PMP Certification Study Notes 12 – Project Procurement Management


PMP Procurement Management

Newly UPDATED for the new PMP® Exam 2018. Happy learning!

Introduction: This part of the PMP® exam study notes (updated for new PMP® Exam 2018) is based on Section 12 of new PMBOK® Guide 6th Edition. The study notes have been rewritten to reflect the latest changes in the PMBOK® Guide for the new PMP® Exam. More information on my PMP® certification exam preparation can be found at my PMP® exam and certification journey (with free PMP® study resources and tips) here.

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”)


 

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Edward Chung

Edward Chung aspires to become a full-stack web developer and project manager. In the quest to become a more competent professional, Edward studied for and passed the PMP Certification, ITIL v3 Foundation Certification, PMI-ACP Certification and Zend PHP Certification. Edward shares his certification experience and resources here in the hope of helping others who are pursuing these certification exams to achieve exam success.

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19 Responses

  1. Amarpreet Kaur says:

    Hi, Great article!!
    I would like to know examples of procurement categories-major complexity, and minor complexity from real life.
    Can you help with that?

    • Edward Chung says:

      Thanks for your comment.

      Major complexity procurement may be purchasing a new CRM system; minor complexity procurement may involve selecting a new desktop computer for a new hire.

      Wish you PMP success!

  2. Mustafa says:

    Hi Edward,
    appreciate if you could elaborate more about the following

    Request for Proposal (RFP) – cost reimbursable contract, functional/performance SOW (RFP issue just in case if we go with CRC)
    Invitation for Bid (IFB) / Request for Bid (RFB) – fixed-price contract, design SOW (IB/RFB just in case of FPC and design SOW)
    Request for Quote – time and material, any type of SOW

    • Edward Chung says:

      Sorry for my shorthand. Let me explain in this way: Request for Proposal is to be used for cost reimbursable contract by providing the functional/performance SOW. Hope this has made things clearer.

      Wish you PMP success!

  3. Investigator in Toronto says:

    I’ve been googling the internet for some related information, but
    haven’t found anything as good as what you have here. I really, need to improve my Tumblr layout.
    What do you use here?

  4. Leilani says:

    For the IFB, RFQ, and RFP, you have associated each with a particular kind of contract in your notes. For example, RFP is associated with a cost reimbursable contract. Are you saying that only a cost reimbursable contract is used with an RFP?

    • Edward Chung says:

      Hi Leilani,

      The study notes outlined above are over-simplified – with the intention to help fellow aspirants to pass the PMP Exam. The answer to your question: yes, in general sense but there are always *exceptions* in real life. But those exceptions will not be tested in the PMP Exam.

      Wish you PMP success!

  5. sandeep K says:

    Hi Edward Chung,
    I cleared my PMP exam last week and would like to thank you for the notes you have complied on every knowledge area.It’s been of great help especially during the last weeks where in you want to brush up and run through all the knowledge areas.
    Thanks a lot, you are awesome.

    Sandeep K

  6. Lily says:

    Thank you so much, this is very helpful! I do have a question, I was told that in close procurements there might be procurement negotiation. I got this from one of Rita’s flashcards. Why would there be negotiation during procurement closure?

    • Edward Chung says:

      Hi Lily,

      Thanks for your encouraging comment.

      Yes, during close procurements, there may be some disagreements between the seller and the buyer that would need to be resolved through negotiation or even litigation. And in the notes above, it is written that “unresolved claims may be left for litigation after closure”.

      Hope this helps.

      Wish you PMP success!

  7. Edward Chung says:

    Hi Mei,

    Based on your performance in mock PMP exams, you should be able to pass the PMP Exam. Relax and perform your best!

    Wish you PMP success!

    Regards,
    Edward

  8. Mei Lin says:

    Hi Edward,

    I have been using and reading a lot of your study notes. They are very helpful. Thank you!
    One question I have is on Study Notes #12 – Procurement Management, you wrote “contract change control system is defined in the procurement management plan, but not in the contract”, is this accurate?

    This is what Rita’s book has on page 504 8th edition, ” To handle these changes, a contract change control system is established. This system includes change procedures, forms, dispute resolution processes, and tracking systems and is specified in the contract.”

    Can you please help me to clarify this confusion on whether or not a change control system in defined in Procurement Management Plan or Contract? Maybe I misread your notes or Rita’s book?

    Thanks,
    Mei

    • Edward Chung says:

      HI Mei,
      Thanks for pointing out this. I made the note based on my mistakes in mock exams but I did not record from which mock exam I got this. Upon further research into the topic, it is obvious that the Contract Change Control System should also be defined in the contract as this involves not only the performing organization but also the vendor. Rita’s explanation is more reasonable. Thanks!

      • Mei Lin says:

        Thanks, Edward! I am taking the exam on the 16th, any suggestions or advice? I’m currently practicing using Rita’s PM Fastrack and PM Exam simulator. I got around 85% on PM Exam Simulator and 75% on Rita’s. I don’t know if I will pass the exam in 9 days. I am very nervous!

        Mei

  9. saroj singi says:

    Dear Sir,
    I was going through your websites for PMP concepts. it is very good and informative site. Thanks for having this informations.
    I have one doubt on ” procurement document” that has been generated in the planning process group of the “plan procurement management”process. but how it can be the input for the “Initiating Process group” for the process “Identify stakeholder”? Please help me to understand the flow here.
    Thanks
    Saroj

    • Edward Chung says:

      Thanks for your compliments.

      From the procurement document Project Managers can identify vendors that are also considered as stakeholders to the project (some are vital while some vendors are of trivial importance).

      Sometimes we may have nominated vendor before the project begin (exclusive suppliers) while the other times we will only select the vendors midway in the project. However, once the vendors are identified, we will need to go through the “Identify Stakeholders” again to formulate the stakeholder management plan for the vendors.

      This is just like Risk Management. We will need to continually monitor risks and once new risks emerge, we will need to go through the whole Risk Management processes to update the risk register and plan.

      Hope this helps you understand the flow. Wish you PMP success!