Plan Procurement Management

This article contains most of the important information you need to know about Plan Procurement management process in order to answer questions related to this topic in the PMP Exam, I recommend you review this type of articles 1 week before your exam date, all information mentioned are based on PMBOK Guide 6th edition and PMP Exam Prep 9th edition for Rita Maclhy’s, ITTO refers to Inputs, Tools & Techniques and outputs.

This process is a part of Planning Process group and Procurement Management Knowledge Area with the following ITTO’s

Inputs:

  1. Project Charter
  2. Business Documents ( Business Case , Benefits Management Plan )
  3. Project Management Plan ( Scope, Quality & Recourses Management Plans , Scope Baseline)
  4. Project Documents (Requirements Documentation , Stakeholder Register , Milestones list , Resources Requirements ,Project Schedule , Requirements traceability Matrix , Project team assignments )
  5. Organizational Process Assets
  6. Enterprise Environmental Factors

Tools & Techniques:

  1. Expert Judgment
  2. Data Analysis (Make or buy analysis)
  3. Meetings
  4. Data Gathering (Market Research)
  5. Source Selection Analysis

Outputs:

  1. Procurement Management Plan
  2. Bid Documents
  3. Procurement Strategy
  4. Procurement Statement of work
  5. Independent Cost estimates
  6. Source Selection Criteria Documents
  7. Make or Buy decisions
  8. Change Requests
  9. Project Document Updates ( Lessons Learned register , Issue log , milestone list , requirements documentations , Requirements tractability matrix , Risk register , Stakeholder register )

 

  • Contracts can be written or verbal, but they are created with external entity as there is exchange of goods or services for some type of compensation.
  • Contracts form the legal relationship between entities , it includes business terms regarding payments , reporting requirements , proposal and procurement SOW .
  • To have a legal contract you should have :
  1. Offer
  2. Acceptance
  3. Consideration ( something of value )
  4. Legal Capacity ( Separate legal parties )
  5. Legal Purpose
  • Agreement is a broader term , it encompasses documents or communications that outline internal or external relationships and their intentions.
  • Contract can be considered an agreement , but agreement isn’t a contract.
  • Procurement is a formal process to obtain goods and services , Private companies have a lot of flexibility in their procurement practices rather than governmental entities.
  • Managing procurement requires legal knowledge , Negotiation skills and Understanding of procurement process.
  • Type of contract to be used and procurement documents type are selected by the procurement manager.
  • Buyer : The company or person who purchase the services
  • Seller : The company or person who provides services or goods , can be called “Contractor” , “Subcontractor” , Supplier , designer or vendor .
  • For Large projects, Sellers typically going to provide the complement of a solution .
  • Important Notes :
  1. Contracts Require Formality, so all contracts notifications should be in formal written communication, always take a formal approach In dealing with contracts.
  2. Contracts should help diminish Risks of project.
  3. Changes to contracts must be submitted and approved in writing.
  4. For Contracts breaching, There should be arbitration by a third party or Court system for dispute resolution.
  5. As a project manager you should include the time required to complete the procurement process.
  6. As a project manager you should be involved in project negotiations to protect relationship with the seller, and you will be capable of answering many of the technical and project management questions that arise during bidder conference.
  7. As a project manager you should protect the integrity of the project.
  8. Centralized Contracting ,
  9. Procurement managers have a higher level of expertise.
  10. Defined Career path in procurement.
  11. They are more likely to forget important details about the project.
  12. More difficult for the project manager to get contracting help when needed.
  13. Decentralized Contracting ,
  14. Project manager has easier access to contracting expertise .
  15. Procurement manager has more loyality to the project.
  16. Procurement manager has better understanding of the project.
  17. There is no home department for procurement manager.
  18. May not be a career path and duplication of expertise.
  19. May have little standardization of procurement practices.

 

  • Internal cost estimate for each procurement should be created before the procurement process starts to be used for comparison.
  • Contract elements: Offer , Acceptance , Capacity , Consideration and legal purpose.
  • Procurement Categories ,
  1. Major Complexity ( High Risk )
  2. Minor Complexity ( Low Risk )
  3. Routine Purchase
  4. Goods and Services
  • Plan Procurement management process involves putting together the procurement documents that will be sent to prospective sellers describing buyer needs , how to respond and the criteria buyer will use to select a seller.
  • Make or Buy analysis, Making a decision about whether to do the project work themselves or outsource some or all of the work .
  • You usually make if you have an idle plant or workforce, you want to retain control or work involves proprietary.
  • You usually buy to decrease risk to the project constraints.
  • The cost saving of purchasing a product may be outweighed by the cost of managing the procurement.
  • Planning the procurement includes the process of creating procurement documents and procurement statement of work , terms and conditions of the contract , standards of selecting the contract type in addition to the source selection criteria of proposed sellers.
  • Procurement Statement of Work ( SOW ) , It is the work to be done on each procurement , it must be clear , complete and concise as possible , it will describe all the work and activities the seller is required to do , it contains drawings , specifications , technical and descriptive wording and it comes in different types :
  1. Performance, It conveys what the final product should be able to accomplish, used usually in IT and R&D Projects.
  2. Functional, It conveys the end purpose or result rather than specific procedures of approach, used usually in IT and R&D Projects.
  3. Design , Conveys precisely what work to be done , it includes the materials to be used and an explanation of how work should be completed , usually used in Construction projects and equipment purchasing .
  • Contract Types , Selecting the contract type is affected by the following :
  1. What is being purchased
  2. The completeness of the statement of work.
  3. The level of effort and expertise the buyer can devote to manage the seller.
  4. If the buyer intents to give the seller incentives.
  5. Marketplace and economy
  6. Industry standards for the type of contract used.
  • Category 1: Fixed Price Contracts ( FP )

1, Fixed Price ( Lump Sum , Fixed Firm Price )  , in this type of contracts the Price is fixed , the specifications are well defined , if costs are more than the agreed upon price the seller will bear the additional costs , so that the Seller have risk of this contract type with least on the buyer , profit is not disclosed to the buyer , this type have the following disadvantages :

  1. Seller is forced to take all the risk
  2. Seller will add huge amount of reserves
  3. Seller will try to increase profits by cutting scope or claiming for variation orders
  4. Fixed Price Incentive Fee (FPIF), profits can be adjusted based on the seller meeting specified performance criteria such as getting work done faster.
  5. Fixed Price Award Fee (FPAF), the buyer pays a fixed price plus an award amount based on performance, same like the previous type except the total possible award amount is determined in advance.
  6. Fixed Price Economic Price Adjusted (FPEPA), it used in multiyear period projects, it protect the seller from uncertainties about future economic conditions.
  7. Purchase Order , Unilateral contract instead of bilateral , usually used for simple commodity procurements, becomes contract when they are accepted by performance.

 

 

  • Category 2: Time and Material ( T&M ) or unit price , the buyer pays on a per hour or per item basis , used for service efforts in which the level of effort cannot be defined with contract is awarded . Better to use with small contracts or contracts lasting for short time , buyer and seller share the risk .
  • Category 3: Cost Reimbursable ( CR ) , used when the exact scope is not clear , that time costs cannot be estimated accurately enough to sign a fixed price contract , preferred to be used with research and development projects and Information technology projects , the buyer carry most of the risk in these projects.
  1. Cost Contract ( CR ) , the contract value is equal to the cost , used with work performed by nonprofit organizations.
  2. Cost Plus Fee ( CPF ) or Cost plus percentage of Costs ( CPPC ) , This type requires the buyer to pay for all costs plus percentage of costs as fee , this type is very bad for buyers everywhere as it requires the buyer to carefully monitor and control all invoices.
  3. Cost Plus Fixed Fee ( CPFF ) , This type requires the buyer to pay for all costs plus a negotiated fee , fee doesn’t vary with actual costs.
  4. Cost Plus incentive Fee ( CPIF ) , Seller will be paid for the actual costs plus incentive fee adjustable upon specific performance objective agreed bu both parties in the contract , also both parties share an used if under or over contract value with sharing ratio , example 80/20 .
  5. Cost Plus award fee (CPAF ) , the buyer pays all costs and a base fee plus a bonus amount based on performance , same like the previous type except the total possible award amount is determined in advance.
  • Incentives : It is very useful to make the seller follow the buyer objectives and interests . It is a great motivation tool for the seller .
  • Payment terms should be mentioned in the contract , payment schedule should be clear in order for the project manager to manage his Cost budget plan as per contracts payments.
  • Procurement Documents ( BID Documents ) , Describes the buyer needs to seller , 3 different types :
  1. Request for proposal ( RFP ) , requests a detail proposal on how wwok will be performed , used with Cost Reimbursable contract type and Performance or functional statement of work
  2. Invitation for Bid (IFB), Requires a total price to do all work, used with fixed price contract type and design statement of work.
  3. Request for quotation ( RFQ ) , Requires a price quote per item , used with time and material contract type and any statement of work.
  • Important Terms ,
  • Request For Information ( RFI ) , used before procurement documents are created , used to clarify some information .
  • Profit, The amount included into the price the seller provides the buyer , each seller have accepted margin profit .
  • Price, the total amount seller will charge the buyer for the project work.
  • Cost, how much an item cost the seller, the buyer costs include the seller cost and profit.
  • Target Price , Expected price in mind for the buyer , used as a measure of success .
  • Sharing Ratio , Under or over contract costs will be shared between buyer and seller with a ratio like 70/30 , first number for the buyer , second for the seller.
  • Ceiling Price , Highest Price buyer will pay , it should be mentioned in the contract.
  • Point of total Assumption ( PTA ) , Relates to fixed price incentive fee contract type only , the amount above which the seller bears all the loss of cost overrun.

PTA = ( ( Ceiling Price – Target Price ) / Buyers sharing ration )+ Target Cost

  • Source Selection Criteria , It is the basis for the buyer to use evaluating the bid proposals ( Number of years in business , expertise level , Financial stability measurement … )
  • Nondisclosure Agreement , a formal form signed before procurement information released to sellers in order to protect appropriate information .
  • Letter of intent , sometimes contracts not signed in time , the seller may ask the buyer to provide a letter of intent , it not a contract and doesn’t have any legal binding .
  • Privity , The contractor may use subcontractor , no direct contractual relationships with the buyer .
  • Cancelation for convenience, buyer can cancel the contract and pay up to the point.
  • Cancelation for cause, Default by one of the parties and may result in legal actions.
  • Force of Majeure , Standard disclaimer refers to “ Act of god “ .
  • Retainage , Amount to be withheld to ensure delivery , usually 5% or 10%.
  • Risk of loss , How the risk is shared by the parties in case services are lost or destroyed.
  • Work Made for hire , All performed work to be owned by the buyer .
  • Arbitration , method used to resolve disputes .
  • Warranties , Promises of quality for the goods or services .
  • Time is of the essence, Delivery Dates are strictly binding.
  • Non Competitive Forms of procurement , Can be used in private companies due to schedule pressure , seller with unique qualifications , only one seller can provide the goods or services ….
  • Single Source, You contract directly with your preferred seller without going through full procurement process.
  • Solo Source , there is only one seller , this may be a company that own a patent.

 



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