Project Procurement,

Contract Management

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• Procurement
• Procurement Cycles
– Requirement cycle
– Requisition Cycle
– Solicitation cycle
– Award Cycle
– Admin cycle
• 2. Type of contract
– Six Categories of Contract

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 Procurement
Acquisition of goods/services.
Procurement (& contracting)
is a Process that involves
-Two Parties with:
Different objectives
Who Interact in
a given market segment.
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Good Procurement Practices
includes
Corporate profitability by:
Taking advantage of:
1. Quantity discounts,
2. Minimize Cost/Financial
Problems,
3. Seeking out Quality Suppliers.
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As Procurement
Contributes To Profitability
Procurement is Often
Centralized,
-Results in “Standardized
practices”
-”Lower Paper work Cost”
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Objectives of Procurement
Planning are to select one of
following for the Procurement
of all Goods/Services:
1. From Single Source.
2. From Multiple/source.
3. Procure only small portion of
Goods/Services
4. Procure none of Goods/Services
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Environment in which Procurement Take
Place is Critical factor.
There are two environments:
1. Macro &
2. Micro.
Macro environment includes General
external variables that can Influence
“How & When” we do Procurement and
it Includes:
– Recessions,
– Inflation,
– Cost of borrowing money,
– Unemployment.
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Micro environment is the internal to Firm Include
“Procurement /Contract System” five cycles:
Requirement Cycle: Defines boundaries of
Project
Requisition Cycle: analysis of sources
Solicitation Cycle: Bidding process
Award cycle: Contractor selection & Contract
Award
Contract Admin Cycle: Managing
subcontractor until Completion of the
Contract.
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Several Activities of
Procurement Process that
overlaps Several of Cycles.
These cycles are conducted
In parallel, especially
“Requisition & Solicitation”.

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1. Requirement Cycle
First Step in Procurement
Process “Definition of
Project Specifically
„Requirements”

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 Requirement Cycle Includes
1. Defining the need for the project
2. Development of the statement of work,
specifications, and work breakdown
structure
3. Performing a make or buy analysis
4. Laying out the major milestones and the
timing/schedule
5. Cost estimating, including life-cycle costing
6. Obtaining authorization and approval to
proceed 11
 Specifications
Written Pictorial or graphic Information
describe define or specify
services/item to be procured:
1. Design (physical Characteristics)
2. Performance (measurable
capabilities)
3. Functional Specification ( subset of
Functional , risk is on contractor)
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 2. Requisition Cycle

Once the “Requisition

identification”,
„Requisition form‟ sent
to Procurement to begin
“Requisition Process”.

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Requisition cycle Include:
1. Evaluation confirming specification.
2. Confirming sources
3. Reviewing past performance of
sources
4. Producing Solicitation Package (S/P)
Solicitation Package sent to each
possible “Supplier for Playing” Field
is level.
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Specification Package Includes:
1. Bid documents (usually standardized)
2. Listing of qualified vendors (expected to
bid)
3. Proposal evaluation criteria
4. Bidder conferences
5. How change requests will be managed
6. Supplier payment plan

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3. Solicitation Cycle
Selection of “Acquisition Method” is
the Critical Element in “Solicitation
Cycle”.
Three Acquisition Methods :
• Advertising
• Negotiation
• Small Purchases (off supplies)
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Advertising company goes
out for sealed bids.
There are no negotiations.
Competitive market forces
determine the price and the
award goes to the “lowest
bidder”.
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Negotiation is when the price is
determined through a bargaining
process. In such a situation, the
customer may go out for a:
– Request For Information (RFI)
– Request For Quotation (RFQ)
– Request For Proposal (RFP)
The request for Proposal (RFP) is the
most costly endeavor for the vendor.
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Large proposals contains:
separate volumes for cost,
technical Performance,
Management History, Quality,
facilities, subcontractor
Management, & Others.

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On Large contracts the Negotiation
Process may Also Includes Price,
Quantity, Quality & Timing.
Vendor Relations are critical during
contract negotiations.
Can Shorten Process due to:
1. Integrity of relationship &
2. Previous history
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 Award Cycle (A/C)
Result in a “signed
contract”. Several types of
Contracts.
So Negotiation process also
Include “selection” of the
Type of Contract.
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Objectives of Award Cycle is to
negotiate a contract:
-Type & Price
-Result in reasonable “Contractor
risk” & Provide Contractor risk
with Greatest Incentive for
Efficient & Economic
Performance.
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There are certain basic elements of most contracts.
• Mutual Agreement: There must be an offer and
acceptance.
• Consideration: There must be a down payment.
• Contract Capability: The contract is binding only if
the contractor has the capability to perform the
work.
• Legal Purpose: The contract must be for a legal
purpose.
• Form Provided By Law: The contract must reflect
the contractor's legal obligation, or lack of obligation,
to deliver end products.
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The Two Most Common Contract Forms are
completion contracts and term contracts.
• Completion Contract: The contractor is
required to deliver a DEFINITIVE END
PRODUCT. Upon delivery and formal
acceptance by the customer, the contract is
considered complete, and final PAYMENT
CAN BE MADE.

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2. Term contract:

The Contract Is Required To Deliver A Specific

"Level Of Effort," Not An End Product.
The effort is expressed in Woman/Man-days (Months
Or Years) over a Specific Period Of Time using
Specified Personnel Skill Levels And Facilities.
When The Contracted Effort Is Performed, the
contractor is under no further obligation. Final
payment is made, irrespective of what is actually
Accomplished Technically.

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 Final Contract also called
“Definitive contract”,
Follows normal Contracting
Procedures. E.g. Negotiation of
all Contractual “Terms &
Condition” on Cost & Schedule
prior to “Initiation of
Performance”.
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Negotiating of contract and
preparing it for signatures may
require months of preparation.
If the customer needs the work to
begin immediately or if long-lead
procurement is necessary,
then:

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“Customer may provide the
contractor” with a letter contract
or letter of intent (LOI). The letter
contract is a preliminary written
instrument authorizing the
contractor to begin immediately:
1. The Manufacture Of Supplies Or
2. The Performance Of Services.

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 Final contract price
Must be negotiated
after performance begins,
„Definitive contract”
must
still be negotiated.
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 Types of contract selection
based upon following:
1. Overall degree of Cost & Schedule Risk
2. Type & complexity of Requirement (technical Risk)
3. Extent of Price Competition
4. Cost/Price Analysis
5. Urgency of Requirements
6. Performance period
7. Contractor's Responsibility (and Risk)
8. Contractor's Accounting System (Report Earn Value
reporting?)
9. Concurrent Contract (contract take A back seat to existing
work?)
10. Extent of Subcontracting (how much work contractor out
source?)
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General six types of contracts :
Fixed-price (FP),
Cost -plus-fixed-fee (CPFF),
Cost-plus-percentage-fee (CPPF),
Guaranteed Max-Shard Savings
(GMSS),
Fixed-price Incentive- Fee (FPIF),
Cost-Plus-Incentive-Fee (CPIF)
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 First Category
Fixed-price or
Lump-sum contract

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Contractor carefully “Estimate
Target Cost”.
Contractor required to Perform
work at negotiated Contract
Value.

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If “Estimated target cost” is
low then “Total Profit
reduced” & may vanish.
Contractor may not be able to
“underbid competitors” So
Contractor assumes a Large
risk.
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Lump-sum
Provides “Max Protection to
Owner” for ultimate “Cost of
Project”.
Disadvantage:
Requiring a Long Period For
Preparation & Adjudications of
Bids.
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 Because of a Lack of
knowledge of
Local conditions,
all contractors Include
Excessive
Contingency.
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 Chang Requested
By owner after “Award of
contract” Lead to
Troublesome &
Sometimes “Costly
extras”
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2 nd
Category
Cost-Plus-
Fixed-Fee
(CPFF)
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Cost Plus Fixed Fee (CPFF)
If Accurate Pricing Not Possible in Any Other
way.
So we use CPFF, so Cost may vary but Fee
remains same.
Contractor agrees only to use Best Efforts to
Performance
Good/Poor Performance
Rewarded equally.

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Total Rs/$ Profit likely To
Produce Low “Rate of Return”
reflects Small “Amount of
Risk” By contractor.
Fixed Fee - small % Age Of
“Tot/true Cost”.
CPFF Required Company books
be audited.
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3: Cost-Plus-
Percentage
– fee Contract

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Provides Maximum flexibility
to owner Permits “Owner &
Contractor” to work
together cooperatively on
All “Technical, Commercial,
Financial Problems”.
-No Financial Assurance of
“Ultimate Cost”.
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“No financial incentive to
contractor” this because of “High
building cost” (Compared with
other forms).
Only meaningful Incentive can be:
1. Inc competition &
2. Prospects for
Follow-on contracts.
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4thCategory of
Contracts
“Guaranteed
Maximum-Share
Savings”

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Contractor-Gets “Fixed Fee” for his
“Profit” and Reimbursed for the
“Actual Cost” of Engineering,
Materials, Construction Labor, all
Other Job Costs,
But only up to “Ceiling figure
established” as “Guaranteed
maximum"
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Savings below the" Guaranteed
Maximum” are Shared between
“Owner & Contractor”, where
as Contractor Assumes the
Responsibility
For any “Overrun beyond”
Guaranteed “Maximum Price”.

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Contract form Combines
advantages as well as
disadvantages of Both “Lump
Sum” & “Cost-Plus
Contracts”.
Best form for Negotiated
Contract as it Establishes a
Maximum Price At Earliest
Possible Date
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Though contract awarded
without “Competitive
Tenders”.
-Yet Protects owner
Against being
Overcharged,
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Unique in that “Owner &
Contractor” share Financial
Risk & Both have Real
incentive To Complete
Project At lowest “Possible
Cost”.

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5th Category of Contract

Fixed-Price-
Incentive-fee
Contracts
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These are Same as “Fixed-
Price contracts” Except have
some “Provision for
Adjustment” of the “Total
Profit” by a formula.
This Formula Depends on
“Final Total Cost” at
Completion of Project
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Formula “Agreed to” in
advance By “Owner &
Contractor”.
To use this Both “Project
or Contract” Requirements
Must be firmly established
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Provides An incentive to
Contractor To:
a) Reduce Cost
b) Increase profit
Both “Owner & Cost” Share in
“Risk & Savings”.
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 6 th
Cat.
“Cost-Plus-
Incentive-
Fee Contracts”
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Same as: “Cost” Plus Contracts, Except
have “Provide for” Adjustment of “Fee
as” Determined By a Formula:
Compares “Total Project Cost to Target
Cost”.
Formula agreed to in advance by “Owner
& Contractor”. Used for “Long
Duration” or “R&D Type Project”.

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5. Contract Admin Cycle
Contract Administrator is
Responsible for Compliance
By the Contractor to Contract's
“Terms & Conditions”
To Make Sure Final Product is
“Fit for Use”.
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Functions of contract administrator Include:
Change Management
Specification interpretation
Adherence to Quality
Warranties
Subcontractor Management
Production surveillance
Waivers
Contract breach
Resolution of disputes
Project Termination
Payment “Schedule”
Project Closeout
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• Part Three

• Recap of the course

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• Management
• Project Management
• Project Manager
• Project Proposal
• Project Feasibility
• Project Selection Method
• Project Planning
• Scope
• Charter
• Quality ( 3-4 )
• Productivity
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• Leadership
• Communication
• Ethics
• Costing
• Pricing
• Risk Management
• Procurement
• Close out Note
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• Part Four
• Project Management Institute (PMI)

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• Procurement Management Processes
• Project Procurement Management involves
engaging in a systematic process to purchase or
acquire the needed products, services, or results
from an outside source which will perform the
work. Procure Management encompasses
contract management and control processes
necessary to administer contracts or purchase
orders. It also includes processes which assist in
administering a contract to assure the
buyer/seller relationships are properly managed.
The procurement management processes are:

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• Plan Purchases and Acquisitions – Plan
Purchases and Acquisitions process
involves ascertaining what is needed, and
when it is needed. Then how to assure
you have what you need when you need it.
(Novel concept!) This is completed as a
part of the planning process group.

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• Plan Contracting – The Plan Contracting
process involves documenting the
products, services, and results
requirements and identifies potential
sellers. Plan Contracting is commonly first
engaged in the planning process group.

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• Request Seller Responses – Request
Seller Responses process obtains
information, quotations, bids, offers, or
proposals from sellers as appropriate. This
is a part of the executing process group

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• Select Sellers – The Select Sellers
process is where the offers are reviewed,
and a chosen vendor rises to the top of the
Analytical Hierarchy Process. Commonly
negotiations are started in written form.
This is commonly a part of the executing
process group.

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• Contract Administration - The Contract
Administration Process manages all
aspects of the contract and the
relationship between the buyer and the
seller including managing seller
performance and changes, providing a
basis for future work, and managing the
relationship with the project’s buyer. This
is a part of the monitoring and controlling
process grouping.
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• Contract Closure - The Contract Closure
Process assures completion and settling
terms of any contracts including resolving
any open items and closing each contract.

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• Each Procurement Management process
results in a specific deliverable which is
used as the foundations for the
subsequent process. Combined the
procurement management processes
provide a best practice pattern for
managing contracts and vendor
relationships on a project.

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