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Chapter 12

Project Procurement Management1Importance of Project Procurement Management2Procurement means acquiring goods and/or services from an outside sourceOther terms include purchasing and outsourcingOrganizations or individuals who provide procurement services are referred to as suppliers, vendors, contractors or sellers.Experts predict that global spending on computer software and services will continue to growPeople continue to debate whether offshore outsourcing helps their own country or not

Why Outsource?3To reduce both fixed and recurrent costs like costs of hiring, firing, and reassigning people to projects or paying their salaries when they are between projectsTo allow the client organization to focus on its core business like marketing, customer services, and new product designTo access skills and technologies like an expert in a particular field or using expensive hardware or software for a short time.To provide flexibility like staffing during peak work loadTo increase accountability like well-written contract is legally binding and provides accountability.Why not to Outsource?4An organization outsourcing workDoes not have control over those aspects which are carried out by suppliersBecomes increasingly dependant on the suppliers. In fact if the supplier goes out of business the project may suffer greatlyGets exposed in terms of giving strategic information to its suppliers.Contracts5A contract is a mutually binding agreement that obligates the seller to provide the specified products or services and obligates the buyer to pay for themContracts can clarify responsibilities and sharpen focus on key deliverables of a projectBecause contracts are legally binding, there is more accountability for delivering the work as stated in the contractProject Procurement Management Processes6Project procurement management includes the processes for acquiring goods and services for a project from outside the performing organizationProcesses include:Planning procurements: determining what to procure, when, and howConducting procurements: obtaining seller responses, selecting sellers, and awarding contractsAdministering procurements: managing relationships with sellers, monitoring contract performance, and making changes as neededClosing procurements: completing and settling each contract, including resolving of any open itemsProject Procurement Management Summary7

Planning Procurements8Identifying which project needs can best be met by using products or services outside the organizationIt involves deciding whether to procure any goods or services from outside the organization or notOne of the outputs of this process is the Make or Buy decision.If there is no need to buy any products or services from outside the organization, then there is no need to perform any of the other procurement management processesInputs needed for planning procurements include scope statement, WBS and WBS dictionary, project management plan, enterprise environmental variables and organizational process assets.Tools and Techniques for Planning Purchases and Acquisitions9Make-or-buy analysis: general management technique used to determine whether an organization should make or perform a particular product or service inside the organization or buy from someone elseOften involves financial analysisExperts, both internal and external, can provide valuable inputs in procurement decisionsMake-or-Buy Example10Assume you can lease an item you need for a project for $800/day; to purchase the item, the cost is $12,000 plus a daily operational cost of $400/dayHow long will it take for the purchase cost to be the same as the lease cost?Make-or Buy Solution11Set up an equation so both options, purchase and lease, are equalIn this example, use the following equation; let d be the number of days to use the item:$12,000 + $400d = $800dSubtracting $400d from both sides, you get:$12,000 = $400dDividing both sides by $400, you get:d = 30If you need the item for more than 30 days, it is more economical to purchase it

Types of Contracts12Different types of contracts can be used in different situations:Fixed price or lump sum contractsCost reimbursable contractsTime and material contractsUnit price contractsA single contract can actually include all four of these categories if it makes sense for that particular procurementFixed-Price or lump-sum contracts13Involves fixed price for a well-defined product or serviceIn this type of contract a specific price is agreed for the good or service being sold. In project terms, the buyer and seller will agree on a well-defined deliverable for a specific priceIn this type of contract the bigger risk is borne by the seller. They must make sure they make a profit even given some unknowns such as increasing costs or delays increation of the deliverableFixed price contracts can be catastrophic for both buyer and seller if there isnt a well defined deliverable.Firstly, often the sellers profit is eroded as they compromise to meet the buyers demands.Secondly, the buyermay haveto pay morefor change requests when the supplier is no longer willing to compromise around what, in their eyes, appear to be changing requirements

Fixed-Price or lump-sum contracts (contd)14Example: a company awards fixed price contract to purchase 100 laser printers with a certain print resolution and print speed to be delivered to a specific location within two monthsAnother type of contract you might encounter is the fixed-price plus incentive contract. Here the contract includes an incentive or bonus, typically for the early or on-time completion of the deliverable.

Cost-Reimbursable Contracts15Involves payment to supplier for direct and indirect costs.In this type of contract all the costs that the seller incurs during the project are charged back to the buyer, and thus the seller is reimbursed costs. The costs which are allowable will be defined in the contract These contracts are often used for projects that include providing goods and services that involve new technologies.In this type of contract more risk is carried by the buyer as the final cost is uncertain. If problems arise during the execution of the project then the buyer will have to spend more.The advantage of this type of contract to the buyer is that obviously scope changes can be easily made to the work being done. One problem with this type ofcontract is that the seller has very little incentive to be efficient and productive and complete the work quickly. It should come as no surprise that this type of contract is most often used when there is a lot of uncertainty associated with the final deliverable.

Cost Reimbursable Contracts(Contd)16There are three types of Cost-Reimbursable contracts depending upon the amount of risk a buyer incursCost plus incentive fee (CPIF): the buyer pays the supplier for allowable performance costs plus a predetermined fee and an incentive bonus. If the final cost is less than the expected cost, both the buyer and the supplier benefit from the cost savings, according to a pre-negotiated share formulaCost plus fixed fee (CPFF): the buyer pays the supplier for allowable performance costs plus a fixed fee payment usually based on a percentage of estimated costs. This fee does not vary unless the scope of the contract changes.Cost plus percentage of costs (CPPC): the buyer pays the supplier for allowable performance costs plus a predetermined percentage based on total costs. From the buyers perspective, this is the least desirable type of contract because the supplier has no incentive to decrease costs. In fact the supplier may be motivated to increase costs as it would increase the profits based on the percentage of costs. This type of contract is sometimes used in construction industry. All the risk is borne by the buyer

Time and Material Contracts17This type of contract is a hybrid between fixed-price and cost-reimbursable contracts. This is opposed to a fixed-price contract in which the buyer agrees to pay the contractor a lump sum for work, no matter what the contractors pay their employees etc.Time and materialsis a standard phrase in acontractin which the buyer agrees to pay thecontractorbased upon the work performed by the contractor's employees and subcontractors, and for materials used in the construction (plus the contractor's mark up), no matter how much work is required to complete constructionThis type of contract is often used for services that are needed when the work cannot be clearly specified, and total costs cannot be estimated in a contract.

Time and Material Contracts (Contd)18Time and materials contracts are not common because of the lack of an upper limit for the price paid by the buyer. However, if there is no time to send the job out for bids and complete the work, a time and materials arrangement can save time. It is also a common arrangement where the original fixed price contractor abandons the work and another contractor must complete the unfinished job.Unit Price Contracts19Can be used in various types of contracts to require the buyer to pay the supplier a predetermined amount per unit of product or service.The total value of the contract is the function of the quantities needed to complete the work.Buying an anti-virus software with its different components like spyware, web and email protection etc. Its a flexible strategy and benefits both the buyer and seller.Contract Clauses20Contracts should include specific clauses that take into account issues that are unique to the projectCan require various educational or work experience for different pay rightsA termination clause is a contract clause that allows the buyer or supplier to end the contractProcurement Management Plan21Describes how the procurement processes will be managed, from developing documentation for making outside purchases or acquisitions to contract closureContents may vary based on project needs likeStandard procedures, documents or templatesGuidelines for supplier evaluationsConstraints and assumptions related to procurementsRisk mitigation strategies including insurance of goods etc.Guidelines for identifying prequalified or preferred sellers

Contract Statement of Work (SOW)22A statement of work is a description of the work required for the procurementIf a SOW is used as part of a contract to describe only the work required for that particular contract, it is called a contract statement of workA SOW is a type of scope statementA good SOW gives bidders a better understanding of the buyers expectationsStatement of Work (SOW) Template23

Procurement Documents24Request for Proposals: used to solicit proposals from prospective sellersA proposal is a document prepared by a seller when there are different approaches for meeting buyer needs Requests for Quotes: used to solicit quotes or bids from prospective suppliersA bid, also called a tender or quote (short for quotation), is a document prepared by sellers providing pricing for standard items that have been clearly defined by the buyer Request for Proposal (RFP) Template25

Evaluation Criteria26Its important to prepare some form of evaluation criteria, preferably before issuing a formal RFP or RFQBeware of proposals that look good on paper; be sure to evaluate factors, such as past performance and management approachCan require a technical presentation as part of a proposalConducting Procurements27Deciding whom to ask to do the workSending appropriate documentation to potential sellersObtaining proposals or bidsSelecting a sellerAwarding a contract

Approaches for Procurement28Organizations can advertise to procure goods and services in several ways:Approaching the preferred vendorApproaching several potential vendorsAdvertising to anyone interestedA bidders conference can help clarify the buyers expectations

Source Selection29Evaluating proposals or bids from sellersChoosing the best oneNegotiating the contractAwarding the contractSample Proposal Evaluation Sheet30

Seller Selection31Organizations often do an initial evaluation of all proposals and bids and then develop a short list of potential sellers for further evaluationSellers on the short list often prepare a best and final offer (BAFO)Final output is a contract signed by the buyer and the selected sellerAdministering Procurements32Ensures that the sellers performance meets contractual requirementsContracts are legal relationships, so it is important that legal and contracting professionals be involved in writing and administering contractsIt is critical that project managers and team members watch for constructive change orders, which are oral or written acts or omissions by someone with actual or apparent authority that can be established to have the same effect as a written change orderSuggestions for Change Control in Contracts33Changes to any part of the project need to be reviewed, approved, and documented by the same people in the same way that the original part of the plan was approvedEvaluation of any change should include an impact analysis; how will the change affect the scope, time, cost, and quality of the goods or services being provided? Changes must be documented in writing; project team members should also document all important meetings and telephone calls or emails

Suggestions for Change Control in Contracts (continued)34Project managers and teams should stay closely involved to make sure the new system will meet business needs and work in an operational environmentHave backup plansUse tools and techniques, such as a contract change control system, buyer-conducted performance reviews, inspections and audits, and so on

Closing Procurements35Involves completing and settling contracts and resolving any open itemsThe project team should:Determine if all work was completed correctly and satisfactorilyUpdate records to reflect final resultsArchive information for future useThe contract itself should include requirements for formal acceptance and closureTools to Assist in Contract Closure36Procurement audits identify lessons learned in the procurement processNegotiated settlements help close contracts more smoothlyA records management system provides the ability to easily organize, find, and archive procurement-related documentsUsing Software to Assist in Project Procurement Management37Word processing software helps write proposals and contracts, spreadsheets help evaluate suppliers, databases help track suppliers, and presentation software helps present procurement-related informationE-procurement software does many procurement functions electronicallyOrganizations also use other Internet tools to find information on suppliers or auction goods and servicesSyllabus for Final Exam38All material covered till mid term plus following topicsProject Quality ManagementProject Human Resource ManagementProject Risk ManagementProject Integration ManagementProject Procurement ManagementNote: The final paper would be of 60 marks and of 3 hrs duration