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Friday, December 16, 2011

Chapter 19: Procurement Management

Aim: To understand the Plan Procurements process.

Procurement management involves the relationship between the buyer and the seller when products, services, or other results are being purchased by the project team in order to complete the project. Key PMI principles for procurement management are:
• The contract statement of work (SOW) is a key document that defines the work in order to allow buyers the ability to evaluate and bid on the work.
• There are three primary contract types:
o Fixed price
o Time and material
o Cost reimbursement
• The risk to both the buyer and seller depends on the type of contract chosen.
• The contract is a formal, written document and any changes are submitted in writing.

The table below shows the inputs, tools and techniques, and outputs for the plan procurements process.

Plan Procurements
Inputs Tools & Techniques Outputs

Scope baseline
Requirements documentation
Teaming agreements
Risk register
Risk-related contract decisions
Activity resource requirements
Project schedule
Activity cost estimates
Cost performance baseline
Enterprise environmental factors
Organizational process assets

Make-or-buy analysis
Expert judgment
Contract types

Procurement management plan
Procurement statements of work
Make-or-buy decisions
Procurement documents
Source selection criteria
Change requests
The Make or Buy Decision

The first step in procurement is taking the Make or Buy decision. This decision is made during the plan purchases and acquisition process. An analysis is done to determine if the product or service can be produced by the project team or if it should be purchased. This analysis might also include buying versus renting/leasing a product. For ex: Lets say in a construction company leasing a concrete mixer costs $500 per week to lease and $10,000 to buy, the company will take the decision on how long they intend on using the mixer. If they plan to use it for more than 20 months, then buying would be a wiser choice than leasing it out.

The Contract Statement of Work

In addition to making the make/buy decision during the plan purchases and acquisition process, it is during this step that the contract statement of work (SOW) is developed and the type of contract to be used is determined. The SOW is a document that defines the work to be performed. The contract SOW is developed from the scope statement and WBS and should be sufficiently detailed to allow the potential sellers to determine their ability to perform the work. A project can have multiple SOWs. The SOW will be the benchmark against with the work of the seller will be compared. The seller is liable only for all the work that is outlined in the SOW and nothing more. So, it is imperative that the SOW is complete in all aspects before the contract is signed.

Contract Types

A number of contract types are used in the procurement process. They are:
1. Fixed Price Contracts
a. Firm Fixed Price or Lump Sum (FFP)
b. Fixed Price Incentive Fee (FPIP)
c. Fixed Price with Economic Price Adjustment (FP – EPA)
2. Purchase Order
3. Cost Reimbursable Contracts
a. Cost Plus Fixed Fee (CPFF)
b. Cost Plus Incentive Fee (CPIF)
c. Cost Plus Award Fee (CPAF)
4. Time & Material (T&M)

From a buyer perspective the Fixed Price contracts are the least risky and Cost Reimbursable contracts are the most risky. From a seller perspective it is the other way round.

To know more about the different types of Contracts Click Here

The Procurement Management Plan

The procurement management plan is developed to describe how procurement activities will be carried out in the project. The plan can include content that provides guidance for
• Type of contracts to be used
• Risks and risk management issues
• Criteria for independent estimates
• Standard procurement documents and procedures
• Coordinating procurement with other projects and multiple vendors
• Project assumptions or constraints that affect procurements
• Handling procurement schedules
• Addressing make-or-buy decisions
• Identifying and managing performance requirements
• Identifying prequalified sellers
• Procurement metrics used to evaluate sellers and manage contracts

Exam Watch:
The steps of the procurement process are only necessary if the decision is made to buy outside resources. If the project decides to make it themselves, then the Procurement part is redundant and not required.

To know more about the Procurement Management Plan Click Here

Prev: Chapter 18

Next: Chapter 20

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