Project Procurement Management

Mohammad A. Rob

Importance of Project Procurement Management

Procurement means acquiring goods and/or services

from an outside source

Other terms include purchasing and outsourcing

Many information technology projects involve the use of

goods and services from outside the organization, and

the term outsourcing is commonly used

Many companies outsource their data operations or help

desk support to a specialized company

Many companies outsource the coding part of a system

to a software development company

Why Outsource?To reduce both fixed and recurrent costs

– outside contractors needs not to pay any benefit

To allow the client organization to focus on its core business– outsourcing IT functions, companies can focus on jobs that are

critical to the success of the organization

To access skills and technologies– organizations can gain access to specific skills and technologies

To provide flexibility– using outsourcing to provide extra staff during peak workloads

To increase accountability– Having a contract can clarify responsibilities and focus on

deliverables

Project Procurement Management

Why not Outsource?– An organization looses control on a project when it is

outsourced– One can become too dependent on particular

suppliers. If a supplier goes out of business, it could cause a great deal of damage to the project

Project procurement management includes the processes required to acquire goods and services, to attain project scope, from outside the performing organizations

Project Procurement Management Processes

Procurement planning: Determining what to procure and when. What to outsource, type of contract, creating statement of work and procurement management plan

Solicitation planning: Documenting product requirements and identifying potential sources. Writing Request for Proposal (RFP) and developing evaluation criteria

Solicitation: Obtaining quotations, bids, offers, or proposals as appropriate. Advertisement, holding bids, and receiving proposals or bids

Source selection: Choosing from among potential vendors, negotiating contracts, and awarding the contract

Contract administration: Managing the relationship with the vendor. Monitoring contract performance, making payments, awarding contract modifications

Contract close-out: Completion and settlement of the contract.Product verification, formal acceptance, and closure

Project Procurement Management Processes and Key Outputs

Procurement Planning ProcessProcurement planning involves identifying

which project needs can be best met by using products or services outside the organization

It includes deciding– whether to procure– how to procure– what to procure– how much to procure– when to procure

Procurement Planning

The inputs to this process are scope statement, product description (specification in case of software), market conditions, constraints, and assumptions

Major tools are:– Make-or-buy analysis: determining whether a particular product

or service should be made or performed inside the organization or purchased from someone else. Often involves comparing cost estimation between internal development and outsourcing

– Expert judgement: both internal and external, can provide valuable inputs in procurement decisions

– Type of contract:fixed price or lump-sum, cost-reimbursable, time and material

The outputs are procurement management plan and statement of work

Types of ContractsFixed price or lump sum: involves a fixed total price for a

well-defined product or service. The buyer incurs little risk in this case

Cost reimbursable: involve payment to the seller for direct and indirect actual costs. – Direct costs (salary, hardware, software) can be traced back

item by item. – Indirect cost such as supplies, utility bills, work space; sometime

cannot be traced back dollar-by-dollar

Time and Material: combination of both fixed and reimbursable contract. Example: cost of a hardware and its delivery

Unit price contracts: require the buyer to pay the seller a predetermined amount per unit of service

Cost Reimbursable ContractsThere are three types of reimbursable contracts:

– Cost plus incentive fee (CPIF): the buyer pays the seller for allowable performance costs plus a predetermined fee and an incentive bonus. For example, a supplier would receive 10% more of their fee if the product is supplied one month early

– Cost plus fixed fee (CPFF): the buyer pays the seller for allowable performance costs plus a fixed fee payment usually based on a percentage of estimated costs

– Cost plus percentage of costs (CPPC): the buyer pays the seller for allowable performance costs plus a predetermined percentage based on total costs

Contract Types Versus RiskContracts can be risky. The risk depends on the type of

contract. In some contracts, the buyers incurs more risk than the seller; in others, the opposite is true

Procurement Management Plan

The procurement plan is an output of the procurement planning process. It includes information such as:– What type of contract will be used?– Evaluation criteria and the responsible person– The relationship of project group to the procurement

department of the organization. Example: Who offers a contract? - project manager or vice president

– Any standard procurement document to be used– How multiple providers will be managed?– How procurement will be coordinated with other

project activities.

Statement of Work (SOW)

A statement of work is a description of the work required for the procurement

It is type of scope statement that describes the work in sufficient detail for the supplier to understand whether they are capable of providing the product or service

Many contracts, or other mutually binding agreements, include SOWs

A good SOW gives bidders a better understanding of the buyer’s expectations

Many organizations use templates for SOW

Statement of Work (SOW) TemplateI. Scope of Work: Describe the work to be done in detail. Specify the hardware and

software involved and the exact nature of the work.

II. Location of Work: Describe where the work must be performed. Specify thelocation of hardware and software and where the people must perform the work

III. Period of Performance: Specify when the work is expected to start and end,working hours, number of hours that can be billed per week, where the work mustbe performed, and related schedule information.

IV. Deliverables Schedule: List specific deliverables, describe them in detail, andspecify when they are due.

V. Applicable Standards: Specify any company or industry-specific standards thatare relevant to performing the work.

VI. Acceptance Criteria: Describe how the buyer organization will determine if thework is acceptable.

VII. Special Requirements: Specify any special requirements such as hardware orsoftware certifications, minimum degree or experience level of personnel, travelrequirements, and so on.

Solicitation Planning ProcessSolicitation planning involves preparing the documents

needed for solicitation and determining the evaluation criteria for the contract award. Two common documents are:– Request for Proposals: used to solicit proposals from

prospective suppliers. In this case, the product scope is not well-defined. The buyer may choose a particular option out of several options provided by various suppliers

– Requests for Quotes: used to solicit bids or quotes for well-defined product or item

– Invitations for bid or negotiation, and initial contractor responses are also part of solicitation planning

Outline for a Request for Proposal (RFP)

I. Purpose of RFP

II. Organization’s Background

III. Basic Requirements

IV. Hardware and Software Environment

V. Description of RFP Process

VI. Statement of Work and Schedule Information

VII. Possible Appendices

A. Current System Overview

B. System Requirements

C. Volume and Size Data

D. Required Contents of Vendor’s Response to RFP

E. Sample Contract

Solicitation Process

Solicitation involves obtaining proposals or bids from prospective sellers

Organizations can advertise to procure goods and services in several ways– approaching the preferred vendor– approaching several potential vendors– advertising to anyone interested

A bidders’ conference, or pre-bid conference can help clarify the buyer’s expectations

Source Selection ProcessSource selection involves evaluating bidders’ proposals,

choosing the best one, negotiating the contract, and awarding the contract

Many factors aside from cost or price may need to be evaluated in the selection process– price might be the primary factor for off-the-shelf items, but the

lowest proposed price may not be the lowest cost if the seller seems to be unable to deliver on time

– proposals are often separated into technical (approach) and commercial (price) sections

– multiple sources may be needed for critical products It is helpful to prepare formal evaluation criteria for

selecting vendorsBuyers often create a “short list” of possible suppliers,

and then request detailed proposals from them

Source Selection Process

The inputs to the source selection is bid proposal, evaluation criteria, and organizational policies

Tools and techniques are:– Contract negotiation: involves clarification and mutual

agreement on the structure and requirements of the contract prior to the signing of the contract

– Weighting system: a method of quantifying qualitative data to minimize the personal prejudice or influence of source selection

– Screening system: involves establishing minimum requirements of performance for one or more of the evaluation criteria

– Independent estimates: the procuring department may prepare its own independent estimates as a check on proposed pricing

The output from the source selection is a contract. – It is a mutually binding agreement that obligates the seller to

provide the specified product and obligates the buyer to pay for it.

Sample Proposal Evaluation Sheet

Many organizations suffered by only paying attention to the technical content - not emphasizing management issues. Experts suggest that technical criteria should not be given more weight that management or cost criteria

Detailed Criteria for Selecting VendorsAfter developing a short list of suppliers, a buyer often follow with a more detailed proposal evaluation process as shown here

Contract Administration ProcessContract administration ensures that the seller’s

performance meets contractual requirementsContracts are legal relationships, so it is important that

legal and contracting professionals be involved in writing and administering contracts

Contract administration includes application of appropriate project management processes such as – project plan execution: to authorize contractor’s work at the

appropriate time– performance reporting: to monitor contractor cost, schedule, and

technical performance – quality control: to inspect and verify the adequacy of the

contractor’s product– change control: to ensure that changes are properly approved

and that all involved parties know about the change

Contract Administration ProcessContract administration also has a financial component.

Payment terms should be defined within the contract and must involve a specific linkage between the seller progress made and seller compensation paid

The inputs to contract administration are: contract, work results, change requests, and seller invoices

Tools and techniques for contract administration are– contract change control system: defines the process by which

the contract can be modified – performance reporting: provides management with information

about how effectively the seller is achieving contractual objectives

Major outputs to the contract administration are– correspondence: buyer/seller communication– contract changes

Suggestions on Change Control for Contracts

Changes 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 approved

Evaluation 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 phone calls

Contract Close-Out Process Contract close-out includes

– product verification to determine if all work was completed correctly and satisfactorily

– administrative activities to update records to reflect final results– archiving information for future use

The input to contract close-out is contract documentation. It includes the contract and its supporting documents such as schedules, requested and approved contract changes, invoices, payment records, etc.

The tools for close-out is procurement audits, which is a structured review of the procurement process - from procurement planning through contract administration. The objective is to identify successes and failures during the procurement process

The output to the contract close-out are– contract file: a complete set of indexed records prepared to be included

in the final project records

– final acceptance and closure: written notice of completion to the seller