Chapter 11: Project Procurement Management

adopted from PMIs PMBOK 2000 and Textbook : Information Technology Project Management

Copyright Course Technology 2001

Contents
Importance of Project Procurement Management Project Procurement Management Processes
Procurement planning: Solicitation planning: Solicitation: Source selection: Contract administration: Contract close-out: ) ) planning phase ) > executing phase ) } closing

Using Software to Assist in Project Procurement Management

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Importance of Project Procurement Management

Procurement means acquiring goods and/or services from an outside source Other terms include purchasing and outsourcing Why Outsource?
To reduce both fixed and recurrent costs To allow the client organization to focus on its core business To access skills and technologies To provide flexibility To increase accountability
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Project Procurement Management Processes

Procurement planning

determining what to procure and when

documenting product requirements and identifying potential sources obtaining quotations, bids, offers, or proposals as appropriate choosing from among potential vendors managing the relationship with the vendor
Chap 11 completion and settlement of the contract

Solicitation planning

Solicitation

Source selection

Contract administration

Contract close-out
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Figure 11-1. Project Procurement Management Processes and Key Outputs

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Procurement planning
20th of 21 planning phase process identifying which project needs can be best met by using products or services outside the organization. It includes deciding
whether to procure how to procure what to procure how much to procure when to procure

determines how project needs can best be met by sourcing products or service outside the Chap 11 organization.

Inputs to Procurement planning

Scope statement describes current project needs and strategies Product description defines the end product of the project and provides important information about any technical issues or concerns. Procurement resources resources and expertise needed to support project procurement activities Market consideration affect available products and services that have an impact on decision-making Other planning inputs includes miscellaneous items such as cost and schedule estimates, quality management plans, cash-flow projections, WBS, identified risks, planned staffing needs. Constrains factors that limit the buyers options, such as availability of funds. Assumptions factors that, for planning purposes, will be considered to be true, real, or certain Chap 11 7

Tools and techniques

Make-or-buy analysis determines whether its more cost effective for the performing organization to produce the produce the product or purchase it form an outside vendor. Expert judgment can be sought from groups or individuals with specialized knowledge or training. These include technical consultant company, HR consultant company Contact type selection an important factor to influence and control the sellers performance.
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Types of Contracts
Fixed price or lump sum: involve a fixed total price for a well-defined product or service Cost reimbursable: involve payment to the seller for direct and indirect costs Time and material contracts: hybrid of both fixed price and cost reimbursable, often used by consultants Unit price contracts: require the buyer to pay the seller a predetermined amount per unit of service Different contracts are appropriate for different kinds of work.
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Outputs from Procurement planning

Procurement management plan part of project plan. It describes how the remaining procurement processes (solicitation planning, contract closeout) will be managed. Statements of work (SOW) describes the procurement items in sufficient detail for prospective sellers to determine if they are capable of providing the items

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Statement of Work (SOW)

A statement of work is a description of the work required for the procurement Many contracts, mutually binding agreements, include SOWs A good SOW gives bidders a better understanding of the buyers expectations

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Figure: Statement of Work (SOW) Template

I. II. III. Scope of Work: Describe the work to be done to detail. Specify the hardware and software involved and the exact nature of the work. Location of Work: Describe where the work must be performed. Specify the location of hardware and software and where the people must perform the work Period of Performance: Specify when the work is expected to start and end, working hours, number of hours that can be billed per week, where the work must be performed, and related schedule information. Deliverables Schedule: List specific deliverables, describe them in detail, and specify when they are due. Applicable Standards: Specify any company or industry-specific standards that are relevant to performing the work. Acceptance Criteria: Describe how the buyer organization will determine if the work is acceptable. Special Requirements: Specify any special requirements such as hardware or software certifications, minimum degree or experience level of personnel, travel requirements, and so on.
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IV. V. VI. VII.

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Solicitation Planning
21st of 21 planning phase process This process involves documenting the product requirements and identifying potential sources in preparation to support solicitation.

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Collaborative Procurement
Several organizations, even competitors, have found that it makes sense to collaborate on procurement for some projects Kodak worked with several competitors to develop the Advantix Advanced Photo System (see What Went Right?)
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Inputs to Solicitation Planning

Procurement management plan
describe how to manage the procurement process (from output of procurement planning process)

SOW - describes the procurement items in sufficient detail for prospective sellers to determine if they are capable of providing the items. Other planning inputs
includes preliminary cost and schedule estimates, quality management plans, cash-flow projections, the WBS identified risks, and planned staffing.
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Tools and techniques

Standard forms include standardized contracts, description of procurement items, and bid documents. Expert judgment - can be sought from groups or individuals with specialized knowledge or training. These include technical consultant company, HR consultant company
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Outputs from Solicitation Planning

Procurement documents
solicit proposals form potential buyers. Documents include Request for proposal (RFP), Request for quotation (RFQ), Invitation to bidding, invitation for negotiation, contractor initial response. Others: project SOW, description of the desired format of the response, required contractual provisions, evaluation criteria to rate or score proposals (objective or subjective), overall or lifecycle cost, technical capabilities, management approach, financial capacity.

SOW updates modifications to existing SOWs.

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Figure: Outline for a Request for Proposal (RFP)

I. II. III. IV. V. VI. VII. Purpose of RFP Organizations Background Basic Requirements Hardware and Software Environment Description of RFP Process Statement of Work and Schedule Information Possible Appendices A. Current System Overview B. System Requirements C. Volume and Size Data D. Required Contents of Vendors Response to RFP E. Sample Contract
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Solicitation
5th of 7 executing phase process It involves obtaining information in the form of bids and proposals from prospective sellers. The seller trying to win business bears most of the effort of gathering the information. Organizations can advertise to procure goods and services in several ways
approaching the preferred vendor approaching several potential vendors advertising to anyone interested

A bidders conference can help clarify the buyers expectations

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Inputs to Solicitation
Procedure documents solicit proposals from potentials buyers. Documents include Request for proposal (RFP), Request for quotation (RFQ), Invitation to bidding, invitation for negotiation, contractor initial response. Qualified seller lists The preferred vendors for a product or service. The performing organization usually has a list of preferred suppliers.
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Tools and technique

Bidder conferences provide mutual understandings in meetings. Bidder conferences give a change to exchange key information with the project manager and his team. Advertising request for services, supplies, materials, and equipments completed primarily on government projects to ensure equal access to bidding opportunities.

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Outputs from Solicitation

Proposals
entail the seller preparing documents that describe its willingness and ability to provide the service or product. It becomes an important part of the project records. It some cases, they become the SOW. In many events, the proposals are used to develop the formal contracts.
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Source selection
6th of 7 executing phase process Source selection involves
evaluating bidders proposals choosing the best one negotiating the contract awarding the contract

Buyers often create a short list It is helpful to prepare formal evaluation procedures for selecting vendors During Source Selection, project manager use the proposals and evaluation criteria (developed in Solicitation Planning) and exercise his judgment in analyzing the answers from the sellers in order to select the best (or most suitable) bid.
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Be Careful in Selecting Suppliers and Writing Their Contracts

Many dot-com companies were created to meet potential market needs, but many went out of business, mainly due to poor business planning, lack of senior management operations experience, lack of leadership, and lack of visions. Check the stability of suppliers Even well-known suppliers can impede project success. Be sure to write and manage contracts well with all suppliers (see What Went Wrong?)
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Inputs to Source selection

Proposals seller-prepared document that describe the sellers ability and willingness to provide the requested product and service. (it is output from Solicitation Planning) Evaluation criteria establish ratings or scores for proposals. The criteria can be objective or subjective. Organizational policies it may affect the project managers decision. These policies can come from any of the organization involved in the project
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Tools and technique

Contract negotiations clarification and mutual agreement on structure and requirements of a contract prior to signing. The subjects covered usually include: a) responsibilities and authorities; b) applicable terms and law; c) financing and price; technical and business management. Weighting system to quantify data in 3 steps to minimize personal prejudices of source selection. First, they assign numerical weight to evaluation criteria. Second, they rate the seller. Finally, they multiply weights by rating and totaling overall score. Screening system establish minimum performance criteria. Independent estimates prepared by the project procuring section to determine any significant differences. The differences could mean the seller didnt understand the SOW or omitted something in the SOW.

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Outputs from Source selection

Contract a mutually binding agreement that obligates a seller to provide goods or services and the buyer to make payment. It establishes a legal relationship that is subject to remedy in court.
Most organizations have policies and procedures concerning who can sign a contract, refereed as delegation of procurement authority. Many organizations also require legal review and approval of contracts.
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Cost Reimbursable Contracts

Cost plus incentive fee (CPIF)
the buyer pays the seller for allowable performance costs plus a predetermined fee and an incentive bonus

Cost plus fixed fee (CPFF)

the buyer pays the seller for allowable performance costs plus a fixed fee payment usually based on a percentage of estimated costs

Cost plus percentage of costs (CPPC)

the buyer pays the seller for allowable performance costs plus a predetermined percentage based on total costs
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Figure: Contract Types Versus Risk

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Contract Administration
7th of 7 executing phase process Ensures that the sellers performance meets contractual requirements. It involves managing vendor relationships, especially important with change requests It entails maintaining formal correspondence with the seller and expediting requirement for payment with performing organization. Contracts are legal relationships, so it is important that legal and contracting professionals be involved in writing and administering contracts Many project managers ignore contractual issues, which Chap 11 30 can result in serious problems

Inputs to Contract Administration

Contracts - a mutually binding agreement that obligates a seller to provide goods or services and the buyer to make payment. Work results sellers deliverables, quality standards, and actual costs. Change requests modifications to the contract or its description of the product or service. If the sellers work is unsatisfactory, the project manager can terminate the contract. Seller invoices submitted periodically and requesting payment for work performed. The contract defines invoice requirements and supporting document.
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Tools and technique

Contract change control system defines how a contact may be modified. It includes paperwork, tracking system, dispute resolution procedures, and the hierarchy of approval levels. Performance reporting tells the project management team how effective the seller is achieving the contractual objectives. Performance reporting is generated by the communications process. It is part of processes of controlling the project. Payment system it involves the organizations account payable process
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Outputs from Contract Administration

Correspondence retained as a way of documenting and
clarifying the contracts terms and conditions. Contract changes changes (formal and informal) are fed back through the planning and procurement processes. The project plan or other relevant documentation is updated when necessary. Payment requests Issues when project manager are using an external payment system. It is the responsibility of the project manager to interface with account payable for timely payments to sellers.
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Contract Close-out
2nd of 2 closing phase process Closing takes place at the end of the project. Because projects are temporary. Project closeout briefings and lessons-learned documents provide important feedback. Contract close-out includes
product verification to determine if all work was completed correctly and satisfactorily administrative activities to update records to reflect final results archiving information for future use

Procurement audits identify lessons learned in the procurement process

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Inputs t Contract closure

Contract documentation includes the contract along with all supporting schedules, requested and approved contract changes, any seller-developed technical documentation, seller performance reports, financial documents, and the results of any contract-related inspections.
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Tools and technique

Procurement audits structured reviews of the procurement process, from procurement planning through contract admin. The objective of a procurement audit is to identify success and failures that warrant transfer to other procurement items o this project or to other projects.
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Outputs from Contract closure

Formal acceptance & closure provides the seller with formal written notice that the contract has been completed. Contract file a complete set of indexed records. Compile them for inclusion with the final project records.

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Using Software to Assist in Project Procurement Management

Word processing software helps in writing proposals and contracts, spreadsheets help in evaluating suppliers, databases help track suppliers, and presentation software aids in presenting procurement-related information In the late 1990s and early 2000s, many companies started using e-procurement software to do many procurement functions electronically Organizations also use other Internet tools to help find information on suppliers or auction goods and services

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Summary
Project Procurement Management
acquiring goods and/or services from an outside source

Project Procurement Management Processes

Procurement planning
identifying which project needs can be best

Source selection
choosing from among potential vendors

Solicitation planning
documenting product requirements and identifying potential sources

Contract administration
managing the relationship with the vendor

Solicitation
obtaining quotations, bids, offers, or proposals as appropriate

Contract close-out
completion and settlement of the contract
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