PMP Certification Study Notes 12 – Project Procurement Management

Please note that the study notes below is intended to include only the most important or esaily confused PMP concepts. It is by no means complete in the sense that one can rely on it to be fully prepared for the PMP Exam. Aspirants are advised to make use of this piece of study notes for revision purposes. Wish you PMP success!

Project Procurement Management

• sellers are external to the project team
• need to go through all 4 processes for each and every procurement
• Contract Elements:
  • offer (seller offer buyer)
  • acceptance (buyer criteria)
  • capacity (physical/financial capabilities)
  • consideration (seller receive)
  • legal purpose (must be legal under law)
• PM needs to understand terms and conditions, identify risks, include procurement schedule and involve in negotiations
• Centralized contracting vs Decentralized contracting
• Procurement Categories:
  • major complexity (high risk)
  • minor complexity (low risk, expensive)
  • routine purchase (Commercial Off the Shelf Products COTS)
  • goods and services (to perform part of our product)
• Suppliers can be:
  • sole source
  • single source (preferred, for building a long-term relationship)
  • oligopoly (very few sellers)
• a contract is not required to be written, it can be verbal or handshake, for internal projects, a formal contract is best

Plan Procurement Management

• Inputs: Project Charter, Business Documents, Project Management Plan, Project Documents, EEF, OPA
• Tools & Techniques: Expert Judgement, Data Gathering (e.g. Market Research), Data Analysis, Source Selection Analysis, Meetings
• Outputs: Procurement Management Plan, Procurement Strategy, Bid Documents, Procurement Statement of Work, Source Selection Criteria, Make-or-buy Decisions, Independent Cost Estimates (inside or outside the organization), Change Requests, Project Documents Update, OPA Updates

• identify explicitly what is needed
• identify possible sellers and pre-meeting with them
• make-or-buy analysis (determine whether to obtain products/services outside of the organization) is a compulsory process, needs to take risks into considerations
  • carefully written terms and conditions can transfer/share risks
  • teaming agreements or joint ventures
• Procurement Documents:
  • request for proposal (RFP)
  • invitation for bid (IFB)
  • request for quote (RFQ)
  • request for information (RFI)
  • tender notice
  • invitation for negotiation
  • seller initial response
• The procurement management plan specifies how a project will acquire goods/services from outside, includes contract type, risk management, constraints and assumptions, insurance requirements, form and format, pre-qualified sellers, metrics used, etc.
• Data Analysis Techniques:
  • Return on investment (ROI)
  • Internal rate of return (IRR)
  • Discounted cash flow
  • Net present value (NPV)
  • Benefit/cost analysis (BCA)
• target cost = total cost = estimated cost, total price = total cost + total profit
• Point of Total Assumption – (in fixed-price (incentive fee) contracts) in budget overrun, the point at which the seller assumes all additional costs for delivering the product/service
  • PTA = (Ceiling Price – Total Price) / Buyer’s Share Ratio + Target Cost
  • PTA = Target Cost + (Ceiling Price – Target Price) / % Share of Cost Overrun
• Procurement Statement of Work (SOW) is a legal document subject to legal reviews, legal advice should be sought throughout the whole procurement process, can be developed by the seller or buyer and must be detailed enough to allow the potential sellers to decide whether they want/are qualified (at a minimum) to pursue the work
  • performance (describe what can be accomplished)
  • functional (convey the end purpose or result)
  • design (convey precisely what are to be done),
• Evaluation Criteria: risk, understanding of need, life-cycle cost, technical capability, management approach, technical approach
• Procurement Strategy (new in PMBOK® Guide 6th Edition)
  • the procurement strategy determines the project delivery method:
    • with/without subtracting, joint venture, representative, etc.
    • turnkey, design and build (DB), build own operate transfer (BOOT), etc.
  • contract payment types:
    • Firm Fixed Price (FFP) – the price is fixed, specifications are well known, risk on the seller
    • Fixed Price Incentive Fee (FPIF) – incentives for faster/better than contracted
    • Fixed Price with Economic Adjustment / Economic Price Adjustment (FPEA / FP-EPA) – inflation are taken into account
    • Purchase Order (PO) – for off-the-shelf goods/services with published rates
    • Cost Reimbursable (CR) / Cost Plus – buying the expertise (not the products), outcome is not clear, risk on the buyer, little incentive to control costs on buyer, need invoice audits
      • Cost Plus Fixed Fee (CPFF)
      • Cost Plus Incentive Fee (CPIF) – incentive for performance, sharing of unused money if under/over contracted amount
      • Cost Plus Award Fee (CPAF) – award to be given based on agreed criteria, solely decided by the customer on the degree of satisfaction
      • Cost Plus Percentage of Costs (CPPC) – illegal for contracts with US Government
      • Cost Contract – no profit, for NGO
    • Best Efforts – obligates the seller to utilize best attempts, high uncertainty in meeting the goal
    • Time and Materials (T&M) – (hybrid type) when scope is not known, need constant monitoring to control schedule and cost, simple, for short duration, good for proof-of-concept type projects
  • procurement types
• Bid Documents
  • Request for Proposal (RFP) – cost reimbursable contract, functional/performance SOW
  • Invitation for Bid (IFB) / Request for Bid (RFB) – fixed-price contract, design SOW
  • Request for Quote (RFP) – time and material, any type of SOW
• Contractual Terms
  • Cancellation for Convenience – buyer can cancel and pay up to the point
  • Cancellation for Cause – default by either party, may result in legal actions
  • Escrow – survivability of seller in doubt, put the product in escrow (esp. if seller does not give up intellectual properties)
  • Force Majeure – standard disclaimer refers to ‘Acts of God’
  • Indemnification / Liability – responsible party
  • LOI Letter of Intent – not legally binding
  • Privity – the contractor may use sub-contractor, no direct contractual relationship with buyer
  • Retainage – amount to be withheld to ensure delivery
  • Risk of Loss – how the risk is shoulder by the parties
  • Time is of the Essence – delay in delivery will cause cardinal breach of contract
  • Work Made for Hire – all work owned by the buyer

Conduct Procurements

• Inputs: Project Management Plan, Project Documents, Agreements, Procurement Documentation, Seller Proposals, EEF, OPA
• Tools & Techniques: Expert Judgement, Advertising, Bidder Conferences, Data Analysis, Interpersonal and Team Skills
• Outputs: Selected Sellers, Agreements, Change Requests, Project Management Plan Updates, Project Documents Update, OPA Updates

• identify the sellers and award the contracts
• PM may not be the lead negotiator on procurement but may be present to assist
  • may need senior management approval before awarding the contracts
• bidder’s conference is a Q&A session with bidders, all bidders receive the same information (bidder are careful not to expose their technical approach during the session => may not have many questions)
• remember NOT to have secret meetings or communications with individual vendors
• review seller proposals: weighting systems, independent estimates, screening systems (screen out non-qualified vendors), seller rating systems (for past performance), expert judgement
• Data Analysis includes ensuring that proposal is full and complete
• Contract Negotiations and Tactics
  • Fait Accompli – not negotiable terms
  • Deadline – deadline for deliverables
  • Good Guy/ Bad Guy – one friendly, one aggressive
  • Missing Man – decision maker is missing
  • Limited Authority – not given authority
  • Fair and Reasonable – what is fair?
  • Unreasonable – making unreasonable demands
  • Delay – esp in critical moments
  • Attack – force compliance
• The agreement is legally binding and should include (PM should NOT attempt to write the agreement):
  • statement of work, schedule baseline, performance reporting, the period of performance, roles and responsibilities, warranty, payment terms, fees and retainers, incentives, liability, penalties, etc.

Control Procurements

• Inputs: Project Management Plan, Project Documents, Agreements, Procurement Documentation, Approved Change Requests, Work Performance Data, EEF, OPA
• Tools & Techniques: Expert Judgement, Claims Administration, Data Analysis, Inspection, Audits
• Outputs: Closed Procurements, Work Performance Information, Procurement Documentation Updates, Change Requests, Project Management Plan Updates, Project Documents Update, OPA Updates

• would be performed by both seller and buyer
• manage procurement relationships, monitor contract performance, make change and corrections
• Data Analysis Techniques:
  • Performance reviews
  • Earned value analysis (EVA)
  • Trend analysis
• the procurement administrator may be external to the project team
  • to close a procurement, the project management team should check and approve all deliverables and a written notice be sent to the seller (closed procurement)
  • may identify early signs and capture details for pre-mature termination of a contract
• For Fixed Price contracts, look out for Bait and Switch (replace with cheaper materials), look out for excessive change requests
• For Cost Reimbursable contracts, audit all invoices, look out for additional charges, tie payment to milestones, make sure people with the required skill sets are doing the job
• For Time and Materials contracts, ensure hours are not padded, follow the milestone dates
• the claims administration process deals with changes/disputes, disputes is best to be settled through negotiation > ADR
• may need Alternative Dispute Resolution (ADR) by 3rd parties in case disputes cannot be settled
• OPA may include the seller’s performance

(The “Close Procurements” process in PMBOK® Guide 5th Edition has been moved and merged into “Control Procurements and Close Project or Phase”)