1. Project Procurement, Contract Management, and
Lecture 45
Project Procurement, Contract Management, and
Ethics in
Project Management

2. 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

3. Lecture 45 Procurement Procurement Cycles 2. Type of contract
Requirement cycle
Requisition Cycle
Solicitation cycle
Award Cycle
Admin cycle
2. Type of contract
Six Categories of Contract
Ethics in Project Management

4. “Self-pity is our worst enemy & if we yield to it,
we can never do anything wise in this world”
- Helen Keller

5. “To be prepared is half the victory.”
 Miguel de Cervantes Saavedra

6. “Treat people as if they were - Johann Wolfgang von Goethe
what they ought to be,
& you
help them to become
what
they are
capable of being”
- Johann Wolfgang von Goethe

7. regardless of their chosen field of endeavor.
The quality of a person's life is in direct production to their commitment to excellence,
regardless of their chosen field of endeavor.

8. The race is not always to the swift...
but to those
who keep
on running.

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

10. Action in Your Project “Action may not always bring happiness,
but there is
no happiness
without Action”
- Benjamin Disraeli

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

12. Good Procurement Practices includes
Corporate profitability by:
Taking advantage of:
Quantity discounts,
Minimize Cost/Financial Problems,
Seeking out Quality Suppliers.

13. As Procurement Contributes To Profitability Procurement is Often Centralized,
-Results in “Standardized practices”
-”Lower Paper work Cost”

14. Objectives of Procurement Planning are to select one of following for the Procurement of all Goods/Services:
From Single Source.
From Multiple/source.
Procure only small portion of Goods/Services
Procure none of Goods/Services

15. Environment in which Procurement Take Place is Critical factor.
There are two environments:
Macro &
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.

16. Requirement Cycle: Defines boundaries of Project
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.

17. Several Activities of Procurement Process that overlaps Several of Cycles.
These cycles are conducted In parallel, especially “Requisition & Solicitation”.

18. 1. Requirement Cycle
First Step in Procurement Process “Definition of Project Specifically ‘Requirements”

19. Requirement Cycle Includes
Defining the need for the project
Development of the statement of work, specifications, and work breakdown structure
Performing a make or buy analysis
Laying out the major milestones and the timing/schedule
Cost estimating, including life-cycle costing
Obtaining authorization and approval to proceed

20. Design (physical Characteristics)
Specifications
Written Pictorial or graphic Information describe define or specify services/item to be procured:
Design (physical Characteristics)
Performance (measurable capabilities)
Functional Specification ( subset of Functional , risk is on contractor)

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

22. Requisition cycle Include:
Evaluation confirming specification.
Confirming sources
Reviewing past performance of sources
4. Producing Solicitation Package (S/P)
Solicitation Package sent to each possible “Supplier for Playing” Field is level.

23. Specification Package Includes:
Bid documents (usually standardized)
Listing of qualified vendors (expected to bid)
Proposal evaluation criteria
Bidder conferences
How change requests will be managed
Supplier payment plan

24. 3. Solicitation Cycle
Selection of “Acquisition Method” is the Critical Element in “Solicitation Cycle”.
Three Acquisition Methods :
Advertising
Negotiation
Small Purchases (off supplies)

25. 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”.

26. 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.

27. Large proposals contains:
separate volumes for cost, technical Performance, Management History, Quality, facilities, subcontractor Management, & Others.

28. 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:
Integrity of relationship &
Previous history

29. Result in a “signed contract”. Several types of Contracts.
Award Cycle (A/C)
Result in a “signed contract”. Several types of Contracts.
So Negotiation process also Include “selection” of the Type of Contract.

30. 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.

31. 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.

32. 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.

33. 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.

34. 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”.

35. 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:

36. “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:
The Manufacture Of Supplies Or
The Performance Of Services.

37. after performance begins, ‘Definitive contract”
Final contract price
Must be negotiated
after performance begins,
‘Definitive contract”
must
still be negotiated.

38. Types of contract selection based upon following:
Overall degree of Cost & Schedule Risk
Type & complexity of Requirement (technical Risk)
Extent of Price Competition
Cost/Price Analysis
Urgency of Requirements
Performance period
Contractor's Responsibility (and Risk)
Contractor's Accounting System (Report Earn Value reporting?)
Concurrent Contract (contract take A back seat to existing work?)
Extent of Subcontracting (how much work contractor out source?)

39. 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)

40. First Category
Fixed-price or
Lump-sum contract

41. Contractor carefully “Estimate Target Cost”.
Contractor required to Perform work at negotiated Contract Value.

42. 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.

43. Lump-sum
Provides “Max Protection to Owner” for ultimate “Cost of Project”.
Disadvantage:
Requiring a Long Period For Preparation & Adjudications of Bids.

44. Because of a Lack of knowledge of all contractors Include
Local conditions,
all contractors Include
Excessive
Contingency.

45. Chang Requested
By owner after “Award of contract” Lead to Troublesome & Sometimes “Costly extras”

46. 2nd Category
Cost-Plus-
Fixed-Fee
(CPFF)

47. 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.

48. 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.

49. 3: Cost-Plus-Percentage
– fee Contract

50. Provides Maximum flexibility to owner Permits “Owner & Contractor” to work together cooperatively on All “Technical, Commercial, Financial Problems”.
-No Financial Assurance of “Ultimate Cost”.

51. “No financial incentive to contractor” this because of “High building cost” (Compared with other forms).
Only meaningful Incentive can be:
Inc competition &
Prospects for
Follow-on contracts.

52. 4th Category of Contracts Maximum-Share Savings”
“Guaranteed
Maximum-Share Savings”

53. 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"

54. Savings below the" Guaranteed Maximum” are Shared between “Owner & Contractor”, where as Contractor Assumes the Responsibility
For any “Overrun beyond” Guaranteed “Maximum Price”.

55. 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

56. Though contract awarded without “Competitive Tenders”.
-Yet Protects owner Against being Overcharged,

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

58. 5th Category of Contract
Fixed-Price-
Incentive-fee Contracts

59. 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

60. Formula “Agreed to” in advance By “Owner & Contractor”.
To use this Both “Project or Contract” Requirements Must be firmly established

61. Provides An incentive to Contractor To:
a) Reduce Cost
b) Increase profit
Both “Owner & Cost” Share in “Risk & Savings”.

62. “Cost-Plus-Incentive-
6th Cat.
“Cost-Plus-Incentive-
Fee Contracts”

63. 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”.

64. 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”.

65. Functions of contract administrator Include:
Change Management
Specification interpretation
Adherence to Quality
Warranties
Subcontractor Management
Production surveillance
Waivers
Contract breach
Resolution of disputes
Project Termination
Payment “Schedule”
Project Closeout

66. Part Two
Ethics

67. Standards of Members of Society
Ethical Origins
Societal Ethics:
Standards of Members of Society
use when dealing with
each other.
Based on
“Values & standards”

68. Found in Society’s Legal Rules, Norm, & Mores. Codified in the
Societal Ethics:
Found in Society’s
Legal Rules,
Norm, & Mores.
Codified in the
“Form of Law”
& Society Customer.

69. Societal ethics vary based Strong beliefs in one country
Norms dictate
how people
Should behave.
Societal ethics vary based
On a given Society.
Strong beliefs in one country
differ elsewhere.

70. “Values & standards used by Group of Managers in workplace”.
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)

71. An individual’s Basic convictions of What is “Right & Wrong”
Values
An individual’s Basic
convictions of
What is “Right & Wrong”

72. Basic beliefs About what
Values
Basic beliefs About what
one should or
should not do?
& What is &
is not important?

73. Values of an individual
Individual Ethics:
Values of an individual
resulting from their
family & upbringing.

74. Behavior
not illegal,
Yet People still
disagree
If not
ethical.

75. Ethics of top Project Manager
set the
tone for
Project

76. Provide sign of top Management’s desires in Organizational culture
Ethics Codes
& Policies
Provide sign of top Management’s desires in
Project Based
Organizational culture

77. Project Manager should behave ethically
Why Behave Ethically?
Project Manager should behave ethically
To Avoid Harming others. Managers Responsible for “Protecting & Nurturing Resources”
In their Charge.

78. “Leadership, Culture, Incentive Compensation Plans” help Shape
“Individual Ethical behavior”
in Project Management

79. “Evidence” Showing “Ethical Managers”
Promoting Ethics
“Evidence” Showing “Ethical Managers”
benefit
over long term .

80. To all employees. 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.

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

82. Ethical decisions involve
Normative Judgment implies
“something is good or bad,
right or wrong, better or worse.”
Morality Society’s accepted
norms of behavior

83. 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.

84. Views of Ethical Decision-Making
Utilitarian
Rights
Justice
Decisions made
solely on the basis
of outcomes or
consequences
Decisions are
concerned with
respecting and pro-
tecting basic rights
of individuals
Decision makers
seek to impose
and enforce rules
fairly and
impartially

85. Professional organizations Project Management Institute (PMI)
Code of Ethics
Professional organizations Project Management Institute (PMI)
Taking a serious look at developing
Requirements for a Professional Project manager.

86. Ethics obligation matrix.

87. 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.

88. ARTICLE I: Project Managers shall maintain high standards of personal and professional conduct.
Accept responsibility for their actions.
Undertake projects and accept responsibility only if qualified by training or experience, or after full disclosure to their employers or clients of pertinent qualifications.
Maintain their professional skills at the state -of-the-art and recognize the importance of continued personal development and education.
Advance the integrity and prestige of the profession by practicing in a dignified manner.
Support this code and encourage colleagues and co-workers to act in accordance with this code.
Support the professional society by actively participating and encouraging colleagues and coworkers to participate.
Obey the laws of the country in which work is being performed.

89. ARTICLE II: Project Managers shall, in their work:
Provide the necessary project leadership to promote maximum productivity while striving to minimize costs.
Apply state-of-the-art management tools and techniques to ensure schedules are met and the project is appropriately planned and coordinated.
Treat fairly all project team members, colleagues and co-workers, regardless of race, religion, sex, age or national origin.
Protect project team members from physical and mental harm.
Provide suitable working conditions and opportunities for project team members.
Seek, accept and offer honest criticism of work, and properly credit the contribution of others.
Assist project team members, colleagues and co-workers in their professional development.

90. ARTICLE III: Project Managers shall, in their relations
with employers and clients:
Act as faithful agents or trustees for their employers or clients in professional or business matters.
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.
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.
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.
Be honest and realistic in reporting project cost, schedule and performance.

91. ARTICLE IV: Project Managers shall, in fulfilling their responsibilities to the community:
Protect the safety, health and welfare of the public and speak out against abuses in those areas affecting the public interest.
Seek to extend public knowledge and appreciation of the project management profession and its achievements.

92. Part Two ends

93. Social Responsibility
Social Power
Social Responsibility Concept
Project Management Organization must behave Proactively Business has certain social responsibility because power it wields
Be a “Good Corporate Citizen”

94. Social Responsibility Pyramid
Good Corporate Citizen
Do What is Right, Just
Obey the Law
Make Enough Money To Survive

95. Levels of Social Responsibility
Reactive
(Obstruction)
Proactive
Defensive
Accommodative
Low
Level of Social Responsibility
High

96. Social Responsiveness
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”

97. 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.

98. The Social Audit Profitability Social Returns Favored Strategies
Negative
Low
Medium
High
Favored
Strategies
Social Returns
Profitability

99. Arguments For Social Responsiveness
Business is
involved in
social issues

100. tackle today’s complex societal problems
Business resources to
tackle today’s complex societal problems

101. a better environment for doing business Corporate social action
A better society means
a better environment for doing business
Corporate social action
will prevent
Government intervention

102. 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

103. Part Three
Recap of the course

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

105. Leadership
Communication
Ethics
Costing
Pricing
Risk Management
Procurement
Close out Note

106. Part Four
Project Management Institute (PMI)

107. 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:

108. 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.

109. 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.

110. 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

111. 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.

112. 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.

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

114. 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.