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Project Procurement Management Mohammad A. Rob. Importance of Project Procurement Management. Procurement means acquiring goods and/or services from an outside source Other terms include purchasing and outsourcing
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Importance of Project Procurement Management • Procurement means acquiring goods and/or services from an outside source • Other terms include purchasing and outsourcing • Many information technology projects involve the use of goods and services from outside the organization, and the term outsourcing is commonly used • Many companies outsource their data operations or help desk support to a specialized company • Many companies outsource the coding part of a system to a software development company
Why Outsource? • To reduce both fixed and recurrent costs • outside contractors needs not to pay any benefit • To allow the client organization to focus on its core business • outsourcing IT functions, companies can focus on jobs that are critical to the success of the organization • To access skills and technologies • organizations can gain access to specific skills and technologies • To provide flexibility • using outsourcing to provide extra staff during peak workloads • To increase accountability • Having a contract can clarify responsibilities and focus on deliverables
Project Procurement Management • Why not Outsource? • An organization looses control on a project when it is outsourced • One can become too dependent on particular suppliers. If a supplier goes out of business, it could cause a great deal of damage to the project • Project procurement management includes the processes required to acquire goods and services, to attain project scope, from outside the performing organizations
Project Procurement Management Processes • Procurement planning: Determining what to procure and when. What to outsource, type of contract, creating statement of work and procurement management plan • Solicitation planning: Documenting product requirements and identifying potential sources. Writing Request for Proposal (RFP) and developing evaluation criteria • Solicitation: Obtaining quotations, bids, offers, or proposals as appropriate. Advertisement, holding bids, and receiving proposals or bids • Source selection: Choosing from among potential vendors, negotiating contracts, and awarding the contract • Contract administration: Managing the relationship with the vendor. Monitoring contract performance, making payments, awarding contract modifications • Contract close-out: Completion and settlement of the contract.Product verification, formal acceptance, and closure
Procurement Planning Process • Procurement planning involves identifying which project needs can be best met by using products or services outside the organization • It includes deciding • whether to procure • how to procure • what to procure • how much to procure • when to procure
Procurement Planning • The inputs to this process are scope statement, product description (specification in case of software), market conditions, constraints, and assumptions • Major tools are: • Make-or-buy analysis: determining whether a particular product or service should be made or performed inside the organization or purchased from someone else. Often involves comparing cost estimation between internal development and outsourcing • Expert judgement: both internal and external, can provide valuable inputs in procurement decisions • Type of contract:fixed price or lump-sum, cost-reimbursable, time and material • The outputs are procurement management plan and statement of work
Types of Contracts • Fixed price or lump sum: involves a fixed total price for a well-defined product or service. The buyer incurs little risk in this case • Cost reimbursable: involve payment to the seller for direct and indirect actual costs. • Direct costs (salary, hardware, software) can be traced back item by item. • Indirect cost such as supplies, utility bills, work space; sometime cannot be traced back dollar-by-dollar • Time and Material: combination of both fixed and reimbursable contract. Example: cost of a hardware and its delivery • Unit price contracts: require the buyer to pay the seller a predetermined amount per unit of service
Cost Reimbursable Contracts • There are three types of reimbursable contracts: • Cost plus incentive fee (CPIF): the buyer pays the seller for allowable performance costs plus a predetermined fee and an incentive bonus. For example, a supplier would receive 10% more of their fee if the product is supplied one month early • Cost plus fixed fee (CPFF): the buyer pays the seller for allowable performance costs plus a fixed fee payment usually based on a percentage of estimated costs • Cost plus percentage of costs (CPPC): the buyer pays the seller for allowable performance costs plus a predetermined percentage based on total costs
Contract Types Versus Risk • Contracts can be risky. The risk depends on the type of contract. In some contracts, the buyers incurs more risk than the seller; in others, the opposite is true
Procurement Management Plan • The procurement plan is an output of the procurement planning process. It includes information such as: • What type of contract will be used? • Evaluation criteria and the responsible person • The relationship of project group to the procurement department of the organization. Example: Who offers a contract? - project manager or vice president • Any standard procurement document to be used • How multiple providers will be managed? • How procurement will be coordinated with other project activities.
Statement of Work (SOW) • A statement of work is a description of the work required for the procurement • It is type of scope statement that describes the work in sufficient detail for the supplier to understand whether they are capable of providing the product or service • Many contracts, or other mutually binding agreements, include SOWs • A good SOW gives bidders a better understanding of the buyer’s expectations • Many organizations use templates for SOW
Solicitation Planning Process • Solicitation planning involves preparing the documents needed for solicitation and determining the evaluation criteria for the contract award. Two common documents are: • Request for Proposals: used to solicit proposals from prospective suppliers. In this case, the product scope is not well-defined. The buyer may choose a particular option out of several options provided by various suppliers • Requests for Quotes: used to solicit bids or quotes for well-defined product or item • Invitations for bid or negotiation, and initial contractor responses are also part of solicitation planning
Solicitation Process • Solicitation involves obtaining proposals or bids from prospective sellers • Organizations can advertise to procure goods and services in several ways • approaching the preferred vendor • approaching several potential vendors • advertising to anyone interested • A bidders’ conference, or pre-bid conference can help clarify the buyer’s expectations
Source Selection Process • Source selection involves evaluating bidders’ proposals, choosing the best one, negotiating the contract, and awarding the contract • Many factors aside from cost or price may need to be evaluated in the selection process • price might be the primary factor for off-the-shelf items, but the lowest proposed price may not be the lowest cost if the seller seems to be unable to deliver on time • proposals are often separated into technical (approach) and commercial (price) sections • multiple sources may be needed for critical products • It is helpful to prepare formal evaluation criteria for selecting vendors • Buyers often create a “short list” of possible suppliers, and then request detailed proposals from them
Source Selection Process • The inputs to the source selection is bid proposal, evaluation criteria, and organizational policies • Tools and techniques are: • Contract negotiation: involves clarification and mutual agreement on the structure and requirements of the contract prior to the signing of the contract • Weighting system: a method of quantifying qualitative data to minimize the personal prejudice or influence of source selection • Screening system: involves establishing minimum requirements of performance for one or more of the evaluation criteria • Independent estimates: the procuring department may prepare its own independent estimates as a check on proposed pricing • The output from the source selection is a contract. • It is a mutually binding agreement that obligates the seller to provide the specified product and obligates the buyer to pay for it.
Sample Proposal Evaluation Sheet Many organizations suffered by only paying attention to the technical content - not emphasizing management issues. Experts suggest that technical criteria should not be given more weight that management or cost criteria
Detailed Criteria for Selecting Vendors After developing a short list of suppliers, a buyer often follow with a more detailed proposal evaluation process as shown here
Contract Administration Process • Contract administration ensures that the seller’s performance meets contractual requirements • Contracts are legal relationships, so it is important that legal and contracting professionals be involved in writing and administering contracts • Contract administration includes application of appropriate project management processes such as • project plan execution: to authorize contractor’s work at the appropriate time • performance reporting: to monitor contractor cost, schedule, and technical performance • quality control: to inspect and verify the adequacy of the contractor’s product • change control: to ensure that changes are properly approved and that all involved parties know about the change
Contract Administration Process • Contract administration also has a financial component. Payment terms should be defined within the contract and must involve a specific linkage between the seller progress made and seller compensation paid • The inputs to contract administration are: contract, work results, change requests, and seller invoices • Tools and techniques for contract administration are • contract change control system: defines the process by which the contract can be modified • performance reporting: provides management with information about how effectively the seller is achieving contractual objectives • Major outputs to the contract administration are • correspondence: buyer/seller communication • contract changes
Suggestions on Change Control for Contracts • Changes to any part of the project need to be reviewed, approved, and documented by the same people in the same way that the original part of the plan was approved • Evaluation of any change should include an impact analysis. How will the change affect the scope, time, cost, and quality of the goods or services being provided? • Changes must be documented in writing. Project team members should also document all important meetings and telephone phone calls
Contract Close-Out Process • Contract close-out includes • product verification to determine if all work was completed correctly and satisfactorily • administrative activities to update records to reflect final results • archiving information for future use • The input to contract close-out is contract documentation. It includes the contract and its supporting documents such as schedules, requested and approved contract changes, invoices, payment records, etc. • The tools for close-out is procurement audits, which is a structured review of the procurement process - from procurement planning through contract administration. The objective is to identify successes and failures during the procurement process • The output to the contract close-out are • contract file: a complete set of indexed records prepared to be included in the final project records • final acceptance and closure: written notice of completion to the seller
