1. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12. Procurement Management PMP Prep Course Based on the PMBOK ® Guide 3 rd Edition

2. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 2 12. Procurement Management What is Project Procurement Management? Includes the processes to purchase or acquire products, services, or results needed from outside the project team to perform the work Includes the contract management and change control processes required to administer contracts or purchase orders issues by authorized team members Includes administering any contract issue by an outside organization (the buyer) this is acquiring the project from the performing organization (the seller) and administering contractual obligations placed on the project team by the contract *Source: PMBOK ® p.125

3. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 3 12. Procurement Management The seller will typically manage the work as a project if the acquisition is not just for material, goods, or commons products Buyer becomes the customer and thus is a key project stakeholder Terms and conditions of the contract become the key inputs to many of the seller’s management processes For purposes of the test, we assume that the buyer of items is within the project team and the seller is external to the project team, i.e., YOU are the buyer *Source: PMBOK ® p.125

4. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 4 12. Procurement Management Procurement InitiatingPlanningExecutingControlling Closing Knowledge Area Processes 12.1 Plan Purchases & Acquisitions 12.2 Plan Contracting 12.3 Request Seller Responses 12.4 Select Sellers 12.5 Contract Administration 12.6 Contract Closure

5. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 5 12.1 Plan Purchases and Acquisitions

6. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 6 12.1 Plan Purchases and Acquisitions Determining what to purchase or acquire and determining when and how Also include the consideration of potential sellers, particularly if the buyer wishes to exercise some degree of influence or control over contracting decisions Includes reviewing the risks involved in each make or buy decision Includes reviewing the type of contract planned

7. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 7 12.1 Plan Procurement & Acquisitions Includes attitudes toward Procurement and Procurement tolerance of the organization and people involved in the project Organization may have pre-defined approaches to Procurement management (such as Procurement categories or standard templates Describes project boundaries, requirements, constraints, and assumptions for buyer’s and seller’s Relationships among all the components Detailed SOW identification of the deliverables Overall plan for managing the project

8. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 8 12.1 Plan Procurement & Acquisitions – Tools & Techniques Should include actual cost of the product as well as the indirect costs of managing the purchasing process To evaluate offers or proposals made by sellers Contract types Fixed-price Cost-reimbursable –CPF or CPPC –CPFF –CPIF Time and materials

9. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 9 12.1 Plan Purchases & Acquisitions – Tools & Techniques Contract Types – From PMBOK pg 277 Cost Plus Percentage Of Costs Cost Plus Fixed Fee Cost Plus Incentive Fee Time & Materials Fixed Price or Lump Sum High Buyer’s Risk Low Seller’s Risk High Low Cost-Reimbursable Fixed Price T&M

10. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 10 12.1 Plan Purchases & Acquisitions – Tools & Techniques Firm Fixed Price – Best suited when reasonably definite production specifications are available and costs are relatively certain Cost Plus Percentage of Cost – Reimbursable to contractor for allowable costs plus an agreed upon percentage of the actual costs as profit Cost Plus Fixed Fee – Reimbursable to contractor for allowable costs plus a fixed payment as profit

11. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 11 12.1 Plan Purchases & Acquisitions – Tools & Techniques Cost Plus Incentive Fee – Reimbursable to contractor for allowable costs plus an agreed upon fixed fee plus an incentive bonus. The incentive bonus is based upon a pre- negotiated formula generally representing the level of risk for each party (e.g. the buyer and seller). Examples include: Cost Plus Fixed Fee + Incentive Bonus (85/15) Incentive Bonus = Original Estimate – Actual Costs Split 85% to the buyer and 15% to seller.

12. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 12 12.1 Plan Purchases & Acquisitions – Outputs How the procurement processes will be managed from developing documentation through closure Describes the procurement items in sufficient detail for prospective sellers Documented decision on what will be acquired or developed by project team Processed for review and disposition through the Integrated Change Control process

13. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 13 12.2 Plan Contracting Prepares the DOCUMENTS needed to support the Request Seller Responses process and Select Sellers process

14. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 14 12.2 Plan Contracting

15. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 15 12.2 Plan Contracting - Inputs How the procurement processes will be managed from developing documentation through closure Describes the procurement items in sufficient detail for prospective sellers Documented decision on what will be purchased or acquired or produced by project team Provides other planning output documents with procurement documentation Risk register – risk related information Risk-related contractual agreements – insurance and services Activity resource requirements Project Schedule Activity cost estimates Cost Baseline

16. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 16 12.2 Plan Contracting – Tools & Techniques Standard contracts, standard descriptions of procurement items, non-disclosure agreements and bidding documents Can be applied to both the technical details of the products, services, or results and to various aspects of the procurement management process

17. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 17 12.2 Plan Contracting – Outputs Documents used to seek proposals from prospective sellers – The complexity and level of detail should be consistent with the value of, and risk associated the planned purchased or acquisition Used to rate or score proposal – purchase price, technical capability, production capacity and interest, etc. Modification when identified )

18. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 18 12.3 Request Seller Responses Obtains responses, such as bids and proposals, from prospective sellers Usually has no cost to the buyer

19. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 19 12.3 Request Seller Responses

20. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 20 12.3 Request Seller Responses - Inputs List or files on prospective and previously qualified sellers, who can be asked to bid, propose, or quote on work Describes how the procurement processes will be managed Documents that are used to seek proposals from prospective sellers

21. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 21 12.3 Request Seller Responses – Tools & Techniques Used to ensure that the sellers all understand what is being requested – Contractor conferences, vendor conferences, and pre-bid conferences Sometimes mandated by government jurisdictions – used to expand existing lists of potential sellers Developed from organizational assets or by the project team

22. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 22 12.3 Request Seller Responses – Outputs Those who are asked to submit a proposal or quotation Buyer prepared formal request sent to each seller Seller prepared documents that describe the seller’s ability to provide the requests products or services

23. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 23 12.4 Select Sellers Receives bids or proposals and applies evaluation criteria to select one or more sellers

24. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 24 12.4 Select Sellers

25. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 25 12.4 Select Sellers - Inputs Organizations typically have formal policies that affect the evaluation of proposals How the procurement process will be managed Samples of the suppliers previous work to evaluate capabilities and quality – review supplier’s history Buyer-prepared formal request sent to seller Seller prepared - used to select successful bidder Those asked to submit a proposal or quotation Overall plan to manage project

26. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 26 12.4 Select Sellers – Tools & Techniques Method for quantifying qualitative data to minimize the effect of personal prejudice Referred to as a “should-cost” estimate – If significant differences result could be SOW was inadequate or seller misunderstood or failed to respond fully. Involves establishing minimum requirements of performance of the evaluation criteria

27. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 27 12.4 Select Sellers – Tools & Techniques Used to clarify the structure and requirements of the contract so mutual agreement is reach before signing Information such as seller’s past performance, quality rating, etc that may assist in determining if this seller is adequate Used in evaluating seller proposals Usually pre-defined weightings with respect to each other; usually has multiple reviewers

28. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 28 12.4 Select Sellers – Outputs Based on the outcome of the proposal or bid evaluation Awarded to the selected seller and is a legal relationship subject to remedy in the courts Used to administer the contract Show dates specific resource quantities are available Updated to reflect any approved changes Processed for review and disposition through the Integrated Change Control process

29. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 29 12.5 Contract Administration Allows for both parties to ensure that they meet their contractual agreements Includes application of appropriate project management processes to the contractual relationship Includes Direct and manage project execution Performance reporting Perform quality control Integrated change control Risk monitoring and control

30. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 30 12.5 Contract Administration

31. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 31 12.5 Contract Administration - Inputs Can be in the form of a complex document or a simple purchase order – mutually binding agreement This is a plan to administer the contract – an a sublet of the project management plan Those who have been judged to be in a competitive range based upon the outcome of the proposal or bid evaluation Seller performance-related documentation All changes are formally documented in writing and approved before being implemented Is collected as part of project execution – quality standards being met, costs incurred or committed. etc

32. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 32 12.5 Contract Administration – Tools & Techniques Process by which the contract can be modified (since it is a legal binding document A structured review of the seller’s progress to deliver project scope and quality, within cost and schedule, as compared to the contract Can be conducted during execution of the project to identify any weakness in the seller’s process or deliverables Provides management with information about how effectively the seller is achieving the contractual objectives

33. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 33 12.5 Contract Administration – Tools & Techniques Includes appropriate reviews and approvals by the project management team, and payments are made in accordance with the terms of the contract Claims, disputes, or appeals – can involve arbitration or litigation and can be invoked prior to or after contract closure Is part of the project management information system (PMIS) – used by the project manager to manage contract documents and correspondence Is used to enhance the efficiency and effectiveness of contract administration – usually by automation.

34. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 34 12.5 Contract Administration – Outputs The contract, along with all supporting scheduled, requested unapproved contract changes, and approved change request Are processed for review and approval through the Integrated Change Control process Anything that needs to be done to bring the seller in compliance with the terms of the contract Correspondence –written documentation of certain aspects of buyer/seller communications – payment schedules and request if needed – and seller performance evaluation documents prepared by the buyer The procurement and contract management plans are updated to reflect any approved change requests that affect these plans

35. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 35 12.6 Contract Closure Due to the legal nature of the contract, it is important to ensure that proper closeout be performed Involves administrative activities such as updating records to reflect final results and archiving for future use In multi-phase projects, this may be done multiple times

36. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 36 12.6 Contract Closure

37. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 37 12.6 Contract Closure- Inputs This can include types of contracts to be used, action the project management team can take, constraints and assumptions, and procurement metrics Covers the contract administration activities throughout the life of the contract and is a subset of the project management plan The contract along with all supporting schedule, requested unapproved contract changes, and approved contract change requests Is developed to provide a step-by-step methodology that addresses the terms and conditions of the contracts and any required completion or exit criteria for contract closure

38. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 38 12.6 Contract Closure– Tools & techniques Structured review of the procurement process – to identify successes and failures that warrant recognition A specific set of processes, related control functions, and automation tools used by project managers to manage contract documentation and records

39. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 39 12.6 Contract Closure– Outputs The buyer provides the seller with formal written notice that the contract has been completed Updates Contract file – a complete set of indexed contract documentation prepared for inclusion with the final project files Deliverable acceptance – the buyer provides the seller with formal written notice that deliverables have been accepted or rejected Lessons learned documentation – developed for future purchasing and acquisition planning and implementation

40. v. 2.0 - © Copyright and all rights reserved – 2005 PMI Mile Hi Chapter 12/07/05Procurement - 40 12.6 Procurement - Summary Procurement Processes IN ORDER Be able to identify based on scenario what phase of the procurement process you are in Contract types! And when to use them – remember SCOPE DEFINITION is the key on selecting a contract type