hybrid of both fixed price and cost reimbursable
contracts
• Unit price contracts: require the buyer to pay the seller a predetermined
amount per unit of service
Types of Contracts (2 of 3)
Types of Contracts (3 of 3)

• Contracts should include specific clauses to take into account issues

unique to the project
• Time and material contracts and unit-price contracts can be high or low risk,
depending on the nature of the project and other contract clauses
• A termination clause allows the buyer or supplier to end the contract
Tools and Techniques for Planning
Procurement Management
• Several tools and techniques are available to help project managers
and their teams in planning procurement management
• Make-or-buy analysis
• General management technique used to determine whether an organization should
make or perform a particular product or service inside the organization or buy from
someone else
• Expert judgment
• Experts both from inside and outside an organization can provide excellent advice in
planning purchases and acquisitions
• Market research
• Many potential suppliers are often available for goods and services, so the project team
must choose suppliers carefully
Procurement Management Plan

• Describes how the procurement processes will be managed, from

developing documentation for making outside purchases or
acquisitions to contract closure
• Contents varies based on project needs
Statement of Work (1 of 2)

• A statement of work (SOW) is a description of the work required for

the procurement
• If a SOW is used as part of a contract to describe only the work required for
that particular contract, it is called a contract statement of work
• A contract SOW is a type of scope statement
• A good SOW gives bidders a better understanding of the buyer’s expectations
Statement of Work (2 of 2)
Procurement or Bid Documents

• Request for Proposals: used to solicit proposals from prospective

sellers
• A proposal is a document prepared by a seller when there are different
approaches for meeting buyer needs
• Requests for Quotes: used to solicit quotes or bids from prospective
suppliers
• A bid, also called a tender or quote (short for quotation), is a document
prepared by sellers providing pricing for standard items that have been
clearly defined by the buyer
Examples from a Real RFP

• Government agencies are often required to make procurement

information open to the public
• It’s very important for buyers to clarify what they want so that sellers
can respond appropriately
Source Selection Criteria

• It’s important to prepare some form of evaluation criteria, preferably

before issuing a formal RFP or RFQ
• Organizations use criteria to rate or score proposals, and they often assign a
weight to each criterion to indicate its importance
• Beware of proposals that look good on paper
• Be sure to evaluate factors, such as past performance and management
approach
• Some IT projects also require potential sellers to deliver a technical
presentation as part of their proposal
• The proposed project manager should lead the potential seller’s presentation
team
Conducting Procurements (1 of 4)

• Steps after planning for procurement management

• Decide whom to ask to do the work
• Send appropriate documentation to potential sellers
• Obtain proposals or bids
• Select a seller
• Award a contract
Conducting Procurements (2 of 4)

• Approaches for procurement

• Organizations can advertise to procure goods and services in several ways
• Approaching the preferred supplier
• Approaching several potential suppliers and taking bids
• A bidders’ conference can help clarify expectations
• Meeting with prospective sellers prior to preparation of their proposals or
bids
Conducting Procurements (3 of 4)
Conducting Procurements (4 of 4)

• Seller selection
• After developing a short list of possible sellers, organizations often follow a
more detailed proposal evaluation process
• It is customary to have contract negotiations during the source selection
process
• Sellers on the short list often prepare a best and final offer (BAFO)
• Final output is a contract signed by the buyer and the selected seller
Controlling Procurements (1 of 4)

• Ensures the seller’s performance meets contractual requirements

• Contracts are legal relationships, so it is important that legal and contracting
professionals be involved in writing and administering contracts
• Project team members must be aware of potential legal problems they might cause by
not understanding a contract
• It is critical that project managers and team members watch for
constructive change orders
• Oral or written acts or omissions by someone with actual or apparent
authority that can be construed to have the same effect as a written change
order
Controlling Procurements (2 of 4)

• Suggestions for change control in contracts

• Changes to any part of the project need to be reviewed, approved, and
documented by the same people in the same way that the original part of
the plan was approved
• Evaluation of any change should include an impact analysis
• Changes must be documented in writing
• Project managers and teams should stay closely involved to make sure the
new system will meet business needs and work in an operational
environment
• Have backup plans
• Use tools and techniques, such as a contract change control system, buyer-
conducted performance reviews, inspections and audits, etc.
Controlling Procurements (3 of 4)

• Closing procurements
• Involves completing and settling contracts and resolving any open items
• The project team should determine if all work was completed correctly and
satisfactorily, update records to reflect final results, and archive information
for future use
• The contract itself should include requirements for formal acceptance and
closure
Best Practice

• Procurement can be more intelligent

• Data scientists build predictive models to analyze big date related to finance,
marketing, etc.
• Why not model procurement processes?
• Behavioral economists know that people do not act rationally
• Why no apply irrationality to your advantage in negotiations?
• Quality control/assurance departments encourage employees to suggest
quality improvements all the time
• Why not enable your workers to be on the lookout for additional new and innovative
suppliers?
• Crowdsourcing solicits ideas from a large group of people
• Can it apply to some of your organization’s procurements?
Controlling Procurements (4 of 4)

• Tools to assist in contract closure

• Procurement audits identify lessons learned in the procurement process
• A records management system provides the ability to easily organize, find,
and archive procurement-related documents
• Ideally, all procurements should end in a negotiated settlement between the
buyer and the seller; if negotiation is not possible, then some type of
alternate dispute resolution such as mediation or arbitration can be used
• Archiving information for future use is particularly important
Using Software to Assist in Project
Procurement Management (1 of 2)
• Word-processing software: write proposals and contracts
• Spreadsheet software: create proposal evaluation worksheets
• Databases: track suppliers
• Presentation software: present procurement-related information
• E-procurement software: electronic procurement functions
Using Software to Assist in Project
Procurement Management (2 of 2)
• Procure-to-pay suite: provides support for indirect procurements
• E-purchasing functionality
• Catalog management capabilities
• E-invoicing
• Accounts Payable Invoice Automation
Chapter Summary

• Procurement, purchasing, or outsourcing is the acquisition of goods

and services from an outside source
• Project procurement management includes planning procurement
management and then conducting and controlling procurements
• Involves deciding what to procure or outsource, what type of contract to use, and how
to describe the effort in a statement of work
• Several types of software can assist in project procurement management