The document discusses procurement management and the various cycles and strategies involved. It describes the requirement, requisition, solicitation, award, and contract administration cycles. It also covers make-or-buy analysis, contract types, risk allocation, and contract changes and termination. The goal of procurement management is to purchase necessary goods and services while managing relationships and contracts.

1. 1
Procurement
Management
Sharif Project Management
Session 11 – Fall 1390

2. Impossible to produce everything internally!
Inputs to company must be procured/managed
Contracts and relationships must be managed!
2
Procurement
 Purchasing, Acquisition, Supply
(Materials, Services, Results, Consultants)
 Outsourcing, Sub-contractors
 Contracts, Supplier Relationships

3. 3
Procurement
Management
Includes the processes to purchase or inquire
the products, services, or results needed from
outside the project team to perform the work.
Includes the contract management & change
management processes needed to administer
contracts or purchase orders issued.
 Plan Purchases/Acquisitions o Plan Contracting
 Request Seller Responses o Contract Closure
 Select Sellers o Contract Administration

4. 4
The Make Decision
 Less costly (but not always!!)
 Easy integration of operations
 Utilize existing capacity that is idle
 Maintain direct control
 Maintain design/production secrecy
 Avoid unreliable supplier base
 Stabilize existing workforce

5. 5
The Buy Decision
 Less costly (but not always!!)
 Utilize skills of suppliers
 Small volume requirement (not cost
effective to produce)
 Having limited capacity or capability
 Augment existing labor force
 Maintain multiple sources (qualified
vendor list)
 Indirect control

6. 6
Procurement Strategies
 Corporate procurement strategy:
the relationship of specific procurement actions
to the corporate strategy
 Project procurement strategy:
the relationship of specific procurement actions
to the operating environment of the project
 Procure all goods/services from a single source.
 Procure all goods/services from multiple sources.
 Procure only a small portion of the goods/ services.
 Procure none of the goods/services.

7. 7

8. 8
Procurement
Management
1. Requirement cycle: definition of the
boundaries of the project
2. Requisition cycle: analysis of sources
3. Solicitation cycle: the bidding process
4. Award cycle: contractor selection
and contract award
5. Contract administration cycle:
managing the subcontractor until
completion of the contract

9. 9
1. Requirement Cycle
 Defining the need for the project
 Development of the statement of work,
specifications & work breakdown structure
 Performing a make or buy analysis
 Laying out the major milestones and the
timing/schedule
 Cost estimating, including life-cycle costing
 Obtaining authorization/approval to proceed

10. 10
Specifications
Specifications are written, pictorial,
or graphic information that describe,
define, or specify the services or
items to be procured. There are
three types of specifications:
• Design
• Performance
• Functional

11. 11
Types of Specifications
 Design specifications: These detail what is to be done in
terms of physical characteristics. The risk of
performance is on the buyer.
 Performance specifications: These specify measurable
capabilities the end product must achieve in terms of
operational characteristics. The risk of performance is
on the contractor.
 Functional specifications: This is when the seller
describes the end use of the item to stimulate competition
among commercial items, at a lower overall cost.
This is a subset of the performance specification. The
risk of performance is on the contractor.

12. 12
2. Requisition Cycle
 Evaluating/confirming specifications
(are they current?)
 Confirming sources
 Reviewing past performance of
sources
 Producing solicitation package

13. 13
3. Solicitation Cycle
 Bid documents (usually standardized)
 Listing of qualified vendors (expected
to bid)
 Proposal evaluation criteria
 Bidder conferences
How change requests will be managed
 Supplier payment plan

14. 14
Solicitation Cycle
 Advertising
 Negotiation
 Small purchases (i.e., office supplies)
Negotiation Processes
 Request for information (RFI)
 Request for quotation (RFQ)
 Request for proposal (RFP)

15. 15
Negotiation Planning
Develop objectives
(i.e., min-max positions)
Evaluate your opponent
Define your strategy and tactics
Gather the facts
Perform price/cost analysis
Arrange “hygiene” factors

16. 16
Negotiation
Objective-Setting
Buyer
Seller
Min
Objective Max
Min Objective
Max
Price

17. 17
Contract Negotiations Requires
Knowing When to Speak and When
to Be Quiet.
Negotiation Factors
 Compromise-ability
 Adaptability
 Good faith
Research Your Supplier/
Customer Before Entering
Into Contract Negotiations

18. 18
4. Award Cycle
The objective of the award cycle is to
negotiate a contract type and price that
will result in reasonable contractor risk
and provide the contractor with the
greatest incentive for efficient and
economic performance.

19. 19
Contract Elements
 Mutual agreement
 Consideration
 Contract capability
 Legal purpose
 Form provided by law
Contract Forms
 Contract Completion
 Contract Terms

20. 20
Contract Selection
Criteria
 Overall degree of cost and schedule risk
 Type and complexity of requirement (technical risk)
 Extent of price competition
 Cost/price analysis
 Urgency of the requirements
 Performance period
 Contractor’s responsibility (and risk)
 Contractor’s accounting system (is it capable of
earned value reporting?)
 Concurrent contracts (will my contract take a back
seat to existing work?)
 Extent of subcontracting (how much work will the
contractor outsource?)

21. 21
Contracting Type
 Fixed price contract
 Cost plus contract
 Unit rates contract
 EPC-Turnkey contract
 BOOT contract

22. 22
Contract’s Risk and Reward
Go Hand-in-Hand
Negotiating wrong type of contract can be devastating!

23. 23
Contractor’s Risks
HIGH LOW
Risk On Client
FFP CPFF
Risk On Contractor
LEGEND
FFP FIRM FIXED PRICE
CPFF COST PLUS FIXED FEE

24. 24
Cost Plus Contracts

25. •All costs are reimbursed (cost run-ups)
•Fee is fixed (in $$$ not %) irrespective of costs
•Contractor is motivated for early completion
25
Cost-Plus-Fixed-Fee
Contract (CPFF)
0 %
0 %
100 %
100 %
CONTRACTOR’S
CUSTOMER’S
RISK
RISK
RISK SHARING METER
RISK
LOCATION

26. 26
Cost-Plus-Award-Fee
Contract (CPAF)
•All costs are reimbursed (cost run-ups)
•Negotiated range of possible profits
•Award may be percentage of cost
0 %
0 %
100 %
100 %
CONTRACTOR’S
CUSTOMER’S
RISK
RISK
RISK SHARING METER
RISK
LOCATION

27. 27
Cost-Plus-Incentive-
Fee Contract (CPIF)
•Contractor can earn additional profits
•All costs are reimbursed (cost run-ups)
•A “floor” and “ceiling” exists on profits
0 %
0 %
100 %
100 %
CONTRACTOR’S
CUSTOMER’S
RISK
RISK
RISK SHARING METER
RISK
LOCATION

28. 28
Firm-Fixed-Price
Contract (FFP)
• Maximum risk with contractor
• Higher negotiated profit margins
• High likelihood of scope changes
0 %
0 %
100 %
100 %
CONTRACTOR’S
CUSTOMER’S
RISK
RISK
RISK SHARING METER
RISK
LOCATION

29. Firm-Fixed-Price with
Economic Price Adjustments (FPE)
29
•Adjustments for escalation factors
•Adjustments for inflation
•Negotiated adjustment cycle
0 %
0 %
100 %
100 %
CONTRACTOR’S
CUSTOMER’S
RISK
RISK
RISK SHARING METER
RISK
LOCATION

30. 30
Incentive Contracts
• Additional profits are possible by lowering cost
• Customer and contractor share cost savings

31. 31
Principles of Incentive
Contracts
EXAMPLE
TARGET COST: $20,000
TARGET FEE: $1500
SHARING RATIO: 80/20 %
•Customer pays 80 % of overrun
•Contractor pay 20 % of overrun
•Profit is $1500 less
CONTRACTOR’S 20 %
•Customer keeps 80 % of underrun
•Contractor keeps 20 % of underrun
•Profit is $1500 plus
CONTRACTOR’S 20 %
Note: limitations may be imposed on price or profit

32. •Contractor can earn additional profits
•Contract has a ceiling on price (or cost) paid
•Incentive may be on time, quality, other factors
32
Fixed-Price-Incentive-
Fee Contract (FPIF)
0 %
0 %
100 %
100 %
CONTRACTOR’S
CUSTOMER’S
RISK
RISK
RISK SHARING METER
RISK
LOCATION

33. 33
Cost-Sharing Contract (CS)
•No profits allowed
•Customer and contractor share costs
•Contractor may retain control of
Proprietary knowledge after completion
0 %
0 %
100 %
100 %
CONTRACTOR’S
CUSTOMER’S
RISK
RISK
RISK SHARING METER
RISK
LOCATION

34. • No profits allowed
• Contractor is usually a non-profit organization
• Limitations on costs allowed may be imposed
34
Cost Contract (C)
0 %
0 %
100 %
100 %
CONTRACTOR’S
CUSTOMER’S
RISK
RISK
RISK SHARING METER
RISK
LOCATION

35. •COSTS INCURRED MAY BE UNLIMITED
•CONTRACTORS CAN MAXIMIZE PROFITS
•SCOPE CHANGES MAY BE FREQUENT AND UNLIMITED
35
Cost-Plus-Percentage-of-
Cost Contract (CPPC)
0 %
0 %
100 %
100 %
CONTRACTOR’S
CUSTOMER’S
RISK
RISK
RISK SHARING METER
RISK
LOCATION

36. CUSTOMER’S RISK
36
Relative Contract Risk
RISK
LOCATION
FFP
FFE
FPIF
CPIF
CPAF
CPFF
CPPC
CS
C
100 %
CONTRACTOR’S RISK
0 %
0 %
100 %
RISK SHARING METER

37. There are several other types of
contracts available. They may be
derivatives of these contracts,
combinations, or simply special
contracts for special circumstances.
37
Other Types of Contracts

38. 38
5. Contract
Administration Cycle
 Change management
 Specification interpretation
 Adherence to quality
 Warranties
 Subcontractor management
 Production surveillance
 Waivers
 Contract breach
 Resolution of disputes
 Project termination
 Payment schedules
 Project closeout

39. 39
Order of Precedence
A. Specifications (first priority)
B. Other instructions (second priority)
C. Other documents, such as exhibits,
attachments, appendices, SOW, contract
date requirements list [CDRL], etc.
(third priority)
D. Contract clauses (fourth priority)
E. The schedule (fifth priority)

40. 40
Type of Changes
Administrative change
Change order
Contract modification
Undefinitized contractual action
Supplemental agreement
Constructive change

41. 41
Causes of Constructive
Changes
 Defective specification with
impossibility of performance
 Erroneous interpretation of contract
 Over-inspection of work
 Failure to disclose superior knowledge
 Acceleration of performance
 Late or unsuitable owner or customer
furnished property
 Failure to cooperate
 Improperly exercised options
 Misusing proprietary data

42. 42
Reasons for Termination
For Convenience of the Customer
 Elimination of the requirement
 Technological advances in the state-of-the-
art
 Budgetary changes
 Related requirements and/or
procurements
 Anticipating profits not allowed

43. Reasons for Termination -
For Default Due to Contractor’s Actions
43
 Contractor fails to make delivery on
scheduled date.
 Contractor fails to make progress so as to
endanger performance of the contract
and its terms.
 Contractor fails to perform any other
provisions of the contract.

44. 44
Contract Administration
Rights
 Reject the entire shipment
 Accept the entire shipment (barring
latent defects)
 Accept part of the shipment