Project Procurement Management PMBOK 5

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Project Procurement Management
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Pankaj Sharma - Mobile No -919810996356

Processes necessary to purchase or acquire products, services or results needed from
outside the project team.
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Procurement Management Processes
Process Process Group
Plan Procurements Planning
Conduct Procurements Executing
Control Procurements Monitoring and Controlling
Close Procurements Closing
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Plan Procurements
Plan Procurements is the process of documenting project purchasing decisions,
specifying the approach, and identifying potential sellers
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Plan Procurements
Inputs Tools and Techniques Outputs
 Project management plan
 Requirements
documentation
 Teaming agreements
 Risk Register
 Project Schedule
 Activity cost estimates
 Stakeholder register
 Enterprise Environmental
Factors
 Organizational Process
Assets
 Make or buy analysis
 Expert Judgment
 Market research
 Meetings
 Procurement
management plan
 Procurement
statements of work
 Make or buy decisions
 Procurement
documents
 Source selection
criteria
 Change requests
 Project document
updates
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Plan Procurements - Inputs
Project Management Plan - describes the need, justification, requirements, and current
boundaries for the project. It consists of Scope statement, WBS and WBS dictionary.
Requirements documentation include Important information about project
requirements that is considered during planning for procurements.
Risk Register include risk-related information such as identified risk, risk owners and risk responses
Activity resource requirements state the type and quantities of resources needed for project
activities
Project Schedule provides information on project timelines and milestones
Activity cost estimates are used to evaluate the price quoted in the bids or proposals received
from potential sellers
Stakeholder Register describes the details on the participants and their interest in the project
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Plan Procurements - Inputs
Enterprise Environmental Factors includes condition of marketplace, what product and service
are available in the market, who is the seller and what are his terms and condition
Organizational Process Assets includes policies and procedures , standards ,guidelines,
performance measurement criteria, defect management procedures, change control procedures and
historical information. Some organizations may define certain constraint on procurement decisions.
This also include the various types of contractual agreements used by the organization, All legal
contractual relationships generally fall into one of two broad families: either fixed – price or
cost reimbursable. Also, there is a third hybrid type commonly in use called the time and materials
contract.
The next slides describes the different contract types in details
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Plan Procurements -Tools and Techniques
Time & Material – T & M The seller is paid for the amount of time it
takes to accomplish the work and he is
also reimbursed for the materials used for
the project
Firm Fixed Price - FFP The seller is paid a fixed price for an
agreed upon unit of work done by him
Fixed Price Incentive Fee – FPIF The seller is paid a fixed price plus an
incentive amount for achieving pre-agreed
project metrics
Fixed Price with Economic Price
Adjustment Contracts – FP-EPA
The seller is paid a fixed price. The
contract is reviewed at pre-defined
intervals in the project for adjustments to
the contract price based on certain
parameters
Types of Contract
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Cost Plus Fixed Fee – CPFF The contractor is reimbursed its cost plus
an additional fixed fee. Not desirable from
the buyer’s point of view
Cost Plus Incentive Fee - CPIF Seller is reimbursed for an agreed upon
performance cost along with a pre-
established fee plus an incentive bonus. In
this case, the buyer and seller share the
uncertainty to a certain degree
Cost Plus Award Fee Seller is reimbursed for an agreed upon
performance cost plus all legitimate cost
Types of Contract
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Make or buy analysis helps project management team to decide whether it is beneficial
(in terms of cost and quality) to procure a product or service or it can be produced within
the organization.
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.
Meetings , by collaborating with potential bidders , the organization purchasing the
material or service may benefit while supplier can influence a mutually beneficial
approach or product.
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Plan Procurements - Outputs
Procurement management plan describes how the procurement process will be
managed from planning procurement to close procurement. It contains detail on
1. Types of Contracts to be used
2. Risk management issues
3. Whether independent estimates will be used and whether they are needed as
evaluation criteria
4. Standardized procurement documents, if needed
5. Process of managing multiple providers (sellers)
6. Coordination with other project aspects
7. Any constraints and assumptions that could affect planned procurements
8. Handling the long lead times to purchase certain items from sellers and
coordinating the extra time needed to procure these items with the development
of the project schedule
9. Handling make – or – buy decision and linking them to the Estimate Activity
Resources and Develop schedule process.
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Procurement statements of work defines the products, services , or result to be
procured in details so that the seller can be sure that he can provide appropriate
products , services, or results. It is developed from the project scope baseline and
defines only that portion of the project scope that needs to be procured and stated in
the contract.
Procurement documents define the buyer’s requirements and facilitate complete
and correct response from the prospective sellers in the form of a proposal, which
aids in the selection of the seller(s). The most commonly used procurement
documents are RFP (Request for Proposal), IFB (Invitation for Bid and RFI (Request for
Information
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Source selection criteria are the set of guidelines on the basis of which a particular
seller is selected from among the proposals received. Some of the source selection
criteria are seller’s understanding of need , overall- life-cycle cost, technical capability,
Risk, past performance of the seller, Financial capacity, Warranty etc
Make –or - Buy Decisions, A make-or- buy analysis results in a decision of whether
particular work can best be accomplished by the project team or needs to be
purchased from outside sources.
Change requests may be there during this process due to updates in the project plan
or its subsidiary plan and other components. These changes are reviewed and
approved through the integrated change control process.
Project Documents Updates that may be updated include requirement
documentation, requirements traceability matrix and risk register.
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Practicing Key Concepts
Exercise 1: Make or Buy Analysis
You’ve been contracted by a construction company to manage their contracting.
They have a choice of either buying an excavator or renting it. To buy it, the
company would have to pay $105,000, but owning it will require approximately
$10,000 in maintenance costs per year. The price to rent the excavator is $5000 per
month, with a one-time service charge of $2000. What’s the minimum number of
months the company needs to use the excavator in order for it to make sense to
buy it rather than rent?
1. 8 months
2. 16 months
3. 21 months
4. 25 months
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Exercise 2: Plan Procurements
Which document are we referring below?
1. A type of procurement document used to request proposals from
prospective sellers of products or services.
2. A type of procurement document used to request price
quotations from prospective sellers of common or standard
products or services.
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Exercise 2: Plan Procurements
Which document are we referring below?
1. A type of procurement document used to request proposals from
prospective sellers of products or services.
RFP
2. A type of procurement document used to request price
quotations from prospective sellers of common or standard
products or services.
RFQ
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Conduct Procurement
Conduct Procurements is the process of obtaining seller responses, selecting a seller,
and awarding a contract
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Conduct Procurement
 Project Management
Plan
 Procurement
documents
 Source selection
criteria
 Seller proposals
 Project documents
 Make or buy decisions
 Teaming agreements
 Organizational Process
Assets
 Bidder conferences
 Proposal evaluation techniques
 Independent estimates
 Expert Judgment
 Advertising
 Analytical Techniques
 Procurement negotiation
 Selected sellers
 Agreements
 Resource calendars
 Change requests
 Project
management plan
updates
updates
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Project Management Plan contains procurement management plan and this
describes how the procurement process will be managed from preparing procurement
documentation through close procurements
Procurement Documents as explained earlier provide an audit trail for contracts and
other agreements
Source Selection criteria are set of guidelines, either subjective or objective, that
are used by the performing organization to select a particular contract/ vendor (seller)
from among the proposals received.
Seller proposals are responses to the procurement document package that will be
used for selection of the sellers by the organization’s evaluation body
Conduct Procurement - Inputs
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Project documents that are important inputs to this process include risk register and
risk related contract decisions.
Make- or -buy decisions as explained earlier is based on the outcome of Make –or-
buy- Analysis. The factors that influence the decision making include , core
competencies of the organization, value delivered, risk associated with meeting the
need in a cost=effective manner and internal capability as compared to the vendor
community.
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 include
 Specifications
 Quantity desired
 Quality levels
 Performance data, period of performance, work location and other requirements
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Organizational Process Assets that can influence this process include listings of
prospective and previously qualified sellers and information on relevant past
experience with sellers, prior agreements
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Conduct Procurement – Tools and Techniques
Bidder conferences are meetings wherein the prospective supplier (sellers) are called
in to ensure that all the supplier have a clear understanding of the work defined in the
procurement documents.
Proposal evaluation techniques are used to evaluate the proposals by giving a
rating score to each proposal
Independent estimates are sometimes prepared by the procuring organization using
internal expert in estimation or an outside professional estimator
Expert Judgment includes a team of experienced and skilled experts for evaluation of
proposals under various areas of expertise as mentioned in the procurement
documents and contract
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Conduct Procurement – Tools and Techniques
Advertising is used by the performing organization to invite the potential sellers to be
Contracted
Analytical Techniques, procurements involve defining a need in such as way
that vendors can bring value through offerings. To ensure that the need can be and is
met, analytical techniques can help organizations identify the readiness of a vendor to
provide the desired end state. 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
Procurement negotiations between the buyers and the potential sellers are
performed with the goal of reaching mutual agreement on the contractual terms and
conditions. The goal is to reach a win-win scenario between the buyer and seller.
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Conduct Procurements– Outputs
Selected Sellers are those who have met the evaluation criteria and negotiated a
draft contract with the buyer, which will become the actual contract when the contract
is awarded
Agreement is a formal document governing the relationship between the buyer and
the seller. The contract describes the work to be performed and perhaps the way in
which the work will be performed. An important to include with the contract is how
disputes will be resolved. Depending upon the application area, an agreement can also
be called an understanding , a contract, a subcontract, or a purchase order.
Regardless of the document complexity , a contract is a mutually binding legal
agreement that obligates the seller to provide the specific products, services, or
results and obligates the buyer to compensate the seller. The major component of
agreement are:
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Major components of an agreement
 Statement of work or deliverables
 Schedule baselines
 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 and retainer
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Major components of an agreement
 Penalties
 Incentives
 Insurance and performance bonds
 Subordinate subcontractor approvals
 Change request handling and
 Termination clause and alternative dispute resolution (ADR) mechanism. The ADR
method can be decided in advance as a part of the procurement award.
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Resource Calendar state the availability and the quantity of contracted resource and
the project period (dates) during which the resources are active or idle
Change Requests to the project management pan, its subsidiary plans and other
components are processed for review and disposition through the Perform Integrated
Change Control process.
Project Management Plan Updates, the elements of the project management plan
that may be updated include Cost baseline, Scope baseline, Schedule baseline,
Communication management plan, and Procurement management plan.
Project Document Updates, the project documents that may be updated include,
requirement documentation, requirement traceability documentation, risk register and
stakeholder register.
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Selected Sellers are those who have met the evaluation criteria and negotiated a
draft contract with the buyer, which will become the actual contract when the contract
is awarded
Procurement Contract Award is a formal document governing the relationship
between the buyer and the seller. The contract describes the work to be performed
and perhaps the way in which the work will be performed. An important to include
with the contract is how disputes will be resolved.
Resource Calendar state the availability and the quantity of contracted resource and
the project period (dates) during which the resources are active or idle
Change Requests As discussed earlie
Project Management Plan Updates As discussed earlier
Project Document Updates As discussed earlier
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Control Procurements
Managing procurement relationships, monitoring contract performance and
making changes and corrections as needed.
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Control Procurement
Plan
 Procurement
documents
 Agreement
 Approved change
requests
 Work Performance
reports
 Work performance
Data
 Contract change control system
 Procurement performance
reviews
 Inspections and audits
 Performance reporting
 Payment system
 Claims administration
 Records management system
•
 Work performance
information
 Change requests
 Project
management plan
updates
updates
 Organizational
process assets update
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Project Management Plan describes how the procurement process will be managed
from developing procurement documentation through contract closure.
Procurement documents contain complete supporting records for administration of
the procurement processes; this includes procurement contract awards and the
statement of work
Agreements As Explained earlier Agreements are understanding between parties,
including understanding of the duties of each parties.
Approved change requests include modifications to the terms and condition of the
contract including the procurement statement of work, pricing and the description of
the products , services or results.
Control Procurement - Inputs
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Work Performance Reports – is a seller performance related documentation that
include
 Technical documentation. Sellers- developed technical documentation and other
deliverable information are provided in accordance with the terms of the contract.
 Work performance information. The seller’s performance reports indicate which
deliverables have been completed and which have not.
Work Performance Data includes information on a regular basis of the performance
and status of the seller’s project work activities. It includes information such as which
deliverables have been completed and which have not, whether the quality standards
defined for the project are being adhered to and the payment is being made for the
costs that have been stated in the contract.
Control Procurement - Inputs
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Control Procurement – Tools and Techniques
Contract change control system is a component of integrated change control system
and it describes the process of updating the contract
Procurement performance reviews are periodic reviews initiated by the buyer to
measure the project’s progress against the plan
Inspections and audits are done by the buyer and supported by the seller to identify
any non-compliance to the project’s process or deliverables.
Performance reporting provides information to management about how effectively
the seller is achieving his contractual objective.
Payment system helps to ensure that invoices and payments match up and that the
right amount is being invoiced for the right deliverables at the right time.
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Control Procurement – Tools and Techniques
Claims administration are basically disagreements (about scope or change request).
It is preferred that the claims should be resolved by the parties involved as per the
dispute resolution procedure . If not resolved by the parties involved, then the disputes
are resolved by the process of Arbitration whereby a third neutral party is given the
task of getting the dispute resolved.
Records management system is a part of the project management information
systems (PMIS). In addition to the documentation, it also consists of processes, control
functions, and automated tools. This system should index various documents for their
easy retrieval and archival.
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Control Procurement – Outputs
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 the 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.
Change requests, changes to the project management plan, its subsidiary plans, and
other components , such as the cost baseline, schedule baseline, and procurement
management plan may result from the control procurement process.
Project management plan updates includes update to the procurement
management plan ,schedule baseline and cost baseline
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Control Procurement – Outputs
Project Documents Updates include updates to procurement documentation, it
include the procurement contract with all supporting schedules, requested unapproved
contract changes , and approved change requests. It also includes any seller
developed technical documentation and other work performance information such as
deliverable s, seller performance reports and warranties, financial documents including
invoices and payment records, and the result of contract – related inspections.
Organizational process assets updates that will be updated as a result of this
process includes documentation related to seller’s unsatisfactory performance, request
for contract changes or clarifications, payments made by the buyer to the seller and
also the documents related to seller’s performance.
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Revising Tools and Techniques
Exercise : Control Procurements
1. ___________________ involves process to change the
procurement contract. It can involve the approvals, paperwork
and the dispute resolution mechanism required for the change
control.
2. ______________ system refers to how the payments are made to
the seller.
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Revising Tools and Techniques
Answer to Exercise : Control Procurements
1. Contract Change Control System involves process to change the
procurement contract. It can involve the approvals, paperwork
and the dispute resolution mechanism required for the change
control.
2. Payment system refers to how the payments are made to the
seller.
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Close procurements
Process of completing each project procurement. It involves administrative activities
such as updating the project records with results and archiving the information for
future use and finalizing open claims in accordance with the terms and conditions
stated in the contract document
Close Procurement process closes the procurement applicable to that phase of the
project
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Close procurements
Plan
 Procurement
documentation
 Procurement audits
 Procurement Negotiations
 Records management system
 Closed
procurements
 Organizational
process assets
updates
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Close procurements- Inputs
Project Management Plan Discussed Earlier
Procurement documentation includes information on contract schedule, scope,
quality and cost performance along with all contract change documentation, payment
records and inspection results. This information can be used for lessons learned
information and as a basis of evaluating contractors for future contracts.
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Close procurements- Tools and Techniques
Procurement Audits is a structured review of the procurement processes from the
plan procurements process through administer contracts process. The purpose of
procurement audit is to identify the improvement areas and the flawed procurement
processes and/ or procedure. This will assist in reusing the successful/updated
procedures in other projects.
Procurement Negotiations refers to the settlement for any outstanding issues,
claims and disputes through negotiation. Whenever the settlement cannot be achieved
through direct negotiation, some form of alternative dispute resolution(ADR) including
mediation or arbitration can be explored
Records Management System is used by the project manager to manage contract
and procurement documentation and records. Contract documents and
correspondence are archived through the records management system as part of the
close procurement process
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Close procurements- Outputs
Closed Procurements is the process in which the buyer’s contract administrator
sends formal written notice to the seller that the contract is complete.
Organizational Process Assets Updates will be updated due to modification in the
procurement files and lessons learned documentation. Also, deliverable acceptance
and rejection will be stated in the final contract documentation with supporting
reasons.
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Reviewing Associated Risks to Buyers & Sellers
Exercise 5: Contract Type
Explain the risks from buyer and seller perspective in case of the following
types of contracts
1. Firm fixed price
2. Fixed price plus incentive fee (FPIF)
3. Cost plus fixed fee
4. Cost plus award fee
5. Cost plus incentive fee
6. Time and Material (T&M)
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 Negotiations Techniques
– Deadline: imposing a deadline to reach an agreement
– Stalling: one party may claim that an agreement cannot be finalized
because of his limited authority
– Fair and Responsible: a negotiator may claim that the price for a
product is equitable because that’s what another company is
paying.
– Delay: are useful when tempers are beginning to flare, to divert from
a subject, etc (Ex: arrival of refreshments, request for recess etc)
– Withdrawal: one party may attack an issue, then retreat
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 Negotiations Techniques
– Arbitration: a third party may be brought in when agreement cannot
be reached. (out of court settlement)
– Fait Accompli: a party may claim that what is being asked for has
already been accomplished and cannot be changed
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Revising Key Terms : Complete the following
Exercise 5: Procurement Management
1. An Invitation for __________ is a document that ask sellers for
the price of work
2. The buyer selects the __________ selection criteria before
contacting potential sellers
3. The ___________contract has high risk to the seller because the
seller must cover costs that go beyond the price
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QUIZ !
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Project Procurement Management PMBOK 5

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Project Procurement Management PMBOK 5