12- Project

Procurement
Management
12

Unit - 12
- 12-

Agenda

Plan
Procurements.
Conduct
Procurements .
Administer
Procurements .
Close
Procurements .

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12 Project Procurement Management

12 -
12.1 Plan Procurements
The process of documenting
project purchasing 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 Administer Procurements

The process of managing
procurement relationships,
monitoring contract performance,
and making changes and
corrections as needed.

12.4 Close Procurements

The process of completing each
project procurement.

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12-2

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12-3


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12-4

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Project Procurement Management Definition

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Includes the processes to

purchase or acquire the Products,
Services, or Results needed from
outside the project team to
perform the work.
Includes the contract management
and control processes required to
administer contracts or purchase
orders issued authorized project
team members.
Includes administering any
contract by an outside
organization (The Buyer) that is
acquiring the project from the
performing organization (The
Seller), and administering
contractual obligations on the
project team by the contract.

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Centralized Vs. Decentralized Contracting

Centralized
Contracting:
A separate contracting
office handles
contracts for all
projects.

Decentralized
Contracting:
A contract
administrator
(Contracting Officer) is
assigned to each
project.

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Definition(s) of a Contract

A mutually binding
agreement that obligates the
seller to provide the
specified products, services,
or results, and obligates the
buyer to provide monetary
or other valuable
consideration:
Is a legal relationship subject to
remedy in the courts.

An agreement that affects

the legal relationship
between two ore more
parties:
A promise of set of promises the
breach of which the law
provides a remedy .

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The Project Manager Role in Procurement

Know the procurement

process .
Understands the contract .
Make sure that the contract
contain all scope of work and
project management
requirements .
Identify risks , mitigation and
allocation of risks into the
contract .
Help tailor the contracts .
Fit the schedule of
procurement process in the
schedule of the project .

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The Project Manager Role in Procurement

Be involved in the contract
negotiating .
Protect the integrity of the
project and the ability to get
the work done .
Help make sure that PM
work in the contract done .
Do not ask any work that
not a part of the contract
without approved change .
Work with the procurement
manager to manage
changes to the contract .

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Plan Procurements ( Planning ) 12.1

) 1-12 )

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Plan
Procurement
is the process
of
documenting
project
purchases
decisions.

Buyer -Seller Model

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The seller can be called a

contractor, subcontractor,
vendor, service provider, or
supplier. Depending on the
buyers position in the
project acquisition cycle.
The buyer can be called a
client, customer, prime
contractor, contractor,
acquiring organization,
governmental agency,
service requestor, or
purchaser.
The seller can be viewed
during the contract life cycle
first as a bidder, then as the
selected source, and then
as the contracted supplier.

Plan Procurements 12.1

- 12-1
1. Scope baseline
2. Req. documentation
3. Teaming agreements
4. Risk register
5. Risk-related contract decisions
6. Activity resource req.
7. Project schedule
8. Activity cost estimates
9. Cost performance baseline
10. Enterprise environment factors
11. Organizational PA

11

1. Procurement management
plan
2. Procurement statements of
work
3. Make-or-buy decisions
4. Procurement documents
5. Source selection criteria
6. Change requests

1. Make-or-buy analysis
2. Expert judgment
3. Contract types

Outputs

Tools & Techniques

Inputs
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Outputs

Tools & Techniques

Inputs

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.

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1.
2.
3.

Source: PMBOK Guide Fourth Edition,

page 317

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1.
2.
3.
4.
5.
6.

Plan Procurements 12.1

12-1
1.
2.
3.
4.
5.

Scope baseline
Req. documentation
Teaming agreements
Risk register
Risk-related contract
decisions
6. Activity resource req.
7. Project schedule
8. Activity cost estimates
9. Cost performance
baseline
10. Enterprise environmental
factors
11. Organizational process
assets

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2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
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Scope baseline

The scope baseline
describes the need,
justification,
requirements, and
current boundaries for
the project. It consists
of the following
components:
Scope statement.
WBS.
WBS dictionary.

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Requirements Documentation

Requirements documentation
may include:
Important information about
project requirements that is
considered during planning for
procurements.
Requirements with contractual
and legal implications that may
include health, safety, security,
performance, environmental,
insurance, intellectual property
rights, equal employment
opportunity, licenses, and
permitsall of which are
considered when planning for
procurements.

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Risk-Related Contract Decisions

Risk-related contract
decisions include
agreements including
insurance, bonding,
services, and other
items as appropriate,
that are prepared to
specify each partys
responsibility for
specific risks .

Enterprise environmental factors

The enterprise environmental

factors that can influence the
Plan Procurements process
include, but are not limited to:
Marketplace conditions.
Products, services, and
results that are available in
the marketplace.
Suppliers, including past
performance or reputation.
Typical terms and
conditions for products,
services, and results or for
the specific industry; and
Unique local requirements.

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Organizational process assets

The organizational process assets

that influence the Plan
Procurement process include, but
are not limited to:

Formal procurement policies,

procedures, and guidelines. Most
organizations have formal procurement
policies and buying organizations.
When such procurement support is not
available, the project team will have to
supply both the resources and the
expertise to perform such procurement
activities.
Management systems that are
considered in developing the
procurement management plan and
selecting the contract types to be used.
An established multi-tier supplier
system of pre-qualified sellers based
on prior experience.

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Plan Procurements 12.1

12-1

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1. Make-or-buy
analysis
2. Expert
judgment
3. Contract
types

Make-Or-Buy Analysis

Some of what to consider if

the buy decision is to be made:

A further decision of whether to

purchase or rent is also made.
The perspective of the project
teams organization.
The immediate needs of the
project.
Example: purchasing an item
(Anything from a construction
crane to a personal computer)
rather than renting or leasing it
may or may not be cost effective
from the perspective of the
project. However, if the project
teams organization has an
ongoing need for the item, the
portion of the purchase cost
allocation to the project could be
less than the cost of the rental.

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Make-or-Buy Analysis

Some general rules to keep
in mind during the decisionmaking process are:

Leverage internal resources

first (staff, factories, etc.) and
supplement with procured
resources as needed.
Consider both the direct
costs and indirect costs
during make-or-buy analysis.
Budget constraints may
influence make-or-buy
decisions.
If a buy decision is to be
made, then a further
decision of whether to
purchase or lease is also
made.

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Reasons to Make over Buy

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Protect proprietary
information that
provides competitive
advantage
Surplus staff
Surplus plant
capacity
Ease of project
control

Cost Considerations

Make-or-buy
decisions should
always take into
consideration
both the direct
costs to the
buyer and the
indirect costs to
the buyer.

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Direct and Indirect Cost

Make Product

Direct Costs:

Labor
Material
Other

Direct Costs:
-

Purchase
price
Other

Indirect Costs:
Overhead
-

Buy Product

Salaries of
Executives

General
Administrative
Other

Indirect
Costs:
-

Contract
administrati
on
Other

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Contract Types
) )

The Four major types of

contracts are:
Fixed-price or lump-sum
contracts.
Cost Plus Fixed Fee Contracts
(CPFF).
Cost Plus Incentive Fee Contracts
(CPIF).
Cost Plus Award Fee Contracts
(CPAF).

Cost-reimbursable contracts.
Cost-Plus-Fee (CPF) or CostPlus-Percentage of Cost (CPPC).
Cost-Plus-Fixed-Fee (CPFF).
Cost-Plus-Incentive-Fee (CPIF).

Time and Material (T&M)

contracts.
Purchase Order

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Fixed Price Contract

Fixed Price

Other
Names

Lump-sum, Firm Fixed Price, FP

When to
Use

Scope of work is well defined

Substantial changes are not expected

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Advantages

Requires least amount of managerial

oversight by buyer
Least cost risk to buyer if scope is well
defined
Seller has incentive to control costs
Project budget is known at the
beginning

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, (FPIF)
(FP-EPA)

Dis advantages

Takes greatest effort to create scope

of work
Scope changes are difficult to
accommodate and typically expensive

Forms of
Contract
Type

FPI (or FPIF) (Fixed Price Incentive Fee )

FPEPA (Fixed Price with Economic Price
Adjustments)

Cost Risk
Carried
By

Seller assuming that the product is well

defined, the seller carries the most
risk for higher costs

FP , ,

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Cost-Reimbursable Contract

CR

Other
Names

Desired results are known but

When to
Use

CR

Cost-Reimbursable

( .
.

). ( FP

.

). ( FP

). ( FP
). (CPFF
). (CPFF
). (CPAF

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requirements to achieve results are not

known
Flexibility in change control is needed

Advantages Takes less effort to create scope of work

than FP
Provides more flexibility to the buyer in
accommodating scope changes than FP
Requires greater amount of managerial
oversight by buyer than FP
Seller has less incentive to control costs
than in FP

Disadvanta
ges

)CPFF (Cost Plus Fixed Fee

)CPIF (Cost Plus Incentive Fee
)CPPC (Cost Plus Percentage of Costs

Forms of
Contract
Type

Buyer total costs are not known until

project completion

Cost Risk
Carried
By

Time and Material Contract

T&M , ,
( FP ) ( ) .CR

Time and Material

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... ,. ( .

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) (T&M
.
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T&M, Unit Price, Hybrid of FP and CR

Other Names

When to use

Takes least effort to create scope of

work and contract
Ease of use when the item being
purchased is skilled labor (engineering
or technical) or when work must begin
)immediately (repairs, emergencies, etc.

Advantages

Short-term project
Scope of work is not well defined
Cost is small
Buyer wants more control

Disadvantages Seller has no incentive to control

costs
Requires greatest amount of day-today oversight by buyer
Buyer medium risk because T&M
typically used for short-term delivery.
The seller has no financial risk on T&M
contracts.

Cost Risk
Carried By

Exercise

What is the most

appropriate contract
type that can used in
the following situation:
Assumed Situation

Contract
Type
( CPFF ,
FP , T&M )

:

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CPFF , FP ,(
)T&M
.

You know exactly what

needs to be done

FP

You want work to start

immediately

CPFF

You want the services of a

contracted employees to
support your project team

CPFF

You want work to be done

without auditing invoices
of the work

FP

You need expertise to help

determining what to do

T&M

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Risk & Types of Contracts

- - Seller Risk :
Low
High

Buyer

Risk
High

100
0

CP
PC

CP
FF

Cost
Plus
Percenta
ge of Cost
(CPPC)

Cost
Plus
Fixed Fee
(CPFF)

Variable
Sharing Ratio

CPI
F

CP
CS

Cost
Plus
Incentive
Fee
(CPIF)

Cost
Plus
of Cost
(CPCS)

Low

100

FPI FFP
Fixed
Price Plus
Incentive
(FPPI)

Firm
Fixed
Price
Lump
Sum
(FFP)

Question : Who does carry the risk in a cost

reimbursable contract ?
Buyer
Question : Who carries the risk in a lump sum
contract ?

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Risk & Types of Contracts

- - 100%

) )

) )

0
%100

FPI FFP

)(FFP

30

+

)(FPPI

CP
CS

CPI
F

CP
FF

CP
PC

+

)(CPCS

)(CPIF

)(CPFF

+

)(CPPC

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Risk & Types of Contracts

- -100
%

)
)

0%
FPIF
+

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FP

rr
e
ll cto
e
S ra
nt
o
(C

CPIF
+

100
%

Ris
k

0%
CPPC
+

CPAF
+

T&M

FPEPA

Bu
( O yer
wn
er

CPFF
+

1. Fixed Price Contract (Lump Sum)

1 ) )
Most commonly used.
Involves a fixed total
price for a well
defined product.
Can also include
incentives for meeting
or exceeding selected
project objectives, such
as schedule targets.
Simplest form:
A purchase order for a
specified item to be
delivered by a specified
date for a specified price.

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)1. Fixed Price Contract (Lump Sum

) ) 1

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Fixed Price Contract

)(Lump Sum) ( FFP
contract is used when
:
Project is clearly defined
(Defined quantity and
defined quality).
Contractor is competent.
Contractor has control.
There are enough
contractors in the market
who are willing to bid for
the project .

Types of Fixed Price Contracts

Fixed Price Contract
( FP, Lump Sum ) :
Fixed Price Incentive
Fee Contract ( FPIF ) :
Fixed Price Award Fee
Contract ( FPAF ) :
Fixed Price Economic
Price Adjustment
Contract ( FPAPA ) :

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Fixed Price Contract Examples

Fixed Price Contract ( FP,
Lump Sum )

.( )
$ 1,200,000 =

Contract = $ 1,200,000
Fixed Price Incentive Fee
Contract ( FPIF )
Contract = $ 1,200,000
For every Month early the
project is Finished , an Additional
$ 10,000
to Fee
the Contract
Seller
Fixed
Price Paid
Award
( FPAF )
Contract = $ 1,200,000
For every Month Performance
exceeds the planning level by
more than 15%
an Additional $ 5,000 is awarded
to the Seller
With Maximum Award of $50,000

$ 1,200,000 =
,
$ 10,000

$ 1,200,000 =
%15
$ 5,000

. $ 50,000

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Fixed Price Contract Examples

Fixed Price Economic Price
Adjustment Contract
( FPAPA )
Contract = $ 1,200,000
But a Price Increase will
be Allowed in Year Two
Based On the US.
Consumer Price Index
For Year One . Or
Contract = The Contract
Price $1,200,00
But a
Price Increase will be
Allowed in Year Two For
Increases in Specific
Material Costs .

$ 1,200,000 =


.

$ 1,200,000 =


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2. Cost Reimbursable Contracts

2 .

Involve payment
(reimbursement) to the
seller:
Often include incentive
clauses:
Example : If the seller meets or
exceeds selected project
objectives, such as schedule
targets or total cost, then the
seller receives an incentive or
bonus payment.
Payment
=
Sellers actual costs
+
A fee typically representing
seller profit

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?2. Cost Reimbursable Contracts When To Use

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Cost Plus Contract

is used when :
Project is not clearly
defined (quantity and
quality of work are not
defined ).
Owner wants to keep
control of key factors
(decisions, cost, ..).
Fast tracking could be
used.

Cost Plus Contracts

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Contra
ctor

Owner

Normally
wont lose
money.
Reasonabl
e bidding
costs.

Involved.
Control
contractor
markups.
Fewer
surprises.
Fast track
potential.

Advantage
s

Profit level
modest.
Heavy
owner
participation

Over run.
High staff
costs.
Weaker
contractor
personnel.
Contractor
home office costs
opportunity for
loading

Disadvant
ages

2. Cost Reimbursable Contracts 3 Common Types

2. 3
1.

Cost Plus Fee (CPF) or

Cost Plus Percentage of
Cost (CPPC):

1.

Seller is reimbursed for allowable

costs for performing the contract
work and receives a fee
calculated as an agreed upon
percentage of the cost.
The fee varies with the actual
cost.

Cost Plus Fixed Fee

(CPFF):

Seller is reimbursed for allowable

costs for performing the contract
work and receives a fixed fee
payment calculated as an agreed
upon percentage of the
estimated project cost.
The fixed fee does not vary with
actual costs unless the project
scope changes.

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2. Cost Reimbursable Contracts 3 Common Types

2. 3
3.

Cost-Plus-Incentive-Fee
(CPIF):

Seller is reimbursed for allowable

costs for performing the contract
work and receives a predetermined ,
an incentive bonus, based upon
achieving certain performance
objective levels set in the contract.
In some (CPIF) contracts, if the final
costs are less than the expected
costs, then both the buyer and seller
sharing benefit from the cost savings
based upon a pre-negotiated sharing
formula.

Question : What are the

advantages of the incentives?
Answer : With incentives,
both buyer and seller work
toward the same objectives, for
example, finishing the project
on time.

3.

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Types of Cost Reimbursable Contracts

42

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+
+
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+ .
+ .
+
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Cost Contract :
Cost Plus Fee ( CPF ) ,
Cost Plus Percentage
Of Cost ( CPPC ) :
Cost Plus Fixed Fee
( CPFF ) :
Cost Plus Incentive Fee
( CPIF ) :
Cost Plus Award Fee
( CPAF ) :

Types of Cost Reimbursable Contracts

Cost Contract

Contract = Costs . There is

No Profit .
Cost Plus Fee ( CPF )
Cost Plus Percentage Of Cost
( CPPC )

. = .

Contract = Cost Plus 10% of

Costs As Fee.
Cost Plus Fixed Fee ( CPFF )
Contract = Cost Plus a Fee of
$100,000 .
Cost Plus Incentive Fee ( CPIF
)
Contract = see The Example
in Incentives Calculations .

+ +
) )
%10 + =
+
10,000 + = $ .

+
= .

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Types of Cost Reimbursable Contracts

Cost Plus Award Fee
( CPAF )
Contract = Cost Plus $
5,000 For Every month
Production exceeds
100,000 units.
Maximum Award Available
is $ 50,000 .
Contract = Cost Plus an
Award fee ( To be
determined ) for each
Deliverable Completed At
Least 7 Days Earlier .

+ .
$ 50,000 + =
100,000
50,000
$

) + ) =
) (
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)Point of Total Assumption ( PTA

45

+
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= ))
( \
( + .

Point of Total Assumption

( PTA ) :
Applies to Fixed Price
Incentive Fee Contracts.
Costs that go above The
( PAT ) are assumed to be
due to mismanagement .
The seller bear all the loss
on cost overrun .
The seller will monitor their
) actual costs against ( PTA
to make sure that they will
have profits .
PTA = (( Ceiling Price
Target Price ) / Ratio ) +
Target Cost .

Incentives Calculations Cost Plus Incentive Fee

) ( CPIF
+
210,000 $ .

$ 210,000

Target Cost

25,000 $ .

$ 25,000

Target Fee

235,000 $ .

$ 235,000

Target Price

80/20

Sharing Ratio

$ 200,000

Actual Cost

80/20 .
200,000 $ .

= $200,000 - $210,000
$10,000
X 20% = $10,00
$2,000
= $2,000 + $25,000
$27,000

=$210,000 - $200,000
$10,000
= $10,00 X 20%
$2,000
= $25,000 + $2,000
$27,000

Final
Fee

=$27,0000 + $200,000
$227,000 .
46

Final Price $200,000 +

$27,0000=$ 227,000

Final
Price

Incentives Calculations Cost Plus Incentive Fee ( CPIF )

+
Target Cost

$ 150,000

$ 150,000

Target Fee

$ 30,000

30,000 $

Target Price

$ 180,000

180,000 $

Sharing Ratio

60/40

Ceiling Price

$ 200,000

200,000 $

Actual Cost

$ 200,000

210,000 $

Final
Fee

$150,000 - $2100,000 =
( $60,000) Over .
$60,000) X 40% =
( $24,000) .
$30,000 + ( $24,000) = $
6,000

Final
Price

$200,000 + $6,000 $
216,000
This is above the ceiling
price of $200,000 .
Therefore the final price is
$200,000

Point Of

(( $200,000 - $180,000) /

60/40

$150,000 - $210,000 =
( $60,000)
$(60,000) X 40% =
( $24,000) .
$30,000 + ( $24,000) =
$ 6,000

$200,000 + $6,000 = $
216,000

200,000 = $

(( $200,000 - $180,000) /

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) Incentives Calculations Cost Plus Incentive Fee ( CPIF

+
$ 9,000,000

$ 9,000,000

Target Cost

$ 850,000

$ 850,000

Target Fee

$ 9,850,000

$ 9,850,000

Target Price

70/30

Sharing Ratio

$ 12,500,000

Ceiling Price

$ 8,000,000

Actual Cost

70/30
$ 12,500,000
$ 8,000,000

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$9,000,000 $8,000,000 = $
1,000,000
= $ 1,000,000 X 30%
$300,000 .
$300,000 + $
850,000 = $1,150,000

48

$ 8,000,000 + $
1,150,000 = $ .
9,150,000

$9,000,000- $8,000,000
= $ 1,000,000
= $$ 1,000,000 X 30%
$300,000 .
$30,0000 + $ 850,000
= $ $ 1,150,000

Final
Fee

$ 8,000,000 + $
1,150,000 = $ 9,150,000

Final
Price

3. Time and Material (T&M) Contracts

3 .

Are a hybrid type of

contractual arrangement
that contain aspects of both
cost-reimbursable and fixed
price type arrangements.
Fixed-Price hourly labor
rates:
Direct and indirect costs and
profit are included in the rates.

Buyer pays for actual labor

hours at hourly rates.
Buyer pays for material
costs at cost.

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3. Time and Material (T&M) Contracts

3 .
Time And Material
Contracts ( T&M)
Contract = $100 Per Hour
Expenses or Material At
Cost .
Contract = $100 Per Hour
Plus Materials At $15 Per
Linear Meter of Wood .

.
$100 =
.

+ $100 =
. $15

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3. Time and Material (T&M) Contracts

3 .

How do T&M contracts

resemble cost-reimbursable
types?
T&M contracts are open ended.
The full value of the agreement
and the exact quantity of items
to be delivered are not defined
by the buyer at the time of the
contract award.
Thus, T&M contracts can grow
in contract value as if they were
cost-reimbursable type
agreements.

How can T&M arrangements

resemble fixed-price type?
Example : Unit rates can be
preset by the buyer and seller
when both parties agree on the
rates for a specific resource
category.

.


.
,

.

:


.

51

Purchase Order (PO)

Purchase Order (PO)
Is a legal document
(contract) issued by
the buyer authorizing
a purchase. It is a
unilateral document in
that only one party,
the buyer in this case,
need sign the
document. POs are
used for simple
procurements ( On
The Shelf ) .

) (
( )
.


.

.
52

Purchase Order4 .
. 4

Purchase
Order
Contract to
Purchase 300
Linear Meters Of
Wood At $10 Per
Linear Meter .

300
$15
.

53

Plan Procurements 12.1

12-2
1. Procurement
management plan
2. Procurement
statements of work
3. Make-or-buy
decisions
4. Procurement
documents
5. Source selection
criteria
6. Change requests

.

.

.
.
.
.

1.
2.
3.
4.
5.
6.
54

Procurement Management Plan

The procurement
management plan can
include guidance for:
Types of contracts to be
used
Risk management issues
Whether independent
estimates will be used
and if they are needed as
evaluation criteria;
Those actions the project
management team can
take unilaterally, if the
performing organization
has a prescribed
procurement, contracting,
or purchasing department.

:
.
.


.




.

55

Procurement Management Plan

Standardized
procurement
documents
Managing multiple
suppliers
Coordinating
procurement with
other project aspects,
such as scheduling
and performance
reporting.
Any constraints and
assumptions that
could affect planned
procurements.

.
.



.


.

Procurement Management Plan

Handling the make-or-buy
decisions and linking them
into the Estimate Activity
Resources and Develop
Schedule processes
Setting the scheduled dates
in each contract for the
contract deliverables and
coordinating with the
schedule development and
control processes
Identifying requirements for
performance bonds or
insurance contracts to
mitigate some forms of
project risk;
Establishing the direction to
be provided to the sellers on
developing and maintaining
a work breakdown structure
(WBS)

.


.



.


.


.

57

Procurement Management Plan

/.


.


.

Establishing the form

and format to be used
for the
procurement/contract
;statements of work
Identifying prequalified
sellers, if any, to be
;used
Procurement metrics to
be used to manage
contracts and evaluate
sellers.

Procurement Statements of Work

Each procurement
statement of work defines,
for those items being
purchased or acquired, just
the portion of the project
scope that is included within
the related contract.
The statement of work
(SOW) for each contract is
developed from:

.

: SOW))

The procurement SOW

describes the procurement
item in sufficient detail to
allow prospective sellers to
determine if they are
capable of providing the
item.

The project scope statement

The project work breakdown
structure (WBS)
WBS dictionary.

.
. (WBS)
. (WBS)

59

Procurement Documents

Procurement documents
are used to solicit proposals
from prospective sellers.
Terms such as bid, tender,
or quotation are generally
used when the seller
selection decision will be
based on price (as when
buying commercial or
standard items), while a
term such as proposal is
generally used when other
considerations, such as
technical capability or
technical approach are
paramount.

.





)
(
" "

.

60

Common Names for Different Types of Procurement Documents

Request for
Information (RFI).
Invitation for bid (IFB)
Request for proposal
(RFP) .
Request for quotation
(RFQ).
Tender notice
Invitation for
negotiation
Contractor initial
response.

.(RFI)
. (IFB)

.(RFP)
.(RFQ)
.
.
.( )

61

Source Selection Criteria

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.

Understanding of need
Overall or life-cycle cost
Technical capability
Risk
Management approach
Technical approach
Warranty
Financial capacity
Production capacity and
interest
Business size and type
Past performance of
sellers
References
Intellectual property rights
Proprietary rights

.( )
.
.
.
.
.
.
.
.
.
.
.
.

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.

14.
62

Plan Procurements ( Execution ) 12.1

) ) 12-2
Conduct
Procurement is
the process of
obtaining seller
responses,
selecting a
seller, and
awarding a
contract.

.
63

Conduct Procurements 12.1

- 12-2
Inputs

1.
2.
3.
4.
5.
6.
7.
8.
9.

PM plan
Procurement documents
Source selection criteria
Qualified seller list
Seller proposals
Project documents
Make-or-buy decisions
Teaming agreements
Organizational PA

Inputs

.
.
.
.
.
.
.
.
.
64

Outputs

Tools & Techniques

1.
2.
3.
4.
5.
6.
7.
8.
9.

1. Bidder conferences
2. Proposal evaluation
techniques
3. Independent estimates
4. Expert judgment
5. Advertising
6. Internet search
7. Procurement negotiations

1. Selected sellers
2. Procurement contract
award
3. Resource calendars
4. Change requests
5. Project management plan
updates
6. Project document updates

Tools & Techniques

Outputs

.
.
.
.
.

. ( )
.

1.
2.
3.
4.
5.
6.
7.

Source: PMBOK Guide Fourth Edition,

page 329

.
.
)
. (
.
.
.

1.
2.
3.
4.
5.
6.

Conduct Procurements 12.1

12-2
1.
2.
3.
4.
5.
6.
7.
8.
9.

PM plan
Procurement
documents
Source selection
criteria
Qualified seller list
Seller proposals
Project documents
Make-or-buy
decisions
Teaming agreements
Organizational
process assets

.
.
.
.
.
.
.
.
.

1.
2.
3.
4.
5.
6.
7.
8.
9.
65

Conduct Procurements 12.1

12-2
1. Bidder conferences
2. Proposal evaluation
techniques
3. Independent
estimates
4. Expert judgment
5. Advertising
6. Internet search
7. Procurement
negotiations

.
.
.
.
.

. ( )
.

1.
2.
3.
4.
5.
6.
7.
66

Bidder Conferences

Bidder conferences (sometimes called

contractor conferences, vendor
conferences, and pre-bid conferences) are
meetings between the buyer and all
prospective sellers prior to submittal of a bid
or proposal.
They are used to ensure that all prospective
sellers have a clear and common
understanding of the procurement (both
technical and contractual requirements),
and that no bidders receive preferential
treatment.
Responses to questions can be
incorporated into the procurement
documents as amendments.
To be fair, buyers must take great care to
ensure that all prospective sellers hear
every question from any individual
prospective seller and every answer from
the buyer.

)

(

.


)
(
.

.




.

67

Proposal Evaluation Techniques

Proposals are sellerprepared documents that
describe the sellers
ability and willingness to
provide the requested
products, services, or
results described in the
procurement
documentation.
Proposals are prepared in
accordance with the
requirements of the
relevant procurement
documents and reflect the
application of applicable
contract principles.

) (

,

.




.
68

Proposal Evaluation Techniques

The sellers proposal
constitutes a formal and
legal offer in response to
a buyers request.
After a proposal is
formally submitted, the
buyer sometimes
requests the seller to
supplement its proposals
with an oral presentation.
The oral presentation is
meant to provide
additional information
with respect to the sellers
proposed staff,
management proposal,
and technical proposal,
which can be used by the
buyer in evaluating the
sellers proposal.

.
,
)
( Presentation
.



,


.

Evaluation Criteria

Evaluation criteria are
developed and used to
rate or score proposals.
Objective or subjective
evaluation criteria are
often included as part of
the procurement
documents.
Selection criteria can be
identified and
documented to support
an assessment for a
more complex product or
service.

) (
.


) (
.

) (

.

70

Evaluation Criteria

Evaluation criteria can be as

straightforward as price only. It
can also be complex, based on
ratings in several categories:

Understanding of need
Overall or life-cycle cost
Technical capability
Risk
Management approach
Technical approach
Warranty
Financial capacity
Production capacity and interest
Business size and type
Past performance of sellers
References
Intellectual property rights
Proprietary rights

.
,
: ) (
.( )
.
.
.
.
.
.
.
.
.
.
.
.
.

71

Weighting System
) (
This is a method for
quantifying qualitative
data to minimize the
effect of personal
prejudice on seller
selection.
Most such systems
involve assigning a
numerical weight to each
of the evaluation criteria,
rating the prospective
sellers on each criterion,
multiplying the weight by
the rating, and totaling
the resultant products to
compute an overall score.

)
(

.

) (
,
,( )

,

.

72

Weighting System
) (
Weighting systems
typically involve four
steps:
Assign a numerical weight
(percentage) to each of the
evaluation criteria
Rate prospective sellers, or
their proposal, on each
criterion
Multiply the weight from
step 1 by the rate from step
2 to derive the score for
that criterion
Add all scores from step 3
to derive the total score for
each seller

:
( )
.

.
)
( 2 ( ) 1
. ) (
1 )
( 3
.

73

Weighting System
) ( -

74

Independent Estimates

75

)
(.

) ( .

/
/


.

The procuring organization can

either prepare its own
independent estimates or have
prepared an independent
estimate of the costs as a
check on proposed pricing.
This independent estimate is
sometimes referred to as a
should-cost estimate.
Significant differences from
these cost estimates can be an
indication that the contract
statement of work was not
adequate

Independent Estimates Benefits

-
Other Names : Should-Cost Estimate
or Fair Price Estimate

Significant differences from

these cost estimates can be
an indication that :
1.
2.

3.

The contract statement of

work was not adequate.
The prospective seller either
misunderstood or failed to
respond fully to the contract
statement of work.
The marketplace changed.

Other benefit:
4.
5.
6.

Isolates variances among the

bids.
Identifies subjects for preaward negotiations.
Guard against bidder
collusion (Bid Rigging).

:
.

:
. ( )


.
.

1.
2.
3.

:
.

.
.

4.
5.
6.

76

Advertising

Existing lists of potential

sellers can often be
expanded by placing
advertisements in general
circulation publications such
as selected newspapers or
in specialty trade
publications.
Some government
jurisdictions require public
advertising of certain types
of procurement items; most
government jurisdictions
require public advertising of
pending government
contracts.

.




.

77

Internet Search
) )

.



.
78

A very good
source for small
commodities
procurement.
May not be
appropriate for
large projects
where close
monitoring is
required.

Procurement Negotiations

It clarifies the structure and
requirements of the contract
so that mutual agreement
can be reached prior to
signing the contract.
Final contract language
reflects all agreements
reached.
Subjects covered include:
Responsibilities and
authorities
Applicable terms and law
Technical and business
management approaches
Proprietary rights
Contract financing
Technical solution
Overall schedule
Payments, and price.

.

.
:
.
.
.
.
.
.
.
.

79

Contract Negotiation

Clarifies the structure and

requirements of the contract
so that mutual agreement can
be reached prior to signing
the contract:

Final contract language reflect all

agreement reached.

Examples of subjects covered

include:

Responsibilities and authorities.

Applicable terms and law.
Technical and business management
approach.
Proprietary rights.
Contract financing.
Technical solutions.
Overall schedule.
Payments.
Price.

.

.

:
.
.
.
.
.
.
.
.

80

What Is The Results of Contract Negotiation?

Contract Negotiations include

with a document that can be
signed by both buyer and seller,
that is, the contract:
The final contract can be a revised
offer by the seller or a counter offer
by the buyer.

For complex procurement

items:
Contract negotiation can be an
independent process with inputs
(e.g., an issue or open item list) and
outputs (e.g., documented decision)
of its own.

For simple procurement items:

The terms and conditions of the
contract can be fixed and nonnegotiable, and only need to be
accepted by the seller.

:


. )(

:

: )
(
. ( : )

:

,
.

81

Who Lead Contract Negotiation?, Who attends?

The project manger
may be the lead
negotiator on the
contract.
The project manger
and other members of
the project
management team
may be present
during negotiations to
provide, if needed
clarification of the
projects.

.



,
,
.
82

5 Stages of Negotiation
5
Protoco Introductions are
l Stage made .

Atmosphere of the
rest of the negotiation
is determined.

Negotiation starts
Probing the search process.
Each party identifies
Stage
their issue of concerns.
No debate only
review to feel where
other party stands.
Points of concessions
are made.

Scratch Actual bargaining Bargain concessions are made.

ing
Closure The 2 position are
summed up
Stage

.


.

.
.

()

.

83

Negotiation Tactics
) (
Deadline

Imposing a deadline for

reaching an agreement.
Limits the time involved in
negotiation.
Implies a possible loss to both
parties.
Other party accept mostly the
deadline.

Take By
Surprise

One party may have

information (e.g., Price Change)
and present it to surprise the
other party.

Limited
Authority

Once an agreement is
reached, one party may claim
they do not have the authority to
finalize it.
Good to know the other party
authority .

Missing
Man

The person with final authority

is absent.
Could be used when the party
does not have the information
asked for by the other party.

)(
.
.

( : )
.

.

.

84

Negotiation Tactics
) (

.
: )(
.
/

) (
:
,
.

.

.

)(

85

Comparison to other
like situation.
Example : you need
to charge just like XYZ
company.

Fair and
Reasona
ble

Delaying /
Lengthening the
meeting to make the
other party diverts
from the subject or
looses temper.
Examples : When a
party leaves the room
for some reason, or
upon the strategic
arrival to
refreshments, or based
on request to recess.

Delay

Working problems
out of the benefits of

Reasoni
ng

Negotiation Tactics
) (

)(
.

.

Make the other party

look unreasonable.
If the other party agrees
on minor issues, then he
wants to change the
method of judgment on
major issue .

)
(

.

,
.

If an agreement cannot
be reached, suggest to go
to arbitrary, hopping to
scare the other party from
a third party who might be
bias during arbitration.

.
,


.

Confusin
g
Opponen
t

One party may

deliberately distort issues
and fingers.

Withdra
wal

Make a false attack upon

an issue, then retreat.
Divert attention from an
area of possible weakness.

Un Reasona
ble

Arbitrati
on

86

Conduct Procurements 12.1

12-2
1. Selected sellers
2. Procurement
contract award
3. Resource calendars
4. Change requests
5. Project
management plan
updates
6. Project document
updates

.
.
)
. (
.

.
.

1.
2.
3.
4.
5.
6.
87

Letter of Intent

The negotiating and signing
the final contract could
consume more time .
The seller could have long
lead items to purchase .
The seller may ask the
buyer to provide him a letter
of intent .
It is not an agreement , but
it allow the seller to start for
preparing his staff,
materials, equipments, or
hiring the required people .

.

.

.

, ,
.

88

Noncompetitive Forms of Procurement

Single source :
Proffered by the buyer ,
might be a company the
buyer has worked with .
Going to sign an
agreement without
procurement process .

Sole source :
There is only one seller ,
might be a company that
owns the patent .

:


)

. (

:
,
.
89

Teaming Agreements ( Joint Venture )

) )
Often two sellers
belief that there
chance to winning the
contract will be
enhanced if they joint
their forces for one
procurement .
The agreement must
define the role of
each one of them .

.

.
90

Plan Contracting - Contract Origination Process

Unilaterally & Bilaterally
1. Purchase order PO
(Unilaterally):

PO : A relatively simple
type of legally binding
document offered
unilaterally .
Supplier & terms specified.

1. Request for Quotation

RFQ (Bilaterally to
different selected
suppliers):

Request a price quote per

item, hour or meter .
Relatively low-dollar-value
& readily-available items
(Supplies & Materials).

)(
: ()
: ( ) 1.
:

.
.

)
: (

( )
.

)
. (

1.

91

Plan Contracting - Contract Origination Process

3.

Request for Proposal RFP

(Bilateral):

3.

Is an invitation which seeks a

formal response to form the basis
of a contract.
Request a price plus a detailed
proposal on how to work will be
done, who will do it, resumes,
company experiences, etc.
High-dollar-value and nonstandard items (Construction
Projects, R&D Projects, made-toorder highly complex piece of
machine).

Invitation to bid release

(Bilateral by ads/mail to all
qualified bidders):

Request one price to do all the

work.
High-dollar-value & standard items
(Supplies, Equipment, Services).

: ( )

.

, ,
. .... ,

,)
,
. (

3.

)
/
: (
.

, , )
. (

3.

92

12.3 Administer Procurements ( Controlling )

12 3 ) )
Administer
Procurements is the
process of:

Managing procurement
relationships
Monitoring contract
performance
Making changes and
corrections as needed.

Both the buyer and the

seller will administer the
procurement contract
for similar purposes.
Each must ensure that
both parties meet their
contractual obligations
and that their own legal
rights are protected.

:

.
.

.


.



.
93

12.3 Administer Procurements

12 3 - -
Inputs
1.
2.
3.
4.
5.
6.

Procurement documents
Project management plan
Contract
Performance reports
Approved change requests
Work performance
information

94

1. Procurement
documentation
2. Organizational process
assets updates
3. Change requests
4. Project management plan
updates

1. Contract change control

system
2. Procurement performance
reviews
3. Inspections and audits
4. Performance reporting
5. Payment systems
6. Claims administration
7. Records management
system

Outputs

Tools & Techniques

Inputs

.
.
.
.

.
.

Outputs

Tools & Techniques

1.
2.
3.
4.
5.
6.

.

.
.
.
.
.
.

1.
2.
3.
4.
5.
6.
7.

Source: PMBOK Guide Fourth Edition,

page 335

.

.
.

.

1.
2.
3.
4.

12.3 Administer Procurements

12 3
1. Procurement
documents
2. Project
management plan
3. Contract
performance reports
4. Approved change
requests
5. Work performance
information

.
.
.
.

.
.

1.
2.
3.
4.
5.
6.
95

12.3 Administer Procurements

12 3
1.
2.
3.
4.
5.
6.
7.

Contract change
control system
Procurement
performance reviews
Inspections and
audits
Performance
reporting
Payment systems
Claims administration
Records
management system

.

.
.
.
.
.
.

1.
2.
3.
4.
5.
6.
7.
96

Contract Change Control System

A contract change control
system defines the

process by which the
contract can be modified.
.
It includes the paperwork,

tracking systems, dispute
resolution procedures,

and approval levels

necessary for authorizing

changes.
The contract change
.
control system is

coordinated with the
integrated change control

system.

97

Procurement Performance Reviews

A procurement performance
review is a structured review of
the sellers progress to deliver
project scope and quality, within
cost and on schedule, as
compared to the contract.
It can include a review of sellerprepared documentation and
buyer inspections, as well as
quality audits conducted during
sellers execution of the work.
The objective of a performance
review is to identify performance
successes or failures, progress
with respect to the contract
statement of work, and contract
non-compliance that allows the
buyer to quantify the sellers
demonstrated ability or inability to
perform work.

.




.





.

98

Inspections And Audits

Inspections and audits,
required by the buyer and
supported by the seller as
specified in the contract
documentation, can be
conducted during
execution of the project to
identify any weaknesses
in the sellers work
processes or
deliverables. If authorized
by contract some
inspection and audit
teams can include buyer
procurement personnel.

.



.
99

Performance Reporting

Performance reporting
provides management
with information about
how effectively the
seller is achieving the
contractual objectives.
Contract performance
reporting is integrated
into performance
reporting

.


.
100

Payment Systems

101

,

.


.

.

Payments to the seller are

usually handled by the
accounts payable system of
the buyer.
On larger projects with
many or complex
procurement requirements,
the project can develop its
own payment system.
In either case, the payment
system includes appropriate
reviews and approvals by
the project management
team.
payments are made in
accordance with the terms
of the contract.

Claims Administration

102

.


.

Contested changes and

constructive changes are
those requested changes,
where the buyer and
seller cannot agree on
compensation for the
change, or cannot agree
that a change has even
occurred.
These contested changes
are variously called
claims, disputes, or
appeals.

Records Management System

.





.
103

A records
management system
is a specific set of
processes, related
control functions, and
automation tools that
are consolidated and
combined into a
whole, as part of the
project management
information system.

12.3 Administer Procurements

12 3
1. Procurement
documentation
2. Organizational
process assets
updates
3. Change requests
4. Project
management plan
updates

.

.
.

.

1.
2.
3.
4.

104

Procurement Documentation

Procurement documentation
includes, but is not limited to,
the procurement contract with
all supporting schedules,
requested unapproved
contract changes, and
approved change requests.
Procurement documentation
also includes any sellerdeveloped technical
documentation and other work
performance information such
as deliverables, seller
performance reports,
warranties, financial
documents including invoices
and payment records, and the
results of contract-related
inspections.

-



.






.

105

Organizational Process Assets Updates

Correspondence
Payment
schedules and
requests
Seller
performance
evaluation
documentation

.

.

.
106

Change Requests

Procurement
management
plan
Cost baseline,
project
schedule

.


.
107

Close Procurement ( Closing ) 12.4

) ) 12-4
Close Procurements
is the process of
completing each
project procurement.
It supports the Close
Project or Phase
process, since it
involves verification
that all work and
deliverables were
acceptable

.



.

108

Close Procurement 12.4

- 12-4
Inputs

Tools & Techniques

1. Project
management plan
2. Procurement
documentation

1. Procurement audits
2. Negotiated
settlements
3. Records
management
system

Inputs

.
.

109

Tools & Techniques

1.
2.

1.
.
. 2.
. 3.

Source: PMBOK Guide Fourth Edition,

page 342

Outputs

1. Closed
Procurements
2. Organizational
process assets
updates

Outputs

1.
. ( )
2.
.

Close Procurement 12.4

12-4

1. Project
management
plan .
2. Procurement
documentation

1.
.
2.
.
110

Close Procurement 12.4

12-4

1. Procurement
audits
2. Negotiated
settlements
3. Records
management
system

1.
.
. 2.
3.
.
111

Procurement Audits

A procurement audit is a
structured review of the
procurement process from the
Plan Purchases and
Acquisitions process through
Contract Administration.
The objective of a
procurement audit is to identify
successes and failures that
warrant recognition in the
preparation or administration
of other procurement contracts
on the project, or on other
projects within the performing
organization.

"
. "





.

112

Negotiated Settlements

In all procurement
relationships the final equitable
settlement of all outstanding
issues, claims, and disputes by
negotiation is a primary goal.
Whenever settlement cannot
be achieved through direct
negotiation, some form of
alternative dispute resolution
(ADR) including
Mediation .
Arbitration .
When all else fails, litigation in
the courts is the least desirable
option.

.



:
.
.

.

113

Close Procurement 12.4

12-4

1. Closed
procurements
2. Organizationa
l process
assets
updates

1.
. ( )
2.
.

114

Closed Procurements
) )
The buyer, usually through
its authorized procurement
administrator, provides the
seller with formal written
notice that the contract has
been completed.
Requirements for formal
procurement closure are
usually defined in the terms
and conditions of the
contract and are included in
the procurement
management plan.

.




.
115

Watch out

Fixed Price
Contract
Watch for the seller cutting
scope .
Watch for the seller cutting
quality .
Make sure the seller's costs
are real costs that have been
incurred , not future costs
Watch for overpriced change
orders .

. ) (
.

. ,
.
.

Check for scope

misunderstanding .
116

Watch out

Time & Material

Provide Day To day
directions to the seller

Attempt to get concrete

deliverables .

. ) (

Make sure the project length

is not extends .

Make sure the number of

hours spend in the project is
reasonable .
Watch for switching to
another form of contract
make sense . ( e.g. you
determine to switch to a
fixed price contract for
completion the project ) .

.
.
)
.
117

Watch out

Cost Reimbursable
Audit every invoice .
Make sure every cost are
applicable and chargeable to
your project .

. ( )
.

Make sure the sellers work

is progressing efficiently .

Watch for the seller adding

resources to your project
that do not add value or
perform real work .

Watch for shifted resources

from your project , from what
was said in original proposal
( less experiences resources
used . ) .

) ,
. (
118

Questions
?