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Lecture 45

Project Procurement, Contract Management,

andEthics

in Project Management

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Lecture 44 contents

• What is Risk?• Primary Components• Tolerance of Risk• Risk Management• Cat of Risk• Risk Planning• Risk Assessment (identification and analysis)• Risk Handling• Risk Monitoring• Qualitative Risk Rating

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Lecture 45 • Procurement

• Procurement Cycles– Requirement cycle– Requisition Cycle– Solicitation cycle– Award Cycle– Admin cycle

• 2. Type of contract– Six Categories of Contract

• Ethics in Project Management

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“Self-pity is our worst enemy &

if we yield to it,

we can never do anything wise in this world”

- Helen Keller

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“To be prepared is half the victory.

” Miguel de Cervantes Saavedra

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“Treat people as if they were what they ought to be,

& you help them to become

what they are

capable of being”

- Johann Wolfgang von Goethe

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The quality of a person's life is in direct production to

their commitment to excellence,

regardless of their chosen field of endeavor.

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The race is not always to the swift...

but to those

who keep

on running.

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In three words, I can sum up everything I've learned about life: It goes on.

- Robert Frost

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Action in Your Project

“Action may not

always bring

happiness,

but there is

no happiness

without Action”

- Benjamin Disraeli

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Procurement

Acquisition of goods/services. Procurement (& contracting)is a Process that involves-Two Parties with: Different objectives Who Interact in a given market segment.

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Good Procurement Practices includes

Corporate profitability by:Taking advantage of:1. Quantity discounts, 2. Minimize Cost/Financial

Problems, 3. Seeking out Quality Suppliers.

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As Procurement Contributes To Profitability Procurement is Often Centralized,

-Results in “Standardized practices”

-”Lower Paper work Cost”

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Objectives of Procurement Planning are to select one of following for the Procurement of all Goods/Services:

1. From Single Source.2. From Multiple/source.3. Procure only small portion of

Goods/Services4. Procure none of Goods/Services

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Environment in which Procurement Take Place is Critical factor.Critical factor.

There are two environments: 1. Macro & 2. Micro.

Macro environment includes General external variables that can Influence “How & When” we do Procurement and it Includes:– Recessions, – Inflation, – Cost of borrowing money, – Unemployment.

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Micro environment is the internal to Firm Include “Procurement /Contract System” five cycles:

Requirement Cycle: Defines boundaries of Project

Requisition Cycle: analysis of sources

Solicitation Cycle: Bidding process

Award cycle: Contractor selection & Contract Award

Contract Admin Cycle: Managing subcontractor until Completion of the Contract.

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Several Activities of Procurement Process that overlaps Several of Cycles.

These cycles are conducted In parallel, especially “Requisition & Solicitation”.

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1. Requirement Cycle

First Step in Procurement Process “Definition of Project Specifically ‘Requirements”

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Requirement Cycle Includes1. Defining the need for the project

2. Development of the statement of work, specifications, and work breakdown structure

3. Performing a make or buy analysis

4. Laying out the major milestones and the timing/schedule

5. Cost estimating, including life-cycle costing

6. Obtaining authorization and approval to proceed

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Specifications

Written Pictorial or graphic Information describe define or specify services/item to be procured:

1. Design (physical Characteristics)

2. Performance (measurable capabilities)

3. Functional Specification ( subset of Functional , risk is on contractor)

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2. Requisition Cycle

Once the “Requisition identification”, ‘Requisition form’ sent to Procurement to begin “Requisition Process”.

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Requisition cycle Include:

1. Evaluation confirming specification.

2. Confirming sources

3. Reviewing past performance of sources

4. Producing Solicitation Package (S/P)

Solicitation Package sent to each possible “Supplier for Playing” Field is level.

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Specification Package Includes:1. Bid documents (usually standardized)

2. Listing of qualified vendors (expected to bid)

3. Proposal evaluation criteria

4. Bidder conferences

5. How change requests will be managed

6. Supplier payment plan

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3. Solicitation Cycle

Selection of “Acquisition Method” is the Critical Element in “Solicitation Cycle”.

Three Acquisition Methods :

• Advertising

• Negotiation

• Small Purchases (off supplies)

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Advertising company goes out for sealed bids.

There are no negotiations. Competitive market forces determine the price and the award goes to the “lowest bidder”.

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Negotiation is when the price is determined through a bargaining process. In such a situation, the customer may go out for a:– Request For Information (RFI)

– Request For Quotation (RFQ)

– Request For Proposal (RFP)

The request for Proposal (RFP) is the most costly endeavor for the vendor.

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Large proposals contains:

separate volumes for cost, technical Performance, Management History, Quality, facilities, subcontractor Management, & Others.

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On Large contracts the Negotiation Process may Also Includes Price, Quantity, Quality & Timing.

Vendor Relations are critical during contract negotiations.

Can Shorten Process due to: 1. Integrity of relationship & 2. Previous history

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Award Cycle (A/C)

Result in a “signed contract”. Several types of Contracts.

So Negotiation process also Include “selection” of the Type of Contract.

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Objectives of Award Cycle is to negotiate a contract:

-Type & Price

-Result in reasonable “Contractor risk” & Provide Contractor risk with Greatest Incentive for Efficient & Economic Performance.

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There are certain basic elements of most contracts.• Mutual Agreement: There must be an offer and

acceptance.• Consideration: There must be a down payment.• Contract Capability: The contract is binding only if

the contractor has the capability to perform the work.

• Legal Purpose: The contract must be for a legal purpose.

• Form Provided By Law: The contract must reflect the contractor's legal obligation, or lack of obligation, to deliver end products.

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The Two Most Common Contract Forms are completion contracts and term contracts.

• Completion Contract: The contractor is required to deliver a DEFINITIVE END PRODUCT. Upon delivery and formal acceptance by the customer, the contract is considered complete, and final PAYMENT CAN BE MADE.

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2. Term contract:

The Contract Is Required To Deliver A Specific "Level Of Effort," Not An End Product.

The effort is expressed in Woman/Man-days (Months Or Years) over a Specific Period Of Time using Specified Personnel Skill Levels And Facilities.

When The Contracted Effort Is Performed, the contractor is under no further obligation. Final payment is made, irrespective of what is actually Accomplished Technically.

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Final Contract also called

“Definitive contract”,

Follows normal Contracting Procedures. E.g. Negotiation of all Contractual “Terms & Condition” on Cost & Schedule prior to “Initiation of Performance”.

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Negotiating of contract and preparing it for signatures may require months of preparation. If the customer needs the work to begin immediately or if long-lead procurement is necessary, then:

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“Customer may provide the contractor” with a letter contract or letter of intent (LOI). The letter contract is a preliminary written instrument authorizing the contractor to begin immediately:

1. The Manufacture Of Supplies Or

2. The Performance Of Services.

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Final contract price

Must be negotiated

after performance begins,

‘Definitive contract”

must

still be negotiated.

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Types of contract selection based upon following:

1. Overall degree of Cost & Schedule Risk2. Type & complexity of Requirement (technical Risk)3. Extent of Price Competition4. Cost/Price Analysis5. Urgency of Requirements6. Performance period7. Contractor's Responsibility (and Risk)8. Contractor's Accounting System (Report Earn Value

reporting?)9. Concurrent Contract (contract take A back seat to existing

work?)10. Extent of Subcontracting (how much work contractor out

source?)

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General six types of contracts :

Fixed-price (FP),

Cost -plus-fixed-fee (CPFF),

Cost-plus-percentage-fee (CPPF),

Guaranteed Max-Shard Savings (GMSS),

Fixed-price Incentive- Fee (FPIF),Cost-Plus-Incentive-Fee (CPIF)

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First Category

Fixed-price or

Lump-sum contract

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Contractor carefully “Estimate Target Cost”.

Contractor required to Perform work at negotiated Contract Value.

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If “Estimated target cost” is low then “Total Profit reduced” & may vanish.

Contractor may not be able to “underbid competitors” So Contractor assumes a Large risk.

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Lump-sum

Provides “Max Protection to Owner” for ultimate “Cost of Project”.

Disadvantage:Requiring a Long Period For

Preparation & Adjudications of Bids.

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Because of a Lack of knowledge of

Local conditions, all contractors Include

Excessive Contingency.

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Chang Requested

By owner after “Award of contract” Lead to Troublesome &

Sometimes “Costly extras”

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2nd Category

Cost-Plus-

Fixed-Fee

(CPFF)

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Cost Plus Fixed Fee (CPFF)

If Accurate Pricing Not Possible in Any Other way.

So we use CPFF, so Cost may vary but Fee remains same.

Contractor agrees only to use Best Efforts to Performance

Good/Poor Performance

Rewarded equally.

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Total Rs/$ Profit likely To Produce Low “Rate of Return” reflects Small “Amount of Risk” By contractor.

Fixed Fee - small % Age Of “Tot/true Cost”.

CPFF Required Company books be audited.

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3: Cost-Plus-Percentage

– fee Contract

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Provides Maximum flexibility to owner Permits “Owner & Contractor” to work together cooperatively on All “Technical, Commercial, Financial Problems”.

-No Financial Assurance of “Ultimate Cost”.

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“No financial incentive to contractor” this because of “High building cost” (Compared with other forms).

Only meaningful Incentive can be:

1. Inc competition &

2. Prospects for

Follow-on contracts.

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4th Category of Contracts

“Guaranteed

Maximum-Share Savings”

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Contractor-Gets “Fixed Fee” for his “Profit” and Reimbursed for the “Actual Cost” of Engineering, Materials, Construction Labor, all Other Job Costs,

But only up to “Ceiling figure established” as “Guaranteed maximum"

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Savings below the" Guaranteed Maximum” are Shared between “Owner & Contractor”, where as Contractor Assumes the Responsibility

For any “Overrun beyond” Guaranteed “Maximum Price”.

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Contract form Combines advantages as well as disadvantages of Both “Lump Sum” & “Cost-Plus Contracts”.

Best form for Negotiated Contract as it Establishes a Maximum Price At Earliest Possible Date

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Though contract awarded without “Competitive Tenders”.

-Yet Protects owner Against being Overcharged,

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Unique in that “Owner & Contractor” share Financial Risk & Both have Real incentive To Complete Project At lowest “Possible Cost”.

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5th Category of Contract

Fixed-Price-

Incentive-fee Contracts

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These are Same as “Fixed-Price contracts” Except have some “Provision for Adjustment” of the “Total Profit” by a formula.

This Formula Depends on “Final Total Cost” at Completion of Project

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Formula “Agreed to” in advance By “Owner & Contractor”.

To use this Both “Project or Contract” Requirements Must be firmly established

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Provides An incentive to Contractor To:

a) Reduce Cost

b) Increase profit

Both “Owner & Cost” Share in “Risk & Savings”.

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6th Cat.

“Cost-Plus-Incentive-

Fee Contracts”

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Same as: “Cost” Plus Contracts, Except have “Provide for” Adjustment of “Fee as” Determined By a Formula:

Compares “Total Project Cost to Target Cost”.

Formula agreed to in advance by “Owner & Contractor”. Used for “Long Duration” or “R&D Type Project”.

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5. Contract Admin Cycle

Contract Administrator is Responsible for Compliance By the Contractor to Contract's “Terms & Conditions”

To Make Sure Final Product is “Fit for Use”.

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Functions of contract administrator Include:Change ManagementSpecification interpretationAdherence to Quality WarrantiesSubcontractor ManagementProduction surveillanceWaiversContract breachResolution of disputesProject TerminationPayment “Schedule” Project Closeout

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• Part Two

• Ethics

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Ethical OriginsEthical OriginsSocietal Ethics:

Standards of Members of Society

use when dealing with each other.Based on

“Values & standards”

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Societal Ethics:

Found in Society’sLegal Rules,

Norm, & Mores.Codified in the “Form of Law”

& Society Customer.

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Norms dictate how people

Should behave.Societal ethics vary based

On a given Society.Strong beliefs in one

country differ elsewhere.

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Professional Ethics:

“Values & standards used by

Group of Managers in workplace”.

Applied when Decision

not “Clear-Cut Ethically”.

Physicians/Lawyers

Professional Associates – (PMA, Bar Council)

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Values

An individual’s Basic

convictions of

What is “Right & Wrong”

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Values

Basic beliefs About what

one should or

should not do?

& What is &

is not important?

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Individual Ethics:

Values of an individual

resulting from their

family & upbringing.

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Behavior

not illegal,

Yet People still

disagree

If not

ethical.

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Ethics of top Project Manager

–set the –tone for –Project

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Ethics Codes

& Policies

Provide sign of top Management’s desires in

Project Based

Organizational culture

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Why Behave Ethically?Why Behave Ethically?

Project Manager should behave ethically

To Avoid Harming others. Managers Responsible for

“Protecting & Nurturing Resources”

In their Charge.

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“Leadership, Culture, Incentive

Compensation Plans” help Shape

“Individual Ethical behavior”

in Project Management

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Promoting EthicsPromoting Ethics

“Evidence” Showing “Ethical

Managers” benefit

over long term .

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Ethical Control System in Project Management

Formal System to encourage

Ethical Management.

Project Management Firms appoint an Ethics Ombudsman to monitor practices. “Communication standards”

To all employees.

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Ethical culture: firms increasingly seek to make good ethics part of norm & organizational culture.

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Ethical decisions involve

Normative Judgment implies “something is good or bad,

right or wrong, better or worse.”

Morality Society’s accepted norms of behavior

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Should you pay compensation pay to laid off workers?

– May December Stakeholder Return.

– Should you buy goods from overseas firms that hire children?

If you don’t Children may not earn enough money to eat.

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Views of Ethical Decision-Making

Decision makersseek to impose

and enforce rulesfairly and impartially

Decisions madesolely on the basis

of outcomes orconsequences

Decisions areconcerned with

respecting and pro-tecting basic rights

of individuals

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Code of Ethics

Professional organizations Project Management Institute

(PMI)

Taking a serious look at developing

Requirements for a Professional Project manager.

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Ethics obligation matrix.

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CODE OF ETHICS FOR PROJECT MANAGERS

PREAMBLE: Project Managers, in the pursuit of their profession, affect the quality of life for all people in our society. Therefore, it is vital that Project Managers conduct their work in an ethical manner to earn and maintain the confidence of team members, colleagues, employees, clients and the public.

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ARTICLE I: Project Managers shall maintain high standards of personal and professional conduct.

a) Accept responsibility for their actions.b) Undertake projects and accept responsibility only if qualified

by training or experience, or after full disclosure to their employers or clients of pertinent qualifications.

c) Maintain their professional skills at the state -of-the-art and recognize the importance of continued personal development and education.

d) Advance the integrity and prestige of the profession by practicing in a dignified manner.

e) Support this code and encourage colleagues and co-workers to act in accordance with this code.

f) Support the professional society by actively participating and encouraging colleagues and coworkers to participate.

g) Obey the laws of the country in which work is being performed.

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ARTICLE II: Project Managers shall, in their work:

a) Provide the necessary project leadership to promote maximum productivity while striving to minimize costs.

b) Apply state-of-the-art management tools and techniques to ensure schedules are met and the project is appropriately planned and coordinated.

c) Treat fairly all project team members, colleagues and co-workers, regardless of race, religion, sex, age or national origin.

d) Protect project team members from physical and mental harm.

e) Provide suitable working conditions and opportunities for project team members.

f) Seek, accept and offer honest criticism of work, and properly credit the contribution of others.

g) Assist project team members, colleagues and co-workers in their professional development.

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ARTICLE III: Project Managers shall, in their relations with employers and clients:

a) Act as faithful agents or trustees for their employers or clients in professional or business matters.

b) Keep information on the business affairs or technical processes of an employer or client in confidence while employed, and later, until such information is properly released.

c) Inform their employers, clients, professional societies or public agencies of which they are members or to which they may make any presentations, of any circumstances that could lead to a conflict of interest.

d) Neither give nor accept, directly or indirectly, any gift, payment or service of more than nominal value to or from those having business relationships with their employers or clients.

e) Be honest and realistic in reporting project cost, schedule and performance.

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ARTICLE IV: Project Managers shall, in fulfilling their responsibilities to the community:

a) Protect the safety, health and welfare of the public and speak out against abuses in those areas affecting the public interest.

b) Seek to extend public knowledge and appreciation of the project management profession and its achievements.

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•Part Two ends

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Social Responsibility

Social Power

Social Responsibility Concept

Project Management Organization must behave Proactively Business has certain social responsibility because power it wieldsBe a “Good Corporate Citizen”

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Social Responsibility Pyramid

Obey the Law

Make Enough Money To Survive

Good Corporate Citizen

Do What is Right, Just

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Levels of Social Responsibility

Reactive (Obstruction)

ProactiveDefensive Accommodative

Level of Social ResponsibilityLow High

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•Accommodative Response: Managers realize need for social responsibility. – Try to balance interests of all S/H.

Proactive response: Manager actively embrace social responsibility.

– Go out of their way to learn about & help Stakeholders

– “Good Corporate Citizen”

Social ResponsivenessSocial Responsiveness

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Why be Responsible?Why be Responsible?

Managers accrue benefits by being responsible.– Workers & Society benefit.– Quality of Life in Society improve.– It is the right thing to do.

Whistleblowers: a per reporting illegal

or unethical acts.

Now protected by law

Social audit: Managers specifically take ethics & business into account when making decisions.

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The Social AuditThe Social Audit

ProfitabilityNegative Low Medium High

NegativeNegative

LowLow

MediumMedium

HighHigh

Favored Strategies

Soc

ial R

etu

rns

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Arguments For Social Responsiveness

Business is

involved in

social issues

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Business resources to

tackle today’s complex societal

problems

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A better society means

a better environment for doing business

Corporate social action

will prevent

Government intervention

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How Firms Can Improve Their Social Responsiveness (Ethical Performance)

• Establish and publish their own Code of Ethics• Ombudsmen - (committee, task force) to review the

corporate past behavior• Protect whistle-blowing - when an employee

discloses an illegal, immoral, or unethical action committed by a member of the organization

• Training programs - ethical sensitivity training• Controlling compliance - corporate social audit (or

ethics audit)• Leadership - demonstrate commitment from

leaders• Involve personnel at all levels

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• Part Three

• Recap of the course

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• Management• Project Management • Project Manager• Project Proposal• Project Feasibility• Project Selection Method• Project Planning• Scope• Charter• Quality ( 3-4 )• Productivity

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• Leadership• Communication• Ethics• Costing• Pricing• Risk Management• Procurement• Close out Note

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• Part Four

• Project Management Institute (PMI)

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• Procurement Management Processes• Project Procurement Management involves

engaging in a systematic process to purchase or acquire the needed products, services, or results from an outside source which will perform the work. Procure Management encompasses contract management and control processes necessary to administer contracts or purchase orders. It also includes processes which assist in administering a contract to assure the buyer/seller relationships are properly managed. The procurement management processes are:

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• Plan Purchases and Acquisitions – Plan Purchases and Acquisitions process involves ascertaining what is needed, and when it is needed. Then how to assure you have what you need when you need it. (Novel concept!) This is completed as a part of the planning process group.

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• Plan Contracting – The Plan Contracting process involves documenting the products, services, and results requirements and identifies potential sellers. Plan Contracting is commonly first engaged in the planning process group.

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• Request Seller Responses – Request Seller Responses process obtains information, quotations, bids, offers, or proposals from sellers as appropriate. This is a part of the executing process group

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• Select Sellers – The Select Sellers process is where the offers are reviewed, and a chosen vendor rises to the top of the Analytical Hierarchy Process. Commonly negotiations are started in written form. This is commonly a part of the executing process group.

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• Contract Administration - The Contract Administration Process manages all aspects of the contract and the relationship between the buyer and the seller including managing seller performance and changes, providing a basis for future work, and managing the relationship with the project’s buyer. This is a part of the monitoring and controlling process grouping.

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• Contract Closure - The Contract Closure Process assures completion and settling terms of any contracts including resolving any open items and closing each contract.

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• Each Procurement Management process results in a specific deliverable which is used as the foundations for the subsequent process. Combined the procurement management processes provide a best practice pattern for managing contracts and vendor relationships on a project.