Project Procurement Management (Based on PMBOK . For PMP Certification Exam preparation)

Projects many times need services or products from the 3rd parties to fulfill the needs. 3rd parties mean external to the Project, either other department within the organization / company or completely outside of the company. Here we are talking about external vendor who is providing services to the Project. And we need to assume those vendor services are not resource augmentation. Just like Project life cycle Procurement management has its own lifecycle. We plan, execute and properly close the services or product acquisition. Most of the Procurement time will fall under Planning Process group as Execution is done by the vendor. Monitoring is required to control costs and changes. Following table shows 6 processes of this knowledge area and groups they belong to 5 Process Groups  Initiation Planning Execution Monitoring & Control Closing Processes -Plan Purchases and acquisitions -Plan Contracting   -Request Seller Responses -Select Sellers -Contract Administration -Contract Closure                                                                                                                                   In Procurement 3 objects are very important. In short they are SBC. (Seller – Buyer – Contract.) Seller is the person or contracting company who sells products or services for the project. In general terms staff augmentation will also fall in this category. Here PMI doesn’t deal that case for the project. PMI in this particular chapter treats seller as any 3rd party who provides products or services from outside of the organizations Buyer: Is you, the project manager who purchases the services from Seller. Unless and otherwise it is asked the exam’s perspective is testing you the project manager. So in this particular case you will become buyer, so all exam questions are on buyer perspective only. Contract: need not to say, a legal document which is a connecting point between Buyer and Seller. Both have to abide by that. You can add any required clauses to the contract but following are important. To remember those use “CCOLA” Capacity: The authorities those will be provided to Seller to do the work. Consideration: Clauses those will be considered by the Buyer Offer: Is provided to make a contract or deal. Legal Purpose: Jurisdiction and legal bondage. Acceptance: The time limit that the buyer has to make an agreement.  Let’s discuss all 6 processes of this knowledge area. Click on respective numbers below to see those processes one after other:

12.1 Plan Purchasing and Acquisition	Project Procurement Management - PMI (Based on PMBOK 3rd Edition. For PMP Certification Exam preparation)
Plan Purchasing and Acquisition ITTO Inputs Tools  Outputs  Enterprise Environmental Factors Organizational Process Assets Project Scope Statement Work Breakdown Structure WBS Dictionary Project Management Plan - Risk Register - Risk Related Contractual Agreements - Resource Requirements - Project Schedule - Activity Cost Estimates - Cost Baseline Make or Buy Analysis Expert Judgment Contract Types   Procurement Management Plan Contract Statement of Work Make-or-Buy Decisions Requested Changes   Various contract types are tools for “Plan Purchasing and acquisition" process. Which means when you the Project Manager is buying some services or Products for you Project you can use these techniques to negotiate better options for your project. PMI categorizes contracts into 3 types. Fixed prices contracts: This type of contracts has a fixed total price for the service or Product. Which means the Buyer pays EXACT amount which was agreed at the beginning to the Seller. Incentives and Awards bring little bit variations to Fixed price contracts. Seller bears the risk in fixed price contracts. Time and Material contracts: These are cusp between FP and CR and have features of both. Work will quoted as per unit price or charges for per hour service and costs for materials will be reimbursed. Sellers and Buyers share the risk. Cost reimbursable contracts: Buyer will reimburse all costs spent by the seller for the project. This is open ended contract type means seller don’t know the total price of the work at the beginning. So seller bears the risk. Awards, incentives bring variances in this category. Following diagram shows types of contracts and who bears the risk FP: Fixed Price FPI: Fixed Price Incentive: In this type of contract and addition incentive will be given to the seller when he beats the project expectations. Either it can be time, quality or features. So Seller will be motivated to deliver better product in shorter time FPEPA: Fixed Price Economic Price Adjustment: These types of contracts are used for long term projects. Buyer bears the extra burden of Economic fluctuation which is a risk. CR: Cost Reimbursable CPF Cost plus Fee or CPPC “Cost plus Percent of Cost”: These types of contracts are illegal and not permissible for US Govt. In these contracts, Buyer is supposed to reimburse all costs plus will add some additional fee to the seller. So Seller has no motivation to control costs or to deliver the product. Seller’s margin or profit is depending on the costs he puts on the project. CPFF Cost plus fixed fee: Buyer reimburses all expenses to the seller and adds a fixed fee as a seller’s profit. CPIF Cost plus Intensive fee: Buyer reimburses all expenses to the seller and adds an incentive for higher. CPAF Cost plus Award fee: These types of contract are very similar to CPIF, but the award is fixed amount instead of percentage. Following table shows major difference between above three types of contracts Work Risk Term FP Known Seller Short T&M UnKnown Both Short CR  UnKnown  Buyer  Long   12.2 Plan Contracting    Project Procurement Management - PMI (Based on PMBOK 3rd Edition. For PMP Certification Exam preparation)   12.2 Plan Contracting Inputs Tools Outputs Procurement Management Plan Contract Statement of Work Make-or-Buy Decisions Project Management Plan - Risk Register - Risk Related Contractual Agreements - Resource Requirements - Project Schedule - Activity Cost Estimates - Cost Baseline Standard Forms Expert Judgment   Procurement Documents Evaluation Criteria Contract Statement of Work (updates)    Plan Contracting is next step in procurement process after planning for purchase and acquisition (12.1 the previous process). For every company there will be few pre-defined forms or policies to acquire products/services or engaging vendors. Those “Standard Forms” will be used as “Tools” in this process. As usual Expert judgment will be counted for this process too. The major outcome or the intent of this process is to generate Planning Documents and developing your own evaluation criteria. In de-centralized procurement organizations Project Manager (you) will directly engage vendors. So in this process you have to develop the evaluation criteria, measures to evaluate vendor responses. Procurement Documents: These documents are useful for the Buyer (You the Project Manager) to communicate the need in most possible efficient way to all prospective sellers. If Sellers can understand your needs, your process and clauses, they can clearly quote and meet your expectations. Following are few documents you prepare: - RFP (Request for Proposal) in this document you can ask for detailed plan for project execution and price. If it is a long term project and the scope is not developed completely you can use these types of documents. - IFB (Invitation for Bid) or RFB (Request for Bid): You have developed the scope and you know the work and willing to get it done by vendor then you will use this type of documents - RFQ (Request for Quotation): This is Price per item or hour labor. In these procurement documents you can include - Your company information - Project information - Criteria which are important for the project and on which you will evaluate - Terms and conditions for the project, legal implications - Contract terms Other documents you will need to develop are: NDA (Non-Disclosure agreement): To perform the Project work buyer has to disclose some confidential information to the sellers or even prospective sellers. Sellers/Prospective sellers are bound by this document to protect Buyers confidential information. Letter of Intent: This document intention is to communicate that the buyer, you are intended to purchase services or products from the seller. But this document is not legally binding document, means you can even decline to purchase in future date based on your changing criteria. Privity of contract: The doctrine of privity in contract law provides that a contract cannot confer rights or impose obligations arising under it on any person or agent except the parties to it. Privity of contract occurs only between the parties to the contract, most commonly contract of sale of goods or services. Horizontal privity arises when the benefits from a contract are to be given to a third party. Vertical privity involves a contract between two parties, with an independent contract between one of the parties and another individual or company. (From Wiki) In a simple 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. 12.3 Request Seller Responses    Project Procurement Management (Based on PMBOK 3rd Edition. For PMP Certification Exam preparation)   12.3 Request Seller Responses Inputs Tools Outputs Organizational Process Assets Procurement Management Plan Procurement Documents Bidder Conferences Advertising Develop Qualified Sellers List  Qualified Sellers List Procurement Document Package Proposals Developing Qualified Sellers list & Proposals are the main goals of "Request Seller Responses" process. Bidder conference and Advertising are major tools provided in this area. Advertisement is very much required to attract more bidders for your project. You should advertise extensively to gather more responses. Few of known formats are - internet, local papers, different print media like magazines, Conferences, vendor shows and so on. But all of those might not be necessary together. As advertisement is cumbersome and expensive normally companies establish preferred vendors list over the time. Bidders Conference: Once you advertise and collected many responses from various bidders you should organize a conference to bring all bidders to same understanding page. You should clarify all technical questions. Each bidder will be beneficiary of other questions and can understand your requirements much better. Bidder’s conference benefits both Bidders and you the project manager. You should document all questions and answers and send those to all bidders. In the bidder conference you should watch for Collusion. Collusion is secret agreement between bidders. And even you should watch for bidders who are not asking any types of questions either. You should prepare your own Qualified Sellers list which is one of the out puts of this process. Buyer prepares few documents for bidders. Few of those are - RFP (Request for Proposal) - IFB (Invitation for Bid) or RFB (Request for Bid) - RFQ (Request for Quotation) These documents can be used with different contract types as follows FP  IFB / RFB T&M RFQ CR  RFP Usage of documents as shown above even makes sense. For Unit price contracts you will ask a quotation at unit level. And you would ask bidders for a proposal where scope is not yet prepared or unknown. 12.4 Select Seller    Project Procurement Management (Based on PMBOK 3rd Edition. For PMP Certification Exam preparation)   12.4 Select Sellers Inputs Tools Outputs Organizational Process Assets Procurement Management Plan Evaluation Criteria Procurement Document Package Proposals Qualified Sellers List Project Management Plan - Risk Register - Risk Related Contractual Agreements Weighting System Independent Estimates Screening System Contract Negotiation Seller Rating Systems Expert Judgment Proposal Evaluation Techniques Selected Sellers Contract Contract Management Plan Resource Availability Procurement Management Plan (updates) Requested Changes As we discussed all of 6 processes of this knowledge area occur sequentially. It follows traditional waterfall model. By the time of this process you the Project Manager might have completed Procurement & contract planning and might have requested and collected Seller Responses (Quotations/Bids/Proposals).  Tip: Bids are for– FP; Quotations are for – T&M; Proposals are for – CR;  The major goal/purpose of this process is Selecting Sellers for your project and making a contract with them. PMI provided several Tools and Techniques to fulfill this requirement. Weighing System: Ranking all filtered prospective sellers. Independent Estimate: Few companies call this estimation group as Shadow IT. Rough estimate with in your company.  Screening System: Weed out Sellers who doesn’t even meet bare minimum criteria Seller Rating System: Is an aid to Weighing System. You will provide your own rating system based on your project environment. Seller’s financial stability might be important aspect for a long term Project but that might not be true for a smaller project which will finish in 6 months. So each project has to establish its own rating system. Proposal Evaluation techniques: This is also another aid for weighing system.  Expert Judgment: You will inherit this quality based on your experience and exposure. Example of Weighing System: Criteria 1 Criteria 2 Grand Total Score Weight Sub Total-1 Score Weight Sub Total-2 Seller 1 2 3 Seller 2  2  3 Step1 you will define what all criteria are important for your project. Then you will quantify those criteria by giving a weight, based on a scale 1-5. These weights go in respective colunms By using different evaluation techniques and rating system, you will provide a score to seller and enter those in to appropriate cells. By multiplying score and weight you will arrive sub total for the seller. By adding all sub totals for a particular seller you will get Grand total for that seller. Finally you will prepare a list of Selected Sellers and Ranks next to them. You have to keep this list as you company asset to use it for next time. But rankings on this list will not stay the same over years. You need to reevaluate all your sellers based on situation and time. The best Seller will not remain the best all the time. They might change their policies or another best seller might emerge. But having a company asset is easy to start. Contract Management Plan: This is one on PMI’ isms which we all are advocating. You will write a document which will say how you manage this area. What all are your approaches, observations, pitfalls. In the modern era every thing should be documents. Nothing should be kept in the mind. Organizations and Projects precede individuals. Project managers need not be powerful warlords. Organizations should able replace them easily. 12.5 Contract Administration   Project Procurement Management (Based on PMBOK 3rd Edition. For PMP Certification Exam preparation)    12.5 Contract Administration Inputs Tools Outputs Contract Contract Management Plan Selected Sellers Performance Reports Approved Change Requests Work Performance Information Contract Change Control System Buyer-Conducted Performance Reviews Inspections and Audits Performance Reporting Payment System Claims Administration Records Management System Information Technology Contract Documentation Requested Changes Recommended Corrective Actions Organizational Process Assets (updates) Project Management Plan (updates) - Procurement Management Plan - Contract Management Plan  Contract Administration is important function of Procurement management and as a Project Manager you have greater responsibilities to manage activities under this process. You the Project manager needs to monitor the progress of your investment and see if you are getting what you are paying for. Requested changes to the contract and Recommended corrective actions are 2 of expected out come of this process. Tools like Change control system helps to monitor this process. As I have been explaining all along Changes need to be monitored all across either for schedule, or for scope or for costs or contracts. Those needed to be evaluated thoroughly and see how they are affecting other aspects of the project. Should be well documented and should be approved by key stakeholders. In the following image “Control Change” covers CCB, the Change Control Board gate keepers of inflowing changes. Even though the change is great and wonderful, the impact on the project needed to be assessed first.   Typically Project Manager will be performing following jobs depicted in the picture   12.6 Closing Contracts  Project Procurement Management (Based on PMBOK 3rd Edition. For PMP Certification Exam preparation)   12.6 Closign Contracts Inputs Tools Outputs Procurement Management Plan Contract Management Plan Contract Documentation Contract Closure Procedure Procurement Audits Records Management System Closed Contracts Organizational Process Assets (updates)