12.0 Project Procurement Management

Procurement is the formal processes many organizations follow obtain goods and services. Project Procurement Management is the process of selecting, monitoring and closing vendor contracts.

The processes with the Procurement Knowledge Area are:

• ·        Plan Procurement Management
• ·        Conduct Procurement
• ·        Control Procurement

Key Concepts

There are many names for procurement documents, such as Request for Proposals (RFP), Invitation for Big (IFB), and Request for Quotation (RFQ).

Contract – A mutually binding agreement that obligates the seller to provide something of value (e.g. product or service) and the buyer to provide monetary compensation.

The seller can also be referred to as: contractor, subcontractor, vendor, supplier, or service provider

During the procurement lifecycle, the seller wears different hats. At the beginning, the seller is a bidder trying to win the contract. When they are selected, they become the selected source. When they begin working on the project, they are the contracted supplier.

12.1 Plan Procurement Management

• Plan Procurement Management is the process of establishing procurement processes to follow. This process will standardize the way the project team selects vendors and administers contracts.
• The key activities in this process include:
• Creating a procurement management plan
• Creating templates for procurement statement of work
• Selecting a contract type for each procurement
• Creating the procurement documents
• Determining the source selection criteria
• The main output of this process is the procurement management plan. This plan is a subsidiary plan of the overall project management plan. It describes how the procurement process will be planned, executed, and controlled.

Procurement Statement of Work (SOW)

The Procurement SOW describes the scope that the vendor/seller must accomplish. This document describes all the work and activities the seller must complete. This document must be as clear, complete, and concise as possible.

There are many types of procurement statements of work. Choice will depend on the nature of the work and type of industry.

·        Performance

This type conveys what the final product should be able to accomplish, rather than how it should be built or what its design characteristics should be

·        Functional

This type conveys what the end purpose or result, rather than specific procedures. It is to be used in the performance of the work and may also include a statement of minimum essential characteristics of the product

·        Design

This type conveys precisely what work is to be done

Contracts

·       Fixed price contract

Fixed price contracts is sometimes also called lump sum contracts. Like its name suggests, the buyer will pay the seller a fixed amount of money for the work specified [SR1] [SR2] in the contract. The contract is signed by both parties before project work begins.

A fixed price contract is used when the scope is well defined . The buyer and seller understand how much time and resources are need to complete the project. The scope and budget can only be changed through formal change control procedures.

If the seller spends more money or labor than anticipated to complete the project, they are not going to be reimbursed for the extra costs. Since the FP contract is legally binding, the seller must complete the project even if they are losing money. Thus, the risk in a Fixed Price contract is on the seller .

§  Firm fixed price contract (FFP)

FFP is the most common type of the fixed price contract. In a FFP contract, the buyer will pay the price specified in the contract, regardless of the cost incurred by the seller. Since the risk is on the seller, the seller has great incentive to complete the project as cheaply and as quickly as possible.

§  Fixed price with economic price adjustment contract (FP-EPA)

• FP-EPA contract is a variation of the FP contract, where the seller is able to adjust the price of the contract based on economic factors.
• These factors must be predefined and agreed upon by both parties before the contract is signed. These factors are economic factors outside of the control of the buyer and seller.
• FP-EPA contract is most often used for fixed price contracts spanning multiple years. There is a direct correlation between uncertainty and length of a project. Because so many factors can change the market in the future, the seller needs to protect themselves by being able to increase the price of the project to adjust for market conditions.
• One  downside of using FP-EPA contract is that there can be a lot of administrative work involved to implement this type of contract. However, the benefits for the seller to adjust the prices to match economic conditions outweigh the extra admin work involved.
• The formula to for FP-EPA is:New price of contract = old price of contract * (1 + inflation rate) 

§  Fixed Price Incentive Fee Contract (FPIF)

The FPIF contract is a variation of the FP contract where there is some price flexibility built in. The buyer and seller will agree upon performance incentives during negotiations, and if the seller is able to meet the required performance incentives, they will be paid a bonus.

On the flip side, the FPIF can also include a negative incentive. If the seller is unable to meet the performance standards, they can also receive a penalty.

In a FPIF contract, the final price is calculated after all the work has been completed.

Cost objectives is the most common type of performance criteria. If the seller completes the project below the target cost, they will receive an incentive from the buyer. Both party wins.

·       Cost reimbursable contract

In cost reimbursable contracts, the buyer will reimburse the seller for all eligible costs plus a fee, which represents the seller’s profits.

Cost of project = cost incurred by seller + agreed upon fees

Cost reimbursable contracts are used when the scope is not fully defined at the start of the project. If there is an unanticipated cost overrun, the buyer is responsible for covering that cost. Thus, the risk in cost reimbursable contracts is on the buyer.

§  Cost plus fixed fee contract (CPFF)

This type of cost reimbursable contract is the most straightforward. In CPFF, the seller will reimburse the buyer for all allowable costs plus a pre-determined fee, which represents the seller’s profits.

§  Cost plus award fee contract (CPAF)

In CPAF contract, the buyer reimburses the seller for all allowable costs plus they may choose to give the seller an award based on a set of subjective factors. Think of the award as a tip given based on how much the buyer liked the seller.

§  Cost plus incentive fee contract (CPIF)

In CPIF, the buyer will reimburse the seller for all allowable costs plus an incentive fee determined based on some predefined performance criteria (usually cost-related).

·       Time and material contract

In a T&M contract, the unit cost of labor or material is fixed, but the number of units is flexible. For example, the contract will fix a consultant’s rate to be $100/hour, but the number of hours the consultant works on the project may vary.

T&M = rate of resource * unit of resource used

A T&M contract is a hybrid between a fixed price contract and cost reimbursable contract. It is sometimes also called Rate Contract or Unit Price Contract.

This type of contract is used when the scope is broadly defined, and there is a high probability of changes to the scope.

In a T&M contract, the buyer and seller share the risk of the contract. The buyer knows the predetermined rates of resources, and the seller can claim extra units delivered if the scope increases.

Source selection criteria 

Included in the procurement documents to give the seller an understanding of the buyer’s needs and to help the seller decide whether to bid or not.

Source criteria may include:

·          Number of years in business or financial stability

·          Understanding or need

·          Price or life cycle costs

·          Technical ability

·          Quality or past performance

·          Ability to complete the work on time

·          Project management ability

Non-Disclosure Agreement (NDA) – NDA is an agreement between the buyer and prospective sellers to keep project information and artifacts confidential.

Non-competitive forms of procurement

If you do not use a competitive process, you are entering into one of the following types of non-competitive procurements

·         Single source

o    In this type of procurement, your contract directly with your preferred seller without going through the procurement process. This might be a company you have worked with before and, for various reasons, you do not want to look for another

·         Sole source

o    In this type of procurement, there is only one seller. This might be a company that owns a patent

Purchase order – A purchase order is the simplest type of fixed price contract. This type of contract is normally unilateral (signed by one party) instead of bilateral (signed by both parties)

Terms and conditions – Terms and conditions (either standard or special) in a contract differ based on what you are buying. If you are buying work that includes equipment, you will need terms that describe when ownership of the equipment will be transferred to the buyer and terms that require insurance for damages in transit

Make-or-buy analysis – This analysis determines whether it is more profitable to produce the product or service in-house or outsource it to third party vendors.

Market research – Examination of industry and vendor specific capabilities and prices

12.2 Conduct Procurement

Conduct Procurement is the process of obtaining seller responses, selecting a seller, and awarding a contract.

Bidders’ conference – The buyer can hold a bidders’ conference to give all the prospective sellers a chance to ask questions and clarify expectations

Qualified sellers list/Prequalified sellers list – Some buyers may have a list of pre-approved vendors that they must choose from

Seller proposal – The seller’s response to the procurement documents, including the price

Proposal review – After reviewing the proposals, the buyer uses the source selection criteria identified in the Plan Procurement process to assess the potential sellers’ ability and willingness to provide the requested products or services.

Negotiation – The discussions between the buyer and seller with the goal of reaching an agreement. The project manager is usually not the lead negotiator for procurement.

It is important for everyone involved in negotiations to understand that the objectives of negotiation are to:

·         Obtain a fair and reasonable price

·         Develop a good relationship with the seller

To achieve a signed contract, the following are usually negotiated in order.

·         Scope

·         Schedule

·         Price

There are other things that need to be negotiated. These include:

·         Responsibilities

·         Authority

·         Applicable law

o    If you are working with a seller from a different state, country or region, you need to agree upon whose law will apply to the contract

·         Project management process to be used

·         Payments schedule

Contract – The entire procurement agreement between both parties, including the terms and conditions, procurement SOW, and timelines.

Letter of Intent – A letter that is notlegally binding that says that the buyer intents to hire the seller. This letter gives the seller the confidence to hire additional staff or acquire more resources (if needed) to prepare for the new project.

Proposal evaluation techniques – A formal evaluation review process of all of the sellers’ proposals (this process is different for every organization)

12.3 Control Procurement

Control Procurement is the process of managing procurement relationships, monitoring contract performance, and making changes when necessary.

The key benefit of this process is that it ensures that both the sellers and buyers are operating in accordance to the terms and conditions outlined in the procurement contract.

Contract Change Control System – This system includes change procedures, forms, dispute resolution processes, and taking systems and is specified in the contract

Procurement performance review – During the Control Procurement process, the project manager should analyze all available data to verify that the seller is performing as they should

Claims administration – A claim is an assertion that the buyer or the seller did something to hurt the other party. Clam administration is the process of handling the claims (or disputes) that arises between the buyer and the seller.

Escalation process for claims = claims -> disputes -> appeals

Records management system – A contract is a formal, legal document, and this document needs to be kept in the records management system, even after the project ends.  Record keeping can be critical if actions taken or situations that occurred during a procurement are ever in question after the work is completed, such as in the case of unresolved claims or legal actions. Records may also be necessary to satisfy insurance requirements.

Contract interpretation – Contract interpretation is based on an analysis of the intent of the parties to the contract and a few guidelines. One such guideline is that the contract supersedes any memos, conversations, or discussions that may have occurred prior to the contract signing

Termination – The contract should have provisions for termination. Termination can be done for cause or for convenience. Termination is a serious issue, and one that has lasting effects on the project.

Inspections and audits – The buyer may choose to conduct inspection audits during execution to verify the seller’s work

Payment systems – usually accounts payable systems of the buyer that pays the vendor after the work has been verified

Important points to remember

1.          Contracts require formality

2.          All products and project management requirements for the procurement work should be specifically stated in the contract

3.          If it is not in the contract, it can only be done if a formal change order to the contract is issued

4.          If it is in the contract, it must be done or formal change order must be approved by both parties

5.          Changes must be submitted and approved in writing

6.          Contracts are legally binding: the seller has no choice but to perform as agreed in the contract

7.          Contracts should help diminish project risk

8.          Most governments back all contract that fall within their jurisdiction by providing a court system for dispute resolution.

9.          Important list of terms

a.       Price

b.        Profit (fee)

c.         Cost

d.        Target price

                                                               i.      Target price = target costs + target fees

e.        Sharing ration

                                                               i.      Incentives take the form of a formula, usually expressed as a ratio

                                                             ii.       This ratio describes how the cost savings or cost overrun will be shared with the buyer, their first number being the account the buyer will keep and the second number being the amount the seller will keep

f.         Ceiling price

                                                               i.      This is the highest price the buyer will pay

g.       Point of Total Assumption (PTA)

                                                               i.      This only applies to fixed price incentive fee contracts and refers to the amount above which the seller bears all the loss of a cost overrun

                                                             ii.       Costs that go above the PTA are assumed to be due to mismanagement

                                                            iii.       Sellers will sometimes monitor their actual costs against the PTA to make sure they are still receiving a profit for completing the project

                                                            iv.       PTA = [(ceiling price – target price)/buyer’s share ratio] + target cost

10.      Things the project manager must watch out for in a bidder conference:

a.       Collusion

b.       Seller not asking questions in front of the competition

c.        Making sure all questions and answers are put in writing and issued to all potential sellers. This ensures all sellers are responding to the same procurement statement of work.

11.      All work and legal requirements in the contract must be accomplished, however small and however seemingly unimportant

12.      Project manager must help uphold all parts of the contract, not just the project scope.