The document discusses procurement and contract management processes for projects. It describes the key stages as procurement planning, solicitation planning, solicitation, source selection, contract administration, and contract closeout. Procurement planning involves determining what, how, and when to procure goods and services externally. Different types of contracts like fixed price, cost reimbursable, and unit price contracts allocate risk differently between the buyer and seller. Effective contract administration and addressing changes via change control are important to ensure the seller meets requirements.

1. Project Implementation and
Closure
(PPM 552)
Chapter Three
Procurement and Contract
Management
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2. PROCUREMENT & CONTRACT MANAGEMENT
Introduction
Procurement
Procurement means acquiring goods and/or services
from an outside source. Procurement is the term
generally used by government, while business uses the
term purchasing and outsourcing is commonly used by
the information technology industry.
Eg. It is estimated that in the year 2003 the worldwide
information technology outsourcing market has grown
to over US$110 billion.
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3. PROCUREMENT & CONTRACT MANAGEMENT
Why Outsource?
Outsourcing is a growing practice within the IT
industry, and it is important to appreciate the reasons
it is adopted:
– To reduce both fixed and recurrent costs.
– To allow the client organization to focus on its
core business.
– To access skills and technologies.
– To provide flexibility.
– To increase accountability.
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4. Procurement Management Processes
Project procurement management includes the
following processes for acquiring goods and
services from outside the project organisation:
– Procurement planning: determining what to procure and when.
– Solicitation planning: documenting product requirements and
identifying potential sources.
– Solicitation: obtaining quotations, bids, offers, or proposals as
appropriate.
– Source selection: choosing from among potential vendors.
– Contract administration: managing the relationship with the
vendor.
– Contract close-out: completion and settlement of the contract.
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5. Procurement Management Processes & Key Outputs
The figure below summarises the major processes involved
in procurement management, and identifies important
milestones associated with each stage.
For example, after procurement planning the key milestone
is the “make or buy decision”. This will determine if further
procurement management processes are required.
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6. Procurement Planning
Procurement planning involves identifying which
project needs can be best met by using products or
services outside the organization. It includes
deciding:
– Whether to procure.
– How to procure.
– What to procure.
– How much to procure.
– When to procure.
It is essential to be thorough and creative when
planning procurement. Even though a company
may be viewed as a competitor, it will often be
advantageous to collaborate on some projects.
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7. Inputs to Procurement Planning
The inputs needed for procurement planning include:
– The project scope statement.
– Product description.
– Market conditions.
– Constraints and assumptions.
It is important to define the scope of the project, the
products, market conditions, and constraints and
assumptions. However, it is also essential to know exactly
why you want to procure goods or services.
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8. Tools and Techniques
Procurement management will often incorporate
the following:
–Make-or-buy analysis: determining whether a
particular product or service should be made or
performed inside the organization or purchased from
someone else. Often involves financial analysis.
–Experts, both internal and external, are valuable assets
in procurement decisions.
• Internal experts are particularly useful in providing knowledge
of organisational and personnel issues.
• External experts can provide expert judgement, especially
with regard to vendors and technology issues.
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9. Types of Contracts
A contract is a mutually and legally binding agreement that
obligates the seller to provide specified products or
services, and obligates the buyer to pay for them. Different
types of contracts are suited to particular circumstances,
there are three broad categories:
– Fixed price or lump sum: involve a fixed total price for
a well-defined product or service.
– Cost reimbursable: involve payment to the seller for
direct and indirect costs.
– Unit price contracts: require the buyer to pay the
seller a predetermined amount per unit of service.
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10. Fixed Price Contracts
Fixed price or lump sum contracts involve a fixed total
price for a well-defined product or service. These
contracts are particularly suited where supplies or
services can be clearly specified before tenders are
invited. The buyer incurs little risk in this situation.
Fixed price contracts may also include incentives for
meeting or exceeding project objectives. They may also
include safeguards in the form of penalty clauses,
however these may be difficult to apply before the
consequences of delay are felt.
An important consideration is that any changes to
resource requirements due to project revision (change) is
likely to lead to additional claims by, and extra payment
to the contractor.
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11. Cost Reimbursable Contracts
Cost reimbursable or cost-plus contracts involve payment to the seller
for direct and indirect actual costs. These contracts are often used for
projects that include the provision of goods and services associated
with new technologies. The buyer absorbs more risk with the type of
contract, which has three forms:
– Cost plus incentive fee (CPIF): the buyer pays the seller for
allowable performance costs plus a predetermined fee and an
incentive bonus.
– Cost plus fixed fee (CPFF): the buyer pays the seller for
allowable performance costs plus a fixed fee payment usually
based on a percentage of estimated costs.
– Cost plus percentage of costs (CPPC): the buyer pays the seller
for allowable performance costs plus a predetermined
percentage based on total costs.
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12. Unit Price Contracts
Unit price contracts require the buyer to pay the seller a
predetermined amount per unit of service, and the total
value of the contract is a function of the quantities needed
to complete the work.
Unit price contracts are also called a time and materials
contract, and may incorporate volume discounts.
This type of contract is often used for services that are
needed when the work cannot be clearly specified and
total costs cannot be estimated in a contract. Many
contract programmers and consultants prefer to use unit
price contracts.
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13. Contract Types Versus Risk
The figure below summarises the spectrum of risk to the
buyer and seller for different types of contract. Note that a
low risk option for a buyer will be high risk for the seller, and
visa-versa.
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14. Statement of Work (SOW)
Many contracts include a statement of work (SOW). A
statement of work is a description of the work required for
the procurement. The SOW describes the work in sufficient
detail to allow prospective sellers to determine if they are
capable of providing the goods and services required, and to
allow them to determine an appropriate price.
A good SOW gives bidders a better understanding of the
buyer’s expectations, and therefore should be as clear, concise
and as complete as possible. It should describe all the services
required, and include performance reporting requirements.
The SOW should specify the product of the project, use
industry terms, and refer to industry standards.
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15. Statement of Work (SOW) Template
I. Scope of Work: Describe the work to be done to detail. Specify the hardware and
software involved and the exact nature of the work.
II. Location of Work: Describe where the work must be performed. Specify the
location of hardware and software and where the people must perform the work
III. Period of Performance: Specify when the work is expected to start and end,
working hours, number of hours that can be billed per week, where the work must
be performed, and related schedule information.
IV. Deliverables Schedule: List specific deliverables, describe them in detail, and
specify when they are due.
V. Applicable Standards: Specify any company or industry-specific standards that
are relevant to performing the work.
VI. Acceptance Criteria: Describe how the buyer organization will determine if the
work is acceptable.
VII. Special Requirements: Specify any special requirements such as hardware or
software certifications, minimum degree or experience level of personnel, travel
requirements, and so on.
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16. Solicitation Planning
Solicitation planning involves preparing of the
documents needed for requesting bids
(solicitation), and determining the evaluation
criteria for the award of a contract. Common
documents used in this process are:
– Request for Proposals: used to solicit proposals from
prospective sellers where there are several ways to
meet the sellers’ needs.
– Requests for Quotes: used to solicit quotes for well-
defined procurements.
– Invitations for bid or negotiation and initial
contractor responses are also part of solicitation
planning.
– Important link: http://globalEDGE.msu.edu
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17. Outline for a Request for Proposal (RFP)
I. Purpose of RFP
II. Organization’s Background
III. Basic Requirements
IV. Hardware and Software Environment
V. Description of RFP Process
VI. Statement of Work and Schedule Information
VII. Possible Appendices
A. Current System Overview
B. System Requirements
C. Volume and Size Data
D. Required Contents of Vendor’s Response to RFP
E. Sample Contract
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18. Solicitation
Solicitation (or tendering) involves obtaining proposals,
tenders or bids from prospective sellers. Prospective
sellers do most the work in this process, usually at no
cost to the buyer or the project. The buying organisation
is responsible for advertising the “request to tender” (the
solicitation).
Organizations can advertise to procure goods and
services in several ways:
– Approaching the preferred vendor.
– Approaching several potential vendors.
– Advertising to anyone interested.
A bidders’ conference or similar meeting between the
buyer and the prospective sellers can help clarify the
buyer’s expectations.
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19. Source Selection
Once buyers receive proposals, they must select a
vendor or decide to cancel the procurement. Source
selection involves:
– Evaluating bidders’ proposals.
– Choosing the best one.
– Negotiating the contract.
– Awarding the contract.
It is highly recommended that buyers use formal
evaluation procedures for selecting vendors.
Buyers often create a “short list”.
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20. Sample Proposal Evaluation Sheet
For instance, templates of the following type can be used
by a project team to help create a short list of the best
three proposals.
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21. Source Selection
After developing a short list of possible sellers,
organisations will often undertake more detailed
evaluation.
The following figure lists items that might be part of
an evaluation of the top three vendors for a large
information technology project.
All of the evaluation criteria are given a certain
number of possible points (based on ranked
importance), and the project team members and
other stakeholders then evaluate each proposal by
assigning points to each criteria.
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22. Detailed Criteria for Selecting Vendors
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23. Contract Administration
Contract administration ensures that the
seller’s performance meets contractual
requirements. Contracts are legal
relationships, and are subject to the contract
law in the country where the project is
conducted, and in the case of international
projects, the country of supply.
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24. Contract Administration
However, due to their complexity, many
project managers ignore contractual issues.
This can result in serious problems. Ideally,
the project manager and the project team
should be actively involved with contract
law experts in the preparation and
administration of contracts.
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25. Contract Administration
Project members must be aware of the legal
problems they might cause by not
understanding a contract. In particular, most
projects involve changes, and these changes
must be handled properly for items under
contract.
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26. Change Control for Contracts
Change control is an important part of the contract
administration process. The following change
control process must be applied where there are
contracts:
– Changes to any part of the project need to be
reviewed, approved, and documented by the same
people in the same way that the original part of the
plan was approved.
– Evaluation of any change should include an impact
analysis. How will the change affect the scope, time,
cost, and quality of the goods or services being
provided?
– Changes must be documented in writing. Project
team members should also document all important
meetings and telephone phone calls.
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27. Contract Close-out
Contract close-out is the final project procurement
management process. It includes:
– Product verification to determine if all work was
completed correctly and satisfactorily.
– Administrative activities to update records to reflect
final results.
– Archiving information for future use.
Procurement audits are often undertaken during contract
close-out to identify lessons learned in the procurement
process.
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28. PROCUREMENT & CONTRACT MANAGEMENT
Conclusion - 1
It is essential that organisations obtain good
contracts that minimise risk while ensuring optimum
results through effective contract administration.
With the current competitive and demanding
conditions found in information technology projects,
it is very important to prepare contracts with great
care and expert assistance. It is equally important to
initiate and follow effective contract administration
procedures.
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29. PROCUREMENT & CONTRACT MANAGEMENT
Conclusion - 2
The following guidelines can help can assist in preparing
proposals, contracts and administrative procedures:
– Use checklists and templates where appropriate.
– Evaluate risks by reference to suggested contract
provisions where appropriate.
– All major proposals and contracts, and contracts with
questionable provisions, should be reviewed by a
contract law expert.
– Appropriate pricing and/or insuring of risk under the
contract.
– Periodic review, improvement and updating of contract
preparation and administration procedures.
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30. End of Chapter Three
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