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PROJECT
PROCUREMENT
MANAGEMENT

PROJECT PROCUREMENT
MANAGEMENT
• Project procurement management includes the processes
necessary to purchase or acquire products, services, or
results needed from outside the project team.
• Project procurement management includes the contract
management and change control processes required to
develop and administer contracts, or purchase orders
issued by authorized project team members.

• Project procurement management also includes

administering any contract issued by an outside organization
(the buyer) that is acquiring the project from the performing
organization (the seller), and administering contractual
obligations placed on the project team by the contract.

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THREE PRIMARY ROLES

• Project Manager
• Procurement/Contracts Team
• Client/Project Sponsor or Supplier

NEGOTIATION
STRATEGIES
• Deadline.
• Extreme demands.
• Good guy, bad guy.
• Missing man (limited authority)
• Attack
• Withdrawal
• Fair and reasonable

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PROJECT PROCUREMENT
MANAGEMENT

Project procurement
Management overview

Plan procurement Conduct Control Close

management procurements procurements procurements

PLAN PROCUREMENTS
• Plan procurements is the process of documenting project
purchasing decisions, specifying the approach, and
identifying potential sellers.
• Plan procurements process also includes consideration of
potential sellers, particularly if the buyer wishes to
exercise some degree of influence over acquisition
decisions.
• Plan procurement process includes consideration of the
risks involved with each make-or-buy decision.

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PLAN PROCUREMENTS
INPUTS
1. Project management plan
2. Requirements documentation
3. Risk register TOOLS & TECHNIQUES
4. Activity resource requirements
5. Project schedule 1. Make-or-buy analysis
6. Activity cost estimates 2. Expert judgment
7. Stakeholder register 3. Market research
8. Enterprise environmental factors 4. Meetings
9. Organizational process assets
OUTPUTS
1. Procurement management plan
2. Procurement statement of work
3. Procurement documents
4. Source selection criteria
5. Make-or-buy decisions
6. Change requests
7. Project documents updates

PLAN PROCUREMENTS
• Make-or-buy analysis.
• Determine whether particular work can be best accomplished by the
project team or must be purchased from outside sources.

• Budget constraints may influence make‐or‐buy decisions.

• If a buy decision is to be made, then a further decision of whether to

purchase or lease is also made.

• A make‐or‐buy analysis should consider all related costs; both direct

costs as well as indirect support costs.

• Capability.

• Secrecy.
• Control.

• Utilize existing recourses.

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PROJECT PROCUREMENT
MANAGEMENT
Example
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 = (240-40) x
• X = 2000 / 200 = 10 days

PROCUREMENT
DOCUMENTS
• Procurement documents are used to solicit proposals from
prospective sellers.
• Terms such as bid, tender, or quotation are generally used when the
seller selection decision will be based on price.
• The term proposal is generally used when other considerations such
as technical capability or technical approach are paramount.
• The common types of procurement documents may include:
• Request for information (RFI)
• Invitation for bid (IFB)
• Request for proposal (RFP)
• Request for quotation (RFQ)

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CONTRACT STATEMENT
OF WORK
• Each individual procurement item requires a separate contract
statement of work (SOW)
• SOW for each contract is developed from the project scope statement,
the project WBS, and the WBS dictionary
• The contract (SOW)
•Describe the procurement item in sufficient detail to allow prospective
sellers to determine if they are capable of providing the item.
•Written to be clear, complete, and concise.
•Can be revised and refined as required as it moves through the
procurement process until it is incorporated into a signed contract.
•Multiple products or services may be grouped as one procurement
item with a single contract SOW

PROJECT PROCUREMENT
MANAGEMENT
CONTRACTS
‐ Contracts are a legally binding documents (formal agreement),
should state all requirements.
‐ Contract must be followed and everything provided in it must
be done.
‐ Any change must be written and formally controlled and
approved by both parties.
‐ Contracts are legal relationships subjects to remedy in the
courts.
‐ the project management team may seek support early from
specialists in contracting, purchasing, law, and technical
disciplines.

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PROJECT PROCUREMENT
MANAGEMENT
CONTRACTS
‐ Contracts types are :
• Fixed Price
• Cost Plus
• Time & Material

FIXED PRICE
CONTRACTS
• Firm fixed price contracts (FFP)
‐ The most commonly used contract type is the FFP.
‐ It is favored by most buying organizations.

‐ any cost increase due to adverse performance is the

responsibility of the seller.
‐ the buyer must precisely specify the product or services to be
procured.

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FIXED PRICE
CONTRACTS
• Fixed price incentive fee contracts (FPIF)
‐ this fixed‐price arrangement gives the buyer and the seller
some flexibility in that it allows for deviation from performance,
with financial incentives tied to achieving agreed to metrics.
‐ Under FPIF contracts, a price ceiling is set, and all costs above
the price ceiling are the responsibility of the seller who is
obligated to complete the work responsibility of the seller, who
is obligated to complete the work.
‐ Fixed price with economic price adjustment contracts (FB‐EPA)
This contract type is used whenever the sellers performance
period spans a considerable period of years, as is desired with
many long‐term relationships

COST-REIMBURSABLE
CONTRACTS
• This category of contracts involve payments to the seller
for all legitimate actual costs incurred for completed work,
plus a fee representing seller profit.
• A cost‐reimbursable contract gives the project flexibility to
redirect a seller whenever the scope of work cannot be
precisely defined at the start and needs to be altered, or
when high risks may exist in the effort.

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COST-REIMBURSABLE
CONTRACTS
• Cost plus fixed fee contracts (CPFF)
The seller is reimbursed for all allowable costs for performing the
contract work, and receive a fixed fee payment calculated as a
percentage of the initial estimated project costs.
• Cost plus award fee contracts (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
• Cost plus incentive fee contracts (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

EXAMPLE COST PLUS

INCENTIVE FEE
Seller managed to save on cost!
Cost savings = 210 – 200 = $10K
Seller’s share (incentive) of savings =
20% * 10K = $2K
Seller’s total fees = 25 + 2 = $27K
Final price = cost + fees
= 200 + 27=$227k

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EXAMPLE 2 …
Seller EXCEEDED cost!
They will get penalized!
Excess Cost= 150 – 160 = ($10K)
Seller’s share (penalty) of loss = 20% *
10K = ($2K)
Seller’s total fees = 20 ‐ 2 = $18K
Final price = cost + fees
= 160 + 18 = $178k

EXAMPLE 3 FIXED PLUS

INCENTIVE
Seller EXCEEDED cost!
They will get penalized!
Excess Cost= 150 – 210 = ($60K)
Seller’s share (penalty) of loss = 40% *
60K = ($24K)
Seller’s total fees = 30‐ 24 = $6K
Final price = cost + fees
= 210 + 6 = $216k
The seller will only get the ceiling $200k

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EXAMPLE 4 ..
Seller EXCEEDED cost!
They will get penalized!
Excess Cost= 250 – 200 = ($50K)
Seller’s share (penalty) of loss = 40% *
50K = ($20K)
Seller’s total fees = 50‐ 20 = $30K
Final price = cost + fees
= 250 + 30 = $280k
The seller will only get the ceiling $260k

EXAMPLE 5 ..
Seller is right on target cost! Bulls eye!
No incentives. No penalty.
Seller’s total fees = 50
Final price = cost + fees
= 200 + 50 = $250k

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EXAMPLE 6 ..
Seller saved on cost.
Cost savings = 200 – 190 = $10k
Incentive = 40% * 10 = $4k
Seller’s total fees = 50 + 4 = $54k
Final price = cost + fees
= 190 + 54= $244k

TIME AND MATERIAL

CONTRACTS (T&M)
• Time and material contracts are a hybrid type contractual
arrangement that contain aspects of both cost‐reimbursable
and fixed‐price contracts

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TYPES OF CONTRACTS
(SUMMARY)
• Fixed
• For a well‐defined product
or requirements
• May include incentives?
• Reimbursement
• Payment of actual COST +
PROFIT
• Include direct & indirect
costs
• Time and Material
• Fixed price per unit
• Variable quantity

RANGE OF CONTRACT
TYPES VERSUS RISK

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CONDUCT PROCUREMENTS
INPUTS
1. Procurement management plan TOOLS & TECHNIQUES
2. Procurement documents
3. Source selection criteria 1. Bidder conference
4. Seller proposals 2. Proposal evaluation techniques
5. Project documents 3. Independent estimates
6. Make-or-buy decisions 4. Expert judgment
7. Procurement statement of work 5. Advertising
8. Organizational process assets 6. Analytical techniques
7. Procurement negotiations

OUTPUTS
1. Selected sellers
2. Agreements
3. Resource calendars
4. Change requests
5. Project management plan updates
6. Project documents updates

BIDDER CONFERENCES
•Bidder Conferences are meetings with prospective sellers
prior to preparation of a proposal.
•They are used to ensure that all prospective sellers have a
clear, common understanding of the procurement.
•Responses to questions may be incorporated into the
procurement documents as amendments.

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EVALUATION CRITERIA
• Criteria developed and used to rate or score proposals; may be objective
or subjective.
• Often included as part of the procurement documents.
• If price is not the overriding factor then the buyer must identify and
document the criteria; for example:
•An understanding of need - As demonstrated by the seller’s proposal.
•Overall or life cycle cost - Does the selected seller produce the lowest total
cost (purchase cost plus operating cost)?
•Technical capability - Does the seller have, or can the seller be reasonably
expected to acquire, the technical skills and knowledge needed ?
•Management approach - Does the seller have an approach that will ensure a
successful project ?
•Financial - Does the seller have adequate financial resources to do the job ?

WEIGHTING SYSTEM AND

SCREENING SYSTEM
Weighting System
A method for quantifying qualitative data in order to minimize personal
prejudice on seller selection; most systems involve:
• Assigning a numerical weight to each of the evaluation criteria
• Rating the prospective sellers on each criteria
• Multiplying the weight by the rating
• Totaling the resultant products to compute an overall score
Screening System
• Involves establishing minimum requirements of performance for one
or more of the evaluation criteria.
• Can employ a weighting system and independent estimates.

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CONTROL PROCUREMENTS
• The process of managing procurement relationships,
monitoring contract performance, and making changes and
corrections as needed.

• This process ensures that both the seller’s and buyer’s

performance meets procurement requirements according to
the terms of the legal agreement.

CONTROL PROCUREMENTS
INPUTS
1. Project management plan TOOLS & TECHNIQUES
2. Procurement documents
3. Agreements 1. Contract change control system
4. Approved Change requests 2. Procurement performance reviews
5. Work performance reports 3. Inspections and audits
6. Work performance data 4. Performance reporting
5. Payment systems
6. Claims administration
7. Records management system

OUTPUTS
1. Work performance information
2. Change requests
3. Project management plan updates
4. Project documents updates
5. Organizational process assets
updates

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CLOSE PROCUREMENTS
• The process of completing each procurement and finalizing
open claims, updating records to reflect final results and
archiving such information for future use.

CLOSE PROCUREMENTS

INPUTS

1. Project management plan

2. Procurement documents

TOOLS & TECHNIQUES

1. Procurement audits
2. Procurement negotiations
3. Records management system

OUTPUTS
1. Closed procurements
2. Organizational process assets
updates

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AND THE FINAL

TOUCHES ..
• Authorized contract administrator @ buyer
• Send with formal written notice DELIVERABLE
ACCEPTANCE that the deliverables have been accepted or
rejected.
• Requirements for formal deliverable acceptance, and how
to address non- conforming deliverables, are usually
defined in the contract.
• LESSONS LEARNED

QUESTIONS

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1 ) What is the BEST way to describe how the contract’s

terms and conditions are created?
A ) they are based on risk analysis.
B ) They are created by the contracting officer assigned to
the project.
C ) They use only the company’s existing standard terms
and conditions.
D ) They are based on the needs of the seller.

2 ) The seller has filed a delay claim against the buyer, asking
for a change order, saying that the buyer took longer than
allowed in the contract to review and approve a deliverable.
Who has the authority to sign the change?
A ) Project manager.
B ) Contracting officer.
C ) Senior manager.
D ) Team and project manager.

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3 ) You are in the middle of a complex negotiation when the

other party says; “we need to finish in one hour because I
have to catch my plane”. That person is using which of the
following negotiation strategies?
A ) Good guy, bad guy.
B ) Delay.
C ) Deadline.
D ) Extreme demands.

4 ) You are managing procurement for a project and have

arranged a bidder conference with the potential proposers.
All of the following are appropriate for a bidder conference
EXEPT?
A ) A walkthrough of the project scope.
B ) An explanation of why particular terms and conditions are
in the contract.
C ) A request for bidders to offer their thoughts on problems
with the scope of the work.
D ) Working with the bidders to determine alternatives
solutions for the project.

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5 ) what is one of the KEY objectives during contract

negotiations?
A ) Obtain a fair and reasonable price.
B ) Negotiate a price under the seller’s estimates.
C ) Ensure that all project risks are thoroughly delineated.
D ) Ensure that an effective communications management
plan is established.

6 ) Which type of contract is the seller MOST concerned

about project scope ?
A ) Fixed price.
B ) Cost plus fixed fee.
C ) Time and material.
D ) Purchase order.

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7 ) You receive 25 new computers from the seller, but were

expecting only 20. In looking at the contract, you see that it
says” seller to provide twenty (25) computers. What should
you do FRIST?
A ) Issue a change order through the contract manager.
B ) Return the five extra computers.
C ) Make payment for the 25 computers.
D ) Call the seller and ask for clarification.

8 ) Company procedures require the creation of a lessons

learned document. Which of the following is the BEST use
of lessons learned?
A ) Historical records for future projects.
B ) Planning record for the current project.
C ) Informing the team about what the project manager has
done.
D ) informing the team about the project management plan

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9 ) Which of the following BEST describes the project

manager’s role during the contracting process?
A ) Project manager has only minor involvement.
B ) Project manager should be the negotiator.
C ) project manager should supply an understanding of the
risks of the project.
D ) project manager should tell the contract manager how
the contracting process should be handled.

10 ) You are trying to decide whether to lease or buy an item

for your project. The daily lease cost is U.S. $150. The
investment cost to purchase the item is U.S. $2000 and the
daily cost is U.S. $50. In how many days will the lease cost
be the same as the purchase cost ?
A ) 10
B ) 15
C ) 20
D ) 25

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