Education Edge PMP Decoded Day 27, 28 and 29 Procurement Knowlede Area

Procurement Knowledge Area Summary

§  Procurement Statement of Work (SOW) is a legal document subject to legal reviews, legal advise should be sought throughout the whole procurement process §  sellers are external to the project team §  need to go through all 4 processes for each and every procurement §  contract elements: offer (seller offer buyer), acceptance (buyer criteria), capacity (physical/financial capabilities), consideration (seller receive), legal purpose (must be legal under law) §  best if contract is signed after PM is assigned §  PM needs to understand terms and conditions, identify risks, include procurement time in schedule and involve in negotiations §  Centralized contracting vs decentralized contracting §  sole source, single source (preferred), oligopoly (very few sellers) §  procurement categories: major complexity (high risk), minor complexity (low risk, expensive), routine purchase (Commercial Off the Shelf Products COTS), goods and services (to perform part of our product) §  a contract is not required to be written, it can be verbal or handshake, for internal projects, formal contract is best §  procurement applies to actors (as a service) §  immaterial breach is minor breach §  point of total assumption (PTA) = Target Cost + (Ceiling Price – Target Price) / % Share of Cost Overrun 1. Plan Procurement Management 2. Conduct Procurement 3. Control Procurements 4.  Close Procurements

Plan Procurement Management

§  determine whether to obtain products/services outside of organization §  identify possible sellers and pre-meeting with them §  identify explicitly what is needed §  make-or-buy analysis is a compulsory process, needs to take risks into considerations §  carefully written terms and conditions can transfer/share risks §  teaming agreements or joint ventures §  procurement documents: request for proposal (RFP), invitation for bid (IFB), request for quote (RFQ), request for information (RFI), tender notice, invitation for negotiation, seller initial response §  the procurement management plan specifies how a project will acquire goods/services from outside, includes: contract type, risk management, constraints and assumptions, insurance requirements, form and format, pre-qualified sellers, metrics used, etc. §  Procurement Statement of Work (SOW) – performance (describe what can be accomplished), functional (convey the end purpose or result), design (convey precisely what are to be done), can be developed by the seller or buyer – detail enough to allow the potential sellers to decide whether they want/are qualified (at a minimum) to pursue the work §  Contract Types: §  Firm Fixed Price (FFP) – the price is fixed, specifications are well known, risk on the seller §  Fixed Price Incentive Fee (FPIF) – incentives for faster/better than contracted §  Fixed Price with Economic Adjustment / Economic Price Adjustment (FPEA / FP-EPA) – inflation are taken into account §  Purchase Order (PO) – for off-the-shelf goods/services with published rates §  Cost Reimbursable (CR) / Cost Plus – buying the expertise (not the products), outcome is not clear, risk on the buyer, little incentive to control costs on buyer, need invoice audits §  Cost Plus Fixed Fee (CPFF) §  Cost Plus Incentive Fee (CPIF) – incentive for performance, sharing of unused money if under/over contracted amount §  Cost Plus Award Fee (CPAF) – award to be given based on agreed criteria, solely decided by the customer on the degree of satisfaction §  Cost Plus Percentage of Costs (CPPC) – illegal for contracts with US Government §  Cost Contract – no profit, for NGO §  Best Efforts – obligates the seller to utilize best attempts, high uncertainty in meeting the goal §  Time and Materials (T&M) – (hybrid type) when scope is not known, need constant monitoring to control schedule and cost, simple, for short duration, good for proof-of-concept type projects §  Point of Total Assumption – (in fixed-price (incentive fee) contracts) in budget overrun, the point at which the seller assumes all additional costs for delivering the product/service §  PTA = (Ceiling Price – Total Price) / Buyer’s Share Ratio + Target Cost §  target cost = total cost = estimated cost, total price = total cost + total profit §  Request for Proposal (RFP) – cost reimbursable contract, functional/performance SOW §  Invitation for Bid (IFB) / Request for Bid (RFB) – fixed-price contract, design SOW §  Request for Quote – time and material, any type of SOW §  Cancellation for Convenience – buyer can cancel and pay up to the point §  Cancellation for Cause – default by either party, may result in legal actions §  Escrow – survivability of seller in doubt, put the product in escrow (esp. if seller not give up intellectual properties) §  Force Majeure – standard disclaimer refers to ‘Acts of God’ §  Indemnification / Liability – responsible party §  LOI Letter of Intent – not legally binding §  Privity – the contractor may use sub-contractor, no direct contractual relationship with buyer §  Retainage – amount to be withheld to ensure delivery §  Risk of Loss – how the risk is shoulder by the parties §  Time is of the Essence – delay in delivery will cause cardinal breach of contract §  Work Made for Hire – all work owned by the buyer §  Sole Source vs Single Source (preferred vendor – for long-term relationship) §  Evaluation Criteria: risk, understanding of need, life-cycle cost, technical capability, management approach, technical approach

Conduct Procurements

§  identify the sellers and award the contracts §  PM may not be the lead negotiator on procurement, but may be present to assist §  may need senior management approval before awarding the contracts §  bidder’s conference is a Q&A session with bidders, all bidders receive the same information (bidder are careful not to expose their technical approach during the session => may not have many questions) §  NOT to have secret meetings or communications with individual vendors §  may set up qualified sellers lists §  review seller proposals: weighting systems, independent estimates, screening systems (screen out non-qualified vendors), seller ratings systems (for past performance), expert judgement §  Contract Negotiations and Tactics §  Fait Accompli – not negotiable terms §  Deadline – deadline for deliverables §  Good Guy/ Bad Guy – one friendly, one aggressive §  Missing Man – decision maker is missing §  Limited Authority – not given authority §  Fair and Reasonable – what is fair? §  Unreasonable – making unreasonable demands §  Delay – esp in critical moments §  Attack – force compliance §  Agreement is legally binding and should include (PM should NOT attempt to write the agreement): §  statement of work, schedule baseline, performance reporting, period of performance, roles and responsibilities, warranty, payment terms, fees and retainers, incentives, liability, penalties, etc.

Control Procurements

§  performed by both seller and buyer §  manage procurement relationships, monitor contract performance, make change and corrections §  the procurement administrator may be external to the project team §  may identify early signs and capture details for pre-mature termination of contract §  the claims administration process deals with changes/disputes, disputes is best to be settled through negotiation > ADR §  may need Alternative Dispute Resolution (ADR) by 3rd parties in case disputes cannot be settled §  ForFixed Price contracts, look out for Bait and Switch (replace with cheaper materials), look out for excessive change requests §  For Cost Reimbursable contracts, audit all invoices, look out for additional charges, tie payment to milestones, make sure people with the required skill sets are doing the job §  For Time and Materials contracts, ensure hours are not padded, follow the milestone dates §  Contract Change Control System: for handling change requests (define who has the authority to approve changes (usually not the PM, but may be assigned the authority)) §  Work performance data includes: the cost incurred and the invoice needs to be paid §  OPA may include the seller’s performance

Close Procurements

§  all work are completed, deliverables accepted, claims settled OR terminated by either party §  at completion / termination of contract §  prior to administrative closure of Close Project or Phase §  unresolved claims may be left for litigation after closure §  settlement of claims/invoices, audit, archive, lessons learned §  the contract is complete when all the specifications are satisfied, no matter the customer is satisfied with the product or not §  Procurement Audit is the structured review of the procurement process from Plan Procurement Management through Control Procurements, is used to capture lessons learned from the procurement exercise §  once a procurement is cancelled, the next process will be the close procurements