PMP Certification Study Notes 12 – Project Procurement Management


PMP Procurement Management

Introduction: This part of the PMP® exam study notes on Project Procurement Management is based on chapter 12 of PMBOK® Guide 5th Edition. More information on my PMP® certification exam preparation can be found at my PMP® exam and certification journey here.

  • Procurement Statement of Work (SOW) is a legal document subject to legal reviews, legal advise should be sought throughout the whole procurement process
  • 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)
  • best if contract is signed after PM is assigned
  • PM needs to understand terms and conditions, identify risks, include procurement time in schedule and involve in negotiations
  • Centralized contracting vs decentralized contracting
  • sole source, single source (preferred), oligopoly (very few sellers)
  • 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)
  • a contract is not required to be written, it can be verbal or handshake, for internal projects, formal contract is best
  • procurement applies to actors (as a service)
  • immaterial breach is minor breach
  • point of total assumption (PTA) = Target Cost + (Ceiling Price – Target Price) / % Share of Cost Overrun

Plan Procurement Management

  • determine whether to obtain products/services outside of organization
  • identify possible sellers and pre-meeting with them
  • identify explicitly what is needed
  • make-or-buy analysis 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.
  • Procurement Statement of Work (SOW) – performance (describe what can be accomplished), functional (convey the end purpose or result), design (convey precisely what are to be done), can be developed by the seller or buyer – detail enough to allow the potential sellers to decide whether they want/are qualified (at a minimum) to pursue the work
  • Contract 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
  • 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
  • target cost = total cost = estimated cost, total price = total cost + total profit
  • 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 – time and material, any type of SOW
  • 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 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
  • Sole Source vs Single Source (preferred vendor – for long-term relationship)
  • Evaluation Criteria: risk, understanding of need, life-cycle cost, technical capability, management approach, technical approach

Conduct Procurements

  • 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)
  • NOT to have secret meetings or communications with individual vendors
  • may set up qualified sellers lists
  • review seller proposals: weighting systems, independent estimates, screening systems (screen out non-qualified vendors), seller ratings systems (for past performance), expert judgement
  • 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
  • Agreement is legally binding and should include (PM should NOT attempt to write the agreement):
    • statement of work, schedule baseline, performance reporting, period of performance, roles and responsibilities, warranty, payment terms, fees and retainers, incentives, liability, penalties, etc.

Control Procurements

  • performed by both seller and buyer
  • manage procurement relationships, monitor contract performance, make change and corrections
  • the procurement administrator may be external to the project team
  • may identify early signs and capture details for pre-mature termination of contract
  • 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
  • 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
  • Contract Change Control System: for handling change requests (define who has the authority to approve changes (usually not the PM, but may be assigned the authority))
  • Work performance data includes: the cost incurred and the invoice needs to be paid
  • OPA may include the seller’s performance

Close Procurements

  • all work are completed, deliverables accepted, claims settled OR terminated by either party
  • at completion / termination of contract
  • prior to administrative closure of Close Project or Phase
  • unresolved claims may be left for litigation after closure
  • settlement of claims/invoices, audit, archive, lessons learned
  • the contract is complete when all the specifications are satisfied, no matter the customer is satisfied with the product or not
  • Procurement Audit is the structured review of the procurement process from Plan Procurement Management through Control Procurements, is used to capture lessons learned from the procurement exercise
  • once a procurement is cancelled, the next process will be the close procurements

 


Additional PMP® Study Resources

If you find the above PMP® study notes useful, you may want to check out the recommended PMP® Exam study resources on my website (all are free):

Wish you PMP® success!


 

Most Popular PMP Certification Exam Articles

50% discount coupon code for GreyCampus PMP online training courses

Support website running for FREE, thanks!

If you find this post helpful and if you are thinking of buying from Amazon, please support the running cost of this website at no extra cost to you by searching and buying through the search box below. Thank you very much for your help!

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.

You may also like...

Leave a Reply

Your email address will not be published. Required fields are marked *

11 Responses

  1. 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

  2. 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!

  3. 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

  4. 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

  5. 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!

November 12, 2013