Project Procurement Management

Dr. Huy Nguyen

Project Management Framework

2
 Process Groups & Knowledge Areas Mapping
Knowledge Process Groups
Areas Initiating Planning Executing Monitoring & Controlling Closing
Develop Project Direct and Manage Project Work Monitor and Control Project Work
Integration Charter
Develop Project Management Plan
Manage Project Knowledge Perform Integrated Change Control
Close Project or Phase

Plan Scope Management

Collect Requirements Validate Scope
Scope Define Scope Control Scope
Create WBS
Plan Schedule Management
Define Activities
Schedule Sequence Activities Control Schedule
Estimate Activity Durations
Develop Schedule
Plan Cost Management
Cost Estimate Costs Control Costs
Determine Budget

Quality Plan Quality Management Manage Quality Control Quality

Acquire Resources
Plan Resource Management
Resource Estimate Activity Resources
Develop Team Control Resources
Manage Team

Communications Plan Communications Management Manage Communications Monitor Communications

Plan Risk Management

Identify Risks
Risk Perform Qualitative Risk Analysis Implement Risk Responses Monitor Risks
Perform Quantitative Risk Analysis
Plan Risk Responses

Procurement Plan Procurement Management Conduct Procurements Control Procurements

Stakeholder Identify Stakeholders Plan Stakeholder Engagement Manage Stakeholder Engagement Monitor Stakeholder Engagement
3
Project Procurement Management
Monitoring &
Controlling Processes
Planning
Processes

Enter phase/ Initiating Closing Exit phase/

Start project Processes Processes End project

Executing
Processes

Process Groups
Knowledge
Area Monitoring &
Initiating Planning Executing Closing
Controlling
• Plan • Conduct • Control
Procurement Procurement Procurements Procurements
Management

4
Project Procurement Management
• Process and acquire product, services or results needed from outside the
project team.
• Include the contract management and change control processes required to
develop and administer contracts or purchase orders issued by authorized
project team members.
• Can be applied to internal work orders, formal agreements, and contracts
between organization units within single entity.

5
Project Manager’s Role in Procurements
• Project Manager must be involved in the creation of contracts and assigned
before contract signed.
• Key roles:
– Know the procurement process;
– Understand contract terms and conditions;
– Make sure the contract contains all project management requirements
such as attendance at meeting, reports, actions and communications
deemed necessary;
– Identify risks and incorporate mitigation and allocation of risks into the
contract;
– Help tailor the contract to the unique needs of the project;
– Align schedule of the contract and schedule of the project;
– Involved in contract negotiation;
– Make sure procurement process done smoothly;
– Work with contract manager to manage changes to the contract.
6
1 - Plan Procurements
• Process of documenting project procurement decisions, specifying the
approach, and identifying potential sellers.

Inputs Tools & Techniques Outputs

1. Project management plan 1. Make-or-buy analysis 1. Procurement

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

8
Make-or-buy analysis (Tools & Techniques)
• Determine whether an organization should make or perform particular product
or service by themselves or buy / acquire from others;
• Evaluate of the benefit and drawback;
• Often involve financial analysis;
• Make or buy analysis focus on:
– Skills and resources to make the product or service;
– Cost to make the product or service more cheaply than to buy it?
– Time:
• How critical is it that we retain detailed control over a certain area?
• Do we need to buy (or make) the product or service to save time if time is a
very important factor?
– Proprietary information or trade secret.

9
Important Terms
• Price, Profit (fee), Cost;
• Target price: Used to compare the end result of the project with what was
expected (the target price);
• Sharing ratio: Incentives take the form of a formula, usually expressed as a
ratio, e.g. 90/10 (buyer/seller);
• Ceiling price: This is the highest price the buyer will pay;
• Point of total assumption (PTA):
– This only applies to fixed price incentive fee contracts;
– Refers to the amount above which the seller bears all the loss of a cost
overrun;
– Seller usually monitor actual costs against PTA to make still having profit;
– Formula: PTA = ((Ceiling price - Target price) / Buyer's share ratio) +
Target cost.

10
Exercise: Contract Calculation
• In this cost plus incentive fee contract, the cost is estimated at $210,000 and
the fee at $25,000. The project is over, and the buyer has agreed that the
costs were, in fact, $200,000. Because the seller's costs came in lower than
the estimated costs, the seller shares in the savings: 80 percent to the buyer
and 20 percent to the seller. Calculate the final fee and final price.

Target cost
Target fee
Target price
Sharing Ratio
Actual cost
Final fee
Final price

11
Exercise: Contract Calculation (cont.)
• In this cost plus incentive fee contract, the cost is estimated at $210,000 and
the fee at $25,000. The project is over, and the buyer has agreed that the
costs were, in fact, $200,000. Because the seller's costs came in lower than
the estimated costs, the seller shares in the savings: 80 percent to the buyer
and 20 percent to the seller. Calculate the final fee and final price.

Target cost 210,000

Target fee 25,000
Target price 235,000
Sharing Ratio 80/20
Actual cost 200,000
210,000 – 200,000 = 10,000
Final fee 10,000 x 20% = 2,000
25,000 (target fee) + 2,000 = 27,000
Final price 200,000 + 27,000 = 227,000
12
Contract Types
• Fixed Price (FP) contracts:
– Fixed Price (FP), or Lump Sum, or Firm Fixed Price (FFP);
– Fixed Price Incentive Fee (FPIF);
– Fixed Price with Economic Price Adjustment (FP-EPA);
– Purchase order: Simplest type of fixed-price contract, unilateral (signed by
one party).
• Cost Reimbursable (CR) contracts:
– Cost Plus Fixed Fee (CPFF) or Cost Plus Percentage of Cost (CPPC);
– Cost Plus Incentive Fee (CPIF);
– Cost Plus Award Fee (CPAF);
– Cost Contract (No fee / profit e.g. contract in nonprofit organization).
• Time and Material (T&M) Contracts:
– Hybrid type of contractual arrangement that contain aspects of both cost-
reimbursable and fixed-price contracts.

13
Fixed-price (FP) contracts
• Used for acquiring goods or services with well defined specifications or
requirements;
• Seller is most concerned with the SOW;
• Sometime the buyer forces seller to accept a high level risk;
• Seller would need huge amount of reserves;
• Seller can try to increase profit by cutting scope;
• Examples:
– FP: Contract = $1M;
– FPIF: Contract = $1M + for every month added $1000;
– FPAF: Contract = $1M + for every month added $1000 if performance
exceed;
– FPEA: Contract = $1M + additional pricing based on Government Center
Bank depreciation rate;
– PO: $1K per 1 metric ton.

14
Cost Reimbursable (CR) contracts
• Used when work is uncertain and, therefore, costs cannot be estimated
accurately enough;
• Requires the seller to have an accounting system that can track costs;
• Buyer requires auditing seller’s invoice;
• Example:
– CPFF / CPPC: Contract = cost + fee (10% of cost);
– CPFF: Contract = cost + $1K;
– CPIF: Contract = cost + additional fee based on performance;
– CPAF: Contract = cost + additional fee bases on manager satisfaction
(performance criteria).

15
Time & Material (T&M) contracts
• Used for service efforts in which the level of effort cannot be defined at the time
the contract is awarded;
• Make sure the costs do not become higher than budgeted, the buyer may put a
“Not to Exceed” and time limits clause in the contract;
• Often used for staff augmentation, acquisition of experts, outside support;
• Example:
– Contract = $1K per day plus expenses or material cost;
– Contract = $1K per day plus material at $5 per linear meter of wood.

16
Contract Types vs. Risk
• Effect of contract types on buyer & seller risk:
T&M can be a high risk
for buyer if contract does
not include a “total not-to-
exceed” (NTE)
Low High
Fixed Price
FFP
FPIF
BUYER RISK Time and Materials SELLER RISK
Cost Reimbursable
CPIF
CPFF
CPF
CPPC

High Low
17
Procurement Management Plan (Outputs)
• Procurement management plan:
– Describe how procurement process will be managed;
– Guidance for any procurement process.
• Procurement Statement of Work (SOW):
– Develop from scope baseline;
– Include only the portion will be included within the contract;
– This can be revised/refined through the procurement process until signed.
• Make-or-buy decisions:
– The conclusion reaches regarding what product/service/result will be
acquired from outside.

18
Procurement Documents (Outputs)
• May include:
– Information for sellers;
– Contract statement of work;
– Proposed terms & conditions of the contract;
– Non-disclosure agreement (NDA) - to disclose some confidential information.
• Procurement documents, examples:
– Request for Information (RFI);
Procurement
– Invitation For Bid (IFB); Contract types
documents
– Request For Proposal (RFP);
RFP CR
– Request For Quotation (RFQ);
IFB FP
– Tender notice;
RFQ T&M
– Invitation for negotiation;
– Invitation for seller’s initial response.

19
Procurement Documents (Outputs)
• Letter of Intent (LOI):
– It is not a contract, but a letter without legal binding, that says the buyer
intends to hire seller.
• Privities of contract:
– A contractual relationship;
– Example:
• You hired a contractor A, and the contractor hires another sub-contractor B to
deliver part of your work. Even though B is performing your work, he/she is
contractually not bound to you, because B contractually bound to “A” only. So
you need to talk to A instead of B.
• Teaming Agreements (or a join venture):
– Two sellers join force for one procurement.

20
Noncompetitive Form of Procurement
• Form used when only one seller awarded without a competitive procurement.
• Should keep follow rules of bidding process and laws.
• Saving time on procurement process.
• Would be implemented in the following condition:
– The project under schedule pressure;
– A seller has unique qualification;
– There is only one seller;
– A seller hold a patent;
– Other mechanism exist that seller’s prices are reasonable.
• Types of noncompetitive procurement:
– Single source: Contract directly to preferred seller;
– Sole source: There is one seller; might be a company owns a patent.

21
Source selection criteria (Outputs)
• Some criteria for evaluating proposals and bids (due diligence):
– Understanding of need;
– Technical approach and capability;
– Past performance of sellers (experience);
– Project management approach;
– Production capacity and interest;
– Financial stability & capacity;
– Business size and type;
– Intellectual & property rights;
– Overall or life cycle cost;
– Risk;
– Warranty;
– References.

22
2 - Conduct Procurements
• Process of obtaining seller responses, selecting a seller, and awarding a
contract.

Inputs Tools & Techniques Outputs

1. Procurement 1. Bidder conferences 1. Selected sellers

management plan 2. Proposal evaluation 2. Agreements
2. Procurement documents techniques 3. Resource calendars
3. Source selection criteria 3. Independent 4. Change requests
4. Seller proposals estimates
5. Project management
5. Project documents 4. Expert judgment plan updates
6. Make-or-buy decisions 5. Advertising 6. Project documents
7. Procurement statement 6. Analytical techniques updates
of work 7. Procurement
8. Organizational process negotiations
assets

23
2 - Conduct Procurements

24
Proposal Evaluation (Tools & Techniques)
• Proposal Evaluation or Bid or Price Quote;
• One or a combination of following process used for selecting seller:
– Weighting system:
• Evaluate by weighting the source selection criteria;
– Independent estimate:
• Estimation created in-house or with outside assistance;
– Screening system:
• Eliminate sellers who do no meet minimum requirement;
– Past performance history.

25
Procurement Negotiations (Tools & Techniques)
• Project Manager may be involved during negotiation to clarify requirement,
protect relationship.
• Objectives of negotiation:
– Obtain fair and reasonable price;
– Develop good relationship with the seller.
• Main items to negotiate:
– Scope;
– Schedule;
– Price & payment;
– Responsibilities;
– Authority;
– Applicable law;
– Technical & business management approaches;
– Contract financing.

26
Agreement - Contract Document (Outputs)
• Purposes of contract:
– Define role and responsibilities;
– Make things legally binding;
– Mitigate or allocate risks.
• Contract has many names and types from simple to complex documents:
– Agreement, subcontract, purchase order, memorandum of understanding
(MOU).
• A legal contract will need:
– An offer;
– Acceptance;
– Consideration (Something of value, not necessary money);
– Legal capacity (Separate legal parties, competent parties);
– Legal purpose (We cannot have a contract for something illegal).

27
Agreement - Contract Document (Outputs)
• Contract document usually includes:
– Statement of work or deliverables;
– Schedule baseline;
– Performance reporting;
– Period of performance;
– Role & responsibilities;
– Seller’s place of performance;
– Pricing, payment terms;
– Place of delivery;
– Inspection and acceptance criteria;
– Warranty, product support, limitation of liability;
– Fees and retainer;
– Penalties, incentives;
– Insurance and performance bonds;
– Subordinate subcontractor approvals;
– Change request handling;
– Termination clause and alternative dispute resolution (ADR) mechanisms.
28
3 - Control Procurements
• Process of managing procurement relationship, monitoring contract
performance and making changes and corrections to contracts as appropriate.

Inputs Tools & Techniques Outputs

1. Project management 1. Contract change control 1. Work performance

plan system information
2. Procurement 2. Procurement 2. Change requests
documents performance reviews 3. Project management
3. Agreements 3. Inspections and audits plan updates
4. Approved change 4. Performance reporting 4. Project documents
request 5. Payment systems updates
5. Work performance 6. Claims administration 5. Organizational
reports 7. Records management process assets
6. Work performance system updates
data

29
3 - Control Procurements

30
Control Procurements
• Direct and manage project works:
– Authorize the seller’s work at the appropriate time;
• Control quality:
– Inspect and verify the adequacy of the seller’s product;
• Perform intergrated change control:
– Assure that changes are properly approved and that all those with a need
to know are aware of such changes;
• Control risks:
– Ensure that risks are mitigated.

31
Contract Change Control System (Tools & Techniques)
• Contract administration:
– Assuring the performance of both parties to the contract meets contractual
requirement;
– Contract administrator is the only one with authority to change the
contract;
– There are potential conflicts between project manager and contract
administrator.
• Contract change control system:
– A process for modifying a contract and reviewing the impacts;
– Paperwork, tracking systems, dispute resolution procedures and approval
levels necessary for authorizing changes;
– Integrated with Intergrated change control system.

32
Procurement Negotiations
• In all procurement relationships, the final equitable settlement of all
outstanding issues, claims, and disputes by negotiations is a primary goal.
• Whenever settlement cannot be achieved by direct negotiation, some form of
alternative dispute achieved by direct negotiation , some form of Alternative
Dispute Resolution (ADR) including mediation or arbitration may be
explored.
• When all else fails, litigation in the courts is the least desirable option.

33
INCOTERMS 2000
• Terms from International Chamber of Commerce;
• Make the same definition between seller and buyer used for export/import;
• Group E Incoterms (departure):
– EXW (Ex works).
• Group F Incoterms (main carriage unpaid):
– FCA (Free carrier);
– FAS (Free alongside ship);
– FOB (Free on board).
• Group C Incoterms (main carriage paid):
– CFR (Cost and freight);
– CIF (Cost, insurance and freight);
– CIP (Carriage and insurance paid to).
• Group D Incoterms (arrival):
– DAF (Delivered at frontier);
– DES (Delivered ex ship);
– DEQ (Delivered ex quay);
– DDU (Delivered duty unpaid);
34
– DDP (Delivered duty paid).
 Next topic:
Contemporary Issues in Project Management

Thank You

35