Project Procurement Management Processes

1. Manage Project ProcurementProcurement Processes Diploma of Project Management 17872Qualification Code BSB51507Unit Code BSBPMG509A

2. Project Procurement Management Processes PMBOK Project Procurement Management Processes - 12.1 Plan Procurements 12.2 Conduct Procurements 12.3 Administer Procurements 12.4 Close Procurements PMBOK 4th Edition

3. Learning Objectives Learn how to contribute to the development of the procurement management plan under the direction of the Project Manager Understand how to contribute to the development of project documentation for contract definition and formation Assist with the development of the final tendering and contractual documentation Monitor and control contractors and suppliers and their activities for compliance with contractural requirements Report on contracting and procurement management issues and responses

4. Reading – Cost Processes • Please take some time to review the PMBOK Chapters 12.1, 12.2, 12.3 and 12.4 • This could take 30 to 45 minutes

5. Monitor Initiation Planning Execution Close Control 12.1 Plan Procurements • The process of documenting project purchasing decisions, specifying the approach and identifying potential suppliers. • It identifies project needs that are best met by acquiring products or services from outside of the project organisation. It considers potential suppliers and the contractual arrangements that may be required to manage these external parties to achieve the project objectives. • Closely related to Risk Management • Occurs during Planning Adapted from PMBOK 4th Edition

6. 12.1 Plan Procurements Inputs to Plan Procurements Scope Baseline - Scope Statement and WBS Requirements documentation Project Schedule Teaming Agreements - with third parties Risk Register Activity Resource Requirements Activity Cost Estimates Cost Performance Baseline Enterprise Environmental Factors Marketplace conditions and products/services available Suppliers past performance Typical terms and conditions Organisational Process Assets Formal procurements policies and procedures Preferred Supplier Agreements Adapted from PMBOK 4th Edition

7. 12.1 Plan Procurements Tools and techniques to Plan Procurements – Make or Buy Analysis Contract Types Preferred Supplier Agreements Procurement Approach Expert Judgement Procurement Policies & Procedures Adapted from PMBOK 4th Edition

8. 12.1 Plan Procurements Make or Buy Analysis Determines whether particular work can be accomplished by the project team or must be purchased from outside sources The capability may exist internally but may be committed to other projects Budget constraints can influence make or buy decisions Make or buy decisions need to cover the following – Purchase versus lease Related costs – direct costs and indirect support costs Adapted from PMBOK 4th Edition

9. 12.1 Plan Procurements Expert Judgement Consulting procurement and legal professionals May be internal or external to the project organisation Preferred Supplier Agreements Many organisations (particularly government) negotiate agreements with pre-qualified suppliers of regularly purchased products or services The project team then needs to select the supplier from the preferred supplier agreement It makes it much easier to find reputable suppliers and reduces requests for information within the market Exceptions normally need to be approved by an internal Procurement Department Adapted from PMBOK 4th Edition

10. 12.1 Plan Procurements Procurement Approach Once the Buy decision has been made, many different approaches can be used to procure the required products or services Three Quotes – traditionally three quotes are obtained for certain trades and then the cheapest is selected, depending on conditions Previous Supplier – may be related to preferred supplier agreements, a well known supplier that has been used in the past is automatically chosen Tender Processes – can be open to the entire market or closed to specific suppliers often from the preferred supplier list Adapted from PMBOK 4th Edition

11. 12.1 Plan Procurements Procurement Policies and Procedures Most large organisations and all government departments will have extensive policies and procedures to govern purchasing These often include – Preferred Supplier Agreements Purchase Ordering and Supply processes Delegated authorities for approval of expenditure Contract Types Fixed Price Cost Reimbursable Time and Materials Adapted from PMBOK 4th Edition

12. Fixed Price Contracts Involves setting a fixed total price for a defined product or service Often include financial incentives for achieving or exceeding objectives such as time, cost and quality Suppliers assume much of the delivery risk and are legally obligated to complete the contract Financial and legal penalties are common if the contract conditions are not met Normally the most complex to negotiate and administer Adapted from PMBOK 4th Edition

13. Types of Fixed Price Contracts Firm Fixed Price Contracts (FFP) • Most common form of fixed price contract, favoured by most buying organisations • Price is set at the outset and only subject to change if the scope of work formally changes • Any cost increase due to poor performance is the responsibility of the seller • The buyer must precisely specific the requirements, any changes to the specification will normally result in additional costs • Doesn’t normally result in the BEST price for the product or service Buyer Risk is LOW but must document detailed requirements Seller Risk is HIGH so normally charge a premium

14. Types of Fixed Price Contracts Fixed Price Incentive Fee Contracts (FPIF) • Similar to basic Fixed Price but with some flexibility based on performance under the contract • Financial incentives and penalties are often negotiated based on time, cost and quality • The Seller can receive additional payment if they outperform or may be subject to addition costs if they under perform • Not popular with Sellers for new products or services, or high risk procurement • Under FPIF a price ceiling is set, all costs above this are the responsibility of the Seller Similar Buyer and Seller Risk Profiles to Fixed Price Much more COMPLEX to negotiate and administer

15. Types of Fixed Price Contracts Fixed Price with Economic Price Adjustments (FP-EPA) • Normally used for long term contracts • Basic Fixed Price with clauses allowing for a variation in price should economic conditions change • Price adjustments may be allowed due to inflation, commodity price fluctuations and variations to exchange rates • Best if related to reliable, standard and externally calculated financial indices • Should ideally allow for both price increases and price decreases, but price decreases are often overlooked • Intended to protect both the Buyer and Seller from economic conditions outside of their control Lowest Risk Profile but COMPLEX to negotiate and administer

16. Involves paying the Seller for all legitimate actual costs incurred plus an agreed fee for Seller profit May also include financial incentive or penalty clauses Delivery risk is shared between the Buyer and Seller Gives flexibility to the Buyer to redirect the Seller whenever the scope of work changes Especially popular where the Buyer cannot define detailed requirements or for high risk projects Financial and legal penalties are harder to enforce if the contract conditions are not met, simpler than Fixed Price to negotiate and administer Cost Reimbursable Contracts Adapted from PMBOK 4th Edition

17. Types of Cost Reimbursable Contracts Cost Plus Fixed Fee Contracts (CPFF) • Seller is reimbursed for all allowable costs for performing the agreed work • Seller receives a fixed fee payment calculated as a percentage of the initial estimated project cost • The Fee is paid only for completed work and does not change due to Seller performance – no incentives of penalties • The Fee can only be varied due to an agreed change in project scope Low Risk Profile but COMPLEX to negotiate and administer Loosely defined requirements can lead to disagreements over SCOPE

18. Types of Cost Reimbursable Contracts Cost Plus Incentive Fee Contracts • Seller is reimbursed for all allowable costs for performing the agreed work • Seller receives a predetermined incentive fee based on meeting agreed performance objectives • If the final costs vary from the original estimate, then both the Buyer and the Seller share the cost overrun or underrun based on a predetermined percentage split • Approach to changes in costs due to changes in scope is unclear and can cause conflict Medium Risk Profile and COMPLEX to negotiate and administer Loosely defined requirements can lead to disagreements over SCOPE

19. Types of Cost Reimbursable Contracts Cost Plus Award Fee Contracts (CPAF) • Seller is reimbursed for all allowable costs for performing the agreed work • The profit component of the fee is only earned based on the satisfaction of broad subjective performance criteria defined and incorporated into the contract • The amount of the fee is based solely on the subjective assessment of Seller performance by the Buyer • Generally includes a clause where no appeals can be made on the amount of the fee. Very unpopular with Sellers LOW Risk Profile for Buyer, HIGH Risk Profile for Seller

20. Hybrid type of contract containing both aspects of cost-reimbursable and fixed-price contracts Often used to acquire consultants, contract staff and subject matter experts Also used when the Buyer cannot, or doesn’t want to, specify the statement of work or requirements in detail Gives flexibility to the Buyer to redirect the Seller whenever the scope of work changes Many organisations will require not-to-exceed values or time limits on such contracts in order to manage and monitor costs Time and Material Contracts (T&M) VERY Common for contract labour Risk is shared between the Buyer and Seller

21. 12.1 Plan Procurements Outputs of this process include – Procurement Management Plan Detailed contents covered in slide 22 and 23 Procurement Statements of Work Derived from the project scope baseline That portion of project scope to be included in the particular contract Make or Buy Decisions Included as a table of decisions in the Procurement Management Plan Procurement Documents Requests for Tender Seller Evaluations Contracts Source Selection Criteria Detailed in slide 24 Change Requests Monitor Initiation Planning Execution Close Control Adapted from PMBOK 4th Edition

22. Procurement Management Plan The Procurement Management Plan describes how the procurement processes will be managed. It is critical that it is linked to relevant industry regulations and organisational policies and procedures. Common inclusions in the Procurement Management Plan – Links to organisational procurement management policies and procedures Types of contracts to be used and contract templates Delegated authorities and required involvement from internal purchasing, finance and legal experts/departments Tender document templates Assumptions, constraints and risks related to procurement Schedules of contracted deliverables Preferred supplier lists Procurement metrics and performance measurements Adapted from PMBOK 4th Edition

23. It is often very useful to document all procurement approaches and decisions in a table known as the Procurement Planning Register Includes information about the sourcing approach, type of contract, selection criteria, requirements, risks etc Content can be tailored to organisational policies and procedures Procurement Planning Register Name of the item being purchased Summary requirements for the product or service Primary criteria on which the selection will be made Summary of Risks Major date and dependencies Name and position of the person responsible for managing the procurement – often NOT the Project Manager Approach selected for the procurement eg – three quotes, preferred supplier, tender Fixed Price, Cost reimbursable or Time and Materials, often includes performance criteria Budget estimate or allowance

24. Selection Criteria • Selection criteria are often included as part of tender documents and are used to rate or score different suppliers • Facilitate and provides justification for procurement decisions • Can be limited to purchase price for commodity type items or can also include other selection criteria such as reputation, financial viability, fit with requirements etc • Often weighted based on relative importance Management Approach Risk Technical Capability Understanding Of Requirements Overall or Lifecycle Costs Technical Approach Industry Experience Business Size & Type Financial Viability Production Capacity Warranty Past Performance & References Intellectual Property

25. Monitor Initiation Planning Execution Close Control 12.2 Conduct Procurements • The process of obtaining seller responses, selecting a seller and awarding the contract • The team applies selection criteria to the bids or proposals received from the various sellers • The process is sometimes repeated in more detail for major procurements once a short list of qualified vendors is identified • Often referred to as the tender process • Occurs during Execution Adapted from PMBOK 4th Edition

26. 12.2 Conduct Procurements Inputs to Conduct Procurements Project Management Plan Procurement Management Plan Procurement Planning register Procurement Documents Source Selection Criteria Seller Short List Seller Proposals Risk Register Teaming agreements with external companies Organisational Process Assets – Preferred supplier lists Preferred supplier agreements Lessons learned on past procurements Monitor Initiation Planning Execution Close Control Adapted from PMBOK 4th Edition Adapted from PMBOK 4th Edition

27. 12.2 Conduct Procurements Tools and techniques to Conduct Procurements – Bidder Conferences Proposal Evaluation Techniques Independent Estimates or Review Advertising Expert Judgement Procurement Policies & Procedures Procurement Negotiations Internet Search Adapted from PMBOK 4th Edition

28. 12.2 Conduct Procurements Bidder Conferences Also known as Contractor Conferences, Vendor Conferences, Pre-Bid Conferences Meetings with all prospective sellers and representatives from the buyer Used to clarify requirements and answer questions prior to the submission of bids or proposals Ensure that all sellers have a clear and common understanding of the requirements and that no bidder receives preferential treatment Buyers must ensure that all prospective sellers hear every question and receive every answer Adapted from PMBOK 4th Edition

29. 12.2 Conduct Procurements Expert Judgement Consulting procurement and legal professionals May be internal or external to the project organisation Establishing multi disciplined review team for the proposals Proposal Evaluation Techniques Used for complex purchasing decisions where the selection is made using pre-defined and weighted selection criteria Requires complex spreadsheet and calculations of the responses of a selection committee The selection committee normally consists of project team members, key stakeholders and subject matter experts who independently rate the selection criteria Results are then calculated and presented to the selection committee who may alter the outcome based on other considerations Adapted from PMBOK 4th Edition

30. 12.2 Conduct Procurements Independent Estimates and Review The purchaser may elect to have an independent specialist prepare an estimate of costs to provide a benchmark for the seller responses Significant variations in the cost estimates of the different proposals can indicate deficiencies with the requirements or statement of work Can also use independent experts to review the outcomes of selection processes Advertising Advertisements for prospective sellers are often placed in major newspapers or on specific websites that are regularly reviewed by the providers of commonly purchased products and services Low cost means of expanding the pool of prospective sellers Adapted from PMBOK 4th Edition

31. 12.2 Conduct Procurements Internet Search Now a major tools and influence on the availability of prospective sellers and the outcomes of procurement decisions Many commodities and off the shelf items can be quickly located and secured at a fixed price on the internet Not very useful for high risk and complex procurements, except for the location of potential sellers Procurement Negotiations Many large organisations and government departments will have a specific negotiation process to ensure a fair outcome Can include assistance from legal and purchasing professionals Can also include pro forma contracts and mandatory clauses Adapted from PMBOK 4th Edition

32. 12.2 Conduct Procurements Procurement Policies and Procedures Most large organisations and all government departments will have comprehensive policies and procedures It is critical that the project team are aware of these and that they are followed, otherwise approval may not be obtained for purchasing requirements and timeframes can be severely impacted These procedures will also impact the project schedule during the planning stage as critical internal specialist may not be available when required by the project It is often mandatory to engage internal purchasing professionals and either internal or external legal professionals Purchasing decisions may need to be escalated to senior management or even the Board for approval, depending on the overall cost. This can also impact timelines. Adapted from PMBOK 4th Edition

33. 12.2 Conduct Procurements Outputs of this process include – Selected Sellers Procurement Contract Statement of Work, deliverables and requirements Timeline and pricing Performance and reporting procedures Roles and responsibilities Incentives and penalties Acceptance criteria Warranty and insurances Confidentiality and intellectual property Resource Calendars Change Requests Project Management Plan updates Cost, Scope and Schedule baseline Procurement Management Plan Project Document Updates Requirements documentation Risk Register Monitor Initiation Planning Execution Close Control Adapted from PMBOK 4th Edition

34. The process of managing procurement relationships, monitoring contract performance and making changes or corrections as needed Undertaken by both the buyer and the seller as both parties need to ensure that the other is meeting their contractual obligations Many organisations treat contract administration as an administrative function separate from the project and it is carried out by a Purchasing Department or by a designated functional manager Managing these relationships both internally and externally can be a very complex communication activity with it’s own processes and procedures that must be followed, often dictated by the terms of the contract and internal policies and procedures Occurs during Monitoring and Control 12.3 Administer Procurements Monitor Initiation Planning Execution Close Control Adapted from PMBOK 4th Edition

35. This process is closely related to the following project management processes – Direct and Manage Project Execution Report Performance Perform Quality Control Perform Integrated Change Control Monitor and Control Risks Control Costs The Project Manager must regularly monitor the efficiency and effectiveness of this process in order to successfully manage the project and any dependencies Close financial management is also required to ensure that payments are being made according to the terms in the contract 12.3 Administer Procurements Adapted from PMBOK 4th Edition

36. 12.3 Administer Procurements Inputs to Administer Procurements Procurement Documents Project Management Plan Contract Performance and Status Reports From the Seller Approved Change Requests Work Performance Information Quality Costs Schedule Scope Adapted from PMBOK 4th Edition Adapted from PMBOK 4th Edition

37. 12.3 Administer Procurements Tools and techniques to Administer Procurements – Contract Change Control Procurement Policies & Procedures Inspections & Audits Procurement Performance Reviews Payment Systems Claims Administration Adapted from PMBOK 4th Edition

38. 12.3 Administer Procurements Contract Change Control The process by which procurements can be modified, often included in each specific contract and can vary between them Closely related to the processes of Control Scope and Perform Integrated Change Control Often jointly managed by the Project Manager and the purchasing department Procurement Performance Reviews A structured review of the seller’s progress to delivery the contracted scope and quality within the cost and timeframe that have been agreed Performance information is compared against actual outcomes Often conducted by the purchasing department or internal audit Adapted from PMBOK 4th Edition

39. 12.3 Administer Procurements Inspections & Audits If required by the buyer, then these will be specified in the contract Often involves the buyer having access to regular external audit reports on the seller, can include buyer procurement personnel Performance Reporting Regular status reports and performance information required of the seller as specified in the contract Tracks the seller’s performance against contractual obligations of scope, quality, time and cost Payment Systems Payments to the seller are typically processed by the accounts payable system after they have been authorised by project or procurement personnel Adapted from PMBOK 4th Edition

40. 12.3 Administer Procurements Claims Administration Relates to contested changes where the buyer and seller cannot agree on items such as Change Requests, Incentive Payments or Penalties Referred to as Claims, Disputes or Appeals A resolution process is normally documented in the contract and settlement via negotiation is preferred If agreement cannot be reached then legal action may be required Records Management Systems Used by the Project Manager to manage contract and procurement documentation and records Contains a retrievable archive of all contract documentation, correspondence and performance reports Adapted from PMBOK 4th Edition

41. 12.3 Administer Procurements Procurement Policies and Procedures Most large organisations and all government departments will have comprehensive policies and procedures It is critical that the project team are aware of these and that they are followed, otherwise approval may not be obtained for purchasing requirements and timeframes can be severely impacted These procedures will also impact the project schedule during the planning stage as critical internal specialist may not be available when required by the project It is often mandatory to engage internal purchasing professionals and either internal or external legal professionals Purchasing decisions may need to be escalated to senior management or even the Board for approval, depending on the overall cost. This can also impact timelines. Adapted from PMBOK 4th Edition

42. 12.3 Administer Procurements Outputs of this process include – Procurement Documentation Contract and supporting schedules Change Requests Claims and disputes Organisational Process Assets Correspondence regarding the contract Payment schedules and requests Seller performance evaluation documentation Change Requests Project Management Plan Updates Procurement Management Plan Baseline Schedule and Budget Monitor Initiation Planning Execution Close Control Adapted from PMBOK 4th Edition

43. The process of Completing each project procurement Part of the overall Close Project Phase Involves the administrative activities related to claims, change requests and final procurement results Includes either the completion of each contract or the handover of contracts for on-going administration for the life of the product or service that has been purchased Early termination of a contract is a special case of procurement closure and can occur by mutual agreement or when either the buyer or seller fails to meet agreed terms and obligations Legal action can occur on unresolved claims even after the contract has been closed Occurs during Close 12.4 Close Procurements Monitor Initiation Planning Execution Close Control Adapted from PMBOK 4th Edition

44. 12.4 Close Procurements Inputs to Close Procurements Procurement Documents Project Management Plan Contract Tools and techniques to Close Procurements – Records Management System Procurement Audits Negotiated Settlements Adapted from PMBOK 4th Edition Adapted from PMBOK 4th Edition

45. 12.4 Close Procurements Procurement Audits A structured review of the procurement process that may have been specified in the Plan procurements process and then carried out during Administer Procurements and Close Procurements The objective is to identify successes, failures and lessons learned Negotiated Settlements Final equitable settlement of all outstanding issues, claims and disputes Direct negotiation between the buyer and seller is preferred, if not possible then mediation, arbitration or legal action may be required Adapted from PMBOK 4th Edition

46. 12.4 Close Procurements Record Management Systems Used by the Project Manager to manage contract and procurement documentation and records Contains a retrievable archive of all contract documentation, correspondence and performance reports Adapted from PMBOK 4th Edition

47. 12.4 Close Procurements Outputs of this process include – Closed Procurements Formal written notice of contract completion Contract closure performed as per terms and conditions of the contract and the Procurement Management Plan Organisational Process Assets Procurement File Deliverable Acceptance and Sign Off Lessons Learned documentation Monitor Initiation Planning Execution Close Control Adapted from PMBOK 4th Edition

48. Project Procurement Forum Research the tender process and requests for proposals that are often used for government purchasing. Take some time to reflect on the pros and cons involved in the process of conducting and responding to requests for proposals. Reflect on these and load up your thoughts for both the pros and cons. Then go to the Forum on Project Procurement Management, discuss your findings and comment on the thoughts of the other students. Practice Comment Research

49. Next Steps Please proceed to Tests & Tasks and take the Project Procurement Quiz and the Project Procurement Knowledge Test Be sure that you have participated in the Forums. Best of Luck! These are all due during Weeks 19 and 20 in the Course Delivery Schedule