Procurement is the formal processes many organizations follow obtain goods and services. Project Procurement Management is the process of selecting, monitoring and closing vendor contracts. In this PMP study notes PDF based on the PMBok 6 PDF, we will cover the 4 processes with the Procurement Knowledge Area. They are:
Here are some key concepts for this Knowledge Area:
- There are many names for procurement documents, such as Request for Proposals (RFP), Invitation for Big (IFB), and Request for Quotation (RFQ).
- Contract – A mutually binding agreement that obligates the seller to provide something of value (e.g. product or service) and the buyer to provide monetary compensation
- The seller can also be referred to as: contractor, subcontractor, vendor, supplier, or service provider
- During the procurement lifecycle, the seller wears different hats. At the beginning, the seller is a bidder trying to win the contract. When they are selected, they become the selected source. When they begin working on the project, they are the contracted supplier.
Plan Procurement Management
Plan Procurement Management is the process of establishing procurement processes to follow. This process will standardize the way the project team selects vendors and administers contracts.
The key activities in this process include:
- Creating a procurement management plan
- Creating templates for procurement statement of work
- Selecting a contract type for each procurement
- Creating the procurement documents
- Determining the source selection criteria
The main output of this process is the procurement management plan. This plan is a subsidiary plan of the overall project management plan. It describes how the procurement process will be planned, executed, and controlled.
Procurement Statement of Work (SOW) – The Procurement SOW describes the scope that the vendor/seller must accomplish. This document describes all the work and activities the seller must complete. This document must be as clear, complete, and concise as possible.
There are many types of procurement statements of work. Your choice will depend on the nature of the work and type of industry.
- This type conveys what the final product should be able to accomplish, rather than how it should be built or what its design characteristics should be
- This type conveys what the end purpose or result, rather than specific procedures
- It is to be used in the performance of the work and may also include a statement of minimum essential characteristics of the product
- This type conveys precisely what work is to be done
There are three categories of contracts, and they are:
- Fixed price
- Time and materials
- Cost reimbursable
Source selection criteria are included in the procurement documents to give the seller an understanding of the buyer’s needs and to help the seller decide whether to bid or not.
Source criteria may include:
- Number of years in business or financial stability
- Understanding or need
- Price or life cycle costs
- Technical ability
- Quality or past performance
- Ability to complete the work on time
- Project management ability
Non-Disclosure Agreement (NDA) – NDA is an agreement between the buyer and prospective sellers to keep project information and artifacts confidential.
Non-competitive forms of procurement
If you do not use a competitive process, you are entering into one of the following types of non-competitive procurements
- Single source
- In this type of procurement, your contract directly with your preferred seller without going through the procurement process. This might be a company you have worked with before and, for various reasons, you do not want to look for another
- Sole source
- In this type of procurement, there is only one seller. This might be a company that owns a patent
Purchase order – A purchase order is the simplest type of fixed price contract. This type of contract is normally unilateral (signed by one party) instead of bilateral (signed by both parties)
Terms and conditions – Terms and conditions (either standard or special) in a contract differ based on what you are buying. If you are buying work that includes equipment, you will need terms that describe when ownership of the equipment will be transferred to the buyer and terms that require insurance for damages in transit
Make-or-buy analysis – This analysis determines whether it is more profitable to produce the product or service in-house or outsource it to third party vendors.
Conduct Procurement is the process of obtaining seller responses, selecting a seller, and awarding a contract.
Here are some concepts and terminologies from this process:
Bidders’ conference – The buyer can hold a bidders’ conference to give all the prospective sellers a chance to ask questions and clarify expectations
Qualified sellers list/Prequalified sellers list – Some buyers may have a list of pre-approved vendors that they must choose from
Seller proposal – The seller’s response to the procurement documents, including the price
Proposal review – After reviewing the proposals, the buyer uses the source selection criteria identified in the Plan Procurement process to assess the potential sellers’ ability and willingness to provide the requested products or services.
Negotiation – The discussions between the buyer and seller with the goal of reaching an agreement. The project manager is usually not the lead negotiator for procurement.
It is important for everyone involved in negotiations to understand that the objectives of negotiation are to:
- Obtain a fair and reasonable price
- Develop a good relationship with the seller
To achieve a signed contract, the following are usually negotiated in order.
There are other things that need to be negotiated. These include:
- Applicable law
- If you are working with a seller from a different state, country or region, you need to agree upon whose law will apply to the contract
- Project management process to be used
- Payments schedule
Contract – The entire procurement agreement between both parties, including the terms and conditions, procurement SOW, and timelines.
Letter of Intent – A letter that is not legally binding that says that the buyer intents to hire the seller. This letter gives the seller the confidence to hire additional staff or acquire more resources (if needed) to prepare for the new project.
Control Procurement is the process of managing procurement relationships, monitoring contract performance, and making changes when necessary.
The key benefit of this process is that it ensures that both the sellers and buyers are operating in accordance to the terms and conditions outlined in the procurement contract.
Here are the key concepts and terminologies for this process:
Contract Change Control System – This system includes change procedures, forms, dispute resolution processes, and taking systems and is specified in the contract
Procurement performance review – During the Control Procurement process, the project manager should analyze all available data to verify that the seller is performing as they should
Claims administration – A claim is an assertion that the buyer or the seller did something to hurt the other party. Clam administration is the process of handling the claims (or disputes) that arises between the buyer and the seller.
Escalation process for claims = claims -> disputes -> appeals
Records management system – A contract is a formal, legal document, and this document needs to be kept in the records management system, even after the project ends. Record keeping can be critical if actions taken or situations that occurred during a procurement are ever in question after the work is completed, such as in the case of unresolved claims or legal actions. Records may also be necessary to satisfy insurance requirements.
Contract interpretation – Contract interpretation is based on an analysis of the intent of the parties to the contract and a few guidelines. One such guideline is that the contract supersedes any memos, conversations, or discussions that may have occurred prior to the contract signing
Termination – The contract should have provisions for termination. Termination can be done for cause or for convenience. Termination is a serious issue, and one that has lasting effects on the project.
Inspections and audits – The buyer may choose to conduct inspection audits during execution to verify the seller’s work
Things to Remember
|1||I highly recommend that you get your mind around being a buyer before you take the exam. The issues and impacts of many situations are completely different if you are the buyer than if you are the seller.
The exam also assumes the seller is not supplying people to adjunct the buyer’s team, meaning that the seller remains external to the project team
|2||Keep in mind the following general rules, especially if you find a question with an answer that is not immediately apparent:
– Contracts require formality
– All products and project management requirements for the procurement work should be specifically stated in the contract
– If it is not in the contract, it can only be done if a formal change order to the contract is issued
– If it is in the contract, it must be done or formal change order must be approved by both parties
– Changes must be submitted and approved in writing
– Contracts are legally binding: the seller has no choice but to perform as agreed in the contract
– Contracts should help diminish project risk
– Most governments back all contract that fall within their jurisdiction by providing a court system for dispute resolution
|3||Expect the exam to ask questions like, “you do not have a finalized scope; which contract type is best?” or “you do not have a complete scope or work and have a fixed price contract. What problems can you expect to run into?” The exam tests whether you know what to do in different situations, not just if you know definitions|
|4||The following list of terms you should understand for the exam.
– Profit (fee)
– Target price
o Target price = target costs + target fees
– Sharing ration
o Incentives take the form of a formula, usually expressed as a ratio
o This ratio describes how the cost savings or cost overrun will be shared with the buyer, their first number being the account the buyer will keep and the second number being the amount the seller will keep
– Ceiling price
o This is the highest price the buyer will pay
– Point of Total Assumption (PTA)
o This only applies to fixed price incentive fee contracts and refers to the amount above which the seller bears all the loss of a cost overrun
o Costs that go above the PTA are assumed to be due to mismanagement
o Sellers will sometimes monitor their actual costs against the PTA to make sure they are still receiving a profit for completing the project
o PTA = [(ceiling price – target price)/buyer’s share ratio] + target cost
|5||Most of the question on the exam will present situations and ask you questions about those situations. In procurement, tricky questions can include addressing concepts that you may not have dealt with before, such as describing th work that would need to be done to negotiate a contract when there is no competition|
|6||The exam often asks what things the project manager must watch out for in a bidder conference. The answers include:
– Seller not asking questions in front of the competition
– Making sure all questions and answers are put in writing and issued to all potential sellers. This ensures all sellers are responding to the same procurement statement of work
|7||A project manager must understand the following about the Administer Procurement process:
– What the project manager should be doing at any point in time
– What problems and issues to watch out for under the different contract types that might affect the management of the project
– That all work and legal requirements in the contract must be accomplished, however small and however seemingly unimportant
– That the project manager must help uphold all parts of the contract, not just the project scope
Before you go…
Lastly, don’t forget to check out the other study notes in this series and download our free 200 practice questions by clicking the links below:
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