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

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

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

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

“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

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.

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

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

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

Project Quality Management “The processes to purchase or acquire the products, services, or results needed from outside the project team to perform the work”

Why Procurement Management? Most all projects will need to acquire some resources from outside Not understanding the different ways to contract could result in unnecessary risk for the project Note for Test Takers: PMI Procurement questions are from the BUYERS perspective unless noted otherwise

How Do We Manage Procurement? Four processes Plan Procurements Conduct Procurements Administer Procurements Close Procurements Conduct Procurements Administer Procurements Plan Procurements Close Procurements

Plan Procurements Tools & Techniques Inputs Outputs Scope Baseline Requirements Documentation Teaming Agreements Risk Register Risk-Related Contract Decisions Activity Resource Requirements Project Schedule Activity Cost Estimates Cost Performance Baseline Enterprise Environmental Factors Organizational Process Assets Tools & Techniques Procurement Management Plan Make or Buy Analysis Expert Judgment Contract Types Procurement Statements of Work Inputs Outputs Make or Buy Decisions Procurement Documents Source Selection Criteria Change Requests Conduct Procurements Administer Procurements Plan Procurements Close Procurements

Conduct Procurements Tools & Techniques Outputs Inputs Project Management Plan Bidder Conference Proposal Evaluation Techniques Independent Estimates Expert Judgment Advertising Internet Search Procurement Negotiations Outputs Inputs Selected Seller Procurement Contract Award Resource Calendars Change Requests Project Management Plan Updates Project Document Updates Procurement Documents Source Selection Criteria Qualified Sellers List Seller Proposals Project Documents Make-or-Buy Decisions Teaming Agreements Organizational Process Assets Conduct Procurements Administer Procurements Plan Procurements Close Procurements

Types of Scopes of Work Performance Functional or Detailed Design What the project wants, how accomplished and project needs defined by seller Functional or Detailed Defines what end product should be as well as minimum requirements Design Defines exactly what is required and how to accomplish it

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

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

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

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.

Procurement Documents Request for Proposal (RFP) Asks for the price and how/who will do the work Invitation for Bid (IFB) One simple price to do the work Request for Quotation (RFQ) Price per unit quote

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.

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

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

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

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)

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

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.

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

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

Advertising goes out for sealed bids. There are no negotiations. Competitive market forces determine the price and the award goes to the “lowest bidder”.

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.

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

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

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.

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.

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.

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.

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.

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”.

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:

“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.

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

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?)

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)

First Category Fixed-price or Lump-sum contract

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

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.

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

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

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

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

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.

Total Le/$ 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.

3: Cost-Plus-Percentage – fee Contract

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

“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.

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

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"

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

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

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

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

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

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

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

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

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

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”.

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”.

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

Part Two Ethics

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

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.

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.

“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)

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

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

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

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

Ethics of top Project Manager set the tone for Project

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

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.

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

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

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.

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

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

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.

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

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.

Ethics obligation matrix.

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.

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.

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.

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.

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.

Part Two ends

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”

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

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

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”

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.

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

Arguments For Social Responsiveness Business is involved in social issues

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

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

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

Part Three Recap of the course

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

Leadership Communication Ethics Costing Pricing Risk Management Procurement Close out Note

Part Four Project Management Institute (PMI)

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:

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.

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.

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

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.

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.

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

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.