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Procurement Management

  • Plan Procurements—12.1

Procurement management involves the relationship between the buyer and the seller when products, services, or other results are being purchased by the project team in order to complete the project. Key PMI principles for procurement management include

  • The contract statement of work (SOW) is a key document that defines the work in order to allow buyers the ability to evaluate and bid on the work.
  • There are three primary contract types:
    • Fixed price
    • Time and material
    • Cost reimbursement
  • The risk to both the buyer and seller depends on the type of contract chosen.
  • The contract is a formal, written document and any changes are submitted in writing.

Table 4.17 shows the inputs, tools and techniques, and outputs for the plan procurements process.

Table 4.17. Plan Procurements Inputs, Tools and Techniques, and Outputs

Inputs

Tools and Techniques

Outputs

Scope baseline

Make-or-buy analysis

Procurement management plan

Requirements documentation

Expert judgment

Procurement statements of work

Teaming agreements

Contract types

Make-or-buy decisions

Risk register

Procurement documents

Risk-related contract decisions

Source selection criteria

Activity resource requirements

Change requests

Project schedule

Activity cost estimates

Cost performance baseline

Enterprise environmental factors

Organizational process assets

The Make/Buy Decision

The first step in procurement is resolving the make/buy decision. This decision is made during the plan purchases and acquisition process. An analysis is done to determine if the product or service can be produced by the project team or if it should be purchased. This analysis might also include buying versus renting/leasing a product.

The Contract Statement of Work

In addition to making the make/buy decision during the plan purchases and acquisition process, it is during this step that the contract statement of work (SOW) is developed and the type of contract to be used is determined. The SOW is a document that defines the work to be performed. A contract SOW is work performed under contract. The contract SOW is developed from the scope statement and WBS and should be sufficiently detailed to allow the potential sellers to determine their ability to perform the work. A project can have multiple SOWs.

Contract Types

A number of contract types are used in the procurement process. In order to be prepared for the exam, understand the benefit of each type, as summarized in Table 4.18

Table 4.18. Contract Types

Name

Description

Pro/Con

Firm fixed price (FFP) (or lump sum)

The work is completed for a predetermined price.

Benefits the buyer. Seller at risk if item isn't clearly defined. Seller must manage changes closely.

Fixed price incentive (FPIF)

Similar to fixed price but an incentive is offered for early completion.

More administrative effort for buyer and seller.

Fixed price with economic price adjustment (FP-EPA)

Similar to fixed price but with an agreed upon final adjustment due to changing economic conditions.

Used for very long term performance when costs can increase or decrease over time. To protect the buyer and seller the EPA clause must relate to a well-known financial index.

Purchase order

A form of fixed price, usually for off-the-shelf items.

Optimal for both parties when item is a commodity (such as computers).

Cost reimbursement, includes CPFF, CPIF, and CPAF (see following exam alert)

The seller is reimbursed for his costs, plus an additional fee.

Benefits the seller because his cost is covered. Risk to buyer if costs are higher than anticipated; the budget is affected.

Time and material (T&M)

Hybrid arrangement between fixed price and cost reimbursement where elements of both are used; a fixed unit rate can be set for certain elements of work while other components are completely reimbursable. For example, a programmer might be acquired at $125 per hour without defining how long he will be used.

Seller benefits if amount of work can be extended, which affects the buyer's budget.

Figure 4.4 illustrates the risk to buyer and seller for the contract types.

Figure 4.4

Figure 4.4 The buyer and seller risk for contract types.

The Procurement Management Plan

The procurement management plan is developed to describe how procurement activities will be carried out. The plan can include content that provides guidance for

  • Type of contracts to be used
  • Risks and risk management issues
  • Criteria for independent estimates
  • Standard procurement documents and procedures
  • Coordinating procurement with other projects and multiple vendors
  • Project assumptions or constraints that affect procurements
  • Handling procurement schedules
  • Addressing make-or-buy decisions
  • Identifying and managing performance requirements
  • Identifying prequalified sellers
  • Procurement metrics used to evaluate sellers and manage contracts

Cram Quiz

Answer these questions. The answers follow the last question. If you cannot answer these questions correctly, consider reading this section again until you can.

  1. The responsibility for tailoring a contract for goods and services to the needs of the project lies with whom?

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    A. The project manager

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    B. The project management team

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    C. The attorneys

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    D. The contract manager

  2. The decision on whether a product or service can be produced by the project management team or can be purchased is called what?

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    A. Buyer assessment

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    B. Expert judgment

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    C. Make-or-buy analysis

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    D. Procurement evaluation

Cram Quiz Answers

  1. Answer B is the best response. The responsibility for tailoring a contract for goods and services to the needs of the project lies with the project management team. The project management team can include the project manager, attorneys, and/or contract manager, but the responsibility does not rest solely with one individual.

  2. Answer C is the best response. The decision on whether a product or service can be produced by the project management team or can be purchased is called a make-or-buy analysis.

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