Pmp procurement chapter 12

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Project Procurement ManagementChapter 12

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What is a Contract

Types of Contracts

12.1 Plan Procurement

12.2 Conduct Procurements

12.3 Control Procurements

12.4 Close Procurements

KEY TERMS

Project Procurement Management

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12.1 Plan Procurement Management The process of

documenting project procurement decisions, specifying the

approach, and identifying potential sellers

12.2 Conduct Procurements The process of obtaining seller

responses, selecting a seller, and awarding a contract.

12.3 Control Procurements The process of managing

procurement relationships, monitoring contract performance,

and making changes and corrections as appropriate

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12.4 Close Procurements The process of completing each

project procurement.

Project Procurement Management

Knowledge

Area

Process

Initiating Planning ExecutingMonitoring &

ControlClosing

Processes

• 12.1 Plan

Procurement

Management

• 12.2 Conduct

Procurements

• 12.3 Control

Procurements

• 12.4 Close

Procurements

Enter phase/

Start project

Exit phase/

End project

Initiating

Processes

Closing

Processes

Planning

Processes

Executing

Processes

Monitoring &

Controlling Processes

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What is a Contract

A Contract is a Legally binding detailed formal

document that refers to an entire agreement

between 2 or more parties.

All terms & conditions of

a Contract must be met.

Anything not mentioned in the Contract is not

Legally Binding to anyone.

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Centralized Contracting

ADVANTAGES DISADVANTAGES

Can result in procurement

managers with higher levels of

expertise.

It may be more difficult for the

project manager to obtain

contracting help when needed.

Employees will have continuous

improvement, training, and shared

lessons learned.

Standardized company practices

help improve understanding.

The procurement manager has

less time to spend working on

your project and understanding

its unique needs.Individuals have a clearly defined

career path in procurement.

There is one procurement department, and a procurement

manager may handle procurements on many projects.

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Decentralized Contracting


The project manager has easier

access to contracting expertise

because the procurement manager

is a member of the team.

No "home" department for the

procurement manager to return to

after the project is completed.

The procurement manager has

more loyalty to the project.

More difficult to maintain a high

level of contracting expertise.

( no procurement dep.)

The procurement manager has a

better understanding of the project

and its procurement needs.

Little standardized company

practices

There is one procurement department, and a procurement

manager may handle procurements on many projects.

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Types of Contracts

The three broad categories of contracts are:3

Fixed price

(FP)

Time and material

(T&M)

Or

Unit Price

Cost-reimbursable

(CR)

1. Fixed Price / Lump Sum

/ Firm Fixed Price)

1. Cost Plus Fee ( CPF) /

Cost Plus Percentage of

Costs ( CPPC)

2. Fixed Price Incentive

Fee (FPIF)

2. Cost Plus Fixed Fee

(CPFF)

3. Fixed Price Award Fee

(FPAF)

3. Cost Plus Incentive

Fee (CPIF)

4. Fixed Price with

Economic Price

Adjustment Contracts

(FP-EPA).

4. Cost Plus Award Fee

( CPAF)

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Fixed Piece Contracts

1. Fixed Price / Lump Sum / Firm Fixed Price)

Well defined sow / scope/ product.

Fixed total Price.

Risk is on the seller.

Any cost increase due to adverse performance is

the responsibility of the seller

Total cost of project is known before executing.

Example of Fixed Price Contract

Contract = 1,100,000.00 $

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2. Fixed Price Incentive Fee (FPIF)

• gives the buyer and seller some flexibility for deviation

from performance.

• Additional incentives is paid based on seller performance

such as finish faster / cheaper / better

• The final price is calculated by a formula based on the

relationship between the buyer and seller ( ex. 20/80 )

Example : Contract= $1,100,000.

For every month early the project is finished,

an additional $10,000 is paid to the seller.

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3. Fixed Price Award Fee (FPAF)

• The buyer pays a fixed price plus an award amount

(a bonus) based on performance.

• This is very similar to the FPIF contract, except the total

possible award amount is determined in advance.

• Performance criteria should be set in advance for fairly

judgment

Example : Contract= $1,100,000.

For every month performance exceeds. The

planed level by more than 15 %, an additional

is awarded to the seller, with a maximum award

of $50,000.

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4. Fixed Price with Economic Price Adjustment Contracts

(FP-EPA).

• Used whenever the seller’s performance period spans a

considerable period of years.

•The FP-EPA contract is intended to protect both buyer and

seller from external conditions beyond

their control. Such as inflation changes, or cost increases

Contract $1, l 00,000,

but a price increase will be allowed in year two to

account for increases in specific material costs.

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Cost-reimbursable (CR)

1. Cost + Fee ( CPF).

Cost Plus Percentage of Costs ( CPPC).

• Involves payments to the seller for all legitimate actual

costs incurred for completed work, plus a percentage of

costs as a fee.

• It is bad for the buyers.

2. Cost Plus Fixed Fee.(CPFF).

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3. Cost Plus Incentive Fee (CPIF).

4. Cost Plus Award Fee ( CPAF).

Cost + additional fee bases on manager satisfaction

(performance criteria)

Contract = $500,000

target cost plus $50,000 target fee. The buyer and

seller share any cost savings or overruns at 80% to

the buyer and 20% to the seller.

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This type allows for a simpler

procurement statement of work.

requires auditing the seller's

invoices.

It usually requires less work to

define the scope for a cost-

reimbursable contract

than for a fixed-price contract.

This contract type requires more

work for the buyer to manage.

A cost-reimbursable contract is

generally less costly than fixed

price because the seller does not

have to add as much for risk.

The seller has only a moderate

incentive to control costs.

The total price is unknown.

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Time and material (T&M) / Unit Price

• Used for service efforts in which the level of effort

cannot be defined at the time the contract is awarded.

•To make sure the costs do not become higher than

budgeted, the buyer may put a "Not to Exceed" and time

limits clause in the contract.

•Often used for staff augmentation, acquisition of experts,

outside support

Example:

Contract = $1K per day plus expenses or material cost.

Contract = $1K per day plus material at $5 per linear meter of wood.

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Purchase Order

• A purchase order is the simplest type of fixed-

price contract

• This type of contract is normally unilateral

(signed by one party) instead of bilateral (signed by

both parties.

Cost Contract • A cost contract is one in which the seller

receives no fee (profit). It is appropriate for

work performed by nonprofit organizations.

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Fixed Price

FFP

FPIF

Time and Materials

Cost Reimbursable

CPIF

CPFF

CPF

CPPC

SELLER RISK

BUYER

RISK

Low

High

T&M can be a high

risk for buyer if

contract does not

include a “total not-

to-exceed” (NTE)

Contract Types vs. Risk

Low

High

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• Price : the amount the seller charges the buyer.

• Profit (fee) : planned into the price the seller provides the

buyer. Sellers usually have an.

• Cost : how much an item costs the seller to create, develop,

or purchase. A buyer's costs.

• Target price: used to compare the end result (final price)

with what was expected (the target price). Target price is a

measure of success.

• Sharing ratio : Incentives are usually expressed as a ratio:

e.g., 90/ 10. This sharing ratio describes

how the cost savings or cost overrun will be shared. (buyer/seller).

• Ceiling price: the highest price the buyer will pay. it's a way

for the buyer to encourage the seller to control costs.

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PTA - Point of Total Assumption

Only applies to Fixed Price incentive fee contracts.

Refers to the amount above which the seller bears all the loss of a cost overrun

Costs that go above the PTA are assumed to be due to management

CP = Ceiling Price TP = Target Price

BSR = Buys Share Ratio TC = Target Cost

CP –TP

BSR+ TC

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Question

In cost plus incentive fee contract, the cost is estimated at

$210,000 and the fee at $25,000. The project is complete,

and the buyer has agreed that the costs were, in fact,

$200,000. Because the seller's costs came

in lower than the estimated costs, the seller shares in the

savings: 80 % to the buyer and 20 % to the seller.

Calculate the final fee and final price?

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Target cost $210,000

Target fee $25,000

Target price $235,000

Sharing ratio 80/20

Actual cost $200,000

Final fee

$210,000 - $200,000 = $10,000

$10,000 x 20% = $2,000

$25,000 target fee + $2,000 = $27,000 fee

Final price $200,000 + $27,000 = $227,000

12.1- Plan Procurement Management

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12.1 Plan Procurement Management

• The process of documenting project procurement

decisions, specifying the approach, and identifying

potential sellers

• Identifies products or services that can be acquired from

outside the project organization Vs needs that can be

accomplished from within the organization.

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12.1 Plan Procurement Management Inputs

1. Project

Management Plan

Project Scope Statement

WBS

WBS Dictionary

2. Requirements Documentation

3. Risk Register

4. Activity Resource Requirements

5. Project Schedule

6. Activity Cost

Estimates

evaluate the reasonableness of the bids or

proposals received

7. Stakeholder Register

8. EEF 9. OPA

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12.1 Plan Procurement Management T & T

1. Make or Buy Analysis:• Purchase or make - Purchase or renting/leasing.

• Determine whether a product or service needs to

be procured or can be produced by the project team.

Reasons to Buy:

Capacity and Capability

Exploit Opportunity

Shift risk (cost, time, or scope)

Reasons to Make:

Idle resources

Want to control

Confidential information

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Question

You are trying to decide whether to lease or buy an item for

your project. The daily lease cost is $120. To purchase the

item, the investment cost is $1,000 and the daily maintenance

cost is $20. How long will it take for the lease cost to be the

same as the purchase cost?

Answer

Let D equal the number of days when the purchase and

lease costs are equal.

$120D = $1,000 + $20D

$120D $20D = $1,000

$100D = $1,000

D= 10

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12.1 Plan Procurement Management Outputs

1. Procurement Management Plan

• Types of contracts to be used

• Risk Management Issues

• Procurement Processes

• Standardized Procurement Documents

• Responsibilities

• Pre-qualified sellers

• Scheduled dates for deliverables

• Managing multiple providers

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2. Procurement Statement of Work

• Specifications, quality levels, quantity desired and other

requirements.

• Describes the procurement item in sufficient detail to

allow sellers to determine if they are capable of

providing the item.

3. Make or Buy Decision

4. Change Requests

5. Project Document Updates

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6. Procurement Documents

• Are used to solicit proposals, quotes, and bids from sellers

• Request for Information ( RFI )

• Request for Proposal (Tender) RFP. request a detailed

proposal on how the work will be accomplished, who will do

it, resumes, company experience.

• Invitation for bid (IFB, or request for bid, RFB) IFBs usually

just request a total price to do all the work.

• Request for Quotation RFQ : price quote per item, hour, or

foot (T&M contracts).

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7. Source Selection Criteria

• The project team must be prepared to compare the proposals

received in an unbiased manner based on identified & documented

selection criteria to rate or score proposals.

Includes but not limited to:

Past performance

Understanding of need

Overall or life cycle cost

References

Technical capability and approach

Risk

Management approach

Financial stability and capacity

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Types of Procurement Statements of Work

Performance Functional Design

This type conveys what

the final product

should be able to

accomplish.

This type conveys the

end purpose or result

This type precisely

conveys what work is

to be done.

Used in Information

systems, information

technology, research

and development

Used in Information

systems, information

technology, research

and development

Commonly used in

construction and

equipment purchasing

(Ex. I want a car goes

from 0 to 100 km in 4

seconds )

(Ex. I want a car with 2

cup holders and a

small TV screen)

12.2- Conduct Procurement

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12.2 Conduct Procurement.

Obtaining seller responses, selecting a seller,

and awarding a contract.

The key benefit is to provide alignment of internal and

external stakeholder expectations through established

agreements.

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12.2 Conduct Procurement Inputs

1. Procurement Management Plan


3. Source Selection Criteria

4. Seller Proposals

5. Project Documents

6. Make or Buy Decisions

7. Procurement Statement of Work

8. OPA

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12.2 Conduct Procurement T & T

1. Bidder Conferences

Also known as contractor, vendor, or pre-bid

conferences.

The purpose of these conferences is to clarify any of

the information not clearly stated in the RFP.

Creates a clear and common understanding of the

procurement.

Proposals received will be more clearly aligned with

project requirements, due to the fact that bidder

conferences make the requirements clear.

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12.2 Conduct Procurement T & T

2. Proposal Evaluation Techniques

3. Independent Estimates

4. Expert Judgment

5. Advertising

6. Analytical Techniques

7. Procurement Negotiations

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• Attacks "If your organization cannot manage the details of its own

operations, perhaps it should get out of the business!“

• Personal insults "If you do not understand what you are doing,

perhaps you should find another job!“

• Good guy/bad guy One person is helpful to the other side, while

another is difficult to deal with.

• Deadline "We have a flight leaving at 5 p.m. today and must finish

negotiations before that time.

• Lying lying may be obvious or hidden.

• Limited authority "I can't agree to shorten the schedule by six months.

I have only been authorized to offer three months.

Negotiation tactics

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• Missing man "Only my boss can agree to that request, and he isn't

here. Why don't we agree to only what I can agree to.

• Fair and reasonable "Let's be fair and reasonable. Accept this offer as

it stands.

• Delay "Let's revisit this issue the next time we get together." This may

also take the form of never actually getting down to negotiating until the

last day of a planned visit.

• Extreme demands "As the buyer you will have to pay for all of the

risks for this work. It is not our responsibility to plan for risks!“

• Withdrawal This can either be an emotional withdrawal or a physical

withdrawal and can show less interest.

• Fait accompli This is a done deal. "These government terms and

conditions must be in all our contracts.

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12.2 Conduct Procurement Outputs

1. Selected Sellers

2. Agreements

3. Resource Calendars

4. Change Requests

5. Project Management Plan Updates

6. Project Document Updates

(SOW and Requirements Documentation)

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Agreements include:

• SOW

• Acceptance How will you specifically know if the work is acceptable?

• Changes How will changes be made

• Confidentiality What information must not be made known or given to

third parties?

• Material breach This breach is so large that it may not be possible to

complete the work under the contract.

• Dispute resolution.

• Force majeure

• Incentives.

• Liability.

• Independent contractor.

• Intellectual property.

• Liquidated damages.

• Payments method.

• Retention

• Warranties

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What Do You Need to Have a Legal

Contract?

• An offer

• Acceptance

• Consideration (Something of value, not necessarily

money)

• Legal capacity (Separate legal parties, competent parties)

• Legal purpose (You cannot have a legal, enforceable

contract for the sale of illegal goods or services)

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• Single Source

In this type of procurement, you contract directly with

your preferred seller without going through the full

procurement process.

• Sole Source

In this type of procurement, there is only one seller.

This might be a company that owns a patent.

12.3- Control Procurement

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12.3 Control Procurement.

The process of managing procurement relationships, monitoring

contract performance, and making changes and corrections as

appropriate

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12.3 Control Procurement Inputs

1. Project Management Plan


3. Agreements

4. Work Performance Reports

5. Approved Change Request.

6. Work Performance Information

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12.3 Control Procurement T & T

1. Contract Change Control System

2. Procurement Performance Review

3. Inspections and Audits

4. Performance Reporting

5. Payment Systems.

6. Claims Administration: (disputes)

7. Record Management System

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12.3 Control Procurement Outputs

1. Work Performance Information

2. Change Requests

3. Project Management Plan Updates

4. Project Documents Updates

5. OPA.

12.4- Close Procurement

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12.4 Close Procurement.

• The process of completing each project procurement.

• Accept deliverables.

• Procurements are closed:

When a contract is completed.

When a contract is terminated before the work is completed

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what work must be done during procurement closure

• Product validation

• Procurement negotiation

• Financial closure

• Procurement audit

• Update to records

• Final contract performance reporting

• Lessons learned

Administrative closure

• Check completion or exit criteria for project or phase.

• Transfer the product to next phase.

• Collect records.

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Organizational Process Assets Updates

• Procurement file. A complete set of indexed contract

documentation, including the closed contract

• Deliverable acceptance. Documentation of formal

acceptance of seller-provided deliverables may be

required to be retained by the organization.

• Lessons learned documentation.

• Close Procurements occurs before Close Project or

Phase . Close Procurements is done once for each

procurement, at the end of the contract.

• All procurements are closed before the project is

closed.

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Questions

1. Once signed, a contract is legally binding unless:

A. One party is unable to perform.

B. One party is unable to finance its part of the work.

C. It is in violation of applicable law.

D. It is declared null and void by either party's legal counsel.

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Questions

1. Once signed, a contract is legally binding unless:

A. One party is unable to perform.

B. One party is unable to finance its part of the work.

C. It is in violation of applicable law.

D. It is declared null and void by either party's legal counsel.

Answer : C

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Questions

2. With a clear procurement statement of work, a seller

completes work as specified, but the buyer is not pleased

with the results. The contract is considered to be:

A. Null and void.

B. Incomplete.

C. Complete.

D. Waived.

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Questions

2. With a clear procurement statement of work, a seller

completes work as specified, but the buyer is not pleased

with the results. The contract is considered to be:

A. Null and void.

B. Incomplete.

C. Complete.

D. Waived.

Answer : C

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Questions

3. A project manager for the seller is told by her

management that the project should do whatever possible to

be awarded incentive money. The primary objective of

incentive clauses in a contract is to:

A. Reduce costs for the buyer.

B. Help the seller control costs.

C. Synchronize objectives.

D. Reduce risk for the seller by shifting risk to the buyer.

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Questions

3. A project manager for the seller is told by her

management that the project should do whatever possible to

be awarded incentive money. The primary objective of

incentive clauses in a contract is to:

A. Reduce costs for the buyer.

B. Help the seller control costs.

C. Synchronize objectives.

D. Reduce risk for the seller by shifting risk to the buyer.

Answer : C

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Questions

4. A seller is working on a cost-reimbursable (CR) contract

when the buyer decides he would like to expand the scope of

services and change to a fixed-price (FP) contract. All of the

following are the seller's options EXCEPT:

A. Completing the original work on a cost-reimbursable basis and

then negotiating a fixed price for the additional work.

B. Completing the original work and rejecting the additional work.

C. Negotiating a fixed-price contract that includes the work.

D. Starting over with a new contract.

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Questions

4. A seller is working on a cost-reimbursable (CR) contract

when the buyer decides he would like to expand the scope of

services and change to a fixed-price (FP) contract. All of the

following are the seller's options EXCEPT:

A. Completing the original work on a cost-reimbursable basis and

then negotiating a fixed price for the additional work.

B. Completing the original work and rejecting the additional work.

C. Negotiating a fixed-price contract that includes the work.

D. Starting over with a new contract.

Answer : D

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Questions

5. 1he sponsor is worried about the seller deriving extra

profit on the cost plus fixed fee (CPFF) contract. Each month

he requires the project manager to submit CPI calculations

and an analysis of the cost to complete. The project manager

explains to the sponsor that extra profits should NOT

be a worry on this project because:

A. The team is making sure the seller does not cut scope.

B. All costs invoiced are being audited.

C. There can only be a maximum 10 percent increase if there is an

unexpected cost overrun.

D. The fee is only received by the seller when the project is

completed.

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Questions

5. 1he sponsor is worried about the seller deriving extra

profit on the cost plus fixed fee (CPFF) contract. Each month

he requires the project manager to submit CPI calculations

and an analysis of the cost to complete. The project manager

explains to the sponsor that extra profits should NOT

be a worry on this project because:

A. The team is making sure the seller does not cut scope.

B. All costs invoiced are being audited.

C. There can only be a maximum 10 percent increase if there is an

unexpected cost overrun.

D. The fee is only received by the seller when the project is

completed.

Answer : B

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Questions

6. In a fixed-price (FP) contract, the fee or profit is:

A. Unknown.

B. Part of the negotiation involved in paying every invoice.

C. Applied as a line item to every invoice.

D. Determined with the other party at the end of the

project.

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Questions

6. In a fixed-price (FP) contract, the fee or profit is:

A. Unknown.

B. Part of the negotiation involved in paying every invoice.

C. Applied as a line item to every invoice.

D. Determined with the other party at the end of the

project.

Answer : A

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Questions

7. A project performed under a cost-reimbursable contract

has finally entered the Close Procurements process. What

MUST the buyer remember to do?

A. Decrease the risk rating of the project.

B. Audit seller's cost submittals.

C. Evaluate the fee she is paying.

D. Make sure the seller is not adding resources.

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Questions

7. A project performed under a cost-reimbursable contract

has finally entered the Close Procurements process. What

MUST the buyer remember to do?

A. Decrease the risk rating of the project.

B. Audit seller's cost submittals.

C. Evaluate the fee she is paying.

D. Make sure the seller is not adding resources.

Answer : B

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Questions

8. The sponsor and the project manager are discussing what

type of contract the project manager plans to use on the

project. The sponsor points out that the performing

organization spent a lot of money hiring a design team to

come up with the design. The project manager is concerned

that the risk for the buyer be as small as possible. An

advantage of a fixed-price contract for the buyer is:

A. Cost risk is lower.

B. Cost risk is higher.

C. There is little risk.

D. Risk is shared by all parties.

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Questions

8. The sponsor and the project manager are discussing what

type of contract the project manager plans to use on the

project. The sponsor points out that the performing

organization spent a lot of money hiring a design team to

come up with the design. The project manager is concerned

that the risk for the buyer be as small as possible. An

advantage of a fixed-price contract for the buyer is:

A. Cost risk is lower.

B. Cost risk is higher.

C. There is little risk.

D. Risk is shared by all parties.

Answer : A

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Questions

9. Your company has an emergency and needs contracted

work done as soon as possible. Under these circumstances,

which of the following would be the MOST helpful to add to

the contract?

A. A clear procurement statement of work.

B. Requirements as to which subcontractors can be used.

C. Incentives.

D. A force majeure clause.

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Questions

9. Your company has an emergency and needs contracted

work done as soon as possible. Under these circumstances,

which of the following would be the MOST helpful to add to

the contract?

A. A clear procurement statement of work.

B. Requirements as to which subcontractors can be used.

C. Incentives.

D. A force majeure clause.

Answer : C

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Questions

10. During which procurement processes does procurement

negotiation occur?

A. Plan Procurement Management and Close Procurements

B. Control Procurements and Close Procurements

C. Conduct Procurements and Control Procurements

D. Conduct Procurements and Close Procurements

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Questions

10. During which procurement processes does procurement

negotiation occur?

A. Plan Procurement Management and Close Procurements

B. Control Procurements and Close Procurements

C. Conduct Procurements and Control Procurements

D. Conduct Procurements and Close Procurements

Answer : D

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Questions

11. Your program manager has come to you, the project

manager, for help with a bid for her newest project. You

want to protect your company from financial risk, and you

have limited scope definition. What is the BEST type of

contract to choose?

A. Fixed price (FP)

B. Cost plus percentage of cost ( CPPC)

C. Time and material (T &M)

D. Cost plus fixed fee ( CPFF)

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Questions

11. Your program manager has come to you, the project

manager, for help with a bid for her newest project. You

want to protect your company from financial risk, and you

have limited scope definition. What is the BEST type of

contract to choose?

A. Fixed price (FP)

B. Cost plus percentage of cost ( CPPC)

C. Time and material (T &M)

D. Cost plus fixed fee ( CPFF)

Answer : D

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Questions

12. Close Procurements is different from Close Project or

Phase in that Close Procurements:

A. Occurs before Close Project or Phase.

B. Is the only one to involve the customer.

C. Includes the return of property.

D. May be done more than once for each contract.

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Questions

12. Close Procurements is different from Close Project or

Phase in that Close Procurements:

A. Occurs before Close Project or Phase.

B. Is the only one to involve the customer.

C. Includes the return of property.

D. May be done more than once for each contract.

Answer : A

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Questions

13. You have just started work on a procurement when

management decides to terminate the contract. What should

you do FIRST?

A. Go back to the Plan Procurement Management process.

B. Go back to the Conduct Procurements process.

C. Finish the Control Procurements process.

D. Go to the Close Procurements process.

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Questions

13. You have just started work on a procurement when

management decides to terminate the contract. What should

you do FIRST?

A. Go back to the Plan Procurement Management process.

B. Go back to the Conduct Procurements process.

C. Finish the Control Procurements process.

D. Go to the Close Procurements process.

Answer : D

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Questions

14. What type of contract do you NOT want to use if you do

not have enough labor to audit invoices?

A. Cost plus fixed fee ( CPFF)

B. Time & material (T &M)

C. Fixed price (FP)

D. Fixed price incentive fee (FPIF)

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Questions

14. What type of contract do you NOT want to use if you do

not have enough labor to audit invoices?

A. Cost plus fixed fee ( CPFF)

B. Time & material (T &M)

C. Fixed price (FP)

D. Fixed price incentive fee (FPIF)

Answer : A

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Questions

15. Which of the following is an advantage of centralized

contracting?

A. Increased expertise

B. Easier access

C. No home for the procurement manager

D. More loyalty to the project

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Questions

15. Which of the following is an advantage of centralized

contracting?

A. Increased expertise

B. Easier access

C. No home for the procurement manager

D. More loyalty to the project

Answer : A

Leadership & Management

Pmp procurement chapter 12