Project Procurement
Management
chapter11
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
Project Procurement Management Processes
and Key Outputs
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
Statement of Work (SOW) Template
I.
Scope of Work: Describe the work to be done in detail. Specify the hardware and
software involved and the exact nature of the work.
II.
Location of Work: Describe where the work must be performed. Specify the
location of hardware and software and where the people must perform the work
III.
Period of Performance: Specify when the work is expected to start and end,
working hours, number of hours that can be billed per week, where the work must
be performed, and related schedule information.
IV.
Deliverables Schedule: List specific deliverables, describe them in detail, and
specify when they are due.
V.
Applicable Standards: Specify any company or industry-specific standards that
are relevant to performing the work.
VI.
Acceptance Criteria: Describe how the buyer organization will determine if the
work is acceptable.
VII.
Special Requirements: Specify any special requirements such as hardware or
software certifications, minimum degree or experience level of personnel, travel
requirements, and so on.
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
Outline for a Request for Proposal (RFP)
I.
Purpose of RFP
II.
Organization’s Background
III.
Basic Requirements
IV.
Hardware and Software Environment
V.
Description of RFP Process
VI.
Statement of Work and Schedule Information
VII.
Possible Appendices
A. Current System Overview
B. System Requirements
C. Volume and Size Data
D. Required Contents of Vendor’s Response to RFP
E. Sample Contract
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