Session 19 4th edition PMP

project Procurement Management

Project Procurement Management

Knowledge AreaProcess

Initiating Planning Executing Monitoring & Contol Closing

Procurement

Plan procurement Conduct procurement

Administer procurement

Close procurement

Enter phase/Start project

Exit phase/End project

InitiatingProcesses

ClosingProcesses

PlanningProcesses

ExecutingProcesses

Monitoring &Controlling Processes

Project Procurement Management

• The process necessary to process and acquire product or services, or result needed from outside the project team.

• Involve planning, acquiring the product or services from sources, choosing a source, administering the contract, and closing out the contract.

• Can be applied to internal work orders, formal agreements, and contracts between organization units within single entity.

Centralized contracting- One procurement

department handle procurements on many projects

- Project manager contact to procurement manager to help him

- Higher level of expertise in procurement

Decentralized Contracting- procurement department

handle procurements on the project

- Procurement manager is one of the team

- Increasing loyalty to project for procurement manager

Project Manager’s Role in Procurements

1- involved in the creation and negotiation of contracts

2-Identify risks and incorporate mitigation and allocation of risks into the

contract

3- Help tailor the contract to the unique needs of the project

4- Align schedule of the contract and monitoring Payment condition

5- Make sure procurement process done smoothly

6-Work with contract manager to manage changes to the contract

Plan Procurements

• the process of documenting project purchasing decisions, specifying the approach ,and identifying potential sellers

Inputs

1. Scope baseline2. Requirement documentation3. Teaming agreements4. Risk register5. Risk-related contract

decisions6. Activity resource requirements7. Project schedule8. Activity cost estimates9. Cost performance baseline10.Enterprise environmental

factors11.Organizational process assets

Tools & Techniques

1. Make-or-buy analysis2. Expert judgment3. Contract types

Outputs

1. Procurement management plan

2. Procurement statement of work

3. Make-or-buy decisions4. Procurement

documents5. Source selection criteria6. Change requests

Teaming Agreements

legal contractual agreements between two

or more entities to form a partnership or

joint venture,

Risk-Related Contract Decisions

insurance, bonding, services, and other

items as appropriate, that are prepared

to specify each party’s responsibility for

specific risks

Make-or-buy analysis

• Determine whether an organization should make or perform particular product or service by themselves or buy/acquire from others.

• Evaluate of the benefit and drawback• Often involves financial analysis• Make or buy analysis focus on:

– skills and resources– cost– time

Exercise• Purchase investment cost is 2000$, Daily cost

is 40$ and Daily lease cost 240$ How long will it take for the lease cost to be the same as the purchase cost?

2000+40*X=240*X

2000=240*X-40*X

2000=200*X

X=10 Days

Contract Types

1- Fixed-price (FP) contractsLump Sum, or Firm Fixed Price (FFP)

the price for goods is set at the outset and not subject to change unless the scope of work changesThe buyer must clarify the product or service

Fixed Price Incentive Fee (FPIF) gives the buyer and seller some flexibility in that it allows for deviation from

performance, with financial incentives tied to achieving agreed to metrics– Fixed Price with Economic Price Adjustment (FP-EPA)

whenever the seller’s performance period spans a considerable period of years, as is desired with many long-term relationships– Purchase order : simplest type of fixed-price contract; unilateral (signed by one party)

Examples:

FP: Contract = $1M

FPIF: Contract = $1M + for every month added $1000

FPEA: Contract = $1M + additional pricing based on

Government Center Bank depreciation rate.

PO: $1K per 1 metric ton

2-Cost-reimbursable (CR) contractsCost Plus Fixed Fee (CPFF) or Cost Plus Percentage of Cost (CPPC)

The seller is reimbursed for all allowable costs for performing the contract work, and receives a fixed fee payment calculated as a percentage of the initial estimated project costs Cost Plus Incentive Fee (CPIF) :

The seller is reimbursed for all allowable costs for performing the contract work and receives a predetermined incentive fee based upon achieving certain performance objectives as set forth in the contract.

Cost Plus Award Fee (CPAF)

The seller is reimbursed for all legitimate costs, but the majority of the fee is only earned based on the satisfaction of certain broad subjective

performance criteria defined and incorporated into the contract.

Examples:

: CPPC = Cost plus 10 percent of costs as a fee

CPIF: look At exercises

CPAF: Contract = Cost Plus 5.000$ for every month

production exceeds 100.000 unit the maximum award 50.000

Exercise: Cost Plus incentive fee

Target cost $210.000

Target fee $25.000

Target price $235.000

Sharing Ratio 80/20

Actual cost $200.000

Final fee

Final price

Cost Saving =210-200=$10KSeller share saving =20% *10K = $2KFinal Fee = 25+2= $27K Final Price =200+27=$227 K

Exercise 2


Target fee $20.000


Sharing Ratio 80/20

Actual cost $160.000

Final fee

Final price

seller exceeded Cost excess cost =150-160=$10KSeller share loss =20% *10K = $2KFinal Fee = 20-2=$ 18KFinal Price =160+18=$178 K

Exercise 3


Target fee $30.000


Sharing Ratio 60/40

Actual cost $210.00

Ceiling Price $ 200.000

Final fee

Final price

seller exceeded Cost excess cost =150-210=$60KSeller share loss =40% *60K = $24K Fee = 30-24=$ 6K Price =210+6=$216 KThe seller will only get the ceiling $200K he pays 10K $

• Time and Material Contracts (T&M)

• Hybrid type of contractual arrangement that contain

aspects of both cost-reimbursable and fixed-price

contracts

Contract Types vs. Risk

Fixed Price

FFP

FPIF

Time and Materials

Cost Reimbursable

CPIF

CPFF

CPF

CPPC

• Effect of contract type on buyer & seller risk

SELLER RISK

High

Low

BUYERRISK

Low

High

Plan Procurement Output

• Procurement Management plan – Describe how procurement process will be managed– Guidance for any procurement process

• Procurement Statement of Work (SOW)– Develop from scope baseline– Include only the portion will be included within the contract– This can be revised/refined through the procurement process until

signed

• Make-or-buy decisions– The conclusion reach regarding what product/service/result will be

acquired from outside

PROCUREMENT MANAGEMENT PLAN

Procurement Authority:Describe the project manager’s decision authority and limitations, including at least: budget, signature level, contract changes, negotiation, and technical oversight.

Roles and Responsibilities:

Project Manager:1. Define the responsibilities

of the project manager and their team.

Procurement Department:1. Describe the responsibilities of the procurement or

contracting representative and department.

Standard Procurement Documents:1. List any standard procurement forms, documents, policies, or procedures relevant to

procurements.

Contract Type:Identify the contract type, incentive or award fees, and the criteria for such fees.Define bonding or insurance requirements that Bidders must meet.

Weight

Criteria

Identify selection criteria and their relative weighting. Include information on independent cost estimates if appropriate.

Identify and document relevant assumptions and constraints related to the procurement process.

Procurement Assumptions and Constraints:

Bonding and Insurance Requirements:

Define bonding or insurance requirements that bidders must meet.



Procurement Authority:The Project Manager will provide oversight and management for all procurement activities under this project. The Project Manager will work with the project team to identify all items to be procured for the successful completion of the project. . The contracts and purchasing department will review the procurement items, determine whether it is advantageous to make or buy the items, and begin the vendor selection, purchasing and the contracting process

Project Manager:1. Provide oversight and

management for all procurement activities

2. identify all items to be procured for the successful completion of the project.

Procurement Department:1. review the procurement items2. begin the vendor selection, purchasing and the contracting

process.

Standard Procurement Documents:1. procurement documents, : request for proposal , proposal , qualified seller list.

contract.

Contract Type:Fixed price incentive fee .the contractor must present letter of intent

Weight CriteriaThere are technical and financial evaluation there are minimum requirment of the source selection criteria

Project schedule is not flexible and the procurement activities, contract administration, and contract fulfillment must be completed within the established project schedule.

Procurement Assumptions and Constraints:

Bonding and Insurance Requirements:

Previous expererience for contractor to procure in same field.


Procurement Documents

• May includes:– Information for Sellers– Contract statement of work– Proposed terms & conditions of the contract– Non-disclosure agreement (NDA) -- to disclose some confidential information

• Procurement documents, examples:– Request for Information (RFI)– Invitation For Bid (IFB)– Request For Proposal (RFP)– Request For Quotation (RFQ)

Source selection criteria

• Some criteria for evaluating proposals and bids (due diligence):– Understanding of need– Technical Capability– Past performance of sellers (experience)– Project management approach– Financial stability & capacity– Overall or life cycle cost– Risk– Warranty

QUESTIONS?

1- in a fixed price contract, the fee or profit is:A- unknown

B-part of negotiation involved in paying every invoice

C- applied as a line item to every invoice

D- determined with the other party at the end of the project.

2- which of the following is an advantage of centralized contracting?

A- easier access

B- no home

C- increased expertise

D- more loyalty to the project

3-the primary objective of incentive fee in a contract is to:

A- reduce costs for the buyer B- help the seller control costs

C-Synchronize objective

D- reduce risk for the seller by shifting risk to the buyer

4-Tree Consultancy is getting 200 computers

installed from a vendor. The vendor will be paid

the cost involved and a 10% incentive. Which

contract will be used in this case?

A-CPPC

B-CPIF

C-CPFF

D-Fixed Cost

•5-Sam Consultancy has a large internal project to be initiated. To

staff this project, Sam Consultancy is working with People

Consultancy to provide three resources for six months. The

resources will be part of the team managed by Sam Consultancy

for six months. Which contract type should be used by Sam

Consultancy ?

A.Purchase Order

B.Cost plus Fee

C.Fixed cost

D.Time and Material

Thank you

Session 19 4th edition PMP

Leadership & Management