2 Lecture 44 contents What is Risk? Primary Components Tolerance of Risk Risk ManagementCat of RiskRisk PlanningRisk Assessment (identification and analysis)Risk HandlingRisk MonitoringQualitative Risk Rating
3 Lecture 45 Procurement Procurement Cycles 2. Type of contract Requirement cycleRequisition CycleSolicitation cycleAward CycleAdmin cycle2. Type of contractSix Categories of ContractEthics 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,& youhelp them to becomewhatthey arecapable 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 thosewho keepon 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 isno happinesswithout Action”- Benjamin Disraeli
11 Acquisition of goods/services. Procurement (& contracting) is a Process that involves-Two Parties with:Different objectivesWho Interact ina 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/ServicesProcure 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 ProjectRequisition Cycle: analysis of sourcesSolicitation Cycle: Bidding processAward cycle: Contractor selection & Contract AwardContract 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 CycleFirst Step in Procurement Process “Definition of Project Specifically ‘Requirements”
19 Requirement Cycle Includes Defining the need for the projectDevelopment of the statement of work, specifications, and work breakdown structurePerforming a make or buy analysisLaying out the major milestones and the timing/scheduleCost estimating, including life-cycle costingObtaining authorization and approval to proceed
20 Design (physical Characteristics) SpecificationsWritten 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 CycleOnce the “Requisition identification”, ‘Requisition form’ sent to Procurement to begin “Requisition Process”.
22 Requisition cycle Include: Evaluation confirming specification.Confirming sourcesReviewing past performance of sources4. 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 criteriaBidder conferencesHow change requests will be managedSupplier payment plan
24 3. Solicitation CycleSelection of “Acquisition Method” is the Critical Element in “Solicitation Cycle”.Three Acquisition Methods :AdvertisingNegotiationSmall 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 OrThe Performance Of Services.
37 after performance begins, ‘Definitive contract” Final contract priceMust be negotiatedafter performance begins,‘Definitive contract”muststill be negotiated.
38 Types of contract selection based upon following: Overall degree of Cost & Schedule RiskType & complexity of Requirement (technical Risk)Extent of Price CompetitionCost/Price AnalysisUrgency of RequirementsPerformance periodContractor'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)
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 PerformanceGood/Poor PerformanceRewarded 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 booksbe audited.
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 forFollow-on contracts.
52 4th Category of Contracts Maximum-Share Savings” “GuaranteedMaximum-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 ResponsibilityFor 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 Costb) Increase profitBoth “Owner & Cost” Share in “Risk & Savings”.
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 CycleContract 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 ManagementSpecification interpretationAdherence to QualityWarrantiesSubcontractor ManagementProduction surveillanceWaiversContract breachResolution of disputesProject TerminationPayment “Schedule”Project Closeout
67 Standards of Members of Society Ethical OriginsSocietal Ethics:Standards of Members of Societyuse when dealing witheach other.Based on“Values & standards”
68 Found in Society’s Legal Rules, Norm, & Mores. Codified in the Societal Ethics:Found in Society’sLegal Rules,Norm, & Mores.Codified in the“Form of Law”& Society Customer.
69 Societal ethics vary based Strong beliefs in one country Norms dictatehow peopleShould behave.Societal ethics vary basedOn a given Society.Strong beliefs in one countrydiffer elsewhere.
70 “Values & standards used by Group of Managers in workplace”. Professional Ethics:“Values & standards used byGroup of Managers in workplace”.Applied when Decisionnot “Clear-Cut Ethically”.Physicians/LawyersProfessional Associates(PMA, Bar Council)
71 An individual’s Basic convictions of What is “Right & Wrong” ValuesAn individual’s Basicconvictions ofWhat is “Right & Wrong”
72 Basic beliefs About what ValuesBasic beliefs About whatone should orshould not do?& What is &is not important?
73 Values of an individual Individual Ethics:Values of an individualresulting from theirfamily & upbringing.
74 Behaviornot illegal,Yet People stilldisagreeIf notethical.
75 Ethics of top Project Manager set thetone forProject
76 Provide sign of top Management’s desires in Organizational culture Ethics Codes& PoliciesProvide sign of top Management’s desires inProject BasedOrganizational culture
77 Project Manager should behave ethically Why Behave Ethically?Project Manager should behave ethicallyTo Avoid Harming others. Managers Responsible for “Protecting & Nurturing Resources”In their Charge.
79 “Evidence” Showing “Ethical Managers” Promoting Ethics“Evidence” Showing “Ethical Managers”benefitover long term .
80 To all employees. Ethical Control System in Project Management Formal System to encourageEthical 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 acceptednorms 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 UtilitarianRightsJusticeDecisions madesolely on the basisof outcomes orconsequencesDecisions areconcerned withrespecting and pro-tecting basic rightsof individualsDecision makersseek to imposeand enforce rulesfairly andimpartially
85 Professional organizations Project Management Institute (PMI) Code of EthicsProfessional organizations Project Management Institute (PMI)Taking a serious look at developingRequirements for a Professional Project manager.
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.
93 Social Responsibility Social PowerSocial Responsibility ConceptProject Management Organization must behave Proactively Business has certain social responsibility because power it wieldsBe a “Good Corporate Citizen”
94 Social Responsibility Pyramid Good Corporate CitizenDo What is Right, JustObey the LawMake Enough Money To Survive
95 Levels of Social Responsibility Reactive(Obstruction)ProactiveDefensiveAccommodativeLowLevel of Social ResponsibilityHigh
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 illegalor unethical acts.Now protected by lawSocial audit: Managers specifically take ethics & business into account when making decisions.
98 The Social Audit Profitability Social Returns Favored Strategies NegativeLowMediumHighFavoredStrategiesSocial ReturnsProfitability
99 Arguments For Social Responsiveness Business isinvolved insocial issues
101 a better environment for doing business Corporate social action A better society meansa better environment for doing businessCorporate social actionwill preventGovernment intervention
102 How Firms Can Improve Their Social Responsiveness (Ethical Performance) Establish and publish their own Code of EthicsOmbudsmen - (committee, task force) to review the corporate past behaviorProtect whistle-blowing - when an employee discloses an illegal, immoral, or unethical action committed by a member of the organizationTraining programs - ethical sensitivity trainingControlling compliance - corporate social audit (or ethics audit)Leadership - demonstrate commitment from leadersInvolve personnel at all levels
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.