Professional Documents
Culture Documents
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Reading Materials
Text:
Chapter 12
References:
PMBOK: Chapter 12
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12.1 12.2
Plan Procurements - Planning Conduct Procurements - Executing Administer Procurements Monitoring and Controlling Close Procurements - Closing
Processes:
12.3 12.4
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Planning
4.2 Develop Project Management Plan 5.1 Collect Requirements 5.2 Define Scope 5.3 Create WBS 6.1 Define Activities 6.2 Sequence Activities 6.3 Estimate Activity Resources 6.4 Estimate Activity Durations 6.5 Develop Schedule 7.1 Estimate Costs 7.2 Determine Budget 8.1 Plan Quality 9.1 Develop HR Plan 10.2 Plan Communications 11.1 Plan Risk Management 11.2 Identify Risks 11.3 Perform Qualitative Risk Analysis 11.4 Perform Quantitative Risk Analysis 11.5 Plan Risk Responses 12.1 Plan Procurements
Executing
4.3 Direct and Manage Project Execution 8.2 Perform Quality Assurance
Closing
4.6 Close Project or Phase 12.4 Close Procurements
PMGT- 401: Project Management Fundamentals 12 Project Integration 04 Procurement Management Management
2009 Bob Xourafas, Bob Xourafas, P.Eng, PMP P.Eng, PMP, Proprietary
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Buzzword
What to buy, when, how much, make or buy, lease or rent
2. Conduct Procurements
Bidders conference (Question and Answers); Pick Sellers Manage the Seller Close contract
Procurement or outsourcing means acquire goods and services from outside the organization
Organizations that procure services are call Buyers Organizations or individuals who provide procurement/outsourcing services are referred to as:
Suppliers, Vendors, Contractors, Subcontractors and Sellers (most frequently term used)
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Level 2
Systems
Quality
Level 3
Under Vehicle Structure at level 2, we have four major subdivisions of work: two of which will be performed in-house (the Frame and Suspension), and the other two will be procured from outside the company (the Transmission and Engine).
PMGT- 401: Project Management Fundamentals 12 Project Procurement Management 2009 Bob Xourafas, P.Eng, PMP, Proprietary
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To provide flexibility
Outsourcing to provide extra staff during periods of peak workloads can be much more economical than trying to staff entire projects with internal resources
To increase accountability
Because contracts are legally binding, there is more accountability for delivering the work as stated in the contract.
PMGT- 401: Project Management Fundamentals 12 Project Procurement Management 2009 Bob Xourafas, P.Eng, PMP, Proprietary
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Difficult to maintain contracting expertise in company; duplication of expertise, inefficient use of resources
Little / no standardization of contracting practices from one project to next
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The determination should be done during scope definition and involves consideration of:
whether to procure, how to procure, what to procure, how much to procure, and when to procure.
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Outputs
1. Procurement Management Plan
2. Procurement Statement of Work (SOW) 3. Make or Buy Decisions 4. Procurement documents 5. Source selection criteria 6. Change requests
2. Expert Judgment
3. Contract Types
4.
5. 6.
Risk registry
Risk-related contract decisions Activity resource requirements
7.
8. 9.
Project schedule
Activity cost estimates Cost performance baseline
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If the buyer does not have a formal contracting group, then the project team will have to supply both the resources and the expertise to support project procurement activities.
PMGT- 401: Project Management Fundamentals 12 Project Procurement Management 2009 Bob Xourafas, P.Eng, PMP, Proprietary
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Solution:
Set up an equation so the lease is equal to the buy Direct and indirect expenses = Cost of product + Daily Maintenance X # of Days) = $3,000 + ($50/day) x Days Lease cost = Daily Lease Cost X # of Days = $100/day x Days Thus, $3,000 + $50 Days = 100 Days 3,000 = 50 Days D = 3,000/50 = 60 Days
PMGT- 401: Project Management Fundamentals 12 Project Procurement Management 2009 Bob Xourafas, P.Eng, PMP, Proprietary
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Solution:
Set up an equation so the buy/leasing is equal to the make/purchase
Solve for D:
$100d = $1,000
d = 10 days
If you need the item for 12 days, it would be more economical to purchase it
PMGT- 401: Project Management Fundamentals 12 Project Procurement Management 2009 Bob Xourafas, P.Eng, PMP, Proprietary
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External experts
Include potential sellers Include sellers with partnership arrangements with the buyer organization
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Objective of a good contract is to have reasonable distribution of RISK between the buyer and seller and the greatest incentive for the sellers efficient and economical performance
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Another aspect of fixed-price plus incentive contracts is that some of the risk is borne by the buyer as opposed to the firm fixed-price contract, where most of the risk is borne by the seller. The buyer takes some risk, albeit minimal, by offering the incentive to, for example, get the work done earlier.
In our example, suppose the buyer really would like the product delivered 30 days prior to when the seller thinks they can deliver. In this case, the buyer assumes the risk for the early delivery via the incentive.
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Indirect costs are costs related to the project that cannot be traced back in a cost-effective way.
For example the cost of providing a work space with electricity, a cafeteria, and so on.
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Cost-reimbursable contracts are used most often when the project scope contains a lot of uncertainty, i.e. not well defined, such as for cutting-edge projects and research and development.
They are also used for projects that have large investments early in the project life.
The contractor has little incentive to work efficiently or be productiveall costs are passed on to the buyer. To counterbalance this deficiency:
Cost reimbursable contracts often include fees such as a profit percentage or incentives for meeting or exceeding selected project objectives.
PMGT- 401: Project Management Fundamentals 12 Project Procurement Management 2009 Bob Xourafas, P.Eng, PMP, Proprietary
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An incentive fee actually encourages better cost performance by the seller, and there is a possibility of shared savings between the seller and buyer according to a pre negotiated share of the incentive bonus formula if performance criteria are exceeded. The qualification for exceeded performance must be written into the contract and agreed to by both parties, as should the definition of allowable costs; the seller can possibly lose the incentive fee if agreed-upon targets are not reached.
PMGT- 401: Project Management Fundamentals 12 Project Procurement Management 2009 Bob Xourafas, P.Eng, PMP, Proprietary
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T&M arrangements can also resemble fixed-price arrangements. For example, unit rates can be preset by the buyer and seller when both parties agree on the rates for a specific resource category. The buyer bears the biggest risk in this type of contract. Most appropriate when: Buyer wants to be more in control; Scope of work is not known or incomplete; Contracts are for small dollar amounts and shorter length of time; Buyer wants to begin work immediately
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The total value of the contract is a function of the quantities needed to complete the work
Example: Contract to purchase 30 meters of wood at $9.00 per meter
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Project risk is an uncertain event or condition that, if it occurs, has a positive or a negative effect on at least one project objective, such as time, cost, scope, or quality, etc.
Contract preparation should be tailored to the circumstances of the project and should reflect both the owner and the contractor objectives.
No single type of contract is best suited for all projects.
2009 Bob Xourafas, P.Eng, PMP, Proprietary
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Clauses related to work scope definition, changes and project control are the most frequent sources of disputes and poor project performance.
Contracts should include procedures to accommodate changes to the contractual obligations.
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Purchase Order:
Signed by one party only; used for simple commodity procurements
PMGT- 401: Project Management Fundamentals 12 Project Procurement Management 2009 Bob Xourafas, P.Eng, PMP, Proprietary
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The statement of work (SOW) should describe the procurement services in sufficient detail to allow prospective contractors to formulate a bid/no bid decision. Sufficient detail may vary, based on the nature the procurement service, the needs of the buyer, or the expected type of contract.
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Invitation for Bid (IFB) An IFB (information for bid) is a sealed document that lists the seller's price to complete the detailed work
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Specifications are written, pictorial, or graphic information that describe, define, or specify the services or items to be procured. There are three types of specifications: Performance
They specify the measurable capabilities the end product must achieve in terms of
operational characteristics (what the product of the project should be able to accomplish) The risk of performance is on the contractor. Used mostly with cost reimbursable types of contract Functional Convey end purpose, or result, along with essential characteristics, rather than procedures The risk of performance is on the contractor. Used with any contract types Design These detail what is to be done in terms of physical characteristics. The risk of performance is on the buyer. Used with fixed type of contracts Performance and Functional are commonly used in IT, hi-tech, and research projects Design is mostly used in construction, equipment purchasing projects
2009 Bob Xourafas, P.Eng, PMP, Proprietary
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Price may be primary determinant, but lowest price may not be lowest cost.
Multiple sources (sellers) may be required for critical products.
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The choice of methods depends on the importance of the procurement, the number of interested sellers and the type of work to be performed.
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1. Project management plan 2. Procurement documents 3. Source selection criteria 4. Qualified sellers list 5. Seller proposals 6. Project documents 7. Make-or-buy decisions 8. Teaming agreements 9. Organizational process assets
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Procurement documents
Request for Proposal (RFP), Requests for Quotation (RFQ), Request for Information (RFI) - 12.1 Plan Procurements
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Project documents
Make-or-buy decisions
12.1 Plan contracting
Teaming agreements
If there are teaming agreements, the procurements must be executed in accordance with the overriding corporate teaming agreement. The corporate teaming arrangement is the supreme governing document. In this situation, the seller and the buyer collectively prepare the SOW to met the project requirements and then negotiate the final contract for award.
2009 Bob Xourafas, P.Eng, PMP, Proprietary
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Weight Assign a numeric weight to each evaluation criteria Rate Assign a numeric rate for each evaluation criterion Multiply Weight X Rating Total Add all products for overall score
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Expert Judgment
Expert judgment applies here as it has on many of the other processes we have discussed. Include experts from all areas of the organization when evaluating proposals and selecting vendors. Dont forget your legal and financial folks, marketing, sales, engineering, and so on.
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Internet Search
Internet search can be used to secure low value, low risk procurements at a fixed predetermined price.
This method is not used for complex, high risk procurements
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The project manager must be involved during negotiation if for no other reason than to protect the relationship with the other side. Many projects go bad because of how negotiations were handled.
If you press too strongly during negotiations and the negotiations turn from a win-win (preferable) situation to a win-lose situation. If negotiations are win-lose (in favor of the buyer): The seller will be less concerned with completing the work than with recovering what they lost in negotiation. The buyer's project manager will have to spend time making sure that the seller does not add extra costs, propose unnecessary work or initiate other activities to "win" back what they lost during negotiation.
PMGT- 401: Project Management Fundamentals 12 Project Procurement Management 2009 Bob Xourafas, P.Eng, PMP, Proprietary
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The selected sellers output is obvious; you choose the seller (or sellers) to whom youll award the project.
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Mutual agreement: There must be an Offer and an Acceptance Consideration: A down payment or something of value, not necessarily money. Legal capacity: The contract must reflect the contractors legal obligation, or lack of obligation to deliver the end products
Legal purpose: The contract must be for a legal purpose. You cannot have a contract for the sale of illegal goods / service
Contract capability: The contract is binding only if the contractor has the capability to perform the work
2009 Bob Xourafas, P.Eng, PMP, Proprietary
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Letter (NOT a contract) without legal binding, that says the buyer intends to hire the seller
Privity: The doctrine of privity in contract law provides that a contract cannot confer rights or impose obligations arising under it on any person or agent except the parties to it. Contractual relationship between seller companies
Example: Company A hires company B. Company B hires Company C. Company As manager asks Company C to stop the work. What should Company C do? Answer: Ignore the request
PMGT- 401: Project Management Fundamentals 12 Project Procurement Management 2009 Bob Xourafas, P.Eng, PMP, Proprietary
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Change requests
Change requests to the project management plan and its subsidiary plans as result of procurement activities must be administered through the Perform Integrated Change Control process (Section 4.5)
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You can see how this situation could multiply quickly when you have a number of vendors involved.
PMGT- 401: Project Management Fundamentals 12 Project Procurement Management 2009 Bob Xourafas, P.Eng, PMP, Proprietary
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If the vendor violates the terms of the contract or doesnt meet the agreed-upon deliverables, you must document the situation and provide this to the procurement department so that they can enforce or terminate the contract.
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Authorizing payments Meetings Monitoring performance against the contract including all its components (terms and conditions, scope of work, etc.) Understanding the legal implications of action taken Correspondence Record keeping Disseminating changes to the appropriate parties Performance reviews Scope verification Identifying risks
PMGT- 401: Project Management Fundamentals 12 Project Procurement Management 2009 Bob Xourafas, P.Eng, PMP, Proprietary
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Outputs
1. Procurement documentation 2. Organizational process asset updates 3. Change requests 4. Project management plan updates
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It includes the paperwork, tracking systems, dispute resolution procedures, and approval levels necessary for authorizing changes.
The contract change control system should be integrated with the integrated change control system. In most contracts, another person controls the contract than the project manager. This person is called the contracting officer or contract administrator, and:
IS THE ONLY ONE WITH AUTHORITY TO CHANGE THE CONTRACT
The contract change control system must incorporate signatures/approvals from both the buyer and the seller.
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The performance reviews themselves might take the form of quality audits or inspections of documents as well as the work of the product itself.
If the seller is not in compliance, action must be taken to either get them back into compliance or terminate the contract.
The yardstick youre using to measure their performance against is the contract SOW and the terms of the contract. When the RFP is included as part of the contract (which it usually is), you might also use it to determine contract compliance.
PMGT- 401: Project Management Fundamentals 12 Project Procurement Management 2009 Bob Xourafas, P.Eng, PMP, Proprietary
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Performance reporting
Performance reporting provides management with information about how effectively the seller is achieving the contractual objectives. Contract performance reporting should be integrated with the 10.5 Report Performance process already discussed
Payment systems
Vendors submit seller invoices for payment and the payment system is the tool and technique used to issue payment. Payment systems include reviews and authorization to issue the check. The organization might have a dedicated department, such as accounts payable, that handles vendor payments, or it might fall to the project manager. In either case, follow the policies and procedures the organization has established regarding vendor payments.
PMGT- 401: Project Management Fundamentals 12 Project Procurement Management 2009 Bob Xourafas, P.Eng, PMP, Proprietary
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A constructive change occurs where a contractor performs work beyond the contract requirements without a formal change order, either by an informal order or due to the fault of the buyer.
Since any constructive change may be disputed by one party and can lead to a claim against the other party, such changes are uniquely identified and documented by project correspondence.
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Warranties
Financial information (such as invoices and payment records) Inspection and audit results Supporting schedules
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Its important that you are kept abreast of any changes to the contract so that you can evaluate whether the project management plan needs adjusting.
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Contracts might have specific terms or conditions for completion and closeout.
You should be aware of these terms or conditions so that project closure isnt held up because you missed an important detail.
Depending on the terms of the contract, early termination (whether by agreement, via default, or for cause) might result in additional charges to the buyer.
Be certain to note the reasons for early termination in your contract documentation.
Generally, if there is no material breach, as the project manager, it is important to continue to make progress towards your objective (successful conclusion of the project).
PMGT- 401: Project Management Fundamentals 12 Project Procurement Management 2009 Bob Xourafas, P.Eng, PMP, Proprietary
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Outputs
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Procurement documentation
Includes the contract itself along with all supporting schedules, requested and approved contract changes, any seller-developed technical documentation, seller performance reports, financial documents such as invoices and payment records, and the results of any contract-related inspections, etc. This information along with all the other information gathered during the project is filed once the project is closed out so that anyone considering a future project of similar scope can reference what was done.
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Procurement audits examine the procurement process to determine areas of improvement and to identify flawed processes or procedures.
Documenting the lessons learnedincluding the successes and failures that occurredallows you to improve other procurement processes currently underway on this project or other projects. It also gives you the opportunity to improve the process for future projects.
Procurement audits might be used by either the buyer or the vendor, or by both, as an opportunity for improvement.
PMGT- 401: Project Management Fundamentals 12 Project Procurement Management 2009 Bob Xourafas, P.Eng, PMP, Proprietary
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Its your responsibility as project manager to document the formal acceptance of the contract. Many times the provisions for formalizing acceptance and closing the contract are spelled out in the contract. If you have a procurement department that handles Administer Procurements, they will expect you to inform them when the contract is completed and will in turn follow the formal procedures to let the seller know the contract is complete.
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This file is stored for use as historical records and help protect the project in case of arguments or legal action regarding what was done and not done on the contract.
Deliverables Acceptance
The deliverable acceptance portion of the organizational process updates includes the formal written notice from the buyer that the deliverables are acceptable and satisfactory or have been rejected. If the product or service does not meet expectations, the vendor will need to correct the problems before you issue a formal acceptance notice. Deliverables acceptance/Validated deliverables is an input into the 5.4 Verify Scope process
Ideally, quality audits have been performed during the course of the project, and the vendor was given the opportunity to make corrections earlier in the process than the Closing stage.
PMGT- 401: Project Management Fundamentals 12 Project Procurement Management 2009 Bob Xourafas, P.Eng, PMP, Proprietary
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