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
2. Conduct Procurement
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
§ For Fixed 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
