Education Edge – Procurement Knowledge Area

Knowledge Area #9 – Procurement

Critical Highlights:

• 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

Processes (4)

1. Plan Procurement Management

2. Conduct Procurement

3. Control Procurements


1. 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 aretaken 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


2. 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 – especially 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.


3. 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


4. 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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