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PMP_Project Procurement Management

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Project Management Professional (PMBOK® 5th edition) training course

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PMP_Project Procurement Management

  1. 1. PPROJECTROJECT PPROCUREMENTROCUREMENT MMANAGEMENTANAGEMENT Hisham Haridy, PMP, PMI-RMPFebruary 2016
  2. 2. Plan Procurement Management Conduct Procurements Control Procurements Close Procurements The processes required to acquire goods and services, to attain project scope, from outside the performing organization. Procurement Management Management Procurements Procurements Procurements Getting the procurement documents created in the plan procurement process to the sellers, answering the seller’s question, having them prepare responses, and reviewing the responses to select seller. Consist of tying up all the loose ends, verifying that all work and deliverables are accepted, finalizing open claims, and paying withheld retainage for each of procurements on the project. Determining what to purchase or acquire and determining when and how. Managing the relation between the buyer and seller and assuring that the performance of both parties to the procurement meets contractual requirements PROJECT PROCUREMENT MANAGEMENT February 2016
  3. 3. Inputs Tools and Techniques Outputs 1. Project management plan 1. Make-or-buy analysis 1. Procurement management Plan Procurements Management “The process of documenting project purchasing decisions, specifying the approach, and identifying potential sellers.” 1. Project management plan 2. Requirements documentation 3. Risk register 4. Activity resource requirements 5. Project schedule 6. Activity cost estimates 7. Stakeholder register 8. Enterprise environmental factors 9. Organizational process assets 1. Make-or-buy analysis 2. Expert judgment 3. Market research 4. Meetings 1. Procurement management plan 2. Procurement statements of work 3. Procurement documents 4. Source selection criteria 5. Make-or-buy decisions 6. Change requests 7. Project documents updates PROJECT PROCUREMENT MANAGEMENT February 2016
  4. 4. INPUTSINPUTS 1. Project management plan The project management plan describes the need, justification, requirements, and current boundaries for the project. Scope statement. WBS. WBS dictionary. 2. Requirements documentation Requirements with contractual and legal implications that may include health, safety, security, performance, environmental, insurance, intellectual property rights, equal employment opportunity. Licenses, and permits. PROJECT PROCUREMENT MANAGEMENT February 2016
  5. 5. INPUTSINPUTS 3. Risk register The risk register provides an understanding of risks uncovered to date. Risk analysis of the project should be completed before contracts are signed. 4. Activity resource requirements Activity resource requirements contain information on specific needs such as people, equipment, or location.people, equipment, or location. 5. Project schedule Project schedule contains information on required timelines or mandated deliverable dates. 6. Activity cost estimates Cost estimates developed by the procuring activity are used to evaluate the reasonableness of the bids or proposals received from potential sellers. 7. Stakeholder register Stakeholder register provides details on the project participants and their interests in the project. PROJECT PROCUREMENT MANAGEMENT February 2016
  6. 6. INPUTSINPUTS 8. Enterprise environmental factors These factors are company culture and existing systems that your project will have to deal with or can use. Marketplace conditions. Products, services, and results that are available in the marketplace. Suppliers, including past performance or reputation. Typical terms and conditions for products, services, and results or for the specific industry.specific industry. Unique local requirements. 9. Organizational process assets Formal procurement policies, procedures, and guidelines. Most organizations have formal procurement policies and buying organizations. Management systems that are considered in developing the procurement management plan and selecting the contract types to be used. An established multi-tier supplier system of pre-qualified sellers based on prior experience. PROJECT PROCUREMENT MANAGEMENT February 2016
  7. 7. Contract INPUTSINPUTS Contact; A contract is a mutually binding agreement that obligates the seller to provide the specified product or service or result and obligates the buyer to pay for it. YOU SHOULD KNOW CONTRACT TYPE Cost reimbursable (CR) Percentage of Costs (CPPC) Fixed Fee (CPFF) Award Fee (CPAF) Incentive Fee (CPIF) Time and Material (T&M) Fixed Price (FP) Award Fee (FPAF) Economic Price Adjustment (FPEPA) Incentive Fee (FPIF) PROJECT PROCUREMENT MANAGEMENT February 2016
  8. 8. Cost Reimbursable (CR) A cost reimbursable contract is used when the exact scope of work is uncertain and, therefore, costs cannot be estimated accurately enough to effectively use a fixed price contract. This type of contract provides for the buyer to pay the seller allowable incurred costs to the extent prescribed in the contract. This type of contract requires the seller to have an accounting system that can INPUTSINPUTS This type of contract requires the seller to have an accounting system that can track costs by project. Here the buyer has the most cost risk because the total costs are unknown. Example; Research and development or information technology projects in which the scope is unknown are typical examples of cost reimbursable contracts. Cost Contract A cost contract is one in which the seller receives no fee (profit). It is appropriate for work performed by nonprofit organizations. Contract = Cost. (without profit) PROJECT PROCUREMENT MANAGEMENT February 2016
  9. 9. 1. Cost Plus Percentage of Costs (CPPC) OR Cost Plus Fee (CPF) Requires the buyer to pay for all costs plus a percentage of costs as a fee. This type of cost reimbursable contract is not allowed for U.S. federal acquisitions or procurements under federal acquisition regulations and is bad for buyers everywhere. Sellers are not motivated to control costs because they will earn a profit on every cost without limit. Contract = Cost + 10% of costs as fee. INPUTSINPUTS Contract = Cost + 10% of costs as fee. 2. Cost Plus Fixed Fee (CPFF) Provides for payment to the seller of actual costs plus a negotiated fee that is fixed before the work begins. The fee does not vary with actual costs, thus providing some incentive for the seller to control costs. The fee may be adjusted as a result of changes to the procurement statement of work. Contract = Cost + $100,000 PROJECT PROCUREMENT MANAGEMENT February 2016
  10. 10. 3. Cost Plus Award Fee (CPAF) The buyer pays all costs and a base fee plus an award amount (a bonus) based on performance. This is similar to the CPIF contract, except the incentive is a potential award, rather than a potential award or penalty. The award amount in a CPAF contract is determined in advance and apportioned out depending on performance. This is a type of incentive contract. In some instances, the award given out is INPUTSINPUTS This is a type of incentive contract. In some instances, the award given out is judged subjectively, Therefore, procedures must be in place in advance for giving out the award, and a board is established to help make the decision fairly. As with a FPAF contract, the cost to administer an award fee program vs. the potential benefits must be weighed in the decision to use this type of contract. Contract = Cost + $5,000 (for every month production exceeds 100,000 units). Maximum award available is $50,000 Contract = Cost + an award fee (to be determined) for each deliverable completed at least 7 days early. PROJECT PROCUREMENT MANAGEMENT February 2016
  11. 11. 4. Cost Plus Incentive Fee (CPIF) Provides for the seller to be paid for actual costs plus a fee that will be adjusted based on whether the specific performance objectives stated in the contract are met. In this type of contract, an original estimate of the total cost is made (the target INPUTSINPUTS cost) and a fee for the work is determined (a target fee). The seller then gets a percentage of the savings if the actual costs are less than the target costs or shares the cost overrun with the seller. Contract = Cost estimated + $100,000 (target fee) PROJECT PROCUREMENT MANAGEMENT February 2016
  12. 12. Fixed Price (FP, or Lump Sum, Firm Fixed Price) Used for acquiring goods or services with well-defined specifications or requirements and when there is enough competition to determine a fair and reasonable fixed price before the work begins. This is the most common type of contract. If the costs are more than the agreed-upon amount, the seller MUST bear the additional costs. INPUTSINPUTS Therefore, the buyer has the LEAST cost risk in this type of contract, provided the buyer has a completely defined scope. It could be said that the seller is most concerned with the procurement statement of work (SOW) in this type of contract. Sellers in some industries may NOT have the detailed accounting records of past project activities required to accurately estimate future projects. Buyers may NOT have the expertise to prepare a complete procurement statement of work. Contract = $250M. PROJECT PROCUREMENT MANAGEMENT February 2016
  13. 13. 1. Fixed Price Award Fee (FPAF) The buyer pays a fixed price (which includes fee) plus an award amount (a bonus) based on performance. This is very similar to the FPIF contract, except the total possible award amount is determined in advance and apportioned out based on performance. In many instances, the award paid is judged subjectively. Therefore, procedures must be in place in advance for giving out the award, and a board must be INPUTSINPUTS must be in place in advance for giving out the award, and a board must be established to help make the decision fairly. The cost to administer the award fee program versus the potential benefits must be weighed in the decision to use this type of contract. Contract = $110 M . For every month performance exceeds the planned level by more than 15% , an additional $5,000 is awarded to the seller, with maximum award of $70,000. PROJECT PROCUREMENT MANAGEMENT February 2016
  14. 14. 2. Fixed Price Economic Price Adjustment (FPEPA) If there are questions about future economic conditions (future prices) for contracts that exist for a multi-year period, a buyer might choose a fixed price contract with economic price adjustment. Future costs of supplies and equipment that the seller might be required to provide INPUTSINPUTS under contract might not be predictable. A similar type of contract is called fixed price with prospective price redetermination. Contract = $110 M, but a price increase will be allowed in year two based on the U.S. Consumer Price Index report for year one. Contract = the contract price is $110 M but a price increase will be allowed in year two to account for increases in specific material costs. PROJECT PROCUREMENT MANAGEMENT February 2016
  15. 15. 3. Fixed Price Incentive Fee (FPIF) Profits (or financial incentives) can be adjusted based on the seller meeting specified performance criteria such as getting the work done faster, cheaper, or better. The final price is calculated by a formula based on the relationship of final negotiated costs to the total target cost. INPUTSINPUTS costs to the total target cost. A variation on a FPIF is a FPIF successive target contract, in which the target for the incentive is changed after the first target is reached. Contract = $110 M. An additional $10,000 or percentage/month early the project is finished will be paid to the seller. PROJECT PROCUREMENT MANAGEMENT February 2016
  16. 16. Time and Material (T&M) or Unit Price The buyer pays on a per-hour or per-item basis. It is frequently used for service efforts in which the level of effort CAN NOT be defined at the time the contract is awarded. It has elements of a fixed price contract and a cost reimbursable contract. The seller's profit is built into the rate, so they have NO incentive to get the work done QUICKLY or efficiently. INPUTSINPUTS For these reasons, this type of contract is BEST used for work valued at small dollar amounts and lasting a short amount of time. To make sure the costs do not become higher than budgeted, the buyer may put a "'Not to Exceed" clause in the contract and thus limit the total cost they are required to pay. The buyer has a Medium amount of cost risk compared with cost reimbursable and fixed price contracts. Contract = $100 /hour + expenses or materials at cost. Contract = $100 /hour + materials at $5/L.M of wood. PROJECT PROCUREMENT MANAGEMENT February 2016
  17. 17. Purchase Order (PO) A purchase order is the simplest type of fixed price contract. This type of contract is normally unilateral (signed by one party) instead of bilateral (signed by both parties). It is usually used for simple commodity procurements. Purchase orders become contracts when they are "accepted by performance (e.g, INPUTSINPUTS Purchase orders become contracts when they are "accepted by performance (e.g, equipment is shipped by the seller-a unilateral PO). Though unilateral purchase orders are most common, some companies will require the seller's signature on a purchase before the buyer will consider the purchase order official. In that case, it is the signature that forms the "acceptance" needed to make a contract. Contract to purchase 30 M.L. of wood at $9 per meter PROJECT PROCUREMENT MANAGEMENT February 2016
  18. 18. Fixed PriceFixed Price (FP)(FP) Time & MaterialTime & Material “Seller”Contractor“Seller”ContractorRiskRisk INPUTSINPUTS Time & MaterialTime & Material (T & M)(T & M) Cost PlusCost Plus (CP)(CP) “Seller”Contractor“Seller”Contractor Remember, we are thinking from the BUYER’S point of view!) PROJECT PROCUREMENT MANAGEMENT February 2016
  19. 19. INPUTSINPUTS PROJECT PROCUREMENT MANAGEMENT February 2016
  20. 20. INPUTSINPUTS PROJECT PROCUREMENT MANAGEMENT February 2016
  21. 21. TOOLS AND TECHIQUESTOOLS AND TECHIQUES 1. Make-or-buy analysis When the decision is made to complete a project, the company also makes a decision about doing the work themselves or outsourcing some or all of the work. The costs involved in managing the procurement should be considered. The direct costs of the product should be considered. The cost savings of purchasing a product or service may be outweighed by theThe cost savings of purchasing a product or service may be outweighed by the cost of managing the procurement. One of the main reasons to "buy" is to DECREASE risk to the project's constraints. It is better to "make" if: You have an idle plant or workforce. You want to retain control. The work involves proprietary information or procedures. PROJECT PROCUREMENT MANAGEMENT February 2016
  22. 22. TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES Total Cost “in house” $ Price of Contractor Example of work Fixed Cost Variable Cost 225 310 Quantity100 PROJECT PROCUREMENT MANAGEMENT February 2016
  23. 23. TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES (Operation) Total Cost “of equipment” $ Cost of rent equipment 1.5 M Example of resource equipment (Asset) 1.5 M Quantity100,000 PROJECT PROCUREMENT MANAGEMENT February 2016
  24. 24. TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES Break-even analysis has other applications including the make-versus-buy decision, and the lease-versus-rent decision. As an example of the lease-versus-rent decision, consider an organization that needs to a piece of construction equipment for its projects. The equipment can be rented for $1,000 per day. Alternately it can be leased for an initial one-time cost of $10,000 plus $600 per day for the duration of the lease. Using break-even analysis, we obtain: 1,000 X = 10,000 + 600 X 10,000 - 600 X = 10,00010,000 - 600 X = 10,000 400 X = 10,000 X = 10,000 / 400 X = 25 days Thus, if the piece of equipment is needed for less than 25 days, it would be more economical to rent it. If it is needed for more than 25 days, it would be more economical to lease it. If it is needed for exactly 25 days, either renting or leasing would have the same cost. PROJECT PROCUREMENT MANAGEMENT February 2016
  25. 25. TOOLS AND TECHIQUESTOOLS AND TECHIQUES 2. Expert judgment Expert technical judgment will often be used to assess the inputs to and outputs from this process. Expert purchasing judgment can also be used to develop or modify the criteria that will be used to evaluate seller proposals. Expert legal judgment may involve the services of legal staff to assist with unique procurement issues, terms, and conditions. Such judgment, including business and technical expertise, can be applied to both the technical details of the acquired products, services, or results and to various aspects of the procurement management processes. PROJECT PROCUREMENT MANAGEMENT February 2016
  26. 26. TOOLS AND TECHIQUESTOOLS AND TECHIQUES 3. Market research Market research includes examination of industry and specific vendor capabilities. Procurement teams may leverage information gained at conferences, online reviews and a variety of sources to identify market capabilities. The team may also refine particular procurement objectives to leverage maturing technologies while balancing risks associated with the breadth of vendors who can provide the materials or services desired.provide the materials or services desired. 4. Meetings Additional information interchange meetings with potential bidders. By collaborating with potential bidders, the organization purchasing the material or service may benefit while the supplier can influence a mutually beneficial approach or product. PROJECT PROCUREMENT MANAGEMENT February 2016
  27. 27. 1. Procurement management plan This plan will describe how the procurement process will be planned, executed, controlled, and closed. A procurement management plan can be formal or informal, can be highly detailed or broadly framed, and is based upon the needs of each project. 2. Procurement statements of work OUTPUTSOUTPUTS The Statement of Work (SOW) for each procurement is developed from the project scope baseline and defines only that portion of the project scope that is to be included within the related contract. The work to be done on each procurement. It must describe all the work and activities the seller is required to complete. It must be as clear, complete, and concise as possible. Information included in a SOW can include specifications, quantity desired, quality levels, performance data, period of performance, work location, and other requirements. PROJECT PROCUREMENT MANAGEMENT February 2016
  28. 28. Types of Procurement Statements of Work 1. Performance: This type conveys what the final product should be able to accomplish, rather than how it should be built or what its design characteristics should be (e.g., "I want a car that will go zero to 120 kilometers per hour in 4.2 seconds"). OUTPUTSOUTPUTS 2. Functional: This type conveys the end purpose or result, rather than specific procedures, etc. It is to be used in the performance of the work and may also include a statement of the minimum essential characteristics of the product (e.g., "I want a car with 23 cup holders" [OK, why can't I try to be funny?]). 3. Design: This type conveys precisely what work is to be done (e.g., "Build it exactly as shown on these drawings"). PROJECT PROCUREMENT MANAGEMENT February 2016
  29. 29. 3. Procurement documents Once the contract type is selected and the procurement statement of work has been created, the buyer can put together the procurement document, which describes their needs to sellers. 4. Source selection criteria Source selection criteria are included in the procurement documents to give the seller an understanding of the buyer’s needs and to help the seller decide whether to bid or make a proposal on the work. OUTPUTSOUTPUTS or make a proposal on the work. When the buyer receives the sellers' responses during the Conduct Procurements process, source selection criteria become the basis by which the buyer evaluates the bids or proposals. Understanding of need. Overall or life-cycle cost. Technical capability. Risk. Management approach. Technical approach. Warranty. Financial capacity. Production capacity and interest. Business size and type. Past performance of sellers. References. Intellectual property rights. Proprietary rights PROJECT PROCUREMENT MANAGEMENT February 2016
  30. 30. 5. Make-or-buy decisions The conclusions reached regarding what project products, services, or results will be acquired from outside the project organization, or will be performed internally by the project team. This may also include decisions to require insurance policies or performance bond contracts to address some of the identified risks. The make-or-buy decisions OUTPUTSOUTPUTS document can be as simple as a listing that includes a short justification for the decisions. These decisions can be altered as subsequent procurement activities indicate a requirement for a different approach. 6. Change requests Change requests are processed for review and disposition through the Perform Integrated Change Control process. PROJECT PROCUREMENT MANAGEMENT February 2016
  31. 31. The different types of procurement documents 1. Request for Proposal (RFP, sometimes called Request for Tender): A detailed proposal on how the work will be accomplished, who will do it, resumes, company experience, price, etc. 2. Invitation for Bid (IFB, or Request for Bid, RFB): It usually just request a total price to do all the work. OUTPUTSOUTPUTS YOU SHOULD KNOW price to do all the work. 3. Request for Quotation (RFQ): A price quote per item, hour, meter, or other unit of measure. 4. Request for Information (RFI): Used to get or collect information. RFI might be used before procurement documents are created. The information received could help identify qualified companies to send an RFP or IFB to. An RFI could also be used to collect information on what work is possible for later inclusion in a RFP or IFB. So in reality it is NOT part of procurement documents as consider by PMBOK. PROJECT PROCUREMENT MANAGEMENT February 2016
  32. 32. OUTPUTSOUTPUTS Letter of intent Getting through contract negotiations and getting final contract signatures can take time. In some instances, the seller may need to start hiring people or ordering equipment and materials before the contract is signed in order to meet the contract requirements. YOU SHOULD KNOW requirements. If the contract is not signed in time, the seller may ask the buyer to provide a letter of intent. A letter of intent is NOT a contract, but simply a letter, without legal binding, that says the buyer intends to hire the seller. It is intended to give the seller confidence that the contract will be signed soon and to make them comfortable with taking the risk of ordering the equipment or hiring the staff that will eventually be needed. PROJECT PROCUREMENT MANAGEMENT February 2016
  33. 33. OUTPUTSOUTPUTS Contracts require formality. All product and project management requirements for the procurement work should be specifically stated in the contract. If it is not in the contract, it can only be done if a formal change order to the contract is issued. If it is in the contract, it must be done or a formal change order must be approved YOU SHOULD KNOW If it is in the contract, it must be done or a formal change order must be approved by both parties. Changes must be submitted and approved in writing. Contracts are legally binding; the seller has no choice but to perform as agreed in the contract. Contracts should help diminish project risk. Most governments back all contracts that fall within their jurisdiction by providing a court system for dispute resolution. PROJECT PROCUREMENT MANAGEMENT February 2016
  34. 34. OUTPUTSOUTPUTS Price: This is the amount the seller charges the buyer. Profit (fee): This is planned into the price the seller provides the buyer. Sellers usually have an acceptable profit margin in mind. However, how much profit they actually receive is based on many factors, including the contract terms and the seller's ability to manage the project. OTHER TERMS TO KNOW the seller's ability to manage the project. Cost This is how much an item costs the seller to create, develop, or purchase. A buyer's costs can be a seller's revenue (and profits) Target price: This term is often used to compare the end result of the project with what was expected (the target price). Target price is a measure of success. Target cost + Target Fee = Target Price. PROJECT PROCUREMENT MANAGEMENT February 2016
  35. 35. OUTPUTSOUTPUTS Sharing ratio: Incentives take the form of a formula, usually expressed as a ratio, e.g., 90/10. This sharing ratio describes how the cost savings or cost overrun will be shared with the buyer, the first number being the amount the buyer will keep and the second number being the amount the seller will keep (buyer/seller). Ceiling price: This is the highest price the buyer will pay.This is the highest price the buyer will pay. Point of Total Assumption (PTA)' This only applies to fixed price incentive fee contracts and refers to the amount above which the seller bears all the loss of a cost overrun, Costs that go above the PTA are assumed to be due to mismanagement. Sellers will sometimes monitor their actual costs against the PTA to make sure they are still receiving a profit for completing the project. Formula: PTA = ((Ceiling price - Target price)/Buyer's share ratio) + Target cost. PROJECT PROCUREMENT MANAGEMENT February 2016
  36. 36. Inputs Tools and Techniques Outputs 1. Procurement management 1. Bidder conferences 1. Selected sellers Conduct Procurements “The process of obtaining seller responses, selecting a seller, and awarding a contract.” plan 2. Procurement documents 3. Source selection criteria 4. Seller proposals 5. Project documents 6. Make-or-buy decisions 7. Procurement statement of work 8. Organizational process assets 2. Proposal evaluation techniques 3. Independent estimates 4. Expert judgment 5. Advertising 6. Analytical techniques 7. Procurement negotiations 2. Agreements 3. Resource calendars 4. Change requests 5. Project management plan updates 6. Project document updates PROJECT PROCUREMENT MANAGEMENT February 2016
  37. 37. INPUTSINPUTS 1. Procurement management plan Describes how the procurement processes will be managed from developing procurement documentation through contract closure. 2. Procurement documents Provide an audit trail for contracts and other agreements.Provide an audit trail for contracts and other agreements. 3. Source selection criteria Source selection criteria can include information on the supplier’s required capabilities, capacity, delivery dates, product cost, life-cycle cost, technical expertise, and the approach to the contract. PROJECT PROCUREMENT MANAGEMENT February 2016
  38. 38. INPUTSINPUTS 4. Seller proposals (Price quote or Bid) A proposal is a seller's response to the procurement documents. A proposal is usually the response to a request for proposal (RFP), a price quote is usually the response to a request for quote (RFQ), and a bid is usually the response to an invitation for bid (IFB). The proposal (or price quote or bid) represents an official offer from the seller. 5. Project documents5. Project documents Risk register. Risk-related contract decisions. 6. Make-or-buy decisions Organizations procuring goods or services analyze the need, identify resources, and then compare procurement strategies when deciding to buy. Organizations also evaluate the need of buying products versus making the items themselves. PROJECT PROCUREMENT MANAGEMENT February 2016
  39. 39. INPUTSINPUTS 7. Procurement statement of work The procurement statement of work provides suppliers with a clearly stated set of goals, requirements, and outcomes from which they can provide a quantifiable response. The statement of work is a critical component of the procurement process and can be modified as needed through this process until a final agreement is in place. 8. Organizational process assets Listings of prospective and previously qualified sellers, and Information on relevant past experience with sellers, both good and bad. PROJECT PROCUREMENT MANAGEMENT February 2016
  40. 40. 1. Bidder conferences Once the prospective sellers have been identified and have received the procurement documents, the buyer controls who can talk to the sellers and what can be said. This control allows the buyer to maintain the integrity of the procurement process and to make sure all sellers are bidding or proposing on the same work. To make sure all the sellers' questions are answered, the buyer may invite the sellers to attend a meeting in which they can tour the buyer's facilities (if relevant to the TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES to attend a meeting in which they can tour the buyer's facilities (if relevant to the project) and ask questions about the procurement. The questions and answers are documented and sent to all prospective bidders to make sure they all have the same information. The questions and answers asked during the bidder conference are also added to the procurement documents as addenda. The bidder conference is also an opportunity for the buyer to discover anything missing in the procurement documents. PROJECT PROCUREMENT MANAGEMENT February 2016
  41. 41. A bidder conference can be the key to making sure the pricing in the seller's response matches the work that needs to be done and is, therefore, the lowest price. Bidder conferences benefit both the buyer and seller. Things the project manager must watch out for in a bidder conference: TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES Things the project manager must watch out for in a bidder conference: Collusion Sellers not asking questions in front of the competition Making sure all questions and answers are put in writing and issued to all potential sellers by the buyer as addenda to the procurement documents; this ensures that all sellers are responding to the same procurement statement of work PROJECT PROCUREMENT MANAGEMENT February 2016
  42. 42. 2. Proposal evaluation techniques The buyer (represented by an evaluation committee) uses the source selection criteria identified in the Plan Procurements process to assess the potential sellers' ability and willingness to provide the requested products or services. The criteria are measurable; therefore, they provide a basis to quantitatively evaluate proposals and minimize the influence of personal prejudices. The buyer may ask a seller to make a presentation and then, if all goes well, move TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES The buyer may ask a seller to make a presentation and then, if all goes well, move on to negotiations. The buyer may narrow down ("short-list") the list of sellers to a few. The buyer may ask the short-listed sellers to make presentations, and then ask the selected seller to go on to negotiations. The buyer can negotiate with more than one seller. The buyer can use some combination of presentations and negotiations. The choice of methods depends on the importance of the procurement, the number of interested sellers and the type of work to be performed. PROJECT PROCUREMENT MANAGEMENT February 2016
  43. 43. The sellers proposals are usually reviewed, compared, or selected by the evaluation committee using one or a combination of the following formal, structured processes: Weighting System: This allows the buyer's evaluation committee to select a seller by weighting the source selection criteria according to the evaluation criteria. You can then compare sellers to choose the one who best meets your criteria. TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES PROJECT PROCUREMENT MANAGEMENT February 2016
  44. 44. Screening System A screening system eliminates sellers who do not meet the minimum requirements of the source selection criteria. Past Performance History The buyer may consider their past history with the prospective sellers in determining which seller to award the procurement to TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES Presentation: Some of the sellers will be asked to make presentations of their proposals to the buyer so the buyer can select the most appropriate seller. This is often a formal meeting of the buyer's and seller's teams. It provides the seller with an opportunity to present their proposal, team, and approach to completing the work. PROJECT PROCUREMENT MANAGEMENT February 2016
  45. 45. 3. Independent estimates For many procurement items, the procuring organization may elect to either prepare its own independent estimate, or have an estimate of costs prepared by an outside professional estimator, to serve as a benchmark on proposed responses. Significant differences in cost estimates can be an indication that the procurement statement of work was deficient, ambiguous, and/ or that the prospective sellers either misunderstood or failed to respond fully to the procurement statement of TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES either misunderstood or failed to respond fully to the procurement statement of work. 4. Expert judgment Expert judgment may be used in evaluating seller proposals. The evaluation of proposals may be accomplished by a multi-discipline review team with expertise in each of the areas covered by the procurement documents and proposed contract. This can include expertise from functional disciplines such as contracting, legal, finance, accounting, engineering, design, research, development, sales, and manufacturing. PROJECT PROCUREMENT MANAGEMENT February 2016
  46. 46. 5. Advertising To attract sellers, an advertisement may be placed in newspapers, in magazines, on the Internet, or in other types of media. NOTE: The U.S. government is required to advertise most of its procurements. 6. Analytical techniques TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES Analytical techniques can help organizations identify the readiness of a vendor to provide the desired end state, determine the cost expected to support budgeting, and avoid cost overruns due to changes. By examining past performance information, teams may identify areas that may have more risk and that need to be monitored closely to ensure success of the project. PROJECT PROCUREMENT MANAGEMENT February 2016
  47. 47. 7. Procurement negotiations Negotiation is a strategy of conferring with parties of shared or opposed interests with a view to compromise or reach an agreement. The objectives of negotiation: Obtain a fair and reasonable price. Develop a good relationship with the seller. Main items to Negotiate 1. Scope TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES 1. Scope 2. Schedule 3. Price Others: 1. Responsibilities 2. Authority 3. Applicable law-If you are working with a seller from a different state, country, or region, you need to agree upon whose law will apply to the contract. 4. Project management process to be used 5. Payments schedule PROJECT PROCUREMENT MANAGEMENT February 2016
  48. 48. 1. Selected sellers The sellers selected are those sellers who have been judged to be in a competitive range based upon the outcome of the proposal or bid evaluation, and who have negotiated a draft contract that will become the actual contract when an award is made. Final approval of all complex, high-value, high risk procurements will generally require organizational senior management approval prior to award. OUTPUTSOUTPUTS 2. Agreements A procurement agreement includes terms and conditions, and may incorporate other items that the buyer specifies regarding what the seller is to perform or provide. An agreement can also be called an understanding, a contract, a subcontract, or a purchase order. PROJECT PROCUREMENT MANAGEMENT February 2016
  49. 49. Contract: a 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. A contract is a legal relationship subject to remedy in the courts. The major components in a contract document will vary, but will sometimes include the following: Statement of work or deliverables, OUTPUTSOUTPUTS Limitation of liability,Statement of work or deliverables, Schedule baseline, Performance reporting, Period of performance, Roles and responsibilities, Seller’s place of performance, Pricing, Payment terms, Place of delivery, Inspection and acceptance criteria, Warranty, Product support, Limitation of liability, Fees , Penalties, Incentives, Insurance and performance bonds, Subordinate subcontractor approvals, Change request handling, and Termination and alternative dispute resolution (ADR) mechanisms. The ADR method can be decided in advance as a part of the procurement award. PROJECT PROCUREMENT MANAGEMENT February 2016
  50. 50. Term and conditions in Contract: Acceptance Agent Arbitration Assignment Authority Payment and performance Bonds OTHER TERMS TO KNOW Invoicing Liquidated damages Management requirements Material breach Notice Ownership Payments TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES Payment and performance Bonds Breach/Default Confidentiality Dispute resolution Force majeure Incentives Indemnification (Liability): Independent contractor Inspection Intellectual properly Payments Procurement statement of work. Reporting Retainage Risk of loss Site access Termination Waivers Warranties Work for hire PROJECT PROCUREMENT MANAGEMENT February 2016
  51. 51. What Do You Need to Have a Legal Contract? An offer Acceptance Consideration (Something of value, not necessarily money) Legal capacity (Separate legal parties, competent parties) Legal purpose (You cannot have a contract for the sale of illegal goods or services) A contract, offer, or acceptance may be verbal or written, though written is preferred. OUTPUTSOUTPUTS A contract, offer, or acceptance may be verbal or written, though written is preferred. 3. Resource calendars The quantity and availability of contracted resources and those dates on which each specific resource can be active or idle are documented. 4. Change requests Change requests to the project management plan, its subsidiary plans, and other components are processed for review and disposition through the Perform Integrated Change Control process. PROJECT PROCUREMENT MANAGEMENT February 2016
  52. 52. 5. Project management plan updates Cost baseline, Scope baseline, Schedule baseline, and Procurement management plan. OUTPUTSOUTPUTS 6. Project document updates Requirements documentation, Requirements traceability documentation, and Risk register. PROJECT PROCUREMENT MANAGEMENT February 2016
  53. 53. Inputs Tools and Techniques Outputs 1. Project management plan 1. Contract change control 1. Work performance Control Procurements “The process of managing procurement relationships, monitoring contract performance, and making changes and corrections as needed” 1. Project management plan 2. Procurement documents 3. Agreements 4. Approved change requests 5. Work performance reports 6. Work performance data 1. Contract change control system 2. Procurement performance reviews 3. Inspections and audits 4. Performance reporting 5. Payment systems 6. Claims administration 7. Records management system 1. Work performance information 2. Change requests 3. Project management plan updates 4. Project documents updates 5. Organizational process assets updates PROJECT PROCUREMENT MANAGEMENT February 2016
  54. 54. INPUTSINPUTS 2. Project management plan Describes how the procurement processes will be managed from developing procurement documentation through contract closure. 2. Procurement documents Procurement documents contain complete supporting records for administration of the procurement processes. This includes procurement contract awards and the statement of work.This includes procurement contract awards and the statement of work. 3. Agreements Agreements are understandings between parties, including understanding of the duties of each party. PROJECT PROCUREMENT MANAGEMENT February 2016
  55. 55. INPUTSINPUTS 4. Approved change requests Approved change requests can include modifications to the terms and conditions of the contract including the procurement statement of work, pricing, and description of the products, services, or results to be provided. All changes are formally documented in writing and approved before being implemented. 3. Work performance reports3. Work performance reports Seller-developed technical documentation and other deliverable information provided in accordance with the terms of the contract, and seller performance reports. The seller’s performance reports indicate which deliverables have been completed and which have not. 6. Work performance data Work performance data including the extent to which quality standards are being satisfied, what costs have been incurred or committed, and which seller invoices have been paid, are all collected as part of project execution. PROJECT PROCUREMENT MANAGEMENT February 2016
  56. 56. 1. Contract change control system A contract change control system defines the process by which the procurement can be modified. It includes the paperwork, tracking systems, dispute resolution procedures, and approval levels necessary for authorizing changes. These procedures must be followed, and all changes should be made formally. The contract change control system is integrated with the integrated change TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES The contract change control system is integrated with the integrated change control system. 2. Procurement performance reviews A procurement performance review is a structured review of the seller’s progress to deliver project scope and quality, within cost and on schedule, as compared to the contract. It can include a review of seller-prepared documentation and buyer inspections, as well as quality audits conducted during seller’s execution of the work. PROJECT PROCUREMENT MANAGEMENT February 2016
  57. 57. The objective of a performance review is to identify performance successes or failures, progress with respect to the procurement statement of work, and contract non-compliance, which allow the buyer to quantify the seller’s demonstrated ability or inability to perform work. Such reviews may take place as a part of project status reviews which would include key suppliers. TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES 3. Inspections and audits Inspections and audits required by the buyer and supported by the seller as specified in the procurement contract can be conducted during execution of the project to verify compliance in the seller’s work processes or deliverables. If authorized by contract, some inspection and audit teams can include buyer procurement personnel. PROJECT PROCUREMENT MANAGEMENT February 2016
  58. 58. 4. Performance reporting Performance reporting provides management with information about how effectively the seller is achieving the contractual objectives. 5. Payment systems TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES 5. Payment systems Payments to the seller are typically processed by the accounts payable system of the buyer after certification of satisfactory work by an authorized person on the project team. All payments should be made and documented in strict accordance with the terms of the contract. PROJECT PROCUREMENT MANAGEMENT February 2016
  59. 59. 6. Claims administration A claim is an assertion that the buyer did something that has hurt the seller and the seller is asking for compensation. Another way of looking at claims is that they are a form of seller change requests. Claims can get nasty. Imagine a seller that is not making as much profit as they had hoped, issuing claims for every action taken by the buyer. TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES for every action taken by the buyer. Imagine the number of claims that could arise if you were working with a fixed price contract and an incomplete procurement statement of work. Claims are usually addressed through the contract change control system. The BEST way to settle them is through negotiation or the use of the dispute resolution process specified in the contract. Many claims are not resolved until after the work is completed. PROJECT PROCUREMENT MANAGEMENT February 2016
  60. 60. Claims Categorize TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES Contractual Claims Extra- Contractual Claims Ex gratia Claims Have a basis in the contract itself where provision can be quoted giving rise to entitlement These claims have no basis in the contract but entitlement stems from the governing law Ex gratia (“Out of Kindness”) claims are those where a contractor is seeking something more 7. Records management system A records management system is used by the project manager to manage contract and procurement documentation and records. It consists of a specific set of processes, related control functions, and automation tools that are consolidated and combined as part of the project management information system . The system contains a retrievable archive of contract documents and correspondence. entitlement governing law seeking something more tangible than sympathy. PROJECT PROCUREMENT MANAGEMENT February 2016
  61. 61. TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES NO Time extension & LD’s Time Extension & Cost & NO LD’s Case A: Case B: Contractor Delay Employer Delay Contractor Delay Employer Delay Others Evaluation of Delay Claim LD’s Time Extension only due delays out of parties control Time Extension & Cost For Employer’s delays portion only Case C: Case D: Employer Delay Others Contractor Delay Employer Delay Others Contractor Delay Employer Delay Others PROJECT PROCUREMENT MANAGEMENT February 2016
  62. 62. 1. Work performance information Work performance information provides a basis for identification of current or potential problems to support later claims or new procurements. By reporting on the performance of a vendor, the organization increases knowledge of the performance of the procurement, which supports improved forecasting, risk management, and decision making. Performance reports also assist in the event there is a dispute with the vendor. OUTPUTSOUTPUTS Performance reports also assist in the event there is a dispute with the vendor. Work performance information includes reporting compliance of contracts, which provides procuring organizations a mechanism to track specific deliverables expected and received from vendors. Contract compliance reports support improved communications with vendors so that potential issues are addressed promptly to the satisfaction of all parties. PROJECT PROCUREMENT MANAGEMENT February 2016
  63. 63. 2. Change requests Change requests to the project management plan, its subsidiary plans and other components, such as the cost baseline, project schedule and procurement management plan may result from the Administer Procurements process. Requested but unresolved changes can include direction provided by the buyer, or actions taken by the seller, that the other party considers a constructive change to the contract. OUTPUTSOUTPUTS the contract. Since any of these constructive changes may be disputed by one party and can lead to a claim against the other party, such changes are uniquely identified and documented by project correspondence. 3. Project management plan updates Procurement management plan. Baseline schedule. PROJECT PROCUREMENT MANAGEMENT February 2016
  64. 64. 4. Project documents updates Project documents that may be updated include procurement documentation that include: The procurement contract with all supporting schedules, Requested unapproved contract changes. Approved change requests. Procurement documentation also includes any seller-developed technical OUTPUTSOUTPUTS Procurement documentation also includes any seller-developed technical documentation and other work performance information such as deliverables, seller performance reports, warranties, financial documents including invoices and payment records, and the results of contract-related inspections. 5. Organizational process assets updates Correspondence Payment schedules and requests Seller performance evaluation documentation PROJECT PROCUREMENT MANAGEMENT February 2016
  65. 65. Inputs Tools and Techniques Outputs 1. Project management plan 2. Procurement documents 1. Procurement audits 2. Procurement negotiations 1. Closed procurements 2. Organizational process Close Procurements “The process of completing each project procurement” 2. Procurement documents 2. Procurement negotiations 3. Records management system 2. Organizational process assets updates Procurements are closed: 1. When a contract is completed 2. When a contract is terminated before the work is completed PROJECT PROCUREMENT MANAGEMENT February 2016
  66. 66. INPUTSINPUTS 1. Project management plan The project management plan contains the procurement management plan, which provides the details and guidelines for closing out procurements. 2. Procurement documents To close the contract, all procurement documentation is collected, indexed, and filed. Information on contract schedule, scope, quality, and cost performance along with all contract change documentation, payment records, and inspection results are cataloged. This information can be used for lessons learned information and as a basis for evaluating contractors for future contracts. PROJECT PROCUREMENT MANAGEMENT February 2016
  67. 67. 1. Procurement audits A procurement audit is a structured review of the procurement process originating from the Plan Procurements process through Administer Procurements. The objective of a procurement audit is to identify successes and failures that warrant recognition in the preparation or administration of other procurement contracts on the project, or on other projects within the performing organization. TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES 2. Procurement negotiations In all procurement relationships the final equitable settlement of all outstanding issues, claims, and disputes by negotiation is a primary goal. Whenever settlement cannot be achieved through direct negotiation, some form of Alternative Dispute Resolution (ADR) including mediation or arbitration may be explored. When all else fails, litigation in the courts is the least desirable option. PROJECT PROCUREMENT MANAGEMENT February 2016
  68. 68. The objectives of negotiation: Obtain a fair and reasonable price. Develop a good relationship with the seller. Main items to Negotiate 1. Scope 2. Schedule 3. Price TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES 3. Price Others: 1. Responsibilities 2. Authority 3. Applicable law-If you are working with a seller from a different state, country, or region, you need to agree upon whose law will apply to the contract. 4. Project management process to be used 5. Payments schedule PROJECT PROCUREMENT MANAGEMENT February 2016
  69. 69. Guidelines For Successful Negotiations Commitment to negotiate for mutual gain Separate the people from the problem Separate the relationship from the substance; deal directly with people problems Don’t bargain over positions Focus on interest not positions Generate options for mutual gain Use objective criteria or standard TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES Use objective criteria or standard Negotiation preparation Financial Minimal acceptable financial position given the schedule and deliverables Target financial position Maximum (opening) financial position Proposal team uses during negotiation the min, max and target as reference points Explore various positions Explore trade-offs. PROJECT PROCUREMENT MANAGEMENT February 2016
  70. 70. TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES Disputes Resolution Techniques AmicableAmicable settlementsettlement MediationMediation ConciliationConciliation DisputesDisputes Review BoardReview Board (D.R.B.)(D.R.B.) DisputesDisputes AdjudicationAdjudication Boards (Boards ( D.A.B.)D.A.B.) ArbitrationArbitration LitigationLitigation PROJECT PROCUREMENT MANAGEMENT February 2016
  71. 71. 3. Records management system A records management system is used by the project manager to manage contract and procurement documentation and records. It consists of a specific set of processes, related control functions, and automation tools that are consolidated and combined as part of the Project Management TOOLS AND TECHNIQUESTOOLS AND TECHNIQUES Information System (PMIS). The system contains a retrievable archive of contract documents and correspondence. PROJECT PROCUREMENT MANAGEMENT February 2016
  72. 72. 1. 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. Formal Acceptance and Closure Once closure is completed and the seller has received formal sign-off that the OUTPUTSOUTPUTS products of the procurement are acceptable from the buyer, the procurement is closed. Expect many questions on the exam that provide you with situations and require you to determine whether the procurement is closed. In gaining formal acceptance, the seller is also working to measure customer satisfaction. Often a formal customer satisfaction survey may be included in a seller's closure records. PROJECT PROCUREMENT MANAGEMENT February 2016
  73. 73. 2. Organizational process assets updates Procurement file: A complete set of indexed contract documentation, including the closed contract, is prepared for inclusion with the final project files. Deliverable acceptance: The buyer, usually through its authorized procurement administrator, provides the seller with formal written notice that the deliverables have OUTPUTSOUTPUTS been accepted or rejected. Requirements for formal deliverable acceptance, and how to address non-conforming deliverables, are usually defined in the contract. Lessons learned documentation: Lessons learned, what has been experienced, and process improvement recommendations should be developed for the project file to improve future procurements. PROJECT PROCUREMENT MANAGEMENT February 2016
  74. 74. Refreshments Q1: 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. Q2: 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. PROJECT PROCUREMENT MANAGEMENT February 2016
  75. 75. Refreshments Q3: A seller is working on a cost reimbursable contract when the buyer decides he would like to expand the scope of services and change to a fixed price (FP) contract. All of the following are the seller's options EXCEPT: A. Completing the original work on a cost reimbursable basis and then negotiating a fixed price for the additional work. B. Completing the original work and rejecting the additional work.B. Completing the original work and rejecting the additional work. C. Negotiating a fixed price contract that includes all the work. D. Starting over with a new contract. PROJECT PROCUREMENT MANAGEMENT February 2016
  76. 76. Refreshments Q4: The sponsor is worried about the seller deriving extra profit on the cost plus fixed fee (CPFF) contract. Each month he requires the project manager to submit CPI calculations and an analysis of the cost to complete. The project manager explains to the sponsor that extra profits should NOT be a worry on this project because: A. The team is making sure the seller does not cut scope. B. All costs invoiced are being audited.B. All costs invoiced are being audited. C. There can only be a maximum 10 percent increase if there is an unexpected cost overrun. D. The fee is only received by the seller when the project is completed. PROJECT PROCUREMENT MANAGEMENT February 2016
  77. 77. Refreshments Q5: During project executing, your project team member delivers a project deliverable to the buyer. However, the buyer refuses the deliverable, stating that it does not meet the requirement on page 300 of the technical specifications. You review the document and find that you agree. What is the BEST thing to do? A. Explain that the contract is wrong and should be changed. B. Issue a change order.B. Issue a change order. C. Review the requirements and meet with the responsible team member to review the WBS dictionary. D. Call a meeting of the team to review the requirement on page 300. PROJECT PROCUREMENT MANAGEMENT February 2016
  78. 78. THANK YOU PROJECT PROCUREMENT MANAGEMENT February 2016

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