12.1 Plan Procurement Management

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

The definition shown above in italics is taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Fifth Edition, Project Management Institute Inc., 2013

Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Fifth Edition, Project Management Institute Inc., 2013 Figure 12-2 Page 358

This process

Determines if outside support is necessary and if yes,

• Where to obtain it from
• What and how much
• When it should be acquired
• What processes to follow
  • How to obtain quotes/proposals/bids
  • How to evaluate them once received

Decisions made in this process will impact on:

• 4.3 Direct and Manage Project Work
• 6.4 Estimate Activity Resources
• 6.6 Develop Schedule
• 8.2 Perform Quality Assurance&
• 9.2 Acquire Project Team

Requires an understanding of the different contract types

Organisational Process Asset include contracts and procuring policies

Contract Types – up to 5 questions on this

Fixed Price – buyers precisely specify product to be bought

• Fixed price does not change unless scope changes.
• Seller legally obligated to complete the contract
  • Firm Fixed Price (FFP)
  • Fixed Price Incentive Fee (FPIF)
  • Fixed Price Award Fee (FPAF)
  • Fixed Price with Economic Price Adjustment (FP-EPA)

Time and Material

• Often used where a precise statement of work cannot be determined at the outset.
• T&M contracts rely on unit or labor costs and rates; Financial and time limits may be prescribed by the buyer. Often used for specialist services such as engineering or IT

Cost – Reimbursable

• Scope cannot be precisely defined at outset or high risk involved
• Involves payment to the seller for all actual costs involved (cost reimbursement) plus a fee representing seller profit.
• Cost Plus Fixed Fee (CPFF) Cost Plus Incentive Fee (CPIF)
• Cost Plus Award Fee (CPAF)

Buyer and Seller Risk Continuum

Cost Reimbursable types

Cost Plus Fixed Fee (CPFF)

• Costs are charged by the seller and the buyer additionally pays a fixed fee which is negotiated and agreed at the outset
• Fee does not vary as it fixed and this removes the need to increase profits by increasing costs above actual costs

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 upon achieving certain performance objectives set out in the contract.
• Costs over and above are shared
• Profits made as a result of costs coming in lower than estimated are also shared (80% to buyer <- -> 20% to seller)

Cost Plus Award Fee (CPAF)

Similar to CPIF but:

• The majority of the fee is only earned based on certain broad subjective performance criteria defined and incorporated in the contract.
• The determination of fee is based solely on the subjective determination of seller performance by the buyer, and is not generally subject to appeals.
• The award is normally based on subjective criteria as judged by the buyer, but it helps for the judging to be objective

Incentivising for good behavior, not penalizing for bad behavior

Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Fifth Edition, Project Management Institute Inc., 2013 Page 324

Time and Material

• T&M contracts rely on unit or labor costs and rates
• Often used where a precise statement of work cannot be quickly determined at the outset.
• Financial and time limits may be prescribed by the buyer.
• Often used for specialist services such as engineering or IT
• Often no incentive for the seller to complete early or on time

Example

• NDIA (New Doha International Airport)
• One seller was on a Time and Materials contract
• Project already overrunning at the end of January 2013
• No incentive to finish early
• Only impact is on reputation and the prospect of repeat business

Fixed Price Contracts

Firm Fixed Price (FFP) – sometimes called Fixed Price

• Used when specification is well defined, requirements are detailed
• Buyer reasonably sure of attracting enough bids from different suppliers
• Seller bears additional costs over the agreed contract amount – risk to seller is high and buyer is low
• Seller reads the Procurement SOW carefully for T&Cs

Fixed Price Incentive Fee (FPIF)

• Seller offers contractual incentives with share ratio for meeting specified performance criteria

Fixed Price Contacts Fixed Price Award Fee (FPAF)

• Similar to FPIF but incentive is now an award or bonus
• Maximum award is determined and agreed in advance, with awarding decisions being taken carefully to reduce subjectivity
• There is a administration cost overhead involved e.g. UK M6 Toll Road project finishing 4 months earlier than planned.

Fixed Price with Economic Price Adjustment (FP-EPA)

• Used when price of some components, supplies or commodities may be volatile during the project life

CPIF Calculations

Frederico Consortium award a contract to Bell Co for some work which does not have a detailed specification, so is for $1,500/day, a target fee of $75,000, for 200 days of effort, with a share of 60:40 (buyer : seller)

Target price = (1500 x 200) + 75,000 = $375,000

What will the buyer pay if:

• Option 1 – the project takes longer to do at 228 days
• Option 2 – it takes less time at 160 days

Answer

Option 1 – project has taken longer than intended at 228 day

Actual Cost = 228 x 1500 = 342,000

• Minus cost of overrun = (28 x 1500) x 40% = -42,000 x 0.4 = -16,800
• Plus the Fee = 75,000 Total Price = $400,200

Buyer has spent extra $25,200, seller lost $16,800

Option 2 – project only takes 160 days

Actual Cost = 160 x 1500 = 240,000

• Minus cost of under run = (40 x 1500) x 40% = 60,000 x 0.4 = 24,000
• Plus the Fee = 75,000 Total Price = $339,000

Buyer – saved $36,000, seller increased profit by $24,000

Exam

You may be asked:

• To make a calculation to determine the correct answer
• To decide which contract type is best within the situation described.
• This is normally the contract which gives reasonable seller risk but incentivizes the seller to achieve, whilst meeting the procurement requirements

Purchase Orders

Gemini Holdings issues a Purchase Order for 250 reams of paper, 2 filing cabinets, 3 laser printers and 500 boxes of paper clips to Fox Office Supplies. The order items are to be supplied within the next 2 weeks

At what point is there a contract between the two parties?
A.When the Purchase Order is issued to the supplier
B.When the PO is received by the supplier
C.When the supplier calls to ask if these should be sent by courier
D.When the supplier accepts the PO thereby agreeing to it's terms and conditions

Correct answer - D but beware of answers like C which sound correct but are not sufficient

Types of Procurement Documents

Request for Quotation (RFQ)

• Used when deliverables are clearly specified commodities, based on a unit of measure and when price is the primary determining factor.

Request for Proposal (RFP)

• Used when deliverables are not well-defined, there are many ways the work can be done, or when other selection criteria will be used in addition to price.

Request for Bid (RFB) and Invitation for Bid (IFB)

• Used when deliverables are commodities for which there are clear specifications; one price of the whole job

Request for Information (RFI)

• Used to develop lists of qualified sellers

Examples of Source Selection Criteria

• Management approach
• Business size, type
• Financial capacity
• Technical approach
• Understanding of need
• Overall or Life-cycle Cost
• Technical Capability
• Warranty
• Risk
• Proprietary Rights
• Lead Time
• Production Capacity & Interest
• References / Past performance
• Location
• Intellectual Property
• Price

How do you let potential sellers know what details you, the buyer, want to see in their submission?

12.1 Plan Procurement Management

• Documenting purchasing decisions for the project ,
• Specifying what approach to take (COTS, customize, bespoke) – deciding whether to “make-or-buy”
• Identifying potential sellers.
• Consideration of potential sellers, and the risks involved.

Make (or Buy Analysis)

• Normally less costly
• Able to utilise existing capacity
• Maintain direct control
• Easily integrated into existing operations
• Protect design/production intellectual property
• Avoid dependence on suppliers

Buy

• Not cost effective to build yourself
• Using specialist skills of suppliers
• When there is limited capacity or capability to build solution
• Maintain multiple sources (qualified vendor list)
• Indirect control.

Typical exam question will be…

ABC Corp have to decide whether to buy a JCB Digger/Excavator for their project, or lease it on a 2 month rolling contract over the 5 months requirement.

The purchase price for a new machine is $475,000 and the daily lease cost is $5,000. There is a small chance it could be sold at the project end and realise $250,000.

Which option is best value for money?
A. Option A – buy= cost to ABC is approx. $225,000, although it is $475,000 up front
B. Option B – lease
C. Option C – buy it second hand, although data on second hand prices is not available at this time
D. Not do it at all because the cost is too high

Answer:

Option A is the correct answer from a purely commercial angle, as the net cost assuming the sale would happen = $225k (475k – 250k).

Option B is too expensive as the cost is 5 months x 4 weeks x 7 days x $5,000 = $700,000.

Tools and Techniques

Expert Judgement

• May need to use Technical and Purchasing experts who will help to assess capability, inputs and outputs, the criteria to select appropriate sellers, and specifying terms and conditions

Market Research

• Industry databases; conferences; reviews

Meetings

Remember:

• The work to be done must be stated in the contract and the contract is legally binding
• Any work not stated is not legally binding
• To complete the contract all work must be done properly – to the criteria specified and agreed

Although not in PMBOK…

Need to be aware that:

Required elements of a contract – CCOLA

• Consideration – the value exchanged for the seller's product, service or result
• Capacity – see next slide
• Offer – the seller‟s proposal of a product, service or result
• Legal Purpose – compliance with prevailing laws of the product, service or result
• Acceptance – buyer agrees to make the deal

If a change in scope is required, this may need a new contract, or could be the existing contract amended

The PM should be appointed before the contract is created to have an input into it

If the buyer and seller act as if a contract is in place, but have not signed one, then it is legally in force

Capacity or Legal Capacity

The PMP exam questions covering contracts will be based on US Law

Important things to note:

US Position

• The parties entering into the agreement are competent
• And they have the legal authority to commit the organization into the contract
• Both of these have to be satisfied for the contract to be legal

UK Position

• Any employee can legally commit the organization to a contract
• This is different to having the delegated authority to be able to do so
• Being over the age of 18, not being capable due to mental incapacity, not under the influence of drink or drugs

Outputs

Procurement Statement(s) of Work (SoW)

• Specifies the element of project scope included in the scope of the contract
• Enables the prospective sellers to decide if they are capable of providing the products, goods or services
• Clear, complete and concise

Make-or-buy Decisions

Procurement Documents

• Used to solicit proposals from prospective sellers
• Includes how the buyer would like the response structure to be and the relevant procurement SOW

Source Selection Criteria

Change Requests

Notes on procurement for the exam

• A contract is a formal and legal agreement
• All requirements should be specifically stated in the contract
• The exam questions are always from the buyer's perspective
• Different words may be used (vendor, contractor, subcontractor, etc…) but seller is the supplier
• Changes must be in writing and formally controlled
• The US Government backs all contracts by providing a court system (this is a US exam)
• There is a courts system in most countries

Procurement Management Plan

Contains:

• Procurement policies, procedures and standard documents
• Types of contracts to be used
• Use of independent estimate(s) and procurement specialists
• How to manage multiple suppliers
• Responsibilities of different roles
• Integration with other project processes
• Constraints, Assumptions and Risks
• Format and detail of requirements for a contract SOW and its WBS
• What metrics will be used to evaluate bids and manage sellers
• Procedures for handling:
  • Make or buy decisions
  • Changes to scope

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