Chapter 12
Proposal
-a document prepared by a seller when there are different approaches for meeting buyer needs
While closing procurements or contract closure the project team should:
-determine if all work was completed correctly and satisfactorily -update records to reflect final results -archive information for future use -the contract itself should include requirements for formal acceptance and closure
-selecting suppliers or sellers is often called source selection
-experts in source selection recommend that buyers use formal proposal evaluation sheets during source selection -the proposals with the highest weighted scores should be included in the short list of possible sellers -experts also recommend that technical criteria should not be given more weight than management and cost criteria -sellers on the short list are often asked to prepare a best and final offer (BAFO) -final output is a contract signed by the buyer and the selected seller
-Planning procurements involves identifying which projects needs can best be met by using products or services outside the organization.
-if there is no need to buy any products or services from outside the organization, then there is no need to perform any of the other procurement management processes.
-final process in project procurement management is closing procurements -sometimes referred to as contract closure
-involves completing and settling contracts and resolving any open items
Procurement
-means acquiring goods from an outside source -procurement is used in government -private companies use the terms purchasing and outsourcing -organizations or individuals who provide procurement services are referred to as suppliers, vendors, contractors, subcontractors, or sellers. The term suppliers is most widely used
Constructive change orders
-oral or written acts or omissions by someone with actual or apparent authority that can be constructed to have the same effect as a written change order
Approaches for Procurement
-organizations can advertise to procure in several ways -approaching the preferred vendor -approaching several potential vendors -advertising to anyone interested -offshore outsourcing has increased a lot
-inputs needed for planning procurements include:
-project management plan -requirements documentation -the risk register -activity resource requirements -project schedule -activity cost estimates -stakeholder register -etc.
Expert Judgment
-project teams often need to consult experts within their organization as part of good business practice. -experts in the company might know who the qualified outside suppliers are -experts outside the company, including potential suppliers themselves, can also provide expert judgement
-PMI defines an outside source as a source outside of the project team, so the same organization can be a supplier or the project team can be a supplier to another group in the organization
-recall in Ch 2 that outsourcing to another country is called offshoring -Politicians debate whether offshoring helps their own country or not
Cost plus fixed fee (CPFF)
-the buyer pays the supplier for allowable performance costs plus a fixed fee payment usually based on a percentage of estimated costs -this fee does not vary unless the scope of the contract changes
Cost plus incentive fee (CPIF)
-the buyer pays the supplier for allowable performance costs plus a predetermined fee and an incentive bonus -incentives are often provided to suppliers for reducing contract costs -if final cost is less than expected cost, both the buyer and supplier benefit according to the negotiated share formula
The PTA is calculated with the following formula:
PTA=(ceiling price - target price)/government share + target cost
Project procurement management involves acquiring goods and services for a project from outside the performing organization
Processes include: -Planning procurement management -Conducting procurements -Controlling procurements -Closing procurements
Three broad categories of contracts are: fixed sum or lump sum, cost reimbursable, and time and material A fourth category is unit pricing
-A single contract can actually include all three of these categories if it makes sense for that particular procurement ex) you could have a contract with a seller that includes purchasing specific hardware for a fixed price or lump sum, some services that are provided on a cost-reimbursable basis, and other services that are provided on a time-and-material basis
Reasons to Outsource
-Access skills and technologies Can gain access to specific skills and technologies -Reduce both fixed and recurrent costs Companies can reduce labor costs on projects by avoiding the costs of hiring, firing, and reassigning people to projects or paying their salaries when they are in between projects -Allow the client organization to focus on its core business Most organizations are not in the business to provide IT services, yet many have spent valuable time and resources on IT functions when they should have focused on core competencies -Provide flexibility Outsourcing to provide extra staff during periods of peak workloads can be much more economical that trying to staff entire projects w internal resources -Increase accountability A well written contract can clarify responsibility and sharpen focus on key deliverables of a project.
Onshoring
-Bringing IT jobs back to the U.S such as functions like software testing
4. Closing procurements
-Completing and settling each contract or agreement, including resolving any open items
1. Planning procurement management
-Determining what to procure and when and how to do it -in procurement planning, one must decide what to outsource, determine the type of contract, and describe the work for potential sellers
Fixed price or Lump sum contracts
-Firm-fixed-price (FFP) contract has the least amount of risk for the buyer, followed by a Fixed-price incentive fee (FPIF) contract -Fixed-price with economic price adjustment contract (FP-EPA) includes a special provision for predefined final adjustments to the contract price due to changes in conditions such as inflation or the cost of specific commodities -An FP-EPA contract is intended to protect both the buyer and seller from external conditions beyond their control
Make-or-buy analysis
-General management technique used to determine whether an organization should make or perform a particular product or service inside the organization or buy from someone else -this form of analysis involves estimating the internal costs of providing a product or service and comparing the estimate to the cost of outsourcing -leasing is often cheaper for meeting short-term needs but more expensive for long-term needs
-U.S. companies are transferring more work abroad, especially in the areas of IT infrastructure, application development and maintenance, and innovation prcocess
-India, China, and the Philippines are the preferred locations for outsourcing, and Latin America is growing in popularity -A shortage of qualified personnel, not cost savings, is the top reason for global outsourcing of IT services
3 tools and techniques for Planning Procurement Mangement
-Make-or-buy analysis -Expert judgment -Market research
3. Controlling procurements
-Managing relationships with sellers, monitoring contract performance, and making changes as needed
Why not to outsource:
-Might not have as much control over the aspects of projects that suppliers carry out -can become too dependent on particular suppliers and can cause great damage to company if they go out of business -to protect strategic information like in-house stuff that gives you an edge over the competition
2. Conducting procurements
-Obtaining seller responses, selecting sellers, and awarding contracts
Sellers
-Providers, contractors, or suppliers, who provide goods and services to other organizations
2 common examples of procurement documents:
-Request for Proposal (RFP) -Request for Quote (RFQ)
-Cost-reimbursable contracts often include fees, such as profit percentage or incentives for meeting or exceeding selected project objectives -These contracts are often used for projects that include providing goods and services that involve new technologies
-The buyer absorbs more of the risk with cost-reimbursable contracts than with fixed-price contracts -Three types of cost-reimbursable contracts, in order of lowest to highest risk to the buyer, include cost plus incentive fee, cost plus fixed fee, and cost plus percentage of costs.
Project Procurement Management
-The processes required to acquire goods and services for a project from outside the performing organization. -organizations can either be the buyer or the seller of products or services under a contract or other agreement -there are 4 main processes
Termination clause
-a contract clause that allows the buyer or supplier to end the contract. -some termination clauses state that the buyer can terminate a contract for any reason and give the supplier only 24hrs notice -supplies must often give a one-week notice to terminate a contract and must have sufficient reason -buyer could also include a contract clause that specifies hourly rates based on the education and experience of consultants
Statement of Work (SOW)
-a description of the work required for the procurement -If a SOW is used as part of a contract to describe only the work required for that particular contract, it is called a contract statement of work -The contract SOW is a type of scope statement that describes the work in sufficient detail to allow prospective suppliers to determine if they can provide the required goods and services and to determine an appropriate price -important to use correct wording in a contract SOW, such as must instead of may -a good SOW gives bidders a better understanding of the buyers expectations -many organizations use samples and templates for a contract SOW -should specify model number for hardware involved(ex) -contract SOW should specify the location of the work, expected period of performance, specific deliverables, special requirements -a contract SOW would become part of the official contract to ensure that the buyer gets what the supplier bid on
Request for Proposal (RFP)
-a document used to solicit proposals from prospective sellers -suppliers might propose various hardware, software, and networking solutions to meet the organization's need -developing an RFP is often time consuming -becoming less appealing
Requests for Quotes (RFQ)
-a document used to solicit quotes or bids from prospective suppliers -organizations often use an RFQ for solicitations that involve specific items ex) company wants to purchase 100 personal computers with specific features -don't take nearly as long as to prepare a RFP nor do responses -selections are often based on the lowest bid
Contract
-a mutually binding agreement that obligates the seller to provide specified products or services and obligates the buyer to pay for them
bidder's conference
-also called a supplier conference or pre-bid conference -a meeting with prospective sellers prior to preparation of their proposals or bids -bidders' conference can help clarify the buyer's expectations -might be held online and can be used to answer questions
Bid
-also called a tender of quote (short for quotation) -a document prepared by sellers providing pricing for standard items that have been clearly defined by the buyer
Cost plus award fee (CPAF)
-buyer pays the supplier for allowable costs (as defined in contract) plus an award fee based on the satisfaction of subjective performance criteria. -A tip you give a waiter is a simple example. You pay for the cost of your meal, but you can decided on the tip based on your satisfaction with the service -not usually subject to appeals
Controlling Procurements: ensures that the seller's performance meet contractual requirements
-contracts are legal relationships so it is important that legal and contracting professionals be involved in writing and administering contracts
Point of Total Assumption (PTA) can be included in a fixed-price incentive fee contract
-cost at which the contractor assumes total responsibility for each additional dollar of contract cost -contractors do not want to reach the point of total assumption because it hurts them financially, so they have an incentive to prevent cost overruns
Conducting Procurements
-deciding whom to ask to do the work -sending appropriate documentation to potential sellers -obtaining proposals or bids -selecting a seller -awarding a contract
Procurement Management Plan
-describes how the procurement processes will be managed, from developing documentation for making outside purchases or acquisitions to contract closure -contents varies based on project needs -ex) guidelines for using independent estimates to evaluate sellers -guidelines for types of contracts to be used in different situations -standard procurement documents or templates to be used
Time and material (T&M) contracts
-hybrid of fixed-price and cost-reimbursable contracts. -often used for required services when the work cannot be specified clearly and total costs cannot be estimated in a contract -Ex) independent computer consultant might have a contract with a company based on a fee of $80 per hour, plus a fixed price of $10,000 for providing specific project materials
other terms used for RFQs and RFPs include:
-invitations for bid, invitations for negotiation, and initial contractor responses
Fixed price or Lump sum contracts
-involve a fixed total price for a well-defined product or service -the buyer incurs little risk because the price is predetermined -the sellers often pad their estimate to reduce their risk, although they realize their price must still be competitive. -fixed price contracts may also include incentives for meeting or exceeding selected project objectives
Cost reimbursable contracts
-involve payment to the seller for direct and indirect costs -recall from Ch 7 that direct costs can be directly related to producing a project's products and services -these costs can be traced back to a project in a cost-effective way such as salaries for people working directly on a project and hardware or software purchased for a specific project -indirect costs are not directly related to the products or services of the project, but are indirectly related to performing the project -cant really be traced back to the project in a cost-effective way -include costs of providing a work space with electricity and an employee cafeteria -are often calculated as a percentage of direct costs
Market Research
-some organizations have a preferred vendor list and detailed information about them -there is a lot of info online and numerous conferences held where attendees can see and discuss new products in addition to make-or-buy decisions, change requests, and project documents updates, important outputs of planning procurements are a procurement management plan, statement of work, procurement documents such as requests for proposals or quotes, and source selection criteria
Cost plus percentage of costs (CPPC)
-the buyer pays the supplier for allowable performance costs plus a predetermined percentage based on total -from buyers perspective, this is the least desirable contract because the supplier has no incentive to decrease costs. -supplier may be motivated to increase costs because it will automatically increase profits based on the percentage of costs. -this type of contract is prohibited for U.S. government use, but it is sometimes used in private industry, particularly the construction industry -all risk is borne by the buyer
Unit pricing
-to require the buyer to pay the supplier a predetermined amount per unit of product or service -the total value of the contract is a function of the quantities needed to complete the work -ex)if company purchases only one unit, the cost might be $1,000. If the company purchases 10 units, the cost might be $10,000. -this type of pricing usually involves volume discounts. -Ex) if company purchases more than 50 units, cost might be $800 per unit -this flexible strategy is often advantageous to both buyer and seller -specific clauses that account for unique project issues-contract should stipulate different hourly rates based on the level of experience of the individual contractors
