PMP Chap 12 - Project Procurement Management Details - Part 1

By: Anand Bobade (nmbobade@gmail.com) All rights reserved, 2015By: Anand Bobade (nmbobade@gmail.com)
PMBOK Chap 12 – Project Procurement Management
The processes necessary to purchase or acquire product, services, or results needed from
outside the project team.
Initiating Planning Executing Monitoring &
Controlling
Closing
Plan Procurement
Management
Conduct Procurement Control Procurement Close Procurement
We cannot solve our problems with the same thinking we used when we created
them.
- Albert Einstein
Detailed
Part-1

By: Anand Bobade (nmbobade@gmail.com) All rights reserved, 2015
Learning Objectives - Project Procurement Management
Introduction
Project Procurement management definition
What is Contract ?
Contract types?
Contact price calculations examples
PTA (Point of total assumption) calculations example.
Procurement Management Processes overview
Procurement Management Processes in detail
Review of procurement management knowledge area
Self Assessment
P1 P2 P3 P4
L : Lesson

Simple
Complex
Seller:
Provide something of value
Buyer:
Provide monetary or other
valuable compensation.
Project Procurement Management-> Introduction
Which Hat you are wearing?
Buyer Seller

Project Procurement Management -> Why Procure?
Organization don’t have expertise to carry out the work.
Organization don’t have capability to do the work on
your own.
Lack of Human resource availability.
Procurement may result in significant saving due to
huge discount by seller.

Project Procurement Management -> Definition
Other Organizations
Outside the Project team
The process is necessary to purchase and acquire product or services or result from
outside the project team.
This chapter assumes that the buyer of items for the project is assigned to the project team and
that the sellers are organizations external to the project team.

Project Procurement Management-> Generic process
Planning Choosing a source Acquiring the
product or services
Administering the
contract(Contract
Manag. & Change
control)
Closing the contract
Applied to
Internal work
orders
Formal
agreements
Contracts
between
organization units
Client / customer
Contractor / Prime
contractor
Acquiring
organization
Service requester /
Purchaser
Buyer can be called as
Generic Procurement process:

Project Procurement Management -> -> What is contract?
Represents a mutually binding agreement. Obligates seller to
provide specified product, service or result. Obligates buyer to pay
for it. It provides the framework for how they will deal with each
other.
Contract is:
Legally binding document. Can be referred to Court. Refer to other documents.
Contract contain:
Scope of work
Major
deliverables
Key Milestones
Terms &
conditions
Signing
authority
Contract;
Subcontract
Memorandum of
Understanding
(MOU), Letter of
Intent (LOI)
SLA, MO Purchase order.
Agreement can be
• Contract can be called as agreement, however agreement is
not a contract.
• Agreement is broader term.
Contract Vs
Agreement:

C Project Procurement Management -> Who reviews contract?
Contract Review:
• Ensure scope is adequately described (Product, service etc.).
• Review price, contract terms & conditions, legal risks & legal language.
• Goes through extensive approval process.
•Buy: Outsourcing
•Can be based on Strategic
direction.
•To manage a risk.
•Required Cost Benefit
Analysis.
Make vs. Buy
•Cost
•Quality
•Materials availability
•Delivery (Milestones)
•Payments
Key procurement factors
•Follow the process for each
contract.
•Even smallest of project
where you acquire resources
from other dept. can be
considered as Verbal
contract.
Repeat Procurement

Procurement Manag.-> Centralized vs decentralized procurement?
Organizations Procurement policies:
• Procurement policies; Rules, Regulations & procedures.
• Vendor selection board; Negotiation team; Signing authority.
• Mandatory involvement – Contract, Legal and Procurement departments.
•Purchase/ Contracting &
Legal dept. is responsible.
•Expertize & Centralized
support.
•Standard process.
•Volume discounts.
Centralized
•Contract manager is assigned
to project.
•Less overhead
•Dedicated to Project
Decentralized

Project Procurement Management-> Centralized procurement
Advantages
• Procurement manager with
higher level of expertise.
• Contracting team may get
training, opportunity for
continuous improvement &
shared lessons learned.
• Standardized procurement
practices allows efficiency &
improve understanding.
• Clearly defined career path.
Disadvantages
• Procurement manager will work
on many projects, hence less
understanding of unique needs
of project.
• PM may ace difficulty in
obtaining Contracting help.
Centralized

Project Procurement Management-> Decentralized procurement
Advantages
• Dedicated Procurement
manager.
• PM has easier access
contracting expertise.
• Procurement manager has
more loyalty to the project.
• Procurement manager has
better understanding of the
project.
Disadvantages
• No home once the project is
completed.
• Difficult to maintain high level
of contracting expertise.
• Duplication of work &
inefficient use of procurement
resources.
• Little standardization of process
between different projects.
• No career path.
Decentralized

Project Procurement Management-> Contract Types
Represents a mutually binding agreement. Obligates seller to
provide specified product, service or result. Obligates buyer to pay
for it.
Fixed Price
Contract
Cost Reimbursable
Contract
Times & Material
Contract
•Amount seller charges buyer.Price
•This is how much cost seller incurred to create/build product.Cost
•Planned in the price, seller provides to the buyer.Profit (fee)

Project Procurement Management-> Contract Types
Fixed Price Contract (as Lump
sum or Firm Fixed price)
Cost Reimbursable Contract Times & Material Contract
Scope is well defined
Cost is estimated by buyer during proposal. Fixed Price
Additional cost is bared by seller.
Profit is not disclosed to the buyer.
Risk is on the seller.
E.g., Mostly used in Construction.
Scope is not exactly defined.
Cost can not be estimated accurately. Target cost is
agreed.
Price is paid, based on costs incurred to build product.
Profit (fees) is agreed separately.
Risk is on the buyer.
E.g., Research & development or Information
technology.
Efforts can not be defined. Scope per unit is defined.
Buyer agrees to pay per-hour/item basis.
Price is paid based on the allocation of resource not
based on work completed.
Seller has no incentive to control costs.
Risk is on buyer (medium compared to CR)
E.g., Staff augmentation in constructions or IT

Project Procurement Management-> Contract modifiers
Incentive Fee Award Fee Economic price Adjustment
Fees paid based on Performance incentive.
Performance criteria – work to be done faster, cheaper
or better.
Price calculated by Formula based on negotiated cost
& total target cost.
Can benefit seller or Buyer.
Profit share in savings (E.g., 80% buyer & 20% seller)
Similar to Incentive Fees. Award fee (bonus) paid
based on the performance.
Performance criteria – work to be done faster, cheaper
or better.
Award fee might be determined in advance or may be
apportioned based on the performance.
Sometime award fee is judged subjectively by buyer
Used in contract with long duration when there is
uncertainties about future economic conditions.
Price linked to economic indicators, Government data
etc.
Price is paid based on the allocation of resource not
based on work completed.

Contract Types -> Fixed Price (Lump Sum or Firm Fixed Price):
FFP – Firm Fixed
Price:
FPIF - Fixed Price
Incentive Fees
Contract
FP-EPA - Fixed Price
with Economic Price
Adjustment Contracts
PO (Purchase Order)
Fixed Price
Simplest type of contract, in which price is fixed.
The seller has to complete the job within an agreed amount and time.
Any cost increase due to bad performance of the seller will be the responsibility of the seller
Used in government or semi-government
Easy to float in market & evaluate
Evaluation is primarily based on a cost
No or little monitoring required by buyer
Risk is born by the seller
Cost tends to be higher.
Possible disputes between buyer & seller
Scope changes can cost more to buyer.
E.g., Contract Price = 1 Million
1

FFP – Firm Fixed
Price:
FPIF - Fixed Price
Incentive Fees
Contract
with Economic Price
PO (Purchase Order)
Fixed Price
Even though price is fixed, seller is given an additional incentive based on his performance.
Incentive lowers the risk taken by seller.
Performance criteria can be work to be done faster, cheaper or better (Cost, time etc).
E.g., Contract Price = 1 Million + Incentive Fees
For every month early project is finished, an additional 10,000 is paid to seller.
A variation is “FPIF successive target contract”. Incentive changes when first
target is reached.
2

FFP – Firm Fixed
Price:
FPIF - Fixed Price
Incentive Fees
Contract
with Economic Price
PO (Purchase Order)
Fixed Price
Used in multi year long contracts. E.g., Road construction, Rail road construction etc
Used a special provision in a clause which protects the seller from inflation.
E.g., Contract Price = 1 Million + Cost related to Economic Price adjustment
Cost increase will be allowed in year 2 for specific materials based on
commodity index.
A variation is “Fixed Price with prospective price redetermination”.
3

FFP – Firm Fixed
Price:
FPIF - Fixed Price
Incentive Fees
Contract
with Economic Price
PO (Purchase Order)
Fixed Price
This type of contract is used to buy commodities.
E.g., Buying 10 laptops or 100 printer cartridges
E.g., Contract Price = 10 X AED 5,000 = AED 50,000
4

Contract Types-> Cost Reimbursable Contract:
CPFF - Cost Plus Fixed
Fee Contracts
CPPC – Cost Plus
Percentage of Cost
(CPF-Cost Plus Fee)
CPIF - Cost Plus
Incentive Fees
Contracts
CPAF - Cost Plus
Award Fee Contracts
Seller is paid for all incurred costs plus a fixed fee (fee will not change irrespective of his performance)
The buyer bears the risk.
Used in high risk projects where sellers are not ready to bid.
E.g., Contract Price = Cost + Fixed Fee (Fee does not vary with actual cost.)
Contract Price = 1Million + 100K.
Fee may be adjusted due to change in Procurement SOW based on mutual
agreement.
Cost Reimbursable
Contract:
1
Note: Cost is
calculated
based on the
actual cost in
CRC contracts.

Fee Contracts
CPPC – Cost Plus
Percentage of Cost
(CPF-Cost Plus Fee)
CPIF - Cost Plus
Incentive Fees
Contracts
CPAF - Cost Plus
Award Fee Contracts
Seller is paid for all incurred costs plus a percentage of the cost.
Not preferred buy buyer because seller might increase the cost to earn a higher profit.
Risk is on the Buyer.
E.g., Contract Price = Cost + Fee ( calculated as % of cost)
Contract Price = 1Million + 5% of 1Million
Cost Reimbursable
Contract:
2
Note: Cost is
calculated
based on the
actual cost in
CRC contracts.

Fee Contracts
CPPC – Cost Plus
Percentage of Cost
(CPF-Cost Plus Fee)
CPIF - Cost Plus
Incentive Fees
Contracts
CPAF - Cost Plus
Award Fee Contracts
Seller is paid for all incurred costs plus incentive based on achieving certain performance.
Incentive will be calculated based upon contractually agreed formula.
Risk is on the Buyer, however it is lower than the CPFF.
E.g., Contract Price = Cost + Incentive Fee (Fee calculated based on achieving
performance criteria/target)
Contract Price = 1Million + 50K
Incentive is a motivating factor for the seller. Buyer & Seller share the
saving or overspending. (E.g., 60/40, 60% to buyer & 40% to seller)
Cost Reimbursable
Contract:
3
Note: Cost is
calculated
based on the
actual cost in
CRC contracts.

Fee Contracts
CPPC – Cost Plus
Percentage of Cost
(CPF-Cost Plus Fee)
CPIF - Cost Plus
Incentive Fees
Contracts
CPAF - Cost Plus
Award Fee Contracts
Seller is paid for all incurred costs plus award fees based on achieving certain performance.
The evaluation of performance is a subjective and only decided by buyer.
E.g., Contract Price = Cost + base fee + award Fee (Jugged by buyer)
Contract Price = 1Million + 200K + 50K
Cost Reimbursable
Contract:
4
• Incentive fee is calculated based on a formula agreed in
contract. It is an objective evaluation.
• Award fee is dependent on buyers satisfaction & is evaluated
subjectively. Award fee is not subjected to an appeal.
Difference
between
Incentive fee
& Award fee.
Note: Cost is
calculated
based on the
actual cost in
CRC contracts.

Contract Types -> Time and Material:
• Contract = $1K per day plus expenses or material cost.
• Contract = $1K per day plus material at $5 per meter.
Time and
Material:
Time and
Material:

Contract Types -> Contract related terms
• Amount seller charges buyerPrice
• This is how much item cost the seller to create.Cost
• Planned in the price, seller provides to the buyer.Profit (fee)
• Used to compare the final price (actual) with what was expected (target price).
• It is measure of success.
Target Price
• Incentive is usually expressed as ratio. E.g., 90/10 (Buyer/seller)
• Describe how cost overrun or saving will be shared
Sharing ratio
• The highest price buyer will pay.
• Used by buyer to encourage seller to control cost.
Ceiling price

Contract Types -> Sample Questions
1. CPIF (Cost Plus Incentive Fee)
•In the CPIF contract, the target cost is estimated at AED 210,000 & the fee at AED 25,000.
•After the completion of the project, buyer agreed that the cost incurred was AED 200,000.
•Since the seller cost came in lower than the estimated cost, the seller shares the saving; that is 80% to the
buyer & 20% to the seller.
•Calculate the final fee & final price.
Target Cost: 210,000
Target Fee: 25,000
Contract Price: 210,000+25,000 = 235,000
80%
(Buyer)
20%
(Seller)

Sample Questions
80%
(Buyer)
20%
(Seller)
Target Fee: 25,000
Contract Price: 210,000+25,000 = 235,000 •Target cost – Actual cost
•210,000-200,000 = 10,000
Saving:
•Saving * Seller’s share%
•10,000 X 20% = 2,000
Seller share
•Target Fee + Seller share
•25,000 + 2,000 = 27,000
Final Fees:
•Actual cost + Final Fees
•200,000 + 27,000 = 227,000
Final Price:
Since Actual cost is less that
target cost, there is saving.
Actual cost is lower than the target cost,
hence the seller receives more fees.

Sample Questions
FPIF (Fixed Price Incentive Fee) – Sellers point of view
• In the FPIF contract, the target cost is estimated at AED 150,000 & the target fee at AED 30,000. After the completion of the
project, buyer agreed that the cost incurred was AED 210,000.
• Since the seller cost came in higher than the estimated cost, the seller shares the added cost; that is 60% to the buyer & 40% to
the seller. The ceiling price is AED 200,000.
• Calculate the final fee & final price, and Point of total assumption.
Target Fee: 30,000
Contract Price: 150,000+30,000 = 180,000
60%
(Buyer)
40%
(Seller)

Sample Questions
60%
(Buyer)
40%
(Seller)
Target Fee: 30,000
Contract Price: 150,000+30,000 = 180,000
Since Actual cost is
more that target
cost, there is
overspending.
•Target cost – Actual cost
•150,000-210,000 = - 60,000
Overspending:
•Overspending * Seller’s
share%
•- 60,000 X 40% = - 24,000
Seller share
•35,000 + (- 24,000) = 6,000
Final Fees:
•210,000 + 6,000 = 216,000
Final Price:
•216K is greater than Ceiling
price.
•200,000
Final Price:
Actual cost is very high than target cost, hence seller
receives no fees & incur losses due to ceiling price.

Sample Questions
PTA (Point of Total assumption):
• Amount above which seller bears all the cost of overrun.
• Only refers to Fixed price incentive fees contracts.
• Cost that goes above PTA assumed to be because of mismanagement.
• Seller PM will some time monitor its actual cost against PTA.
PTA = [(200,000 – 180,000)/60%] +150,000
PTA = (20,000/0.6)+150,000
PTA = 33,333+150,000
PTA = 183,333
(Celling price – Target price )
Buyers share ratio
+ Target CostPTA =
Target Cost:
150,000
Target Fee:
30,000
Target Price =
180,000
Celling Price =
200,000

Sample Questions
Target Cost: 60,000
Target Fee: 15,000
Target Price: 75,000
Ceiling Price: 100,000
Buyer-Seller Share Ratio: 60:40
Q1) What is the PTA?
PTA = (100,000 - 75,000) / 0.6 + 60,000
= 25,000 / 0.6 + 60,000
= 41,666 + 60,000 = 101,666
Q2) How much does buyer pay when actual cost reaches PTA?
Cost overrun = 101,666 - 60,000 = 41,666
Buyer share ratio (BSR) = 60% or 0.6
Buyer's share of cost overrun = Cost overrun x BSR = 41,666 * 0.6 =
25,000
Amount buyer pays at PTA = Target Price + Buyer's share of cost
overrun
= 75,000 + 25,000 = 100,000 (= Ceiling Price)
Q3) How much profit/loss does the seller make when actual cost
reaches PTA?
The amount seller spent (actual cost) = 101,666
The amount seller received = the amount buyer pays = 100,000
So, the amount seller makes = 100,000 - 101,666
= - 1,666 (net loss).
So, in this case, seller is already in losses when the cost reaches PTA.

Sample Questions
Target Cost: 60,000
Target Fee: 15,000
Target Price: 75,000
Ceiling Price: 80,000
Buyer-Seller Share Ratio: 60:40
Q1) What is the PTA?
PTA = (80,000 - 75,000) / 0.6 + 60,000
= 5,000 / 0.6 + 60,000
= 8,333 + 60,000 = 68,333
Q2) How much does buyer pay when actual cost reaches PTA?
Cost overrun = 68,333 - 60,000 = 8,333
Buyer share ratio (BSR) = 60% or 0.6
Buyer's share of cost overrun = Cost overrun x BSR = 8,333 * 0.6 =
5,000
Amount buyer pays at PTA = Target Price + Buyer's share of cost
overrun
= 75,000 + 5,000 = 80,000 (= Ceiling Price)
Q3) How much profit/loss does the seller make when actual cost
reaches PTA?
The amount seller spent (actual cost) = 68,333
The amount seller received = the amount buyer pays = 80,000
So, the amount seller makes = 80,000 - 68,333
= 11,666 (net profit).
So, in this case, seller is making some profit even when the actual cost
reaches PTA.
Lets modify
some
contractual
terms

PTA – Key points
PTA can be more than the Ceiling Price.
At or above PTA, buyer pays the Ceiling Price.
At or above PTA, the contract price is fixed, and is equal to the Ceiling Price.
At PTA, Buyer-Seller share ratio becomes 0:100.
At PTA, a Fixed Price Incentive Fee (FPIF) contract becomes a Firm Fixed Price (FFP) contract.
PTA doesn't mean point of zero profit for the seller. At PTA, seller may be making profit or loss,
or no profit and no loss.
Beyond PTA, all costs on the project are completely borne by the seller.
Seller is usually more concerned about the PTA.

Sample Questions
FPIF (Fixed Price Incentive Fee) – Sellers view
•In the FPIF contract, the target cost is estimated at AED 9,000,000 & the target fee at AED 850,000.
•After the completion of the project, buyer agreed that the cost incurred was AED 8,000,000.
•Since the seller cost came in lower than the estimated cost, the seller shares the saving; that is 70% to the
buyer & 30% to the seller.
•Calculate the final fee & final price.
Target Cost: 9,000,000
Target Fee: 850,000
Contract Price: 9,000,000 + 850,000 = 9,850,000

Sample Questions
Target Cost: 9,000,000
Target Fee: 850,000
Contract Price: 9,000,000 + 850,000 = 9,850,000
•Target cost – Actual cost
•9,000,000-8,000,000 = 1,000,000
Saving:
•Saving * Seller’s share%
•1,000,000 X 30% = 300,000
Seller share
•850,000 + 300,000 = 1,150,000
Final Fees:
•8,000,000 + 1,150,000 = 9,150,000
Final Price:

Contract -> Buyer vs Seller interest
Buyer
• Best Price
• Best Product / Service / End result
• Less Risk
Seller
• Best Profit
• Highest quality of Product / Service
& end result at lowest cost
• Less Risk

Contract -> Buyer vs Seller Risks
FP or FFP
FP-IF
FP-EPA
CP-FF
CP-IF
FP-AF
T&M
Fixed Price or Firm Fixed Price
Fixed Price Incentive Fees Contract
Fixed Price with Economic Price Adjustment
Cost Plus Fixed Fees Contracts
Cost Plus Incentive Fees Contracts
Fixed Price Award Fee Contracts
Time & Material
Seller
Seller
Seller
Buyer
Buyer
Seller
Abbreviation Term Risk to
CP-AF Cost Plus Award Fee Contracts Buyer

Fixed Price
Advantages
• Less work for Buyer to
manage.
• Seller has strong incentive to
control cost.
• Companies has experience &
have good understanding of
scope.
• Buyer knows total price.
Disadvantages
• Seller may charge more on
change orders.
• Seller may try not to complete
some work if they begin to
lose money.
• More work for buyer to write
detailed procurement SOW.
• Can be more expensive if
scope is unclear to
compensate increased risk.

Cost Reimbursable
Contract:
Advantages
• Simpler procurement
SOW.
• Less work to define
procurement SOW
compared to FP contract.
• Less costly than FP as
seller does not have to
add as much for risk.
Disadvantages
• Requires auditing sellers
invoices.
• More work for buyer to
manage.
• Seller has moderate
incentive to control costs.
• The total price is
unknown.

Contract Types -> Time and Material:
Time and
Material:
Advantages
• Very quick to create.
• Smaller duration
• Good for staff
augmentation.
Disadvantages
• Seller has profit in every
hour billed.
• Seller has no incentive to
control cost.
• Useful for smaller
projects.
• Required day to day
oversight from buyer.

Choose a correct Contract
Project situation
PM needs work to begin immediately.
You want to buy expertise to determine what need to be done.
PM has detailed scope & know exactly what need to be done.
You are hiring resources to augment your team.
PM wants work to be done but does not have time to monitor & audit invoices of completed work.
Need to rebuild a bridge ASAP after a earthquake.
You need to hire contractor to perform research & development.
You have clear Scope but economy is unpredictable.
You wan to buy 10 laptops for your project team
The project requires a high level of expertize to complete the work with best possible performance
in finished product.
Which contract to use
T & M
CR
FP
T & M
FP
FPIF
CR
FPEPA
PO
CPIF or CPAF

Project Manager’s Role in Procurements
Know the procurement process
Understand contract terms and conditions
Ensure contract contains project manag. requirements
Identify risks & incorporate risk mitigation in contract
Help tailor the contract to the unique needs of the project
Align schedule of the contract and schedule of the project
Involved in contract negotiation
Make sure procurement process done smoothly
Work with contract manager to manage contract changes

Procurement Management Processes
12.1 Plan Procurement Management
• The process of documenting project procurement decisions, specifying
the approach, and identifying potential sellers.
12.2 Conduct Procurement
• The process of obtaining seller responses, selecting a seller, and awarding
a contract.
12.3 Control Procurement
• Managing procurement relationships, monitoring contract performance,
& making changes & corrections to contracts
12.4 Close Procurement
• The process of completing each procurement.

Introduction
Plan Procurement Management Definition?
Plan Procurement Management -> ITTO
Build vs Buy
Source selection criteria's
Procurement documents
Data flow diagram
Review
Self Assessment
L : Lesson

12.1 Plan Procurement Management -> Introduction
Determine if procurement is required
Full or partial procurement requirement
Make or Buy Analysis & decision
Identify & evaluate potential sellers
Decide on requirements (How, What, how much, When)
Can influence schedule, estimating & make or buy decision.
Includes reviewing risks involved & type of contract.

The process of documenting project procurement decisions,
specifying the approach, and identifying potential sellers.
Whether to acquire outside support, what to acquire, how to acquire it,
how much is needed, and when to acquire it.
Procurement
decisions
Specifying
approach
Identifying
potential sellers.

12.1 Plan Procurement Management -> ITTO
Inputs (9)
• PMP
• Requirements documentation
• Risk register
• Activity resource
requirements
• Project schedule
• Activity cost estimates
• Stakeholder register
• EEF
• OPA
Tools & Techniques(4)
• Make-or-buy analysis
• Expert judgment
• Market research
• Meetings
Outputs(7)
• Procurement Management
Plan
• Procurement statement of
work
• Procurement documents
• Source selection criteria
• Make-or-buy decisions
• Change requests
• Project documents updates

12.1 Plan Procurement Management->Input
PMP Requirements
Documentation
Project
Schedule
Activity Resource
Requirements
Activity cost
estimate
Risk Register Stakeholder
Register
EEF OPA

12.1 Plan Procurement Management ->Input -> PMP
Scope Baseline:
PMP
•Define scope & end
product/service.
•Provides constraints &
assumptions
•Provides acceptance
criteria
Project scope statement
•Hierarchical structure of
the deliverables
•Provides work for
outsourcing
WBS:
Description of the work
required for each
deliverable.
WBS dictionary:
Project management plan:
• Project approach
• Risk management plan
• Communication management plan
• Integrated change control process

12.1 Plan Procurement Management ->Input->Requirements Doc.
Requirements
Documentation
• Product, service or
result
requirements
• User requirements
• Acceptance criteria
Business Requirements
• Security
• Safety
• IPR
• Licenses
Project procurement
requirements.
• Performance
• Insurance
• Intellectual
property rights
• Licenses, and
Permits
Contractual and legal
implications

12.1 Plan Procurement Management->Input->Project Schedule
Include timelines, milestones & delivery dates.
Provides Schedule constraints & dependencies.
Schedule constraints can be major factor in procurement.
Consider time saving techniques: Preferred seller / Templates.
Project
Schedule
Contains information on required timelines or mandated deliverable dates.
Milestones Calendars

12.1 Plan Procurement Management->Input->Activity Resource Req.
People Equipment Location
Activity Resource
Requirements
Business Analyst
System Analyst
Programmer
Laptops
Type
Quantity
2
2
10
20
Contain information on specific needs such as :

12.1 Plan Procurement Management->Input-> Risk Register
Taken from Project Risk Management
List Risks & results of Risk analysis & mitigation
Transfer risks to seller through Contract
Risk Register
Ex: Change in Oil Prices Ex: Change exchange rates

12.1 Plan Procurement Management ->Input->Activity Cost Est.
Cost estimates for each activity
Compare cost estimates with Bids
Activity cost
Estimates
Evaluate reasonableness of bids received from potential sellers.

12.1 Plan Procurement Manag.->Input->Stakeholder Reg.
Provides details on project participants & their interests.
Stakeholder
Register
Name, Designation & Influence
Needs & expectations
Stakeholder specific Strategies
Champions, Influencer, Resistor

12.1 Plan Procurement Manag.->Input->EEF
EEF
Marketplace conditions.
Availability of Products, services, and results in the marketplace.
Suppliers along with their past performance or reputation
Typical terms and conditions for products, services, and results
or for the specific industry; and Unique local requirements.

12.1 Plan Procurement Manag.->Input->OPA
Formal procurement policies, procedures, and guidelines.
OPA
Most organizations have formal procurement
policies.
Project team should supply both resources &
expertise to perform procurement activities, if there
is no procurement dept.
Procurement Management systems - An established
multi‐tier supplier system of prequalified sellers
based on prior experience

12.1 Plan Procurement Management->T&T
Make-or-buy
analysis
Expert Judgment Market
Research
Meetings

12.1 Plan Procurement Management->T&T->Make or buy analysis
Gathering data about product requirements & analyse them against
available alternatives including purchase or internal manufacture.
Make-or-buy
analysis
Reasons to Buy
• Capacity and Capability
• Exploit Opportunity
• Shift risk (cost, time, or scope)
Reasons to Make
• Idle resources
• Want to control
• Confidential information
Buy Make

12.1 Plan Procurement Management->T&T->Make or buy analysis
Schedule Budget Cost
Skills Proprietary information Contract type
Make-or-buy
analysis
It is important to consider scope of Make vs Buy Analysis
Renting or leasing is good if it is one time need
Purchasing is good when it is long term requirement
Major factor to consider in the decision:
Buy
RentLease

12.1 Plan Procurement Manag.->T&T->Expert Judgement
To assess the inputs and outputs. Can be a part of selection board.
To develop proposals evaluate criteria.
Verify Contract terms, conditions and Legal obligations.
Expert Judgment
Business Experts Technical Experts Financial Experts
Legal experts
Project Management
experts
Procurement Experts

12.1 Plan Procurement Management->T&T->Market Research
The process of gathering information at conferences, online
reviews, and a variety of sources to identify market capabilities.
Market
Research
Examination of industry and specific vendor capabilities from various
sources.
Leverage information gained to identify market capabilities.

Business Experts Technical Experts Financial Experts Legal experts
Project
Management
experts
Procurement
Experts
12.1 Plan Procurement Management->T&T-> Meetings
Meetings
Meeting with team to formulate a procurement strategy.
Meetings with potential bidders.
Discuss approach, potential issues & seller evaluation

12.1 Plan Procurement Management->Output
Procurement
Management Plan Make-or-buy
Decisions
Procurement
Statement of
Work
Source Selection
Criteria
Procurement
Documents
Change Requests
Project
Documents
Updates

12.1 Plan Procurement Management-> Output-> Procurement MP
Plans describes how goods and services will be acquired from
outside.
How the procurement processes will be managed from developing
procurement documents through contract closure.
Procurement
Management Plan
Make‐or‐buy decisions
Type of contract
Team responsibilities
Evaluation criteria
Procurement metrics
Managing multiple suppliers & coordination
Risk management (Performance bonds/insurance)
Form/format of procurement document
Procurement SOW
Constraints and assumptions

12.1 Plan Procurement Management-> Output-> Decision
Make-or-buy
Decisions
• Document Internal process
• E.g., Develop Software in-house
Make
• Document external process
• E.g., Buy Seller services to develop software
Buy
Whether particular
work/Service/Product can
best be developed internally
Needs to be purchased from
outside sources.
Decisions made regarding the external purchase or internal
manufacture of a product. Formally document the decision.

12.1 Plan Procurement Management-> Output->Procurement SOW
Developed from the project scope baseline and defines related contract
scope.
It describes all the procurement item in detail.
Procurement
Statement of Work
• Clear, complete, and concise.Written description
• There are specific content and format to be used
In some application
areas
Specifications
Quantity/ Quantity/
Performance desired
Work location
Delivery Schedule
Collateral services (e.g.,
Warranty)

12.1 Plan Procurement Management-> Output->Source Sel. Criteria
Used to compare sellers proposals based on documented selection
criteria to rate or score proposals.
Source
Selection
Criteria
Understanding
of need
Technical
capability
Management
approach
Production
capacity &
interest
Overall Cost &
Warranty
Business size
and type
Past
performance,
References
Intellectual
property rights
Proprietary
rights
Associated
Risks
Proposal1
Proposal2
Proposal3
Criteria1
Criteria2
Criteria3
0
50
100
150
Seller1 Seller2 Seller3

12.1 Plan Procurement Management -> Procurement docs.
Request for Information
(RFI)
Request for Proposal
(RFP)
Invitation for Bid (IFB) Request for Quote
(RFQ)
Procurement
Documents
The documents utilized in bid and proposal activities
• provide various pieces of information related to a product or service
or seller capability.
RFI
• request a detailed proposal on how work will be accomplished with
price.
RFP
• Same as RFP. (usually a sealed bidding processes used by Govt.)IFB
• request price quotations from prospective sellers of common or
standard products or services.
RFQ
RFI
RFP/IFB/RFQ

12.1 Plan Procurement Management-> Output->Procurement docs.
•Used when buyers
doesn’t have clear
information.
•Used for consolidation of
proposals
•Ex.,
•Constructing a Hotel
•ERP System
implementation
RFI
•Used when you have
detailed requirements
•Finds cost & detailed
proposal on how work will
be accomplished.
•Ex.,
•Constructing hotel based
on a plan
•IT Automation of
business process
RFP
•Used when your main
focus is on cost.
•Time and Material
contracts.
•Ex.,
•Construction Crain for 1
year
•6 months consulting to
setup PMO with 2
resources
RFQ
Procurement
Documents
Terminology
may vary by
Industry.

12.1 Plan Procurement Management-> Output-> Change Request
A decision that involves procuring goods, services, or resources
typically requires a change request.
Change
Requests
Change Request due to:
More clarity on the work -> New scope addition.
Project duration may change as Vendor selection process
takes time.
Cost may change based on Vendor & development approach
(onsite/ offshore)
May cause Frustration.
It will go though Integrated Change control process.

12.1 Plan Procurement Management->Output-> Document updates
Project
Documents
Updates
• New/Changed Requirements
Requirements
documentation
• New/Changed Requirements
Requirements
traceability matrix
• New Risks, Risk Closure, Attribute
changes
Risk register
• New communication models
• Additional communication channels
Communication
management plan
• Any changes - possibly based on
agreement with seller
Align with
procurement
management plan

12.1 Plan Procurement Management-> Process Flow

12.1 Plan Procurement Management -> Review
Procurement Management plan
Plan Procurement Management -> ITTO
Procurement SOW
Build vs Buy
Source selection criteria's
Procurement documents
Self Assessment
L : Lesson

Introduction
Conduct Procurement Definition?
Conduct Procurement -> ITTO
What is seller proposals?
Bidder Conference
Proposal Evaluation Techniques
Procurement negotiations
Data flow diagram
Review
Self Assessment
L : Lesson

Introduction – Procurement Management Processes
• The process of documenting project procurement decisions, specifying
the approach, and identifying potential sellers.
• The process of obtaining seller responses, selecting a seller, and awarding
a contract.
12.3 Control Procurement
• Managing procurement relationships, monitoring contract performance,
& making changes & corrections to contracts
12.4 Close Procurement
• The process of completing each procurement.

Seller1
Response
Seller2
Response
Seller3
Response
Seller4
Response
Selection
process
Review
prop.
Evaluate
Seller
Selected Seller Award Contract
The process of obtaining seller responses, selecting a
seller, and awarding a contract.
It provides alignment of internal & external stakeholder
expectations through established agreements.

12.2 Conduct Procurement -> ITTO
Inputs (8)
• Procurement Management
plan
• Procurement Documents
• Source Selection Criteria
• Seller Proposals
• Project Documents
• Make-or-buy decisions
• Procurement SOW
• OPA
Tools & Techniques(7)
• Bidder Conference
• Proposal Evaluation
Techniques
• Independent Estimates
• Expert Judgment
• Advertising
• Analytical Techniques
• Procurement Negotiations
Outputs(6)
• Selected sellers
• Agreements
• Resource Calendars
• Change Requests
• PMP updates
• Project Documents
Updates

12.2 Conduct Procurement->Input
Procurement
Management Plan Make-or-buy
Decisions
Procurement
Statement of
Work
Source Selection
Criteria
Procurement
Documents
Project
Documents
Sellers Proposals OPA

12.2 Conduct Procurement->Input->Procurement Management Plan
Plans describes how goods and services will be acquired from
outside.
How the procurement processes will be managed from developing
procurement documents through contract closure.
Procurement
Management Plan
Make‐or‐buy decisions
Type of contract
Team responsibilities
Evaluation criteria
Procurement metrics
Managing multiple suppliers & coordination
Risk management (Performance bonds/insurance)
Form/format of procurement document
Procurement SOW
Constraints and assumptions

12.2 Conduct Procurement->Input->Make-or-buy Decisions
Make-or-buy
Decisions
• Document Internal process
• E.g., Develop Software in-house
Make
• Document external process
• E.g., Buy Seller services to develop software
Buy
Whether particular
work/Service/Product can
best be developed internally
Needs to be purchased from
outside sources.
Decisions made regarding the external purchase or internal
manufacture of a product. Formally document the decision.

12.2 Conduct Procurement->Input->Procurement SOW
Developed from the project scope baseline and defines related contract
scope.
It describes all the procurement item in detail.
Procurement
Statement of Work
• Clear, complete, and concise.Written description
• There are specific content and format to be used
In some application
areas
Specifications
Quantity/ Quantity/
Performance desired
Work location
Delivery Schedule
Collateral services (e.g.,
Warranty)

12.2 Conduct Procurement->Input->Source Selection Criteria
Used to compare sellers proposals based on documented selection
criteria to rate or score proposals.
Source
Selection
Criteria
Understanding
of need
Technical
capability
Management
approach
Production
capacity &
interest
Overall Cost &
Warranty
Business size
and type
Past
performance,
References
Intellectual
property rights
Proprietary
rights
Associated
Risks
Proposal1
Proposal2
Proposal3
Criteria1
Criteria2
Criteria3
0
50
100
150

12.2 Conduct Procurement->Input->Procurement Documents
Request for Information
(RFI)
Request for Proposal
(RFP)
Invitation for Bid (IFB) Request for Quote
(RFQ)
Procurement
Documents
Used to solicit proposals, quotes, and bids from sellers.
RFP/IFB/RFQ
Sellers Proposals

12.2 Conduct Procurement->Input->Seller Proposals
Contains the information that will be used by an evaluation
team to select one or more successful bidders (sellers).
Seller
Proposals
Proposal1
Proposal2
Proposal3
Criteria1
Criteria2
Criteria3
Vendor Evaluation

12.2 Conduct Procurement->Input->OPA
OPA
Listing of pre-
selected
sellers
Listing of
prospective
sellers
Past
experience
with sellers
Prior
agreements

12.2 Conduct Procurement->Input
Describe overall selection process
Formal decision to engage seller
Explain work required
List of critters that will be used for
proposal raking
All procurement related documents
(RFI, RFP, Selection criteria etc)
Procurement Documents
Contracts, risk register, Stakeholder
Register.
Sellers proposal describing
complete delivery approach, along
with cost.
Prior selection information.

12.2 Conduct Procurement-> T&T
Advertisement Bidder Conference Proposal
Evaluation
Techniques
Analytical
Techniques
Independent
Estimates
Procurement
Negotiations
Expert
Judgment

12.2 Conduct Procurement-> T&T->Advertising
Existing lists of potential sellers can often be expanded by
placing advertisements.
Advertising
Some government jurisdictions require public advertising of
certain types of procurement items
Most government jurisdictions require public advertising of
pending government contracts.

12.2 Conduct Procurement-> T&T->Bidder Conference
Contractor
conferences
Vendor
conferences
Pre-bid
conferences
Bidder Conference
Meetings between buyer & sellers
Ensure a clear and complete understanding of requirements
No bidders receive PREFERENTIAL treatment.
Listen to EVERY question and every answer.
Collecting questions from bidders
Arranging field visits

12.2 Conduct Procurement-> T&T->Bidder Conference
Contractor
conferences
Vendor
conferences
Pre-bid
conferences
Bidder Conference
Important considerations:
Send details technical documents to Vendor, prior to the meeting
Send outline to the vendor & share actual documents during the meeting
Bring all Vendors together in a single room/single meeting
Meet Vendor individually when they are reluctant to share information.
In case of delay in
proposal
submission by
one seller, Give
new date to all.
PM’s aim is to
select best seller.

12.2 Conduct Procurement->T&T->Proposal Evaluation Tech.
The process of reviewing proposals provided by suppliers to support
contract award decisions.
Selection will be done based on seller responses to criteria and as per
buyers procurement policies .
Proposal
Evaluation
Techniques
Proposal
1
Proposal
2
Proposal
3
Criteria1
Criteria2
Criteria3
Evaluation Team
Screening system
Independent estimate
Past performance history
Weighting system
Proposal
Evaluation
Techniques

12.2 Conduct Procurement->T&T->Proposal Evaluation Tech.
•Eliminate sellers who do no meet minimum requirementScreening system
•Estimation created in‐house or with outside assistanceIndependent estimate
•Use of historical information for selection.Past performance history
•Evaluate by weighting the source selection criteriaWeighting system
Proposal Evaluation
Techniques
Seller1 Seller2
Criteria Weight rating Score rating score
1 Company 6 85 510 99 594
2 Technical 9 90 810 90 810
3 Expertise 8 82 656 80 640
4 Cost 7 88 616 75 525
Total 2592 2569
85
99
80
90 90 90
82 80 80
88
75
90
0
20
40
60
80
100
120
Technical Company Expertice Cost

12.2 Conduct Procurement-> T&T->Independent Estimates
Independent
Estimates
• Procurement SOW is Deficient or Ambiguous
• Prospective sellers misunderstood & failed to
respond fully to the procurement SOW
If Significant
differences
found.
Vendor estimates
Third party estimates
A process of using a third party to obtain and analyze information
to support prediction of cost, schedule, or other items.

12.2 Conduct Procurement-> T&T->Analytical Techniques
Analytical
Techniques
Identify the readiness of a vendor to provide the desired end state.
Determine the cost expected to support budgeting
Avoid cost overruns due to changes

12.2 Conduct Procurement-> T&T->Procurement Negotiations
Clarify the structure, requirements, and other terms of the
purchases to be reflected in Final contract..
Procurement
Negotiations
Scope Technical solutions
Technical & business
approaches
Authority to make
changes
Responsibilities
Overall schedule
/Milestones
Price Payment terms
Governing law Proprietary rights Contract financing
• Obtain fair and reasonable price
• Develop good relationship with the seller
Objective of
negotiation:
What is
negotiated?

12.2 Conduct Procurement-> T&T->Procurement Negotiations
PM should not be involved in negotiation.
PM team should not negotiate.
PM & PM team work as supporters & provides clarifications.Procurement
Negotiations
Who should negotiate?
Lead
Negotiator
will
negotiate
Attacks
Personal
insults
Good
guy/bad guy
Deadline Lying
Limited
authority
Missing man
Fair
reasonable
Delay
Extreme
demands
Withdrawal
Negotiation tactics

12.2 Conduct Procurement-> T&T->Expert Judgement
Contracting
Legal
Finance
Accounting
Engineering
Design
Research
Development
Sales
Manufacturing
Screening of potential Sellers
Proposals evaluation
Multi-discipline review team (Expert from each discipline)
Expert
Judgment

12.2 Conduct Procurement->Output
Selected sellers Agreements
Resource
Calendars
Change Requests PMP updates
Project
Documents
Updates

12.2 Conduct Procurement->Output->Selected Sellers
Selected sellers
• Based on the proposal or bid evaluation
Judged:
• A draft contract will become actual contract when an award is
made.
Negotiated:
• For all complex, high‐value, high‐risk procurements prior to
award.
Final senior management approval:

12.2 Conduct Procurement->Output->Agreements
Any document or communication that defines the initial
intentions of a project.
Agreements
A Detailed contract A Purchase Order
A Handshake An Email
Agreements can be:
• Provide something of valueSeller:
• Provide monetary or other valuable compensation.Buyer:
Mutually binding legal agreement that obligates:

12.2 Conduct Procurement -> Output-> Change Request
Once seller is selected, typically project requires a change request
to adjust schedule, cost, payment milestones etc.
Change
Requests
Change Request due to:
More clarity on the work -> New scope addition.
Project duration/schedule may change based on proposal.
Cost may change based on Vendor proposal.

12.2 Conduct Procurement->Output->PMP updates
PMP
updates
Schedule:
• To reflect new Date, Milestones date changes agreed by
seller
Quality Management plan:
• Sellers agreement on Quality standards, processes.

12.2 Conduct Procurement->Output->Project document updates
Project
Documents
Updates
• Actual price based on contact valueCost Baseline:
• WBSScope baseline:
• Delivery dates as agreed with SellerProject schedule:
• Procurement relatedAssumptions:
• updatedQuality Metrics:
• Process changes (if any)
Procurement
Management Plan:

12.2 Conduct Procurement -> Process Flow

12.2 Conduct Procurement -> Review
Conduct Procurement process
Seller proposals
Bidder Conference
Proposal Evaluation Techniques
Independent estimates
Procurement negotiations
Agreements
L : Lesson

Thank you!!
To Learn Project Management, Contact Anand Bobade (055 5932004)
• nmbobade@gmail.com
• https://ae.linkedin.com/in/anandbobade
• http://www.slideshare.net/anandbobade
Free learning resources on
slide share

PMP Chap 12 - Project Procurement Management Details - Part 1

More Related Content

What's hot

Similar to PMP Chap 12 - Project Procurement Management Details - Part 1

More from Anand Bobade

Recently uploaded

PMP Chap 12 - Project Procurement Management Details - Part 1