Procurement means acquiring goods and/or services from an outside source
Other terms include purchasing and outsourcing
Why Outsource?
To reduce both fixed and recurrent costs
To allow the client organization to focus on its core business
To access skills and technologies
To provide flexibility
To increase accountability
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Chapter 11:Project Procurement Managementadopted from PMI’s PMBOK 2000 and Textbook : Information Technology Project Management 1Copyright Course Technology 2001ContentsImportance of Project Procurement ManagementProject Procurement Management ProcessesProcurement planning: )Solicitation planning: ) planning phaseSolicitation: )Source selection: > executing phaseContract administration: )Contract close-out: } closingUsing Software to Assist in Project Procurement Management2Copyright Course Technology 2001Importance of Project Procurement ManagementProcurement means acquiring goods and/or services from an outside sourceOther terms include purchasing and outsourcingWhy Outsource?To reduce both fixed and recurrent costsTo allow the client organization to focus on its core businessTo access skills and technologiesTo provide flexibilityTo increase accountability3Copyright Course Technology 2001Project Procurement Management ProcessesProcurement planningdetermining what to procure and whenSolicitation planningdocumenting product requirements and identifying potential sourcesSolicitationobtaining quotations, bids, offers, or proposals as appropriateSource selectionchoosing from among potential vendorsContract administrationmanaging the relationship with the vendorContract close-outcompletion and settlement of the contract4Copyright Course Technology 2001Figure 11-1. Project Procurement Management Processes and Key Outputs5Copyright Course Technology 2001Procurement planning20th of 21 planning phase processidentifying which project needs can be best met by using products or services outside the organization. It includes decidingwhether to procurehow to procurewhat to procurehow much to procurewhen to procuredetermines how project needs can best be met by sourcing products or service outside the organization.6Copyright Course Technology 2001Inputs to Procurement planningScope statement – describes current project needs and strategiesProduct description – defines the end product of the project and provides important information about any technical issues or concerns.Procurement resources – resources and expertise needed to support project procurement activitiesMarket consideration – affect available products and services that have an impact on decision-makingOther planning inputs – includes miscellaneous items such as cost and schedule estimates, quality management plans, cash-flow projections, WBS, identified risks, planned staffing needs.Constrains – factors that limit the buyer’s options, such as availability of funds.Assumptions –factors that, for planning purposes, will be considered to be true, real, or certain7Copyright Course Technology 2001Tools and techniquesMake-or-buy analysis – determines whether it’s more cost effective for the performing organization to produce the produce the product or purchase it form an outside vendor.Expert judgment – can be sought from groups or individuals with specialized knowledge or training. These include technical consultant company, HR consultant companyContact type selection – an important factor to influence and control the seller’s performance. 8Copyright Course Technology 2001Types of ContractsFixed price or lump sum: involve a fixed total price for a well-defined product or serviceCost reimbursable: involve payment to the seller for direct and indirect costsTime and material contracts: hybrid of both fixed price and cost reimbursable, often used by consultantsUnit price contracts: require the buyer to pay the seller a predetermined amount per unit of serviceDifferent contracts are appropriate for different kinds of work.9Copyright Course Technology 2001Outputs from Procurement planningProcurement management plan – part of project plan. It describes how the remaining procurement processes (solicitation planning, contract closeout) will be managed.Statements of work (SOW) – describes the procurement items in sufficient detail for prospective sellers to determine if they are capable of providing the items10Copyright Course Technology 2001Statement of Work (SOW)A statement of work is a description of the work required for the procurementMany contracts, mutually binding agreements, include SOWsA good SOW gives bidders a better understanding of the buyer’s expectations11Copyright Course Technology 2001Figure: Statement of Work (SOW) Template12Copyright Course Technology 2001Solicitation Planning21st of 21 planning phase processThis process involves documenting the product requirements and identifying potential sources in preparation to support solicitation.13Copyright Course Technology 2001Collaborative ProcurementSeveral organizations, even competitors, have found that it makes sense to collaborate on procurement for some projectsKodak worked with several competitors to develop the Advantix Advanced Photo System (see What Went Right?)14Copyright Course Technology 2001Inputs to Solicitation PlanningProcurement management plandescribe how to manage the procurement process (from output of procurement planning process)SOW - describes the procurement items in sufficient detail for prospective sellers to determine if they are capable of providing the items.Other planning inputs includes preliminary cost and schedule estimates, quality management plans, cash-flow projections, the WBS identified risks, and planned staffing.15Copyright Course Technology 2001Tools and techniquesStandard forms – include standardized contracts, description of procurement items, and bid documents.Expert judgment - can be sought from groups or individuals with specialized knowledge or training. These include technical consultant company, HR consultant company16Copyright Course Technology 2001Outputs from Solicitation PlanningProcurement documentssolicit proposals form potential buyers.Documents include Request for proposal (RFP), Request for quotation (RFQ), Invitation to bidding, invitation for negotiation, contractor initial response.Others: project SOW, description of the desired format of the response, required contractual provisions, evaluation criteria to rate or score proposals (objective or subjective), overall or life-cycle cost, technical capabilities, management approach, financial capacity.SOW updates – modifications to existing SOWs. 17Copyright Course Technology 2001Figure: Outline for a Request for Proposal (RFP)18Copyright Course Technology 2001Solicitation5th of 7 executing phase processIt involves obtaining information in the form of bids and proposals from prospective sellers. The seller trying to win business bears most of the effort of gathering the information.Organizations can advertise to procure goods and services in several waysapproaching the preferred vendorapproaching several potential vendorsadvertising to anyone interestedA bidders’ conference can help clarify the buyer’s expectations19Copyright Course Technology 2001Inputs to SolicitationProcedure documents – solicit proposals from potentials buyers. Documents include Request for proposal (RFP), Request for quotation (RFQ), Invitation to bidding, invitation for negotiation, contractor initial response.Qualified seller lists – The preferred vendors for a product or service. The performing organization usually has a list of preferred suppliers.20Copyright Course Technology 2001Tools and techniqueBidder conferences – provide mutual understandings in meetings. Bidder conferences give a change to exchange key information with the project manager and his team.Advertising – request for services, supplies, materials, and equipments completed primarily on government projects to ensure equal access to bidding opportunities.21Copyright Course Technology 2001Outputs from SolicitationProposalsentail the seller preparing documents that describe its willingness and ability to provide the service or product. It becomes an important part of the project records. It some cases, they become the SOW.In many events, the proposals are used to develop the formal contracts. 22Copyright Course Technology 2001Source selection6th of 7 executing phase processSource selection involvesevaluating bidders’ proposalschoosing the best onenegotiating the contractawarding the contract Buyers often create a “short list”It is helpful to prepare formal evaluation procedures for selecting vendorsDuring Source Selection, project manager use the proposals and evaluation criteria (developed in Solicitation Planning) and exercise his judgment in analyzing the answers from the sellers in order to select the best (or most suitable) bid. 23Copyright Course Technology 2001Be Careful in Selecting Suppliers and Writing Their ContractsMany dot-com companies were created to meet potential market needs, but many went out of business, mainly due to poor business planning, lack of senior management operations experience, lack of leadership, and lack of visions. Check the stability of suppliersEven well-known suppliers can impede project success. Be sure to write and manage contracts well with all suppliers (see What Went Wrong?)24Copyright Course Technology 2001Inputs to Source selectionProposals – seller-prepared document that describe the seller’s ability and willingness to provide the requested product and service. (it is output from Solicitation Planning)Evaluation criteria – establish ratings or scores for proposals. The criteria can be objective or subjective. Organizational policies – it may affect the project manager’s decision. These policies can come from any of the organization involved in the project25Copyright Course Technology 2001Tools and techniqueContract negotiations – clarification and mutual agreement on structure and requirements of a contract prior to signing. The subjects covered usually include: a) responsibilities and authorities; b) applicable terms and law; c) financing and price; technical and business management.Weighting system – to quantify data in 3 steps to minimize personal prejudices of source selection. First, they assign numerical weight to evaluation criteria. Second, they rate the seller. Finally, they multiply weights by rating and totaling overall score.Screening system – establish minimum performance criteria.Independent estimates – prepared by the project procuring section to determine any significant differences. The differences could mean the seller didn’t understand the SOW or omitted something in the SOW.26Copyright Course Technology 2001Outputs from Source selectionContract – a mutually binding agreement that obligates a seller to provide goods or services and the buyer to make payment. It establishes a legal relationship that is subject to remedy in court. Most organizations have policies and procedures concerning who can sign a contract, refereed as delegation of procurement authority. Many organizations also require legal review and approval of contracts.27Copyright Course Technology 2001Cost Reimbursable ContractsCost plus incentive fee (CPIF) the buyer pays the seller for allowable performance costs plus a predetermined fee and an incentive bonusCost 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 costsCost plus percentage of costs (CPPC) the buyer pays the seller for allowable performance costs plus a predetermined percentage based on total costs28Copyright Course Technology 2001Figure: Contract Types Versus Risk29Copyright Course Technology 2001Contract Administration7th of 7 executing phase processEnsures that the seller’s performance meets contractual requirements.It involves managing vendor relationships, especially important with change requestsIt entails maintaining formal correspondence with the seller and expediting requirement for payment with performing organization.Contracts are legal relationships, so it is important that legal and contracting professionals be involved in writing and administering contractsMany project managers ignore contractual issues, which can result in serious problems30Copyright Course Technology 2001Inputs to Contract AdministrationContracts - a mutually binding agreement that obligates a seller to provide goods or services and the buyer to make payment.Work results – seller’s deliverables, quality standards, and actual costs.Change requests – modifications to the contract or its description of the product or service. If the seller’s work is unsatisfactory, the project manager can terminate the contract. Seller invoices – submitted periodically and requesting payment for work performed. The contract defines invoice requirements and supporting document.31Copyright Course Technology 2001Tools and techniqueContract change control system – defines how a contact may be modified. It includes paperwork, tracking system, dispute resolution procedures, and the hierarchy of approval levels.Performance reporting – tells the project management team how effective the seller is achieving the contractual objectives. Performance reporting is generated by the communications process. It is part of processes of controlling the project.Payment system – it involves the organization’s account payable process32Copyright Course Technology 2001Outputs from Contract Administration· Correspondence – retained as a way of documenting and clarifying the contracts’ terms and conditions. · Contract changes – changes (formal and informal) are fed back through the planning and procurement processes. The project plan or other relevant documentation is updated when necessary.· Payment requests – Issues when project manager are using an external payment system. It is the responsibility of the project manager to interface with account payable for timely payments to sellers.33Copyright Course Technology 2001Contract Close-out2nd of 2 closing phase processClosing takes place at the end of the project. Because projects are temporary.Project closeout briefings and lessons-learned documents provide important feedback.Contract close-out includesproduct verification to determine if all work was completed correctly and satisfactorilyadministrative activities to update records to reflect final resultsarchiving information for future useProcurement audits identify lessons learned in the procurement process34Copyright Course Technology 2001Inputs t Contract closureContract documentation – includes the contract along with all supporting schedules, requested and approved contract changes, any seller-developed technical documentation, seller performance reports, financial documents, and the results of any contract-related inspections.35Copyright Course Technology 2001Tools and techniqueProcurement audits – structured reviews of the procurement process, from procurement planning through contract admin. The objective of a procurement audit is to identify success and failures that warrant transfer to other procurement items o this project or to other projects.36Copyright Course Technology 2001Outputsfrom Contract closureFormal acceptance & closure – provides the seller with formal written notice that the contract has been completed.Contract file – a complete set of indexed records. Compile them for inclusion with the final project records.37Copyright Course Technology 2001Using Software to Assist in Project Procurement ManagementWord processing software helps in writing proposals and contracts, spreadsheets help in evaluating suppliers, databases help track suppliers, and presentation software aids in presenting procurement-related informationIn the late 1990s and early 2000s, many companies started using e-procurement software to do many procurement functions electronicallyOrganizations also use other Internet tools to help find information on suppliers or auction goods and services38Copyright Course Technology 2001SummaryProject Procurement Managementacquiring goods and/or services from an outside sourceProject Procurement Management ProcessesProcurement planningidentifying which project needs can be best Solicitation planningdocumenting product requirements and identifying potential sourcesSolicitationobtaining quotations, bids, offers, or proposals as appropriateSource selectionchoosing from among potential vendorsContract administrationmanaging the relationship with the vendorContract close-outcompletion and settlement of the contract39Copyright Course Technology 2001