Copyright Course Technology 2001

1

Chapter 11:Project Procurement

Managementadopted from PMI’s PMBOK 2000 and

Textbook : Information Technology Project Management

Chap 11 2

Contents

• Importance of Project Procurement Management• Project Procurement Management Processes

– Procurement planning: )

– Solicitation planning: ) planning phase

– Solicitation: )

– Source selection: > executing phase

– Contract administration: )

– Contract close-out: } closing

• Using Software to Assist in Project Procurement Management

Chap 11 3

Importance of Project Procurement Management

• Procurement means acquiring goods and/or services from an outside source

• Other terms include purchasing and outsourcing• Why Outsource?

– 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

Chap 11 4

Project Procurement Management Processes

• 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

Chap 11 5

Figure 11-1. Project Procurement Management Processes and Key Outputs

Chap 11 6

Procurement planning

• 20th of 21 planning phase process• 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

• determines how project needs can best be met by sourcing products or service outside the organization.

Chap 11 7

Inputs to Procurement planning

• Scope statement – describes current project needs and strategies• Product description – defines the end product of the project and provides

important information about any technical issues or concerns.• Procurement resources – resources and expertise needed to support

project procurement activities• Market consideration – affect available products and services that have

an impact on decision-making• Other planning inputs – includes miscellaneous items such as cost and

schedule estimates, quality management plans, cash-flow projections, WBS, identified risks, planned staffing needs.

• Constrains – factors that limit the buyer’s options, such as availability of funds.

• Assumptions –factors that, for planning purposes, will be considered to be true, real, or certain

Chap 11 8

Tools and techniques

• Make-or-buy analysis – determines whether it’s more cost effective for the performing organization to produce the produce the product or purchase it form an outside vendor.

• Expert judgment – can be sought from groups or individuals with specialized knowledge or training. These include technical consultant company, HR consultant company

• Contact type selection – an important factor to influence and control the seller’s performance.

Chap 11 9

Types of Contracts

• 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

• Time and material contracts: hybrid of both fixed price and cost reimbursable, often used by consultants

• Unit price contracts: require the buyer to pay the seller a predetermined amount per unit of service

• Different contracts are appropriate for different kinds of work.

Chap 11 10

Outputs from Procurement planning

• Procurement management plan – part of project plan. It describes how the remaining procurement processes (solicitation planning, contract closeout) will be managed.

• Statements of work (SOW) – describes the procurement items in sufficient detail for prospective sellers to determine if they are capable of providing the items

Chap 11 11

Statement of Work (SOW)

• A statement of work is a description of the work required for the procurement

• Many contracts, mutually binding agreements, include SOWs

• A good SOW gives bidders a better understanding of the buyer’s expectations

Chap 11 12

Figure: Statement of Work (SOW) Template

I. Scope of Work: Describe the work to be done to detail. Specify the hardware andsoftware involved and the exact nature of the work.

II. Location of Work: Describe where the work must be performed. Specify thelocation 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 mustbe performed, and related schedule information.

IV. Deliverables Schedule: List specific deliverables, describe them in detail, andspecify when they are due.

V. Applicable Standards: Specify any company or industry-specific standards thatare relevant to performing the work.

VI. Acceptance Criteria: Describe how the buyer organization will determine if thework is acceptable.

VII. Special Requirements: Specify any special requirements such as hardware orsoftware certifications, minimum degree or experience level of personnel, travelrequirements, and so on.

Chap 11 13

Solicitation Planning

• 21st of 21 planning phase process

• This process involves documenting the product requirements and identifying potential sources in preparation to support solicitation.

Chap 11 14

Collaborative Procurement

• Several organizations, even competitors, have found that it makes sense to collaborate on procurement for some projects

• Kodak worked with several competitors to develop the Advantix Advanced Photo System (see What Went Right?)

Chap 11 15

Inputs to Solicitation Planning

• Procurement management plan– describe how to manage the procurement process (from

output of procurement planning process)

• SOW - describes the procurement items in sufficient detail for prospective sellers to determine if they are capable of providing the items.

• Other planning inputs– includes preliminary cost and schedule estimates,

quality management plans, cash-flow projections, the WBS identified risks, and planned staffing.

Chap 11 16

Tools and techniques

• Standard forms – include standardized contracts, description of procurement items, and bid documents.

• Expert judgment - can be sought from groups or individuals with specialized knowledge or training. These include technical consultant company, HR consultant company

Chap 11 17

Outputs from Solicitation Planning

• Procurement documents– solicit proposals form potential buyers.– Documents include Request for proposal (RFP),

Request for quotation (RFQ), Invitation to bidding, invitation for negotiation, contractor initial response.

– Others: project SOW, description of the desired format of the response, required contractual provisions, evaluation criteria to rate or score proposals (objective or subjective), overall or life-cycle cost, technical capabilities, management approach, financial capacity.

• SOW updates – modifications to existing SOWs.

Chap 11 18

Figure: 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

Chap 11 19

Solicitation

• 5th of 7 executing phase process• It involves obtaining information in the form of bids and

proposals from prospective sellers. • The seller trying to win business bears most of the effort of

gathering the information.• 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 can help clarify the buyer’s expectations

Chap 11 20

Inputs to Solicitation

• Procedure documents – solicit proposals from potentials buyers. Documents include Request for proposal (RFP), Request for quotation (RFQ), Invitation to bidding, invitation for negotiation, contractor initial response.

• Qualified seller lists – The preferred vendors for a product or service. The performing organization usually has a list of preferred suppliers.

Chap 11 21

Tools and technique

• Bidder conferences – provide mutual understandings in meetings. Bidder conferences give a change to exchange key information with the project manager and his team.

• Advertising – request for services, supplies, materials, and equipments completed primarily on government projects to ensure equal access to bidding opportunities.

Chap 11 22

Outputs from Solicitation

• Proposals– entail the seller preparing documents that

describe its willingness and ability to provide the service or product.

– It becomes an important part of the project records. It some cases, they become the SOW.

– In many events, the proposals are used to develop the formal contracts.

Chap 11 23

Source selection

• 6th of 7 executing phase process• Source selection involves

– evaluating bidders’ proposals– choosing the best one– negotiating the contract– awarding the contract

• Buyers often create a “short list”• It is helpful to prepare formal evaluation procedures for selecting

vendors• During Source Selection, project manager use the proposals and

evaluation criteria (developed in Solicitation Planning) and exercise his judgment in analyzing the answers from the sellers in order to select the best (or most suitable) bid.

Chap 11 24

Be Careful in Selecting Suppliers and Writing Their Contracts

• Many dot-com companies were created to meet potential market needs, but many went out of business, mainly due to poor business planning, lack of senior management operations experience, lack of leadership, and lack of visions. Check the stability of suppliers

• Even well-known suppliers can impede project success. Be sure to write and manage contracts well with all suppliers (see What Went Wrong?)

Chap 11 25

Inputs to Source selection

• Proposals – seller-prepared document that describe the seller’s ability and willingness to provide the requested product and service. (it is output from Solicitation Planning)

• Evaluation criteria – establish ratings or scores for proposals. The criteria can be objective or subjective.

• Organizational policies – it may affect the project manager’s decision. These policies can come from any of the organization involved in the project

Chap 11 26

Tools and technique

• Contract negotiations – clarification and mutual agreement on structure and requirements of a contract prior to signing. The subjects covered usually include: a) responsibilities and authorities; b) applicable terms and law; c) financing and price; technical and business management.

• Weighting system – to quantify data in 3 steps to minimize personal prejudices of source selection. First, they assign numerical weight to evaluation criteria. Second, they rate the seller. Finally, they multiply weights by rating and totaling overall score.

• Screening system – establish minimum performance criteria.• Independent estimates – prepared by the project procuring section to

determine any significant differences. The differences could mean the seller didn’t understand the SOW or omitted something in the SOW.

Chap 11 27

Outputs from Source selection

• Contract – a mutually binding agreement that obligates a seller to provide goods or services and the buyer to make payment.

• It establishes a legal relationship that is subject to remedy in court. – Most organizations have policies and procedures

concerning who can sign a contract, refereed as delegation of procurement authority.

– Many organizations also require legal review and approval of contracts.

Chap 11 28

Cost Reimbursable Contracts• 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

Chap 11 29

Figure: Contract Types Versus Risk

Chap 11 30

Contract Administration

• 7th of 7 executing phase process• Ensures that the seller’s performance meets contractual

requirements.• It involves managing vendor relationships, especially important

with change requests• It entails maintaining formal correspondence with the seller and

expediting requirement for payment with performing organization.

• Contracts are legal relationships, so it is important that legal and contracting professionals be involved in writing and administering contracts

• Many project managers ignore contractual issues, which can result in serious problems

Chap 11 31

Inputs to Contract Administration

• Contracts - a mutually binding agreement that obligates a seller to provide goods or services and the buyer to make payment.

• Work results – seller’s deliverables, quality standards, and actual costs.

• Change requests – modifications to the contract or its description of the product or service. If the seller’s work is unsatisfactory, the project manager can terminate the contract.

• Seller invoices – submitted periodically and requesting payment for work performed. The contract defines invoice requirements and supporting document.

Chap 11 32

Tools and technique

• Contract change control system – defines how a contact may be modified. It includes paperwork, tracking system, dispute resolution procedures, and the hierarchy of approval levels.

• Performance reporting – tells the project management team how effective the seller is achieving the contractual objectives. Performance reporting is generated by the communications process. It is part of processes of controlling the project.

• Payment system – it involves the organization’s account payable process

Chap 11 33

Outputs from Contract Administration

· Correspondence – retained as a way of documenting and clarifying the contracts’ terms and conditions.

· Contract changes – changes (formal and informal) are fed back through the planning and procurement processes. The project plan or other relevant documentation is updated when necessary.

· Payment requests – Issues when project manager are using an external payment system. It is the responsibility of the project manager to interface with account payable for timely payments to sellers.

Chap 11 34

Contract Close-out

• 2nd of 2 closing phase process• Closing takes place at the end of the project. Because

projects are temporary.• Project closeout briefings and lessons-learned documents

provide important feedback.• Contract close-out 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 identify lessons learned in the procurement process

Chap 11 35

Inputs t Contract closure

• Contract documentation – includes the contract along with all supporting schedules, requested and approved contract changes, any seller-developed technical documentation, seller performance reports, financial documents, and the results of any contract-related inspections.

Chap 11 36

Tools and technique

• Procurement audits – structured reviews of the procurement process, from procurement planning through contract admin. The objective of a procurement audit is to identify success and failures that warrant transfer to other procurement items o this project or to other projects.

Chap 11 37

Outputsfrom Contract closure

• Formal acceptance & closure – provides the seller with formal written notice that the contract has been completed.

• Contract file – a complete set of indexed records. Compile them for inclusion with the final project records.

Chap 11 38

Using Software to Assist in Project Procurement Management

• Word processing software helps in writing proposals and contracts, spreadsheets help in evaluating suppliers, databases help track suppliers, and presentation software aids in presenting procurement-related information

• In the late 1990s and early 2000s, many companies started using e-procurement software to do many procurement functions electronically

• Organizations also use other Internet tools to help find information on suppliers or auction goods and services

Chap 11 39

Summary

• Project Procurement Management– acquiring goods and/or services from an outside source

• Project Procurement Management Processes

• Procurement planning– identifying which project needs can be best

• 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