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
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
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