Chapter 12 Procurement Management

Chapter 12 Procurement Management
In this chapter, we will learn about procurement management. Project Procurement Management is the effective acquisition of goods and services from outside the performing organization. In this process companies negotiate prices to get the best quality resources for the production of goods or services. Smaller businesses do not usually have a department dedicated to procurement since they have much smaller business operations. Usually, small business owners or entrepreneurs are responsible for working with vendors and suppliers to obtain the necessary goods for business operations. In larger companies, the procurement managers are able to purchase resources and inputs in large volume quantities; high volume purchases usually require a procurement management process. Let’s look at the difference between purchase and procurement. Purchasing is a function in which the purchasing officer is responsible for acquiring goods and services by legal means to meet the requirements. Procurement is the total management of purchasing activity to meet long and short term requirements. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 12-1

Procurement Management Contents
The following topics will be covered in this chapter: Overview of Procurement Management Procurement Management processes Plan Procurement Management Conduct Procurements Control Procurements Close Procurements Contract types In this chapter we will cover the following topics: Overview of Procurement Management Procurement Management processes Plan Procurement Management Conduct Procurements Control Procurements Close Procurements Contract types PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 12-2

Procurement Management Learning Objectives
By the end of this chapter, you will be able to: Explain the importance of proper procurement management on projects Name the Procurement Management processes Describe various terminology, tools, and techniques related to procurements, such as contract types Describe the activities that take place in each process By the end of this chapter, you will be able to: Explain the importance of proper procurement management on projects Name the Procurement Management processes Describe various terminology, tools, and techniques related to procurements, such as contract types Describe the activities that take place in each process PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 12-3

Procurement Management
Processes required to acquire products, services or results needed from outside the project team Organization can be either the buyer or seller of products, services or results of a project Includes Contract Management and change control processes required to develop and administer contracts Includes administering contract issued by outside organization (Buyer) acquiring the project from the performing organization (Seller) Main outputs of this process: Procurement Management Plan Procurement documents Procurement Contract Award Project Procurement management includes below processes: Plan Procurements Conduct Procurements Administer Procurements Close Procurements Let’s take a quick look at procurement management areas. Project Procurement Management includes the processes to purchase or acquire products, services or results needed from outside the project team to perform the work. The organization can be either the buyer or seller of the products, services or results under a contract. Project Procurement Management includes the contract management and change control processes required to administer contracts or purchase orders issued by authorized project team members. Project Procurement Management also includes administering any contract issued by an outside organization that is the buyer who is acquiring the project from the performing organization or the seller, and administering contractual obligations placed on the project team by the contract. The main outputs of the Procurement Management Process include the following: Procurement Management Plan Procurement documents Procurement Contract Award The four project Procurement Management processes include the following: 1. Plan Purchases and Acquisitions 2. Select Sellers and contract 3. Contract Administration 4. Contract Closure We will learn about this further in the upcoming slides. Some key things to remember for the exam. Exam questions frequently put the candidate either in the position of the buyer or the seller. Care should be taken to verify which perspective we need to take when answering a question during the exam. Main outputs of this process are procurement Management Plan, Procurement documents and Procurement Contract Award PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 12-4

Procurement Management Processes
Please animate so that each row is highlighted as it’s being mentioned in the narration Process Process Group Plan Procurement Management Planning Conduct Procurements Executing Control Procurements Monitoring and Controlling Close Procurements Closing PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 12-5

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Review Quiz Which one of the following is not one of the Procurement Management processes? Conduct Procurements Manage Procurements Plan Procurement Management Close Procurements The correct answer is B. Manage Procurements is not one of the Procurement Management processes. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 12-6

12.1 Plan Procurement Management
Plan Procurements – Document project purchasing decisions specifying the approach and identifying potential sellers Identify project needs Consideration of potential sellers Procurement management plans might influence project schedule estimate Activity Resources and make or buy decisions Consideration of the risks involved with each make or buy decision. Mitigating risk transferring risks to the seller Lets move on to the first process. The Plan Procurement process involves build versus buy decisions. The purpose of this process is to document the purchasing decisions and approach as well as identify potential sellers. The Scope baseline and Requirements documentation are two inputs used to describe the project work to be performed. The specific work that is to be performed in a contract that is Procurement statements of work. Now, where shall the start plan procurement begin? It must first be decided whether certain work is best done in-house or whether it should be purchased. This is called Make-or-Buy Analysis, and its outcome is Make-or-Buy Decisions. There are advantages and disadvantages of the different types of contracts that need to be considered as well. The types of contracts that should be used, in addition to much other information, is written in the Procurement management plan that provides guidance for performing the procurement processes. Procurement documents describing what work is needed are made available to sellers in order to prompt their offers. Source selection criteria are the criteria developed in this process that will be used to choose among sellers’ responses. For example, sellers representing experience organizations might be preferred. Risk mitigating can be achieved through transferring it to the seller in a buy decision. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 12-7

12.1 Plan Procurement Management Inputs and Outputs
Class Group Activity – 15 Minutes Divide Class into 3 groups (3 to 4 students in each group) Discuss and brainstorm the inputs/outputs Present your inputs/outputs to the rest of the teams Check and compare your inputs/outputs with PMBOK® Guide 5th edition PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 12-8

Contract Types Fixed Price Contracts Firm Fixed Price Contracts (FFP) Fixed Price Incentive Fee Contracts (FPIF) Fixed Price with Economic Price Adjustment Contracts (FP- EPA) Cost reimbursable contracts Cost Plus Fixed Fee Contracts (CPFF) Cost Plus Percentage of Cost (CPPC) Cost Plus Incentive Fee Contracts (CPIF) Cost Plus Award Fee Contracts (CPAF) Time and Material Contracts (T& M) The Project Procurement Management processes involve contracts that are legal documents between a buyer and a seller. A contract is 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. A contract is a legal relationship subject to remedy in the courts. First let’s address the basic categories and then we will go into the sub-categories. The three basic contract types are; 1. Fixed Price Contracts, 2. Cost Reimbursable Contracts, and the 3. Time and Materials Contract. We will look at each of these types of contracts in detail in the upcoming slides. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 12-9

Contract Types (Cont..) Fixed Price (lump sum, firm fixed price) One price for all work Most common type of contract Buyer has the least cost risk Seller is most concerned with scope of work with this type of contract Cost Reimbursable Seller costs are reimbursed Buyer has the most cost risk as total costs are unknown Used when buyer are sure of what they need rather than what to do Types: CPFF: Buyer pays all cost, fee is fixed CPPC: Buyer pays all cost + percent of cost as fee CPIF: Buyer pays all cost + agreed upon fee + bonus for deadlines CPAF: Buyer pays all cost + apportionment of bonus based on performance. This is similar to CPIF Fixed price contract is a type of contract where the buyer pays the seller only the fixed price at the completion of the project as it was agreed in the contract. The contract has two most important driving factors, i.e., the price and the scope of work. Also the price hits the buyer, whereas the scope of work hits the seller. Since the price is fixed in the fixed price contract, the uncertainty is not with the price, so the buyer doesn’t have any uncertainty on its part. However, if the scope of work was not clarified in a greater detail earlier on, and if more work or effort is required to complete the contracted work, it would hit the seller and the uncertainty lies with the seller. Hence fixed price contracts are more risky for the sellers. Cost-reimbursable is a contract category involving payments to the vendor for all legitimate actual costs incurred for completed work, plus a fee representing vendor profit. In cost reimbursable arrangement, all the price of work complete is invoiced to the buyer. The total cost of the arrangement is always unclear to the buyer until the job is completed. On the other hand, the seller is certain that all the costs will be paid by the buyer even if the scope of work was not negotiated earlier, so there is no uncertainty on the seller’s part. Hence the cost reimbursable contracts are more risky for the buyers. Now lets look are the sub-categories. In Firm Fixed Price Contracts, the fee is fixed. Any change in effort or work will directly hit the seller. The seller’s risk is at maximum over here. In Fixed Price Incentive Fee Contracts (FPIF), although the price is fixed, the seller’s margin is a bit variable. The seller will be rewarded by a higher margin based on the performance. Still since the price is fixed, the seller is at risk but in comparison with the firm fixed price contracts, the risk is lower for the seller. Now, for subcategories of cost reimbursable contract. In cost Plus Fixed Fee Contracts (CPFF), the risk for the buyer is maximum over here since all the costs will be reimbursed plus a fixed fee will be paid to the seller regardless of the performance. In Cost Plus Incentive Fee Contracts (CPIF), although all the costs will be reimbursed to the seller, the seller’s fee will be determined by the performance. Again, since it’s a cost reimbursable contract, the risk lies with the buyer, but in comparison with the CPFF contract, the buyer’s risk is lower. Let’s clarify the incentives and how they work in different types of contracts. The incentives in the fixed price arrangement, reduces the risk of the seller. While the incentives in the cost reimbursable contract, reduces the risk of the buyer. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 12-10

Contract Types (Cont..) Time and Material Priced per hour or per time basis Has an element of fixed price contract and a cost reimbursable contract Buyer has medium amount of cost risk Contract is usually for small dollar amounts and for short length projects A time and materials contract is a method of compensation where the client pays an agreed hourly or daily rate for the work conducted by the consultant. In addition, any related expenses or supplies costs are billed to the client at cost. With this method client is billed based on the hours that were put on the project by the contractor until the work is finished. This buyer has medium amount of cost risk. If the scope is not properly managed, the overall cost of the project can go higher. This type of contract has an element of fixed price and a cost reimbursable contract. The question should we use the time and materials contract? Well, the most typical situation in which time and materials would be used would be where there is some uncertainty either on the part of the consultant, the client or both parties, as to what is actually involved in the proposed consulting assignment. In this situation, to move things forward, working on a time and material basis the consultant can start to scope and plan the assignment and be paid on a pay as you go basis. The benefit is that during the early period of uncertainty, the consultant is able to start work and be compensated at a reasonably representative and commercial rate, plus, the client has a degree of flexibility in that after an initial period of working on this basis, a checkpoint meeting can take place at which preliminary progress and findings can be reviewed and discussed. This discussion often enables both the consultant and client to refine their thinking on the nature and scale of the proposed consulting work and agree an appropriate consulting fee and billing approach. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 12-11

Review Quiz Which one of the following is not a valid contract type? Fixed Price Cost Reimbursable Discounted Time and Material The correct answer is C. Discounted is not a valid contract type. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 12-12

Procurement Management Plan
Procurement management plan - describes how procurement processes will be managed and includes: Types of contracts Risk management issues Independent estimates needed? Standardized documents Multiple provider management Incorporate with other project aspects (schedule and performance reporting) Statement of work – describes procurement in detail, clear concise description of services and includes: Developed from the scope baseline and defines specific portion of project scope to be included in the contract Can also be a statement of requirements for problem solving activities Let us look what the procurement management plan contains. The procurement management plan defines how all procurement management processes are to be carried out. The procurement management plan also contains: 1. What will be procured for the project? 2. How a seller will be selected? 3. What types of contracts will apply to this procurement? 4. How all Risks and Sellers will be managed and how their performance will be measured? The procurement statement of work defines the work to be undertaken by the seller to ensure the buyer can complete the procurement action. This document is the foundation of the specific procurement action. The document has to be developed from the scope baseline document and use the relevant parts to specific item, product or services to be procured. The details provided needs to be sufficient so that the seller can accurately determine if he can supply the item. The seller should be able to make an accurate estimate of the effort involved and the pricing is based on these estimates. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 12-13

Conduct Procurements Conduct Procurement is the – Process of obtaining seller responses, selecting a seller and awarding a contract Select sellers qualified to perform work based on selection criteria Weighing system can be used to select Seller(s) Weighing system can also be used to establish a negotiating sequence by ranking all proposals by the weighted evaluation scores assigned to each proposal Conduct procurement is the process of obtaining quotations, offers, information, and proposals from sellers, and then selecting a seller and awarding a contract. The activities that need to take place during the conduct procurements process are: 1. Issuing a Request for Proposal or RFP to the potential Sellers 2. Hold bidder conferences 3. Evaluate potential seller proposals 4. Select the winning seller proposal Because procurement aspects of each individual project is unique, this process may need to occur once or multiple times if there are multiple contracts. This process, Conduct Procurements, receives almost all of the outputs from the plan procurement process as inputs. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 12-14

12.2. Conduct Procurements Inputs and Outputs

Solicitation Procurement Documents Invitation for Bid (ITB): Buyer requests one price to do all work Request for Proposal (RFP): Buyer requests price & detailed proposal of how to accomplish the work Request for Quotation (RFQ): Buyer requests a price quote per item Bidders Conference Meeting with Prospective sellers to ensure clear understanding Project Manager addresses all questions raised by Seller Qualified Sellers List Sellers qualifications are normally checked in advance Name of companies are on an approved or pre-qualified list Proposals Seller prepared documents that describe seller’s ability and willingness to provide requested product Prepared in accordance with requirements of relevant procurement documents Let’s discuss about few types of procurement documents. Solicitations are invitations of bids (ITB), requests for quotations and proposals. These may serve as a binding contract. RFP is a request for proposal is an early stage in a procurement process, issuing an invitation for suppliers, often through a bidding process, to submit a proposal on a specific commodity or service. RFI is a proposal requested from a potential seller or a service provider to determine what products and services are potentially available in the marketplace to meet a buyer's needs and to know the capability of a seller in terms of offerings and strengths of the seller. Request for quotation (RFQ) is used when discussions with bidders are not required and when price is the main or only factor in selecting the successful bidder. Bidder conference are meetings between buyer and sellers before the bid is submitted. The conference is used by buyers to provide consistent information to all sellers. These conferences are usually held in public sectors contract, such as City, State or Federal. Proposals are responses to RFP or RFQs. Seller prepare documents that describe seller’s ability and willingness to provide requested product in accordance with requirements of relevant procurement documents. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 12-16

Review Quiz A document through which a buyer requests one price to do all the work is known as: Request for Quotation Task order Request for proposal Invitation for Bid The correct answer is D. This is an example of an Invitation for Bid. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 12-17

Source Selection Receives, reviews and selects seller Evaluation criteria provides basis of quantitatively evaluating proposals Techniques used: Weighting system Screening system Independent Estimate Past Performance history Presentations may be requested of the Sellers for following reasons: Proposal can be presented in person by seller Buyer can pick the most appropriate seller Buyers can see the prospective team and ask questions to assess the competency, knowledge and ability of the team After the proposals and bids have been submitted by the vendors, the next step in the process is to select a vendor that can fulfill the needs of the project. This process is known as source selection. Several determining factors are associated with source selection, including pricing and technical aspects. The process frequently involves the use of a weighting system to determine the best vendors based on numerous criteria. A weighting system is a multiple step process and initially involves the identification of several attributes, such as pricing, availability, quality, shipping time, previous history with the company and other relevant aspects of the product or service. Screening system is a more or less a raw system of determining whether the minimum requirements are met in a proposal . Independent estimates are obtained separately and are used to compare the offered prices by the seller Generally, Presentations are requested of the sellers. It helps the buyer to pick the most appropriate seller and also to see the prospective team and ask questions to assess the competency, knowledge and ability of the team. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 12-18

Negotiation Purpose of Negotiation is: To obtain a fair, reasonable price and develop a good relationship with the seller To discuss responsibilities, authority and price To discuss on Applicable law, Technical & Business Management approaches Negotiation is a method to confer with the seller to arrive at a mutually agreeable price and terms of the contract. Project manager should utilize negotiation skills to obtain the desired outcome. Negotiation the best contract can be vital to obtain a fair, reasonable price and to arrive at good terms with the seller for a good working relationship. It is also utilized to discuss responsibilities of the players who are engaged in a project. Finally, negotiation can be utilized to discuss any applicable laws, technical and business approaches in accomplishing the goals and tasks of the project. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 12-19

12.3 Control Procurements Process of managing procurement relationships, monitoring contract performance and making changes and corrections as needed Making sure seller’s performance meets procurement requirements buyer performs according to terms of legal contract Control Procurements is the process of managing procurement relationships, mentoring contract performance and making changes and corrections as needed. Effective contract administration ensures that the seller fulfills the terms of the contract. Fulfillment of contract obligations is an outcome toward which both the seller and the project management team must work together. In complex projects involving several contracts and several contractors, one must ensure adequate coordination of schedules of contractors so that the ability of one contractor to deliver on time is not hampered by the failure of another to do so. In the execution of such processes, project team members must be aware of the legal implications of actions they may take and face. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 12-20

12.3 Control Procurements (Cont…)
Control Procurements also: Monitors payments to Seller Compensates Seller based on Seller progress Review and documents Seller performance Reviews performance of Seller to take corrective action, if required Measures Seller’s competency for future projects Evaluates Seller’s non-ability to fulfill contractual obligations Manages early termination of contracted work, per termination clause of the contract Amends contracts prior to contract closure by mutual consent and change control terms of contract It is important to know the difference between conduct procurement and control procurement. In Conduct Procurements, the tasks include obtaining vendor responses, usually to RFPs and also selecting the vendor & awarding contract where as in control Procurements, the tasks include managing procurement relationships, monitoring contract performance and making necessary adjustments. Let’s look at the tasks that are involved in the control procurement process. It includes, monitors payments to seller, Compensates seller based on seller progress, Review and documents seller performance, Reviews performance of seller to take corrective action, if required, measures seller’s competency for future projects, Evaluates seller’s non-ability to fulfill contractual obligations, Manages early termination of contracted work, per termination clause of the contract and also amends contracts prior to contract closure by mutual consent and change control terms of contract. A project manager should ask the following questions on an ongoing basis as a part of administer procurements process: Is the good or service being delivered? Is the good or service being delivered on time? Is the correct amount being invoiced or paid? Is the buyer/seller relationship being properly manage and maintained? Is all condition of the contract being met? PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 12-21

12.3 Control Procurements Inputs and Outputs

12.4 Close Procurements Complete/Close project procurement activities Verify that all work and deliverables are accepted Involves administrative activities finalizes open claims updates records to reflect final results archives records for future use Early termination special case of procurement closure after mutual agreement of both parties Termination clause of contract contains rights/responsibilities of the parties Contract closeout occurs before project is closed As the name indicates, the process is used to complete each project procurement activity. It supports the CLOSE PROJECT or PHASE Process. Closing procurements is done by notifying the seller that the procurement action is formally closed. Finalizing open claims, ensuring that all the deliverables have been accepted and updating the record to reflect the final results are the usual activities associated with the closing procurement processes. Early termination of contract forces a special type of procurement closure where mutual agreement of both parties and understanding termination clause of contract that contains rights/responsibilities of the parties are mighty important. It is important to know the difference between Close Procurement and Close Project. We know, close procurement is the process of completing each project procurement activity. It supports the close project or phase Process. On the other hand, close project or phase is the process of finalizing all activities across all of the project management process groups to formally complete the project or phase. Close Procurement is also known as Contract Closure. A procurement is said to be closed when contract reaches to its deadline and it ends. A project can have a multiple procurement contracts, or single contract. Close Project or Phase Process is performed when project or phase is finally completed and deliverables are accepted. To complete or close the project or phase, close procurement process must has been finished otherwise project closure cannot happen. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 12-23

12.4 Close Procurements Inputs and Outputs

Tips – Procurement Management
Project Manager’s role for procurement Risk identification and evaluation Work within the procurement process Procurement process Procurement planning = Make or buy Solicitation planning = Request for Proposal Solicitation = Questions / Answers Source Selection = Pick Vendor Contract Administration = Admin Contract Closeout = Finish Make or Buy: consider out of pocket costs and indirect cost of managing procurement Buy: to decrease risk (cost, schedule, performance, scope of work) Make Idle plant or workforce Retain control Proprietary information / procedures Buy Vs lease questions Here are some tips on procurement management. These are helpful to know for the preparation of the exam: The project manager should identify any risks associated with the procurement activities and should work within the procurement management process. The procurement process includes the following: Procurement planning = Make or buy Solicitation planning = Request for Proposal Solicitation = Questions / Answers Source Selection = Pick Vendor Contract Administration = Admin Contract Closeout = Finish In make or buy decisions, it is important to consider out of pocket and indirect costs of managing the procurement. Once this is done, a sounds decision can be made. Some of the known benefits of buy include decreasing risk associated with cost, schedule, performance, and scope of work. The Make decision includes the following considerations: Idle plant or workforce Retain control Proprietary information / procedures Buy Vs lease questions PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 12-25

Contract Type selection: reasonable risk between the Buyer and Seller, greatest initiative for seller’s efficient and economic performance Scope is well defined Amount or frequency of changes expected after start date Amount of effort and expertise the buyer can devote to manage the seller Industry standards Cost Reimbursable (CR): seller’s cost are reimbursed, buyer bears highest risk (cost increases) CPFF: Cost plus fixed fee, buyer pays all costs –fee (profit) established CPPC: Cost plus percentage of costs, bad for buyers (seller not motivated to control costs) CPIF: Cost plus incentive fee, seller costs + fee + bonus for meeting / exceeding target (incentive clause) Time and Materials: priced on per hour basis, elements of fixed price contract and cost reimbursable contracts – buyer has medium risk Additional tips on procurement management include: Contract Type selection: By selecting a proper contract for a project, a reasonable and acceptable risk between the Buyer and Seller can be applied. It includes identifying initiative for seller’s efficient and economic performance through a well defined Scope, defining the amount or frequency of changes expected after start date, amount of effort and expertise the buyer can devote to manage the seller, and applying the industry standards. The contract types we have learned in this chapter include the following: Cost Reimbursable (CR): In this method, seller’s cost are reimbursed, buyer bears highest risk (cost increases) CPFF: Cost plus fixed fee, buyer pays all costs –fee (profit) established CPPC: Cost plus percentage of costs, bad for buyers (seller not motivated to control costs) CPIF: Cost plus incentive fee, seller costs + fee + bonus for meeting / exceeding target (incentive clause) Time and Materials: In this method, the contract is priced on per hour basis and it has the elements of fixed price PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 12-26

Fixed Price (lump sum, or fixed price) : most common, one price for all work, Seller has high risk FPIF : Fixed price incentive fee FPEPA: Fixed price economic price adjustment-long duration projects Incentives: Help bring Seller’s objectives in line with buyer’s Incentive Fee and Final Price calculations: Fee = (Target Cost – Actual Cost ) x Seller ratio(%) Total Fee = Fee + Target Fee Final Price = Actual Cost + Total Fee Fixed Price (lump sum, or fixed price): This is the most common, one price for all work. Seller has high risk in this contract type. The sub-categories of the Fixed Price contracts include the following: FPIF : Fixed price incentive fee FPEPA: Fixed price economic price adjustment-long duration projects Incentives help bring Seller’s objectives in line with buyer’s Incentive Fee and Final Price calculations are defined as following: Fee = (Target Cost – Actual Cost ) x Seller ratio(%) Total Fee = Fee + Target Fee Final Price = Actual Cost + Total Fee PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 12-27

Chapter Summary Procurement Management Overview Procurement Management Processes Plan Procurement Management Conduct Procurements Control Procurements Close Procurements Contract types Procurement Management Plan Procurement statement of work PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 12-28

End of chapter quiz Question 1: The buyer has the least cost risk in which type of contract? Cost reimbursable Fixed Price Cannot be determined Time and Material The correct answer is B. The buyer has the least cost risk in a fixed price contract. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 12-29

End of chapter quiz Question 2: The company has just sent out a request for proposal. In which process does this occur? Send proposals Control Procurements Plan Procurement Management Conduct Procurements The correct answer is D. Sending out an RFP would occur in the Conduct Procurements process. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 12-30

End of chapter quiz Question 3: You, the project manager, are at a gathering where prospective sellers are asking questions and making clarifications. You are most likely at a: Bidding conference Sales seminar Leadership meeting Team meeting The correct answer is A. Purpose of a bidder conference is to answer any and all questions potential sellers might have regarding the RFP. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 12-31

End of chapter quiz Question 4: The buyer has the most cost risk in which type of contract? Fixed price Time and Material Cost reimbursable Standard The correct answer is B. The buyer has the most cost risk in a cost reimbursable contract. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 12-32

End of chapter quiz Question 5: An important stakeholder wants to know all the work that will be done by the third party provider on the application development project. Which document contains this information? Procurement Management Plan Request for Bid Procurement Statement of Work Project Charter The correct answer is C. The Procurement Statement of Work would contain this information. PMP, CAPM, PgMP, PMI-SP , PMI-RMP, OPM3 and PMBOK are registered marks of Project Management Institute, Inc Inov8Solutions Inc – Quality Educational Services For Professionals 12-33

Chapter 12 Procurement Management

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