Points to Remember: Project Procurement Management

Sometimes you need to hire an outside company to do some of your project work. That’s called procurement, and the outside company is called the seller.

The PMP exam is based on contracting laws and customs in the United States. If you are someone who hasnt spent time in the states or worked with a customer from the states, it would be useful if you visit http://www.acquisition.gov/ and gather some knowledge about the same.

Procurement is pretty straight forward, and the Procurement Management processes follow a simple order that you can figure out with just common sense. First you plan what you need to contract; then you plan how you’ll do it. Next, you send out your contract requirements to sellers. They bid for the chance to work with you. You pick the best one, and then you sign the contract with them. Once the work begins, you monitor it to make sure the contract is being followed. When the work is done, you close out the contract and fill out all the paperwork.

Teaming Agreenents are partnership documents that describe the relationship between a buyer and a seller when they’re working together as a team. When a buyer and a seller have a teaming agreement in place, they act as partners. They make management decisions together, and both have an increased stake in the outcome.

Contracting adds an extra dimension of risk to your project because your seller will have different management and policies. So managing risks is especially important!

force majeure - is a kind of clause that you’ll see in a contract. It says that if something like a war, riot, or natural disaster happens, you’re excused from the terms of the contract.

The point of total assumption is the point at which the seller assumes the costs. In a fixed price contract, this is the point where the costs have gotten so large that the seller basically runs out of money from the contract and has to start paying the costs.

You always put together procurement documents and source selection criteria before you start talking to individual sellers who want your business.

Buyer-conducted performance reviews let buyers check all of the work that the sellers are doing.

Whenever you see “inspection” or “audit” it means that you’re looking at the products that the seller delivered to see if they meet your standards.


Points to Remember - Other Topics:

Introduction to Projects & Project Management
Relationship Between Knowledge Areas & Process Groups
Project Integration Management
Project Scope Management
Project Time Management
Project Cost Management
Project Quality Management
Human Resource Management
Project Communication Management
Project Risk Management
Ethics & Professional Responsibility

Chapter 61: Conducting Procurements

As you learned in the previous section, procurement refers to obtaining (purchasing or renting) products, services, or results from outside the project team to complete the project. Procurement management is an execution of a set of processes used to obtain (procure) products, services, or results from outside the project team to complete the project. Procurement planning was discussed in the previous section, and implementation of this plan, conducting procurement,
is what we are going to do now.

The picture below explains the conducting procurements process.

Inputs to Conducting Procurements

The input items to conducting procurements are:
Procurement management plan - The major input to conducting procurements is the procurement management plan developed during procurement planning. The procurement management plan may have the following items of interest:

• Prequalified selected sellers
• Procurement metrics to be used to manage contracts and evaluate sellers
• Types of contracts to be used and the format for the contract statement of work
• Assumptions and constraints that could affect planned purchases and acquisitions
• Scheduled dates for contract deliverables
• Directions to be provided to the seller on developing and maintaining a contract work breakdown structure

Procurement documents package - This is the set of procurement documents put together during procurement planning. The buyer structures these documents with two goals in mind:

• To facilitate an accurate and complete response from each prospective seller
• To facilitate easy evaluation of the responses

These documents include the following:

• A description of the desired form of the response
• A relevant contract statement of work
• Any required contractual provisions, such as a copy of a model contract, and non-disclosure provisions

Different terms are used for these documents for different purposes:

• A term such as bid, tender, or quotation is used when the seller selection decision will be based on the price, when buying commercial or standard items.
• A term such as proposal is used when multiple factors are considered, such as cost, technical skills, and technical approach.
• Common names for these different kinds of documents include invitation for bid, request for quotation, tender notice, request for proposal, and contractor initial response.

The procurement documents should be rigorous enough to ensure consistent responses from different sellers that can be fairly compared to one another and flexible enough to allow sellers to offer suggestions on better ways to satisfy the requirements.

How are the requests sent to the potential sellers? This is done according to the policies of the buyer’s organization; for example, publication of the request in the public media, such as newspapers, magazines, and the Internet.

Source selection criteria - Also called evaluation criteria, this is developed by the buyer during procurement planning to rate responses from the sellers. The evaluation criteria could be as simple as the price for off the shelf standard items, or it could be a combination of factors for a more complex proposal. Following is a list of some examples of evaluation criteria.

• Cost - To evaluate the overall cost, you should consider all cost-related factors, such as:

o Purchase price
o Delivery cost
o Operating cost

• Business aspects - This can include the following factors:

o Business size and type - Does the business size or type meet a condition set forth in the contract, such as being a small business or a disadvantaged small business?
o Financial capacity - Does the seller have the financial capacity to do the job, or is the seller in a position to obtain the necessary financial resources to do the job?
o Production capacity and interest - Does the seller have the capacity and the interest to meet future potential requirements?
o References - Can the seller provide reliable references (such as from previous customers) verifying the seller’s work experience and history of compliance with contractual requirements?

• Management approach - If the procurement itself involves a project, does the seller have the ability to execute management processes and procedures to run a successful project?
• Rights - The following rights can be considered:

o Intellectual property rights - Will the seller own the intellectual property rights for the work processes or services that will be used to produce the deliverables?
o Proprietary rights - Will the seller have the proprietary rights for the work processes or services that will be used to produce the deliverables?

• Technical aspects - This includes the technical approach and capability:

o Technical approach - Will the technical methodologies, techniques, solutions, or services proposed by the seller meet the procurement requirements, or will they provide more than the expected results?
o Technical capability - Does the seller have or is the seller capable of acquiring the technical skills and knowledge required to produce the deliverables?

Partner agreements - You might be considering some sellers that already have some contracts or agreements signed with your organization. These agreements, also called teaming agreements, must also be honored while conducting procurements.

Organizational process assets - The organizational process assets relevant to requesting seller responses include the following:

• A preexisting list of prospective sellers
• A list of previously used or qualified sellers
• Information about past experiences with previously used sellers
• Organizational policies that could affect evaluating the responses and selecting the sellers.

Make-or-buy decisions made during procurement planning should also be considered during this process of conducting procurements. This topic was discussed in the chapter on procurement planning.

Tools and Techniques for Conducting Procurements

The first goal for the tools and techniques here is to find sellers and provide them with information about the requests for responses. The list of potential sellers can be developed from various sources, such as the World Wide Web, library directories, relevant local associations, trade catalogs, and the performing organization’s internal information base.
The Tools & Techniques used for conducting procurements are:

Bidder conferences - This refers to meetings with prospective sellers prior to preparation of a response to ensure that the sellers have a clear understanding of the procurement, such as the technical and contractual requirements. These meetings can generate amendments to the documents. All potential sellers should be given the same amount of information (or help) during this interaction so that each seller has an equal opportunity to produce the best response. These conferences are also called contractor conferences, vendor conferences, or pre-bid conferences.
Proposal evaluation techniques - Different techniques can be used to evaluate responses from sellers. All these techniques can use expert judgment and evaluation criteria. The common factors that can be considered in the evaluation include:

• Price - This can play a primary role in the selection of off-the-shelf standard items. However, you should consider that the lower price does not mean lower cost if the seller does not deliver on time.
• Multiple aspects - Proposals are usually evaluated for different aspects, such as technical and commercial. Technical refers to the overall approach, whereas commercial refers to the cost.
• Multiple sources - For products critical to the project, multiple sources (sellers) might be required. This redundancy will help mitigate such risks as failure to meet the delivery schedule or quality requirements.
Some techniques used to make the final selection of sellers are discussed in the following list:
• Independent estimates - The purpose of independent estimates is to have a check on the proposed pricing by the seller. The procuring organization prepares the independent estimate in house or has it done by a third party. Significant differences between the proposed price and the independent estimate mean that either the market has changed or the seller has failed to offer reasonable pricing due to such reasons as failure to understand the contract statement of work. The independent estimates are also called should-cost estimates.
• Seller rating system - A seller’s rating does not depend on a specific response that you are evaluating. Rather, the seller’s rating comes from the seller’s rating system, which is developed by multiple organizations based on multiple factors related to seller’s past performance, such as delivery performance, contractual compliance, and quality rating.
• Weighting system - The purpose of putting a weighting system in place is to have an objective evaluation as opposed to a subjective evaluation influenced by personal prejudice. The weighting system uses a method to quantify the qualitative data and typically involves the following steps:

1. Assign a numerical weight to each of the evaluation criteria according to its importance, such as w1, w2, and w3 for three criteria, and make these weights the same for each seller.
2. Rate the seller on each criterion, such as r1, r2, and r3. These ratings depend upon the seller.
3. Multiply the weight by the rate for each criterion.
4. Add the results in the previous step to compute an overall score, such as s1 for seller 1: s1 = r1 × w1 + r2 × w2 + r3 × w3.

• Expert judgment - Expert judgment is made by a committee that consists of experts from each of the disciplines covered by the procurement documents and the proposed contract. The committee can include experts from functional disciplines, such as accounting, contracts, engineering, finance, legal, manufacturing, and research and development.
Screening system - A screening system consists of minimum requirements as a threshold that must be met if the seller is to stay in the list of candidate sellers. It might, for example, consist of one or more evaluation criteria. The screening system can also use the weighting system and independent estimates.

Procurement negotiations - Procurement negotiations, also called the contract negotiations, have the following two-pronged goal:

• Clarify the structure and requirements of the contract
• Reach an agreement

Subjects covered during the negotiations might include:

• Applicable terms and laws
• Authorities, rights, and responsibilities
• Business management and technical approaches
• Contract financing
• Payments and price
• Proprietary rights
• Schedule
• Technical solutions

The conclusion of contract negotiations is a document, the contract, which can be signed by both the buyer and the seller. The final contract signed by both parties can be an offer by the seller or a counteroffer by the buyer. Sometimes for simple procurement items, the contract is nonnegotiable.

Trivia:
A contract is a mutually binding legal relationship subject to remedy in court. The project manager might not be the lead negotiator on the contract. However, the project manager might be required to be present during negotiations to provide any necessary clarification on the project requirements.

Advertising - The request for seller responses can be advertised in the public media or in relevant professional journals. Whether to use advertising depends on the organization’s policy. However, some government jurisdictions require public advertising of pending government contracts.

Internet search and expert judgment are other tools that can also be used during conducting procurements.

Output of Conducting Procurements

The output of conducting procurements includes the list of selected sellers and the contract awards for the selected sellers.

Selected sellers - This is the list of sellers that you have selected as a result of response evaluations.
Procurement awards - These are the contracts awarded to selected sellers. A contract is a legal document that obligates the seller to provide the specified products, services, or results and obligates the buyer to make the payment to the seller. The contract can be a simple purchase order or a complex document, depending on the nature of the procurement. A contract can include, but is not limited to, the following sections:

• List of deliverables and statement of work
• Schedule
• Acceptance criteria
• Change-request handling
• Inflation adjustments
• Insurance
• Limitation of liability
• Penalties and incentives
• Pricing and payment
• Product support
• Roles and responsibilities
• Termination and dispute-handling mechanism
• Warranty

Resource calendars - This contains information on the quantity and availability of the contracted (procured) resources—for example, the dates on which a resource will be active or idle.
Changes and updates - Conducting procurements can generate changes and updates such as the following:

• Change requests - The selection process can generate change requests for the project management plan and its subsidiary plans and components, such as the project schedule and the procurement management plan. These change requests must be processed through the integrated change control system before implementation.
• Updates to the procurement management plan - If a procurement-related change request is approved, the procurement management plan should be updated to reflect the change. This may include the scope baseline, schedule baseline, cost baseline, and procurement management plan. These changes or updates arise from the fact that procurement and the rest of the project are related to each other. For example, a change in the procurement fulfillment date will affect the schedule that depends on that fulfillment.

Prev: Performing Quality Assurance

Next: Summary - Managing Project Work

Chapter 45: Procurement Management Plan

In the previous chapter, we learnt that the outcome of the procurement planning process is the procurement management plan. In this chapter, we are going to understand what this document is.

So, lets get started!!!

What is Procurement Management Plan?

This document describes how the procurement will be managed throughout the project. The plan includes the following:

• How the make-or-buy decisions will be made and handled
• Contracts

o What types of contracts will be used for this project
o The form and format for the statement of work related to a procurement or a contract
o Metrics to be used to evaluate potential sellers and to manage contracts
o Requirements for performance bonds or insurance contracts that might be put in place to mitigate some project risks

• Management and coordination

o How to manage multiple sellers.
o How to coordinate procurement with other aspects of the project, such as the project schedule, scope, budget, and status progress reporting.
o Evaluation criteria for selecting sellers and measuring their performance. It is also called source selection criteria and will be covered in depth in future when we learn about conducting the actual procurements.

• A list of assumptions and constraints that could affect the procurement
• Any needed standardized procurement documents

In a nutshell, the major tasks of procurement planning are making make-or-buy decisions, preparing the procurement management plan, preparing the statement of work, determining a suitable type of contract, and preparing or acquiring the procurement documents. Once you have these elements in place, you are ready to implement the procurement plan, which will be discussed very soon…

Prev: Procuring Project Resources

Next: Important Terms & Definitions