The Project Management Cer9ficate Program. Project Procurement Management

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Juniper Thompson
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PMP cross-cutting skills have been updated in the PMP Exam Content Outline June 2015 (PDF of the Examination Content Outline - June 2015 can be found under the Resources Tab).

1 PMP cross-cutting skills have been updated in the PMP Exam Content Outline June 2015 (PDF of the Examination Content Outline - June 2015 can be found under the Resources Tab). Learn about why the PMP exam is changing in Download the new Exam Content Outline to study cross-cutting skills here: 1

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4 Review these learning objec9ves carefully. The learning content contained within this module is based on these learning objec9ves. At the end of this module or the end of the course, you should be able to answer quiz or test ques9ons related to these learning objec9ves. If you are par9cipa9ng in this course for cer9fica9on, you will be beoer prepared to pass a cer9fica9on exam by recalling these learning objec9ves. 4

5 Procurement management is a process that lends itself to business efficiency. If managed correctly, procurement management provides a structure that is flexible enough to suit the needs of individual business units and uses sound judgment and constant monitoring to be sure that product and service delivery is not les to chance. Buyers must have a clear vision of business needs and what needs to be delivered in terms of design quality, sustainability, and safety. Before we launch procurement procedures, we must know the factors or considera9ons to take into account, such as: The nature and complexity of the goods and services being acquired. The availability of the goods and/or services and the characteris9cs of the market. The project vs. product life cycle cost implica9ons of goods and/or services required. Transac9on costs associated with undertaking the purchase. The need to take a par9cular course of ac9on to support organiza9onal objec9ves. This may reflect a desire to work with woman- owned or minority- owned or other types of providers. Internal systems in place to control and manage the purchases. Ethical and accountability considera9ons. 5

6 includes the processes necessary to purchase or acquire products, services, or results needed from outside the project team. PMBOK Guide FiSh Edi9on, Glossary 6

7 One of the most confusing areas for those studying for the exam is the buyer- seller rela9onship. Other terms for the seller are contractor, subcontractor, vendor, service provider, or supplier. The buyer can some9mes be called a client, customer, prime contractor, contractor, acquiring organiza9on, governmental agency, service requestor, or purchaser. 7

8 The PMBOK Guide FiSh Edi9on describes the key benefit of this process as making decisions about acquiring outside support. PMBOK Guide - FiSh Edi9on, p

9 The PMBOK Guide FiSh Edi9on defines the following for this first Project Procurement Management process: Inputs Project management plan Requirements documenta9on Risk register Ac9vity resource requirements Project schedule Ac9vity cost es9mates Stakeholder register Enterprise environmental factors Organiza9onal process assets Tools & Techniques Make- or- buy analysis Expert judgment Market research Mee9ngs Outputs Procurement management plan Procurement statement of work Procurement documents Source selec9on criteria Make- or- buy decisions 9

Enterprise environmental factors are a big influence in planning and conduc9ng procurements. The availability of material or personnel resources influence price and delivery dates.

10 Enterprise environmental factors are a big influence in planning and conduc9ng procurements. The availability of material or personnel resources influence price and delivery dates. The number of vendors or suppliers can determine the compe99veness in the marketplace and thereby your ability to nego9ate favorable terms and condi9ons. You will need to be aware of municipal regula9ons or restric9ons, such as 9mes when construc9on work can be done, or when deliveries can be made in order to develop a valid statement of work for the contract. 10

Different types of contracts are more or less appropriate for different types of purchases. Contracts generally fall into one of three broad categories as noted above.

11 Different types of contracts are more or less appropriate for different types of purchases. Contracts generally fall into one of three broad categories as noted above. Cost reimbursable contracts this category of contract involves payment (reimbursement) to the seller for its actual costs, plus typically a fee represen9ng seller profit. Cost reimbursable contracts osen include incen9ves for mee9ng or exceeding selected project objec9ves, such as schedule targets or costs. Fixed price or lump sum contracts this category of contracts involves a fixed total price for a well- defined product. To the extent that the product is not well defined, both the buyer and the seller are at risk. The buyer may not receive the desired product, or the seller may need to incur addi9onal costs to provide it. Fixed price or lump sum contracts may also include incen9ves for mee9ng or exceeding selected project objec9ves, such as schedule targets. Types of Contracts Firm Fixed Price (FFP) fixed total price Fixed Price Incen;ve (FPIF) incen9ves for cost reduc9on or early comple9on Cost Plus Incen;ve Fee (CPIF) cost reimbursable but with incen9ves for most reduc9on using cost sharing Cost Plus Fixed Fee (CPFF) cost plus a set fee Time and Material (T&M) fixed unit arrangements but open ended Cost Plus Percentage Cost (CPPC) cost plus percentage cost (against Federal Acquisi9on Regula9on (FAR)) Note that in the PMBOK Guide FiSh Edi9on, pp , the list of contract types, while similar, is not iden9cal to those on the slide. The PMBOK Guide s list shows the following contract types (those that differ from the slide above are shown in bold type and are explained in some detail): Firm Fixed Price Fixed Price Incen9ve Fee Fixed Price with Economic Price Adjustment This contract type generally spans mul9ple years during which 9me economic condi9ons (and respec9ve costs) might vary, either up or down. It s provisions allow for the contract price to have pre- defined final adjustments which are linked to reliable financial indices. So the final price could be higher or lower that the ini9al price, based on infla9on/defla9on and increasing/ decreasing commodity costs. These adjustments are meant to protect both buyer and seller. Cost Plus Fixed Fee Cost Plus Incen9ve Fee Cost Plus Award Fee In this contract type, the seller is reimbursed for all legi9mate costs, and most of the fee is based on the achievement of broad subjec9ve performance criteria noted in the contract. The final award determina9on is subject to the buyer s evalua9on of seller s performance against those criteria and is generally not subject to appeal. Time and Material 11

12 Fixed Price Incen;ve Fee (FPIF) U.S. Government contracts typically contain incen9ve objec9ves that offer contactors [sellers] more profit if the costs are reduced or performance is improved and less profit if costs are raised or if performance goals are not met. These types of contracts are not commonly used Interna9onally. In prac9ce, this type of a contract is called cost not to exceed or guaranteed maximum priced contract. Terminology Target cost The level of cost that the seller will most likely obtain under normal performance condi9ons. Actual cost The sum of all cost or expenditures. Variance The target cost less the actual cost. Sharing formula Expressed as a ra9o, the sharing formula gives the cost responsibility of the buyer to the cost responsibility of the seller for each dollar spent. Target profit The profit value that is nego9ated for, and is set forth, in the contract. Profit The amount of money (over or under) made by the seller considering the actual cost and the seller sharing ra9o as nego9ated in the contract. Price The actual cost plus the seller profit. Price ceiling The MAXIMUM amount of money for which the buyer is ever liable (never more, without of course authorized changes to the contract). Final Price The amount of money due to the seller by the buyer, which is the lower amount of either the price or the price ceiling). 12

13 Bonus and penalty clauses also help address risk and encourage excellent performance. 13

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If we choose to look outside our organiza9on, we must also consider op9ons and market condi9ons that impact a sole source provider or mul9ple supplier solu9ons.

15 If we choose to look outside our organiza9on, we must also consider op9ons and market condi9ons that impact a sole source provider or mul9ple supplier solu9ons. Sole sources exist when a single seller controls the supply of products or services in a defined market. These situa9ons are usually the product of market condi9ons such as technology leadership, patent protec9on, limited/exclusive franchise distributorships, mergers and acquisi9ons, etc. Single source selec9ons are usually driven by objec9ve business decisions; such as leveraged volume purchase contracts, standardiza9on programs/systems, parts/service provided by an original equipment manufacturer, consistency of quality/batch control, just in 9me delivery requirements, etc. Single source selec9on based purely on personal preference or subjec9ve ra9onale Is not appropriate in a business environment. 15

The project manager is responsible for describing the project needs rela9ve to specifica9ons, drawings, delivery dates, es9mated costs, and input to decision- makers about whether to make or buy

16 The project manager is responsible for describing the project needs rela9ve to specifica9ons, drawings, delivery dates, es9mated costs, and input to decision- makers about whether to make or buy goods and services from outside the performing organiza9on. In either case we also must take into account capital investments versus expense for tax purposes. Another considera9on is whether to rent or buy. You should analyze the cost of ownership, including maintenance and insurance, as well as the 9me value of money and the up front investment. 16

17 Procurement planning and source selec9on follow a logical, ordered process that begins early in the overall project planning effort. When it has been determined that the project would benefit from outside assistance, a contract statement of work is created in sufficient terms to allow prospec9ve sellers to determine whether they are capable of providing the required product, service, or result. The project manager may use a scoring system based on weights assigned to the contract drivers of the project in order to establish evalua9on criteria. 17

18 Addi9onal items that may be addressed in a procurement management plan: If standard procurement documents are needed, where can they be found? How will mul9ple providers be managed? How will procurement be coordinated for project? Handling lead 9mes Handling make- or- buy decisions Sevng the scheduled dates for contract deliverables Iden9fying performance bonds Iden9fying pre- qualified selected sellers Procurement metrics 18

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20 Organiza9onal process assets may require the project team work from an approved vendor list. 20

RFI OSen used to discover poten9al bidders by asking, How would you solve our problem? Cost is usually not discussed in this format. RFP Would ask for suggested solu9on and pricing.

21 RFI OSen used to discover poten9al bidders by asking, How would you solve our problem? Cost is usually not discussed in this format. RFP Would ask for suggested solu9on and pricing. RFQ Typically used to request pricing of goods and materials rather than services or solu9ons. IFB Usually a sealed bid process that is looking for the best or lowest price from known sources. Note: The RFQ and IFB are similar; however, vendors may not respond to an IFB unless they are invited to do so. Other combina9ons are also possible, requiring the poten9al source to carefully read the documents before responding. 21

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23 Evalua9on criteria help clarify what is important to the buyer. While many features may be of interest and nice to have, a weigh9ng system can help isolate those most cri9cal to the purchaser. Weights and evalua9on criteria should be clearly detailed in the request. 23

24 The PMBOK Guide FiSh Edi9on describes the key benefit of this process as aligning internal and external stakeholder expecta9ons. PMBOK Guide - FiSh Edi9on, p

The PMBOK Guide FiSh Edi9on defines the following for the second Project Procurement Management process Inputs Procurement management plan Procurement documents Source selec9on criteria Seller

25 The PMBOK Guide FiSh Edi9on defines the following for the second Project Procurement Management process Inputs Procurement management plan Procurement documents Source selec9on criteria Seller proposals Project documents Make- or- buy decisions Procurement statement of work Organiza9onal process assets Tools & Techniques Bidder conference Proposal evalua9on techniques Independent es9mates Expert judgment Adver9sing Analy9cal techniques Procurement nego9a9ons Outputs Selected sellers Agreements Resource calendars Change requests 25

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27 Proposals are seller- prepared documents that describe the seller s ability and willingness to provide the requested product. They must be prepared in accordance with the requirements of the relevant procurement documents. Failure to respond in the right format or on the documents provided could disqualify the respondent before its informa9on is even reviewed. A screening system involves establishing minimum requirements of performance for one or more of the evalua9on criteria. A weigh;ng system is a method for quan9fying qualita9ve data to minimize the effect of personal prejudice on source selec9on. 27

Final contract language should reflect all agreements reached and typically includes: Deliverables and acceptance criteria Responsibili9es and authori9es

28 Final contract language should reflect all agreements reached and typically includes: Deliverables and acceptance criteria Responsibili9es and authori9es Applicable terms and law Dispute resolu9on process Technical and business management approaches Proprietary rights Contract financing Overall schedule, payments, and price 28

The objec9ve of nego9a9ons is to come to a mee9ng of the minds in which both sides are pleased with the outcome Diplomacy and clear communica9ons allow both sides an opportunity to arrive at fair and

29 The objec9ve of nego9a9ons is to come to a mee9ng of the minds in which both sides are pleased with the outcome Diplomacy and clear communica9ons allow both sides an opportunity to arrive at fair and equitable outcomes. Protocol introduc9ons are made and atmosphere is set Probing issues are searched and iden9fied Scratch bargaining bargaining occurs and concessions are made Closure two posi9ons are summed up and final concessions are made and documented Agreement ensures both par9es have iden9cal agreement and marks the end of nego9a9ons 29

30 Agreement. Any document or communica9on that defines the ini9al inten9ons of a project. This can take the form of a contract, memorandum of understanding (MOU), leoer of agreement, verbal agreements, , etc. Contract. A contract is a mutually binding agreement that obligates the seller to provide the specified product or service or result and obligates the buyer to pay for it. PMBOK Guide FiSh Edi9on, Glossary LeOer contracts are useful when schedules are 9ght and work must begin quickly to avoid missing milestones and cri9cal dates. 30

31 The PMBOK Guide FiSh Edi9on describes the key benefit of this process as ensuring that the seller s and buyer s performance meets procurement requirements. PMBOK Guide FiSh Edi9on, p

32 The PMBOK Guide FiSh Edi9on defines the following for the third Project Procurement Management process: Inputs Project management plan Procurement documents Agreements Approved change requests Work performance reports Work performance data Tools & Techniques Contract change control system Procurement performance reviews Inspec9ons and audits Performance repor9ng Payment systems Claims administra9on Records management system Outputs Work performance informa9on Change requests Project management plan updates Project documents updates Organiza9onal process assets updates 32

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34 Implicit in managing a contract is making sure the contract performance is acceptable. The contractor will provide progress reports in the format and frequency designated in the contract. Periodically the buyer should conduct a more formal review of the SOW and the progress to date against the SOW. Any variances in performance will require preven9ve or correc9ve ac9on. 34

The contract administrator is responsible for administering the following types of changes: Change order: A wrioen order, signed by the contrac9ng officer, direc9ng the contractor to

35 The contract administrator is responsible for administering the following types of changes: Change order: A wrioen order, signed by the contrac9ng officer, direc9ng the contractor to make a change. Contract modifica9on: Any wrioen change in the terms of the contract. Supplemental agreement: A contract modifica9on that is accompanied by the mutual ac9on of both par9es. 35

Other types of changes include: Administra;ve change: A unilateral contractual change, in wri9ng, that does not affect the substan9ve rights of the par9es (i.e., a change in the paying office or the appropria9on funding).

36 Other types of changes include: Administra;ve change: A unilateral contractual change, in wri9ng, that does not affect the substan9ve rights of the par9es (i.e., a change in the paying office or the appropria9on funding). Construc;ve change: Any effec9ve change to the contract caused by the ac9ons or inac9on of personnel in authority or by circumstances that cause a contractor to perform work differently than required by wrioen contract. The contractor may file a claim for an equitable adjustment in the contract. Typical cause of construc9ve changes include: Defec9ve specifica9on with impossibility of performance Late or unsuitable owner or customer furnished property Late or unsuitable customer supplied equipment Accelera9on of performance Misusing proprietary data 36

This may be managed by the project team or the designated department within the organiza9on. This could be influenced by the size of the contract and other organiza9onal process assets.

37 This may be managed by the project team or the designated department within the organiza9on. This could be influenced by the size of the contract and other organiza9onal process assets. There are factors that influence how a contract is interpreted: Patent ambiguity: Courts rule against the person who drased the contract when it is not clear. Standard terms and condi;ons: Courts use the standard defini9ons in the construc9on industry, for instance, when determining meaning. Stated versus implied language: A contract should not imply. Courts assume everything is stated (wrioen) and give liole weight to implied requirements. 37

Warran9es apply to owners (buyers) and sellers: Owner s implied warranty: An owner s implied warranty exists when the project owner extends an implied warranty to the general contractor that all

38 Warran9es apply to owners (buyers) and sellers: Owner s implied warranty: An owner s implied warranty exists when the project owner extends an implied warranty to the general contractor that all documents rela9ng to the project are accurate, complete, and legal. If they are not, the contractor is en9tled to recovery of damages. Contractor s warranty: There are three contractor warran9es: Materials/equipment will be of good quality and new unless otherwise permioed. Work will be free of defects not inherent in the quality permioed. Work will conform to requirements of the contract document. Project contracts should address the dura9on of the warranty, when the coverage begins, and what is covered by the warranty. There are three different types of bonds that might be used, for example, in a construc9on contract: Bid bonds: Compensate the owner for the addi9onal costs incurred because of the low bidder s failure to honor its bid. It is customary for public project owners to require bidders to submit a bid bond with their bid. The bond is usually in the amount of 10% of the total bid amount, but may be more or less. Op9ons to a bid bond include cash, a cer9fied check, or an irrevocable leoer of credit. Performance bonds: Legal instruments in which a third party, usually a corporate surety, guarantees the project contractor s performance to the project owner. The surety s responsibility cannot exceed that owed by the principal to the obligee. The issues rela9ve to performance bonds have to do with understanding the owner s role, the magnitude of the bond, and when it is enforced. Payment bonds: Offer security for unpaid subcontractors and suppliers. The purpose is to avoid liens against the owner s property. Issues related to payment bonds include understanding who benefits from the payment bond, who furnishes the money for them, and when they may be recovered. 38

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40 The PMBOK Guide FiSh Edi9on describes the key benefit of this process as documen9ng agreements and related documenta9on for future reference. PMBOK Guide- FiSh Edi9on, p

41 The PMBOK Guide FiSh Edi9on defines the following for the fourth Project Procurement Management process: Inputs Project management plan Procurement documents Tools & Techniques Procurement audits Procurement nego9a9ons Records management system Outputs Closed procurements Organiza9onal process assets updates 41

42 Termina9on for default is osen caused by delays. Delays can be excusable, non- excusable, or compensable. Excusable delays occur due to factors beyond the control of any party involved in the project, e.g., inclement weather. The contractor may be afforded extra 9me without penalty, but no addi9onal money. Non- excusable delays occur due to the contractor failing to live up to contractual obliga9ons. For example, if materials are not obtained in 9me or if there is insufficient labor, the contractor is due neither addi9onal 9me nor money. Compensable delays are caused by the owner s failure to live up to their contractual obliga9ons. For example, the owner fails to provide access to a building. The contractor is due addi9onal 9me and money. 42

43 All procurement documents are collected in prepara9on for closing. This includes payments, reports and all evidence of execu9on and performance on the contract. 43

Buyer Evalua;ons An evalua9on of seller or contractor performance by the buyer should be conducted to iden9fy strengths and weaknesses of the en9re owner- contractor rela9onship.

44 Buyer Evalua;ons An evalua9on of seller or contractor performance by the buyer should be conducted to iden9fy strengths and weaknesses of the en9re owner- contractor rela9onship. Some ques9ons that could be asked include: Did the seller/contractor display a total understanding and commitment to the project? Did the seller/contractor keep you informed of project status in a 9mely manner? Did the seller/contractor offer alterna9ve recommenda9ons for any requests that could not be granted? Did the seller/contractor provide an impact analysis of 9me, cost, or performance for client- ini9ated scope changes? Did the seller/contractor maintain strong leadership and control of the project? Did the seller/contractor maintain a posi9ve and suppor9ve avtude and set an example of flexibility? Did the seller/contractor ensure 9mely monitoring and follow- up of project objec9ves and milestones? Did the seller/contractor use effec9ve escala9on procedures? Did the seller/contractor provide 9mely and appropriate documenta9on to you? Was a post- project assessment mee9ng conducted with the client? Did the seller/contractor protect proprietary informa9on? Did the seller/contractor present a competent and professional image? Did the seller/contractor reflect strong interpersonal skills? Did the seller/contractor display acceptable technical knowledge of the products and services that were managed in this project? 44

The formal closure eliminates any future liability for the buyer. Administra9ve closure includes indexing and archiving all procurement records.

45 The formal closure eliminates any future liability for the buyer. Administra9ve closure includes indexing and archiving all procurement records. In addi9on to the above, there should be a mutual evalua9on of each other by both par9es to aid in the lessons learned and opportuni9es to con9nuously improve. 45

46 Similar to the desire to cleanly close a project, formal closure of contracts confirms comple9on. 46

RESPONSIBILITY STANDARD We protect proprietary or confiden;al informa;on that has been entrusted to us. We do not disclose informa9on we learn about when we are working with a buyer or a seller.

47 RESPONSIBILITY STANDARD We protect proprietary or confiden;al informa;on that has been entrusted to us. We do not disclose informa9on we learn about when we are working with a buyer or a seller. RESPECT STANDARD We nego;ate in good faith. We must employ fair nego9a9on tac9cs. The goal is to reach a win- win arrangement, where both par9es feel empowered. FAIRNESS STANDARDS We demonstrate transparency in our decision- making process. It is important to disclose how we make contract award decisions to avoid favori9sm, or even the appearance of favori9sm. To insure a fair procurement process the evalua9on criteria should be available to all par9es. We constantly re- examine our impar;ality and objec;vity taking correc;ve ac;on as appropriate. We should examine our approach to contractors and to bid documents to insure we are basing our decisions on factual informa9on and not personal preference. We provide equal access to informa;on to those who are authorized to have that informa;on. When conduc9ng a procurement it is required that all bidders have access to the same informa9on. We make opportuni;es equally available to qualified candidates. When hiring outside labor or puvng a contract out for bid we must make sure that we evaluate all qualified candidates fairly and against objec9ve criteria. 48

48 FAIRNESS STANDARDS We proac;vely and fully disclose any real or poten;al conflicts of interest to the appropriate stakeholders. If we become aware of a conflict of interest, we have a duty to disclose the conflict to the affected par9es. When we realize that we have a real or poten;al conflict of interest, we refrain from engaging in the decision- making process or otherwise ayemp;ng to influence outcomes, unless or un;l We have made full disclosure to the affected stakeholders. We have an approved mi;ga;on plan. We have obtained the consent of the stakeholders to proceed. We must excuse ourselves from par9cipa9ng in a decision- making process un9l we have taken steps to avoid the impact of the conflict of interest. We do not hire or fire, reward or punish, or award or deny contracts based on personal considera;ons, including but not limited to, favori;sm, nepo;sm, or bribery. If we are in a posi9on to approve or deny contracts we need to set our personal considera9ons aside and make decisions based on sound selec9on criteria. We do not discriminate against others based on, but not limited to, gender, race, age, religion, disability, na;onality, or sexual orienta;on. Our decisions to award a contract should only be based on the merit of the proposal. Any considera9on of a person s background or lifestyle is inappropriate. We apply the rules of the organiza;on (employer, Project Management Ins;tute, or other group) without favori;sm or prejudice. We can not apply a double standard. For example, we need to hold all contractors to the same requirements and all people in our organiza9on to the same standards of conduct. HONESTY STANDARD We do not engage in dishonest behavior with the inten;on of personal gain or at the expense of another. 49

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The Project Management Cer4ficate Program. Project Integra4on Management

The Project Management Cer4ficate Program. Project Integra4on Management PMP cross-cutting skills have been updated in the PMP Exam Content Outline June 2015 (PDF of the Examination Content Outline - June 2015 can be found under the Resources Tab). Learn about why the PMP exam