Project Procurement Management

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Project Procurement

Management

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Procurement Planning

 _{Procurement Planning is the process of}

identifying which project needs can be

best met by procuring products or services outside the project organization and

should be accomplished during the scope definition effort. It involves considering whether to procure, how to procure, what to procure, how much to procure, and

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Make or Buy?

 _{Lack needed skills}

 _{Lack adequate staff}

 _{Share risk}

 _{Maintain flexibility}

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Project Management Processes

Scope definition, cost estimating, scheduling, risk management, team building, procurement,

change control, stakeholder management, etc.

Projects, Procurement, and

Contracts

Procurement Processes

Planning, Acquisition, Contract Management

Procurement Processes Contract

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Some Organizations Use Other

Terms

 _{Procurement may also be called:}

 _Acquisition  _Buying

 _Contracting  _Purchasing

 _{Contracts may also be called:}

 _Agreements

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Buyer and Seller

 _{Different names:}

 _{Buyer = customer, sponsor, owner}  _{Seller = vendor, supplier, contractor,}

provider

 _{Different perspectives:}

 _{For the buyer, the seller’s work is}

usually a deliverable or subproject

 _{For the seller, the contract is often a}

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The Buyer/Seller Relationship

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Subcontracts

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Contract Definition

 _{A contract is a compulsory agreement}

between two or more parties and is

constructed such that one party gives something up (money) and the other party receives something (goods or services) in return.

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A Valid Contract Must:

A. Be between competent parties.

B. Accomplish a lawful purpose.

C. Include an offer and acceptance of

that offer.

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A. Competent Parties, B. Lawful

Purpose

A. Competent parties:

 _{Legal age}

 _{With appropriate authority}  _{Mentally competent}

B. Lawful purpose:

 _{Does not violate applicable laws}  _{Compatible with public policy}

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C. Offer and Acceptance

 _{Anything said or done that shows a}

willingness to exchange value.

 _{Offers and acceptances may be:}

 _Written

 _Spoken

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D. Exchange of Value

 _{Both parties must receive something:}

 _{Financial or non-financial}  _{Directly or indirectly}

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Example of

Exchange of Value

 _{Buyer receives:}

 _{Financial value — product or service}  _{Non-financial value — lower risk}

 _{Seller receives:}

 _{Financial value — payment}

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“Terms and Conditions”

 _{The words in the contract}

 _{Rights and responsibilities of the}

parties:

 _{Term — a specific promise}

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Understanding the

Terms and Conditions

 _{Plain, ordinary, and popular}

meanings overrule technical jargon — when in doubt, define the term

within the contract.

 _{With two different but equally}

probable meanings, a contract will be interpreted against the author.

 _{The same word means the same thing}

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… continued

 _{“May” is not a requirement!}

 _{“About”, “approximately,” and}

“almost” do not constitute a guarantee.

 _{Business custom, industry standards,}

or professional practice may be inferred.

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Contract Type Selection

 _{Fixed price or lump-sum contracts}

 _{Cost-Reimbursable Contracts}

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Fixed price assumes fixed

scope!

Price-Based Contracts

 _{Fixed price incentive fee}  _{Firm fixed price (also}

called “lump sum”)

 _{Unit price:}

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Firm Fixed Price: Underrun

225,000 35,000 190,000 Seller Actual 225,000 25,000 200,000 Seller Estimate 225,000 Contract Amount n/a Profit/loss n/a Cost Buyer View

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Firm Fixed Price: Overrun

225,000 –5,000 230,000 Seller Actual 225,000 25,000 200,000 Seller Estimate 225,000 Contract Amount n/a Profit/loss n/a Cost Buyer View

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Seller’s Estimate

Price Must Be Reasonable

Buyer’s Expectation Reasonable Price Higher profit Lower cost ?? ??

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Buyer View of Price-Based

Contracts

 _Advantages:

 _{Seller assumes cost risk}

 _{Disadvantages:}

 _{More effort needed to define scope}  _{Changes can be expensive}

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Cost-Based Contracts

 _{The amount that the buyer pays is}

driven by the actual costs incurred by the seller.

 _{Cost-based contracts are used mostly}

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Cost-Based Contract

Terminology

 _{Direct costs — costs which can be tied to a specific}

deliverable.

 _{Indirect costs — costs which cannot be tied to a}

specific deliverable:

 _{Fringe benefits — non-salary costs}

 _{Overhead — cost of running the business}

 _{Indirect costs are calculated as a percentage of}

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 _{CEO’s salary?}

 _{Equipment bought for project?}  _{Health insurance?}

 _{Materials used in building product?}  _{Office rent?}

 _{Project manager’s salary?}  _{Vacation time?}

Direct, Fringe, or Overhead?

 _{CEO’s salary?}

 _{Equipment bought for project?}

 _{Health insurance?}

 _{Materials used in building product?}

 _{Office rent?}

 _{Project manager’s salary?}

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Types of Cost-Based Contracts

 _{Cost plus percentage of cost (CPPC)}

 _{Cost plus fixed fee (CPFF)}

 _{Cost plus incentive fee (CPIF)}

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CPFF vs. CPIF: Underrun

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CPFF vs. CPIF:

Overrun

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Contract Type

Cost Plus Incentive Fee contracts are:

a. only appropriate on construction projects.

b. seldom used by a well-managed project organization.

c. useful only for government agencies. d. often cost effective for the buyer.

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Buyer View of Cost-Based

Contracts

 _Advantages:

 _{Less effort needed to define scope}  _{More sellers likely to be interested}  _{Easier to get changes accepted}

 _{Disadvantages:}

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Hybrid Contracts

 _{Time and materials (T&M):}

 _{Labor charged at hourly rate(s)}

 _{Materials charged at cost plus a percent}

for administrative overhead

 _{Time and materials, not to exceed:}

 _{Seller stops work once limit has been}

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Factors to Consider When Choosing

Type of Contract

 _{Detailed requirements = price-based}

 _{Many able vendors = price-based}

 _{Urgent = hybrid}

 _{Complex requirements = cost-based}

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Summary of

Key Points

 _{These Topics will be presented from}

the perspective of the Buyer

 _{Valid contracts have four key}

elements

 _{The contract binds the Buyer and the}

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Procurement Planning Outputs

1. Procurement management plan

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Procurement management plan

 _{What types of contract to be used}

 _{Who will be the experts}

 _{What standards forms to be used}

 _{How will the coordination take place}

 _{How will multiple contractors be}

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SOW

 _{Documented with a statement of}

work (SOW):

 _{Must provide enough detail for the}

seller to understand the buyer’s needs.

 _{Will generally describe a specific result}

or deliverable.

 _{May be broadly framed or highly}

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Tradeoffs

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Procurement Overview

A. Planning — preparing the solicitation documents

B. Source Selection — selecting a seller C. Contract Administration — working

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Procurement Planning

 _{Procurement management plan:}

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Solicitation Planning

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Solicitation

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Types of Procurement

Documents

 _{Request for information (RFI)}  _{No commitment to buy}

 _{Usually limited to qualifications}  _{Invitation to Bid (IFB) and}

Request for Quotation (RFQ)

 _{Price-based purchases}  _{Request for Proposal (RFP)}

 _{Services, custom or complex products}

This usage is common but not

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Typical Procurement Document

Contents

 _{Introduction or overview}

 _{Statement of work (SOW)}

 _{Decision process and schedule}

 _{Format of the response}

 _{Evaluation criteria}

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Source Selection

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Source Selection

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1. Sole Source Solicitation

 _{Definition — only one potential seller}

is considered

 _{Why use sole source?}

 _{Get contract signed quickly}

 _{Very few sellers have the skills needed}

 _{Where can you find potential sellers?}

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2. Short List Solicitation

 _{Definition — multiple potential sellers, usually at}

least three

 _{Why use a short list?}

 _{Encourage competition (approach, cost, time)}  _{Avoid extended selection process}

 _{Only a few sellers have the skills needed}

 _{Where can you find potential sellers?}

 _{Prior experience}  _{Web search}

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3. Competitive Solicitation

 _{Definition — advertised, anyone can bid}  _{Why use competitive bidding?}

 _{Encourage competition (approach, cost, time)}  _{Many potential sellers have the skills needed}  _{Avoid appearance of conflict of interest}

 _{Where can you find potential sellers?}

 _Newspapers

 _{Industry publications}  _{Professional journals}

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Evaluating Responses

 _{Objective is to select a single seller}

 _{Evaluation criteria generally fall into three}

major categories:  _Technical

 _Management

 _{Price and schedule}

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Common Technical Criteria for

Products

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Common Technical Criteria for

Services

 _{Overall approach}

 _{Work plan details}

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Common Management Criteria

 _{Skills of staff to be assigned}

 _{Seller’s reputation}

 _{Prior experience with seller}

 _{Financial strength}

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Common Price and Schedule

Criteria

 _{Reasonableness}

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Mechanics of Evaluating

Responses

 _{Screening system:}

 _{Eliminate proposals that don’t meet}

minimum requirements

 _{Scoring system:}

 _{Equal or weighted factors}  _{High score wins}

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Scoring System Example

78 81 88 25 30 35 25 25 30 8 8 8 20 18 15 Seller 3 Seller 2 Seller 1 100 Total 40 Plan 30 Staff 10 Sched 20 Price Weight Item

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Order of Negotiations

 _{Statement of work first}

 _Staffing

 _{Financial arrangements}

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Negotiation Reminders

 _{Be careful of compromising}

evaluation criteria

 _{Win-win to maintain the relationship}

 _{Focus on interests, not positions}

 _{Document all agreements and}

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Summary of

Key Points

 _{Match the solicitation approach}

to the needs of your project.

 _{Work hard to evaluate proposals}

objectively.

 _{Negotiate for a win-win}

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Contract Administration

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Contract Administration

 _{Contract management is a special case}

of project risk management:

 _{Identify (contracting) risks}

 _{Develop (contracting) risk responses}  _{Deal with (contracting) problems}

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High Priority Contracting Risks

 _{Poor communication}

 _{Poor change control}

 _{Breach of contract}

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Contracting Risk =

Poor Communication

 _{Risk responses =}

 _{Kick-off meeting}

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R = Review N = Notify A= Approve

… A A A A N R R R N R N N R … Item 4 Item 3 Item 2 Item 1 … F E D C B A Person Contract Item

Responsibility Assignment

Matrix

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Contracting Risk =

Poor Change Control

 _{Risk responses =}

 _{Clearly defined change control}

practices

 _{Change control practices specified in}

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What are the characteristics of a

good change control system?

 _{A control change system defines the}

process by which the contract may be modified. It includes the paperwork, tracking systems, dispute resolution procedures, and approval levels

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Contracting Risk =

Breach of Contract

 _{Breach of contract — unexcused}

failure to perform a contractual promise.

 _{Risk responses =}

 _{Payment of damages}

 _{Contractually specified corrective}

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Contracting Risk =

Payment Disputes

 _{Risk responses =}

 _{Defined acceptance criteria}  _{Defined acceptance process}  _{Progress reporting system}

 _{Timely processing of payment}

72 Earned Value Cumula tiv e V alu es Time Planned Value Actual Cost

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Payment Processing

 _{Do — follow the procedures in the contract.}  _{Do — communicate promptly regarding}

any problems or issues.

 _{Do — process seller invoices promptly.}  _{Don’t — approve payment if the contract}

terms have not been satisfied.

 _{Don’t — withhold payment except as}

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Payment Terms

 _{All payments require a signed contract!}  _{Advance payments:}

 _{Payments made prior to start of work}

 _{Usually made to support purchase of materials}

 _{Progress (partial) payments:}

 _{Payments that are less than the full contract}

amount

 _{Method of calculation should be defined}

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… continued

 _Retainage:

 _{Amounts withheld to ensure}

performance

 _{Final payments:}

 _{Payments made when all of the contract}

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Sample Payment Terms and

Conditions

i. Payment requests must be supported

by a correct invoice.

ii. Buyer will pay seller 85% of the

agreed value of each work item upon completion of the work item.

iii. Payments will be made within 30

days.

iv. Retainage will be paid within 30

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Summary of

Key Points

 _{Contract management is mostly risk}

management.

 _{Communicate, communicate,}

communicate.

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Warranties & Guarantees

• Product performance guarantees

• Financial guarantees

• Warranties

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Product Performance Guarantees

 _{Definition — does the contracted item}

perform as specified?

 _{Buyer view:}

 _{Seller should deliver as promised}  _{Burden of proof is on the seller}

 _{Seller view:}

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Financial Guarantees

 _{Definition — protection from the risk}

that the other party will be financially unable to fulfill the contract.

 _{Key issue — enforcement may be}

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Guarantees Often Provided

Through Bonds

 _{Payment bond:}

 _{Paid for by the Buyer.}

 _{Protects the Seller if the Buyer becomes}

insolvent.

 _{Performance bond:}

 _{Paid for by the Seller.}

 _{Protects the Buyer if the Seller fails to}

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Warranties

 _Definition:

 _{How post-completion failures will be}

addressed

 _{Normally limited to physical products}

 _{Key issue — can implied warranties}

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Other Warranty Issues

 _Coverage:

 _{For how long?}

 _{Does a failure extend the warranty?}

 _{Responsibilities:}

 _{Can buyer actions void the warranty?}  _{Effect of failure by a subcontractor?}

 _{If a part fails, is the whole product covered?}

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Limitation of Liability

 _{Definition — any condition which}

limits one party’s ability to collect from the other in a court of law.

 _{Common limitations:}

 _{Indirect damages}  _{Lawsuits by others}

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Summary of

Key Points

 _{Product performance guarantees:}

 _{Be clear}

 _{Don’t over promise}

 _{Guarantees, warranties, and}

limitations:

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Contract Closeout