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1Copyright © PMI SOC 2013

Chapter # 12Project Procurement Management

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Copyright © 2013 PMI SOC


Objective & Agenda Introduction to Project Procurement Management

Understanding the processes of project procurement

management in the four process groups:1. Plan Procurement Management

2. Conduct Procurements

3. Control Procurements

4. Close Procurements

Inputs, tools and techniques, and outputs (ITTO’s) of the

four processes & interaction with other knowledge areas.

Sample exam questions


Definitions

Procurement:

• Acquisition of products, services, or results.

Procurement Management:

• The processes necessary to purchase or acquire products,

services, or results needed from outside of the project team.

Assumptions

There is an existence of a formal contract between the buyers &

sellers.

The Buyer of product/services/Item for the project is assigned to

the Project team & Seller belongs to the different organization.

Project Procurement Management Introduction


Buyer-Seller Relationship

Terms for Buyer• Client• Customer• Prime Contractor• Acquiring Organization• Service Requestor• Purchaser

Terms for Seller• Contractor• Subcontractor• Vendor• Service provider• Supplier

Project Procurement Management


Project Procurement Management Overview

PMBOK Ref # Fig 12-1


12.1 Plan Procurement Management



• The process of documenting project procurement decisions,

specifying the approach, and identifying potential sellers.


Data Flow


Project Procurement Management 12.1 Plan Procurement Management


Project Management Plan (Section 4.2.3.1)

Requirements Documentation (Section 5.2.3.1)

Risk Register (Sections 11.2.3.1 & 11.5.3.2)

Activity Resource Requirements (Section 6.4.3.1)

Project Schedule (Section 6.6.3.2)

Activity Cost Estimates (Section 7.2.3.1)

Stakeholder Register (Section 13.1.3.1)

Enterprise Environmental Factors (Section 2.1.5)

Organizational Process Assets (Section 2.1.4)

Project Procurement Management 12.1.1 Plan Procurement Management - Inputs


Fixed Price Contracts

• Firm Fixed Price Contracts (FFP): The buyer will pay the seller one fixed fixed amount regardless of how much it costs the seller to complete the work.

• Fixed Price Incentive Fee Contracts (FPIF): The buyer will pay the seller one fixed amount plus financial incentives tied to achieving agreed upon metrics (performance goal).

• Fixed Price with Economic adjustments (FP-EPA): The buyer will pay the seller one fixed amount with a special provision allowing for predefined final adjustments based on changed conditions such as inflation & commodity price fluctuations; could be used when the seller’s performance period spans a considerable period of years.

Project Procurement Management 12.1.1 Plan Procurement Management - InputsOrganizational Process Assets – Contract Types


Organizational Process Assets – Contract Types

Cost-Reimbursable Contracts

• Cost Plus Fixed Fee (CPFF): The buyer will reimburse the seller for all allowable costs plus a fixed-fee payment calculated as a percentage of initial estimated project costs.

• Cost Plus Incentive Fee Contracts (CPIF): The buyer will reimburse the seller for all allowable costs plus a predetermined incentive fee based upon achieving certain performance objectives.

• Cost Plus Award Fee Contracts (CPAF): The buyer will reimburse the seller for all allowable costs but the majority of the fee is earned only based on the satisfaction of certain broad subjective performance criteria.



Contract Types- Time & Material

Time and Material Contracts (T & M)

• Buyer will reimburse the seller with the time cost of labor (time) and the cost of materials.

• Contains aspects of both cost-reimbursable and fixed-price contracts.

• Cost-reimbursable when these costs are left open ended.

• Fixed-price when certain parameters are specified in the contract:

• Not-to-exceed values

• Time Limits



Contract Type vs. Risk CPFF: Cost + Fixed FeeCPIF: Cost + Incentive Fee FPIF: Firm Price + Incentive Fee FFP: Firm Fixed Price



Make-or-Buy Analysis • Management technique used to determine whether work can best be

accomplished in-house or purchased from outside sources.• Determining factors include budget, schedule, capability, resources, quality,

supplier skills & abilities, contract types.

Expert Judgment• Often used to assess inputs/outputs from this process.

• Purchasing judgment is used to develop criteria to evaluate seller proposals.

• Legal judgment to assist with procurement terms & conditions.

Market Research• Examination of industry specific vendor capabilities through conferences,

online reviews and other sources to identify market capabilities.

Meetings• Information interchange meetings with potential bidders.

12.1.2 Plan Procurement Management – Tools & Tech.



Procurement Management Plan

Procurement Statement of Work

Procurement Documents

Source Selection Criteria

Make-Or-Buy Decision

Change Requests

Project Document Updates

Project Procurement Management 12.1.3 Plan Procurement Management – Outputs



• Component of Project Management Plan.• Describes how the project team will acquire goods and services from outside the

organization.• Describes how the procurement processes will be managed from developing

procurement documents through contract closure including:• Type of contracts to be used.• Risk management issues.• If independent estimates will be used / are needed.• Standardized procurement documents.• Assumptions & constraints that could affect planned procurements.• Make-or-buy decisions.• Scheduled dates in each contract for contract deliverables.• Direction to be provided to sellers on developing and maintaining the

WBS.• Prequalified sellers.• Procurement metrics.

More…PMBOK pg 366-367

12.1.3 Plan Procurement Management – Outputs



Procurement Statement Of Work

Developed for each procurement from the project scope baseline and defines only that portion of project scope that is to be included within the related contract.

Describes the procurement item in a clear, complete, and concise manner to allow prospective sellers to determine if they are capable of providing the products, services, or results.

Can include: Specifications. Quantity. Quality levels. Performance data. Period of performance. Work location.




Documents are used to seek proposals from prospective sellers. Common terms for procurement documents:

Request for information (RFI) Invitation for bid (IFB) Request for proposal (RFP) Request for quotation (RFQ) Tender notice Invitation for negotiation Seller initial response

Procurement documents are structured to facilitate an accurate and complete response from each prospective seller and to facilitate the evaluation process.

Procurement documents include a description of the desired form of seller response, the relevant procurement statement of work, source selection criteria, and any contractual provisions.



Source Selection Criteria

Criteria used to rate and score proposals. Often included in procurement documents.

Possible Source Selection Criteria: Understanding of need. Overall or life-cycle cost. Technical capability Risk Warranty Financial capacity Production capacity and interest Past performance of sellers References

More…PMBOK pg 369



Make-Or-Buy Decisions

Analysis results in a decision of whether particular work can

best be accomplished by the project team or to be purchased

from outside sources.

A buy decision drives the process of reaching agreement with a

supplier for the product or services.



Change Requests


A decision to procurement goods, services, or resources

typically requires a change request.

Change requests are processed for review and disposition

through the Perform Integrated Change Control Process (4.5).

Changes to the project management plan may result in change

requests that impact procurement actions.


Project Documents Update


Project documents that may be updated include:

Requirements documentation.

Requirements traceability matrix.

Risk register.


Project Procurement Management 12.2 Conduct Procurements


• The process of obtaining seller responses, selecting a seller,

and awarding a contract.

23Copyright © PMI SOC 2013 PMBOK Ref # Fig 12-5

Project Procurement Management 12.2 Conduct Procurements


Procurement Management Plan (Section 4.2.3.1)

Procurement Documents (Section 12.1.3.3)

Source Selection Criteria (Section 12.1.3.4)

Seller Proposals

Project Documents (Section 11.5.3.2)

Make-or-Buy Decisions (Section 12.1.3.5)

Procurement Statement Of Work (SOW) (Section 12.1.3.2)

Organizational Process Assets (Section 2.1.4)

Project Procurement Management 12.2.1 Conduct Procurements - Inputs


Bidder Conferences

Proposal Evaluation Techniques

Independent Estimates

Expert Judgment

Advertising

Analytical Techniques

Procurement Negotiations

Project Procurement Management 12.2.2 Conduct Procurements – Tools & Techniques


Also known as contractor conferences, vendor conferences and

pre-bid conferences.

Meetings with Prospective Sellers & Buyers prior submitting a

bid/proposal.

Ensure that all sellers have clear & common understanding of

the procurement requirements.

Fairness is addressed by techniques such as collecting

questions from bidders or arranging field visits in advance of

conference.


Bidder Conferences


A formal review evaluation process used for complex

procurements defined by the buyer’s procurement policies.

Source selection will be made based on seller responses

evaluated using previously defined weighted criteria.

Evaluation committee will make a selection on a seller for

approval by management prior to the award.


Proposal Evaluation Techniques


Estimate prepared either by the procuring organization or by a

professional estimator.

Estimate serves as a benchmark on proposed response.

Significant differences in estimates can be an indication that the

statement of work was deficient, ambiguous, and /or that

prospective sellers misunderstood or failed to respond fully to

the procurement statement of work.


Independent Estimates


Used to evaluate seller proposals.

Evaluation proposals may be accomplished by a multi-discipline

review teams with expertise in the areas covered by the

procurement documents.

Various functional disciplines that may be asked to provide

expertise include contracting, legal, finance, accounting,

engineering, design, research, development, sales, and

manufacturing.

Expert Judgement



Advertising in general circulation publications or in specialty

trade publications.

Purpose is to extend existing list of potential sellers.

Mandatory requirement in some government jurisdictions for

certain types of procurement items.


Advertising


Analytical techniques help organizations to 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.

Involves defining a need in such a way that vendors/sellers can

bring value through their offerings

Examining past performance information may identify high risk

areas that need to be monitored closely.


Analytical Techniques

12.2.2 Conduct Procurements – Tools & Techniques


Clarifies the structure, requirements and other terms of the purchases to

reach mutual agreement prior signing the contract.

Final contract language should reflect all agreements reached and should

include: Responsibilities.

Authority to make changes.

Applicable terms and governing law.

Technical and business management approaches.

Proprietary rights.

Contract financing.

Technical solutions.

Overall schedule.

Payments

Price





Negotiator should not do the following: Rush the process Attempt to leave one stage incomplete Rush to the next stage too quickly





Protocol Stageo Introductionso Negotiator get to know each othero Atmosphere for the rest of the negotiation meeting is

determined

Probing Stageo Beginning of search processo Each party identify their issues & concernso Identify Strengths/Weaknesses and possible area of interesto Negotiation plan updated to take into account any new

information

Procurement Negotiations: Protocol & Probing Stage



Scratch Bargainingo Bargaining Startso Differences between both parties are discussedo Points of Consensus are identifiedo Efforts made to bridge gaps/ shortfalls

Closure Stageo Documents final consensuses between both partieso Arrangements for recording the results initiated , leading to

last stage

Procurement Negotiations: Scratch Bargaining & Closure Stage



Agreement Stageo Ensures that both parties have an identical understanding of

the agreements reached.o Clarifications may be necessary due to difference in

terminology.o Negotiations may be re-openedo Development of Plans for creating a written contract.

Procurement Negotiations: Agreement Stage



Deadlineo Impose a deadline for reaching an agreemento Limits the time involved allowed for negotiating

Surpriseo One party takes on the other party by surpriseo One party may have some information (e.g. Price change )

and present it to the other party Limited Authority

o The agreement cannot be finalized due to the Limited authority with negotiator

o Stalling tactico Knowing the authority of the opponent early in the

negotiation meeting

Procurement Negotiations: Tactics





Missing Mano One party may claim that the person with final authority is

absent.

Fair & Reasonableo Comparisons to other similar situations e.g. “Price is fair

because other company is paying the same price for the assignment”.

Delayso Tactical use of delays.o Delay to get back on track.o Delay to cool down when temper flares.o Need time to further research.





Reasoning Togethero Working out disagreements for benefit of all involved.

Confusing the Opponento One person deliberately distorts issues & figures to confuse

opponent.

Withdrawalo One party makes a false allegation/attack upon issue & retreats.o Usually done to avert attention from a possible area weakness.

Unreasonableo Making opponent appear un-reasonable.




Arbitration

o Involving third party to settle down issues.

Fait accompli

o One party may claim that what is being asked has already

been accomplished and cannot be re-called/changed.

o Any changes at this stage will have an monetary & schedule

impact on the project.




Non-competitive Selection


Single Source

o Occurs when the buyer selects a single seller company to

provide products or services.

Sole Source

o Occurs when there is only one seller that can cater to the

requirements and there isn’t any competition.

o Buyers negotiation powers get affected due to monopoly of

seller in the field.



Types of Warranties


One party assures that the goods will meet certain standards.

Expressed warranty is written in the contract.

Implied warranty is a measure of “merchantability” or “fitness for

a particular purpose”.

Waiver: Provides loss of rights under a contract.




Selected Sellers

o Sellers who have been judged to be in a competitive range

based on the outcome of the proposal or bid evaluation.

o Draft contracts will become the actual contract when an award is

made.

Agreements

o Includes terms & conditions and other items that the buyer

specifies about what the seller is to perform or provide.

o Project team’s responsibility to ensure that all agreements meet

the specific needs of the project.

12.2.3 Conduct Procurements – Outputs


Project Procurement Management 12.2.3 Conduct Procurements – Outputs



Change Requests

o Changes to the project management plan, its subsidiary plans,

and other components.

Project Management Plan Updates

o Updates to the cost baseline, scope baseline, schedule baseline,

communications management plan, procurement management

plan.

Project Documents Updates

o Updates to requirements documentation, requirements

traceability documentation, risk register, stakeholder register.

12.2.3 Conduct Procurements – Outputs


12.3 Control Procurements



• The process of managing procurement relationships, monitoring

contract performance, and making changes and corrections to

contracts as appropriate.







Application of appropriate project management processes to the

contractual relationship(s) with selected sellers.

Integration of the outputs from these processes into the overall

management of the project.

Project management processes that are applied include:

o Direct and manage project work.

o Control quality.

o Perform integrated change control.

o Control risks.




Has a financial management component being the monitoring of

payments to seller which ensures:

Payment terms in the contract are met.

Payments are linked to seller progress; close relationship of

payments made to the work accomplished.

Reviews and documents how well a seller is performing or has

performed based on the contract.

Involves capturing details to determine if corrective actions or

early termination are needed.

Review can be used as a measure of the seller’s competency

for performing similar work on future projects.



12.3.1 Control Procurements - Inputs


Project Management Plan (Section 4.2.3.1)

Procurement Documents (Section 12.1.3.3)

Agreements (Section 12.2.3.2)

Approved Change Requests

Work Performance Reports (Section 4.4.3.2)

Work Performance Data (Section 4.3.3.2)


12.3.2 Control Procurements – Tools & Techniques


Contract Change Control System

Procurement Performance Reviews

Inspections & Audits

Performance Reporting

Payment System

Claims Administration

Records Management System




Contract Change Control System

Defines the process to modify procurements.

Procurement Performance Reviews

Structured review of the seller’s progress to deliver what is

defined in the contract.

Inspections and Audits

Performance Reporting

Payment Systems




Claims Administration

Documenting, processing, monitoring and managing instances

where the buyer and seller cannot reach an agreement on

compensation for a change or cannot agree that a change has

occurred.

Also referred to as claims, disputes, appeals.


System used to manage contract and procurement

documentation and records.


12.3.3 Control Procurements – Outputs


Work Performance Information

Change Requests

Project Management Plan Updates


Schedule Baseline

Cost Baseline

Project Document Updates

Organizational Process Assets Updates


12.4 Close Procurements



• The process of completing each procurement.


12.4 Close Procurements (cont’d)




12.4.1 Close Procurements – Inputs


Project Management Plan



12.4.2 Close Procurements – Tools & Techniques


Procurement Audits

Structured review of the procurement process

originating from Plan Procurement Management

through Control Procurements.

Objective is to identify successes and failures.


Final equitable settlement of all outstanding issues,

claims and disputes.

Settlement through negotiation is ideal.



12.4.3 Close Procurements – Outputs


Closed Procurements

Formal written notice that the contract has been

completed.

Organizational Process Assets Updates

Procurement File.

Deliverable Acceptance.

Lessons Learned.



PMP Exam PreparationSample test questions



Answer:

Question #1You are working on a very dynamic project. You need a specific technical skill which is not available in the team. Consequently you have hired a contractor. Market conditions which drive the requirements are fluctuating. What is the best way to handle this situation? A- Firm fixed price contract- this way your cost is fixed no matter what the requirements will be

B- Cost plus fixed fee contract - this way you will pay only for the work done by the contractor

C-Cost plus incentive fee contract – since the contractor has an incentive to keep their costs down -

D-Make the contactor part of the agile team which includes the customer & the project team members

E- C & D


Answer:

Question #2You’ve been contracted by an industrial design firm to manage their

contracting. Your client asks you to take over the negotiations for an important

contract to design a new lighting remote control system. You’ve narrowed it

down to one seller, and now you’re working with the legal department at the

buyer to negotiate the terms of the contract. Which of the following BEST

describes your goal?

A.You want to make sure that the seller gets as much money as possible

B.You want to get the best deal for your client by making sure the seller’s price

is as low as possible, no matter what it costs them

C.You want to prolong the negotiation so that you earn a higher fee

D.You want to get a fair deal for both the buyer and the seller


Answer:

Question #3Which of the following BEST explains the difference between a seller audit

during Administer Procurements and a procurement audit during Close

Procurements?

A.The seller audit reviews the products being created, while the procurement

audit is used to examine successes and failures and gather lessons learned

B.The seller audit reviews the products being created, while the procurement

audit reviews how well the seller is doing the job

C.The procurement audit reviews the products being created, while the seller

audit reviews how well the seller is doing the job

D.The procurement audit reviews the products being created, while the seller

audit is used to examine successes and failures and gather lessons learned


Answer:

Question #4You have been assigned to a project where the previous project manager left. You find the scope was documented but not the business objectives. The scope has suddenly changed –but the change is not documented. In addition, a contractor was hired for a Fixed Price contract to deliver the previous scope. What tasks should you do & in what order?. 1- Negotiate with the contractor to close the FFP contract & change the contract to a cost + incentive fee

2-Meet with the stakeholders to assess the situation, understand the business objective & determine how the project will deliver the benefits

3-–Document the new scope, asses where the project stands & re baseline immediately A- 3,1 B- 2, 3, 1C- 3, 1, 2 D- 2, 1


Answer:

Question #5

You are managing a project that might have to contract out work, and

you’re comparing the relative advantages and disadvantages of finding

a seller versus having your company do the work itself. Which process

are you in?

A.Conduct Procurements

B.Plan Procurements

C.Request Seller Responses

D.Plan Contracting


Answer:

Question #6

You’re looking for a seller to do work for your project. When do you

send out an RFP?

A.Before you plan contracting, but after you Plan Procurements

B.After you create the procurement documents, but before you select

the seller

C.During Administer Procurements

D.After the bidder conference, but before you select the seller


Answer:

Question #7

What are the Procurement processes?

A. Plan, Conduct, Administer, Monitor & Control, Close

B. Plan Purchases and Acquisitions, Plan Contracting, Request Seller

Responses, Select Sellers, Contract Administration, Contract Closure

C. Plan Procurements, Conduct Procurements, Administer Procurement,

Close Procurements

D. Determine, Plan, Conduct, Monitor & Control, Close


Answer:

Question #8

The project's contractor payment system should include:

A. An administrative review

B. A review of work performed

C. Negotiations over price

D. A viable account payable system


Answer:

Question #9

The contract administrator should provide ___________ at contract

closure.

A.Contract file to the contractor

B.Letters of commendation to all project staff

C.Formal notice of deliverable acceptance to the contractor

D.Lessons learned documentation to senior management/buyer


Answer:

Question #10

you inherited a project where some work was contracted as FFP. Your manager had signed off on the contract The stakeholders have just requested a scope change due to changing industry conditions. You were conducting a procurement audit & found the contractor performing to deliver the previous scope. What should you do next? 1- Understand the business conditions that caused the scope change & document the change 2-Request a contingency for your project to cover the FFP amount in the contract since you were not responsible for it3-Negotiate with the contractor to close the FFP & start a time and material contract 4- Tell the stakeholder there is a fixed price contact & any change will increase the cost of the project so they are aware A- 1, 2 & 3 B- 1, 3, & 4 C- 1, 2, 4 D 1, 3 only


Answer:

Question #11

Close Procurement documentation includes all of the following

EXCEPT:

A.Scope, schedule, and change documentation

B.Financial documents

C.The RFP or RFB and seller's working proposal

D.Results of contract-related inspections


Answer:

Question #12

Potential contract changes should be:

A.Postponed as long as possible to protect the budget

B.Viewed as negative, quantified, and tabulated

C.Quantified and fed back through the perform integrated change

control process

D.Reviewed by senior management and the buyer


Answer:

Question #13

The purpose of a procurement audit is to do all of the following

EXCEPT:

A.Maintain a complete file of contract-related records.

B.Determine if the bid documents used were effective.

C.Determine if the contract change control system was effective

D.Identify successes and failures and their implications


Answer:

Question #14

When the procurement item is available from only one supplier, all of

the following evaluation criteria should be identified and documented to

support an integrated assessment EXCEPT:

A.Management approach

B.Standard forms

C.Life cycle cost

D.Technical capabilities


Answer:

Question #15

All of the following methods are available to the project manager for

short-listing contractor proposals EXCEPT:

A.Comparing proposals against independent estimates

B.Weighting systems

C.Subjective screening systems

D.Resource distribution system


Answer:

Question #16

You have been diligent in capturing lessons learned. You have just discovered a new tool that automates testing & will save you 15 % of testing cost –on a given task – in fact there is potential for it to be applied to all testing . You also have a contractor hired on a Fixed Price contract What should you do next? 1-Llist this as an accomplishment in the stakeholder meeting & advise them you will finish your test early by 2 weeks 2_ Share it with your team & with the contractor & your manager 3- Share it only with your manager & immediate team members – but not with the contractor – since they are on an FFP contract 4- Negotiate with the contractor ½ the savings achieved by the tool A – 1 B – 3C- 2D – 2 & 4


Answer:

Question #17

FFP is an acronym for:

A.Free Flow Performance

B.Fundamentally Fixed Price

C.Firm Fixed Price

D.Free Form Project


Answer:

Question #18

Which of the following item is not a Tool & Technique used in Plan

Procurement Management :

A.Make-or-buy analysis

B.Market Research

C.Contract Negotiations with the Sellers

D.High level meetings with upper management involving the customer


Answer:

Question #19You are the PM for the Union Station Extension Project and have awarded the

electrical scope to Sparky Electrical Inc. There have been numerous issues with

the quality of the work performed by Sparky Electrical causing schedule delays

resulting in penalty charges by the client. There is a new project starting in your

organization and the project team is considering awarding electrical scope to

Sparky Electrical.

Which of the following would have assisted the new project team in the vendor

selection process :

A. Contract Change Control system

B. Procurement Contract

C. Performance Reporting

D. Payment Systems


Answer:

Question #20

A new hospital is being constructed and your company has been selected to

deliver the entire project from design to construction. The client states that there

is no room in their budget for additional charges. Your company will perform

some of the work but most of the scope will be subcontracted. As the PM, you

need to ensure that your subcontractors understand the budgetary constraints

and are clear on the scope of work.

Which of the following is the best type of contract to use on this project?

A. Cost plus fixed fee

B. Fixed Price

C. Time and Material

D. Cost plus Incentive Fee



PMP Exam PreparationEnd of session
