9. project procurement management


Published on

Project Procurement Management (PPM) includes the processes necessary to purchase or acquire products, services, or results needed from outside the project teams. It also includes the contract management and change control processes required to develop and administer contracts or purchase orders issued by authorized project team members.

Published in: Business, Technology
  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

9. project procurement management

  1. 1. 9. Project Procurement Management What is Procurement? Project Procurement Management (PPM) includes the processes necessary to purchase or acquire products, services, or results needed from outside the project teams. It also includes the contract management and change control processes required to develop and administer contracts or purchase orders issued by authorized project team members. Procurement of Items - Procurement means the activities related to purchase, subcontracted items - Procurement items are usually classified as goods, work or services (GWS) - Goods represent raw material or produced items - Work means contracted labor - Service means consultation Planning, budgeting, scheduling and follow-up control of all fall under procurement management Logistics plan includes everything related to the transport and storage of materials for the projects. GWS items cannot be scheduled to arrive just-in-time (JIT). Provision must be made to store and protect them until they are needed. - Procurement Management Procurement management refers to planning and control of the followings; - Equipment , material or components designed and provided by vendors specifically for the project - It may be portion of a work package or entire work package - It may be off-the-shelf (OTS) equipment and components - Bulk material, like cement, metal piping etc. - Consumables items; nails, bolts, lubricants - Support equipment for construction, cranes, lifts etc - Administrative equipment, computers, project office facilities The following table shows 4 processes of this knowledge area and groups they belong to 5 Process Groups Processes Initiation Planning Execution Monitoring Control & 9.1 Plan Procurement 9.2 Conduct Procurement 9.3 Administer Procurement By: Mohamed Salah ElDien Mohamed Aly, MSc, PMP®, DIT, MCAD Closing 9.4 Close Procurement
  2. 2. The Procurement Process In Procurement three objects are very important; Seller: It is the person or contracting company who sells products or services for the project. PMI in this particular chapter treats seller as any 3rd party who provides products or services from outside of the organizations. Buyer: It is you, the project manager who purchases the services from Seller. The exam’s perspective is testing you, the project manager, so in this case you will become buyer, so all exam questions are on buyer perspective only. Contract: - It is a legal document between a buyer and a seller. It provides a mutual binding agreement that obligates the seller to provide the specified product, service or result and obligates the buyer to provide financial or other valuable consideration. The agreement can be simple or complex. By: Mohamed Salah ElDien Mohamed Aly, MSc, PMP®, DIT, MCAD
  3. 3. - A procurement contract will include terms and condition also. A contract can be an agreement, an understanding, a subcontract or a purchase order. You can add any required clauses to the contract but following are important. To remember those use “CCOLA”;  Capacity: The authorities those will be provided to Seller to do the work.  Consideration: Clauses those will be considered by the Buyer.  Offer: Is provided to make a contract or deal.  Legal Purpose: Jurisdiction and legal bondage.  Acceptance: The time limit that the buyer has to make an agreement. 9.1 Plan Procurement - The process of documenting project purchasing decisions, specifying the approach and identifying potential sellers. Inputs - Scope Baseline Requirements documentation Risk Register Risk-related Contract Decisions Activity Resource Requirements Activity Cost Estimates Project Schedule Teaming Agreements Cost Performance Baseline Enterprise Environmental Factors Organizational Process Assets Tools - Make-or-buy analysis. Expert judgment. Contracts Types Outputs - estimates, suppliers) - Procurement statement of work (specifications, quantity desired, quality levels etc) - Make-or-buy decision Procurement documents (RFI, IFB, RFP, RFQ), tender notice, invitation for negotiation) - Source selection criteria (If there are number of sellers + Other management factors) - - Procurement management plan (Types of contracts, RM issues, Change request Various contract types are tools for “Plan Purchasing and acquisition" process. Which means when you are buying some services or Products for your Project you can use these techniques to negotiate better options for your project. By: Mohamed Salah ElDien Mohamed Aly, MSc, PMP®, DIT, MCAD
  4. 4. PMI categorizes contracts into 3 types. 1. Fixed prices contracts: In this type, the Buyer pays EXACT amount for a defined product or service to be provided. Incentives and Awards bring little bit variations to Fixed price contracts. Seller bears the risk in fixed price contracts.    FFP “Firm Fixed Price”: This is the preferred contract type by most buying organizations. It can only be changed if the scope changes or there is a change in specifications. Any cost increase due to adverse performance is the responsibility of the seller. FPI “Fixed Price + Incentive Fee”: In this type of contract an addition incentive will be given to the seller when he beats the project expectations. Either it can be time, quality or features. So Seller will be motivated to deliver better product in shorter time. Under such contract, a Price ceiling is set and all costs above the price ceiling are the responsibility of the seller, who is obligated to complete the work. FPEPA “Fixed Price + Economic Price Adjustment”: These types of contracts are used if the contract is spanned for a considerable period of time. It caters for inflation, cost increase / decrease of specific commodities. It is attached with some reliable financial index. Buyer bears the extra burden of Economic fluctuation which is a risk. 2. Cost reimbursable contracts: Buyer will reimburse all costs spent by the seller for the project. This is open ended contract used especially when the scope of work cannot be preciously defined at the start and needs to be altered. So Buyer bears the risk. Awards, incentives bring variances in this category.    CPFF “Cost plus fixed fee”: Buyer reimburses all expenses to the seller and adds a fixed fee as a seller’s profit. 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 cost. Fee is paid only for completed work and doesn’t change due to seller performance. CPIF “Cost plus Incentive fee”: In this type the buyer reimburses all expenses to the seller and adds a predetermined incentive fee upon achieving certain performance objectives. The final costs are less or greater than the original estimated costs. CPAF “Cost plus Award fee”: This type of contract is very similar to CPIF, but the majority of the fee is only earned based on the satisfaction of certain broad subjective performance criteria defined previously in the contract. 3. Time and Material contracts: These are cusp between FP and CR and have features of both. Work will quoted as per unit price or charges for per hour service and costs for materials will be reimbursed. Sellers and Buyers share the risk. By: Mohamed Salah ElDien Mohamed Aly, MSc, PMP®, DIT, MCAD
  5. 5. The following table shows major difference between above three types of contracts; Work Risk Term FP Known Seller Short T&M Unknown Both Short CR Unknown Buyer Long 9.2 Conduct Procurement - The process of obtaining seller responses, selecting a seller and awarding a contract. Inputs Tools - Project Management Plan Procurement document Source Selection Criteria - (Who qualifies to be a supplier) - - Qualified Seller List Seller Proposals Project Document (Risk register & risk related contract decisions) - Bidder conference Proposal evaluation techniques Independent estimates Expert judgment Advertising Internet search Procurement negotiations. Outputs - Selected sellers Procurement contract award Resource calendars Change request Project management plan updates - Project document updates Make-or-buy decision Teaming agreement OPA Procurement Documents: - These documents are useful for the Buyer (You the Project Manager) to communicate the need in most possible efficient way to all prospective sellers. If Sellers can understand your needs, your process and clauses, they can clearly quote and meet your expectations. Advertising: - Advertising is very much required to attract more bidders for your project. You should advertise extensively to gather more responses. Few of known formats are internet, local papers, different print media like magazines, Conferences, vendor shows and so on. But all of those might not be necessary together. As advertisement is cumbersome and expensive normally companies establish preferred vendors list over the time. By: Mohamed Salah ElDien Mohamed Aly, MSc, PMP®, DIT, MCAD
  6. 6. Bidders Conference: - - Once you advertise and collected many responses from various bidders you should organize a conference to bring all bidders to same understanding page. You should clarify all technical questions. Each bidder will be beneficiary of other questions and can understand your requirements much better. You should document all questions and answers and send those to all bidders. You should prepare your own Qualified Sellers list which is one of the outputs of this process. Buyer prepares few documents for bidders like; RFP (Request for Proposal) - In this document you can ask for detailed plan for project execution and price. If it is a long term project and the scope is not developed completely you can use these types of documents. IFB (Invitation for Bid) or RFB (Request for Bid): - You have developed the scope and you know the work and willing to get it done by vendor then you will use this type of documents. RFQ (Request for Quotation): This is Price per item or hour labor. These documents can be used with different contract types as follows; FP IFB / RFB T&M RFQ CR RFP - For Unit price contracts you will ask a quotation at unit level. And you would ask bidders for a proposal where scope is not yet prepared or unknown. - As we discussed all of 4 processes of this knowledge area occur sequentially. It follows traditional waterfall model. By the time of this process you, the Project Manager, might have completed Procurement & contract planning and might have requested and collected Seller Responses (Quotations/Bids/Proposals). Tip: Bids are for– FP; Quotations are for – T&M; Proposals are for – CR; By: Mohamed Salah ElDien Mohamed Aly, MSc, PMP®, DIT, MCAD
  7. 7. In the procurement documents you can include; - Your company information. - Project information. - Criteria which are important for the project and on which you will evaluate. - Terms and conditions for the project, legal implications. - Contract terms. Other documents you will need to develop are: NDA (Non-Disclosure agreement): To perform the Project work buyer has to disclose some confidential information to the sellers or even prospective sellers. Letter of Intent: This document intention is to communicate that the buyer, you are intended to purchase services or products from the seller. But this document is not legally binding document, means you can even decline to purchase in future date based on your changing criteria. Note: if you hired a contractor “A”, and the contractor hires another sub-contractor “B” to deliver part of your work. Even though “B” is performing your work, he/she is contractually not bound to you, because B contractually bound to “A” only. The major goal/purpose of “Conduct Procurement” process is Selecting Sellers for your project and making a contract with them. PMI provided several Tools and Techniques to fulfill this requirement; - - Weighing System: Ranking all filtered prospective sellers. Independent Estimate: Few companies call this estimation group as Shadow IT. Rough estimate within your company. Screening System: Weed out Sellers who doesn’t even meet bare minimum criteria Seller Rating System: Is an aid to Weighing System. You will provide your own rating system based on your project environment. Seller’s financial stability might be important aspect for a long term Project but that might not be true for a smaller project which will finish in 6 months. So each project has to establish its own rating system. Proposal Evaluation techniques: This is also another aid for weighing system. Expert Judgment: You will inherit this quality based on your experience and exposure. By: Mohamed Salah ElDien Mohamed Aly, MSc, PMP®, DIT, MCAD
  8. 8. Example of Weighing System: 1. Step1 you will define what all criteria are important for your project. 2. Then you will quantify those criteria by giving a weight, based on a scale – from 1to5 or from 1to10- and then, These weights go in respective columns. 3. By using different evaluation techniques and rating system, you will provide a rate to each seller and enter those in to appropriate cells. 4. By multiplying weight and rate you will determine a score for each seller. 5. By adding all scores for a particular seller you will get the total score for that seller. - Finally you will prepare a list of Selected Sellers and Ranks next to them. You have to keep this list as one of your company process asset to use it for next time. But rankings on this list will not stay the same over years. You need to reevaluate all your sellers based on situation and time. The best Seller will not remain the best all the time. They might change their policies or another best seller might emerge. But having a company asset is easy to start. By: Mohamed Salah ElDien Mohamed Aly, MSc, PMP®, DIT, MCAD
  9. 9. 9.3 Administer Procurement - The process of managing procurement relationships, managing contract performance and making changes and corrections as needed. Inputs - Procurement document Project management plan Contracts Performance Reports Approved change requests Work performance information Tools Contract change control system Procurement performance review Inspection and audits Performance reporting Payment systems Claim administration Record management system (manage contract & - Outputs - Procurement documentation Change requests Project management plan updates - Organizational process assets updates Procurement documents) Contract Administration is an important process of Procurement management and as a Project Manager you have greater responsibilities to manage activities under this process. You need to monitor the progress of your investment and see if you are getting what you are paying for or not. Change requests are important expected outcome of this process. Tools like Change control system helps to monitor this process. All Changes need to be monitored all across either for schedule, or for scope or for costs or contracts. Those needed to be evaluated to know how they are affecting other aspects of the project. They should be well documented and should be approved by key stakeholders. 9.4 Close Procurement - The process of completing each project’s procurement. Inputs - Project management Plan Procurement documentation Tools - Procurement audits Negotiated settlements Record management systems Outputs - Closed procurements Organizational process updates By: Mohamed Salah ElDien Mohamed Aly, MSc, PMP®, DIT, MCAD