12 - Project Procurement Management

On Cost Reimbursable contracts, what are some key areas to focus upon:

- Audit every invoice - Make sure all the costs are applicable and chargeable to your project - Make sure the seller's work is progressing efficiently - Watch for the seller adding resources to your project that do not add value or perform real work. - Watch for resources being shifted from what was said in the original proposal (e.g. more experienced people proposed and less experienced people used) - Watch for seller charges that were not part of the original plan - Reestimate the cost of the project

On fixed price contracts, what are some key areas to focus upon:

- Watch for the seller cutting scope - Watch for the seller cutting quality - When the contract requires the seller's costs to be transparent, make sure they are real costs that have been incurred, not just future costs (unless there is an agreement stating otherwise) - Watch for overpriced change orders - Check for scope misunderstandings

Your company requires that before you purchase any routers or switches for the data center you are building, you need to solicit quotes from three separate suppliers prior to submitting the purchase request to the finance department. This policy belongs to: A. Organizational Process Assets B. Enterprise Environmental Factors C. Procurement Management Knowledge Area D. Make-or-Buy Decision

A - Any type of corporate policy or formal procurement procedure is an organizational process asset. [PMBOK 5th edition, Page 27] [Project Procurement Management]

Monica is managing a software system implementation project. The technical work has been outsourced to a technology provider. Monica wants to change the contracted Scope of Work. Where can she find documentation on the process that needs to be followed in order to modify the contracted Scope of Work? A.) Contract Change Control System B.) Project Management Plan C.) Organizational Process Assets D.) Enterprise Environmental Factors

A- The Organizational Process Assets often do contain documentation on generic organizational change control systems. However, the specific details regarding contract changes are documented in every Contract Change Control System.

A routine audit of a cost reimbursable (CR) contract determines that overcharges are being made. If the contract does not specify corrective action, the buyer should: A. Continue to make project payments B. Halt payments until the problem is corrected C. Void the contract and start legal action to recover overpayments D. Change the contract to require more frequent audits

A. Continue to make project payments. Halting all payments would be a breach of contract on the buyer's part. Voiding the contract and beginning legal action is too severe and connot be done unilaterally. Changing the contract to require more frequent audits does not solve the problem presented. A choice that said, "Halt payments on the disputed amount" would probably be the best answer. But, this choice isn't there, so best answer is to continue to make project payments.

An advantage of a fixed-price contract for the buyer is: A. Cost risk is lower B. Cost risk is higher C. There is little risk D. Risk is shared by all parties

A. Cost risk is lower. YES, FIXED PRICE IS LOWER RISK FOR BUYER, BUT WE ARE TALKING ABOUT COST RISK (NOT ANY RISK).

Close Procurements is different from Close Project or Phase in that Close Procurements: A. Occurs before Close Project or Phase B. Is the only one to involve the customer C. Includes the return of property D. May be done more than once for each contract

A. Occurs before Close Project or Phase. Close Procurements is done once for each procurement, at the end of the contract (not charter. We're talking about contract. There's typically one contract per seller on a project.). ALL PROCUREMENTS ARE CLOSED BEFORE THE PROJECT IS CLOSED.

Procurement Documents

An output of Plan Procurement Management process Docs used in bids and proposal activities. E.g. RFI, IFB, RFP, RFQ, format for collection and evaluation of vendor responses,

What's in the Procurement Statement of Work?

An output of Plan Procurement Management process. Based on the scope statement, WBS, WBS Dictionary , all related products and services required, for one or multiple items to be procured, not final until contract signed, specifications, delivery details, schedule, location requirements. Usually one Procurement SOW is created for each procured item. However, one procurement SOW can be created for more than on procured item intended to be supplied by one vendor.

Which of these is not an input to the Control Procurements process? A. Agreements B. Change requests C. Work performance data D. Work performance reports

B - Change requests are not inputs to the Control Procurements process. The other choices are valid inputs to this process. [PMBOK 5th edition, Page 379] [Project Procurement Management] Approved Change requests are an input to Control Procurements process.

Which of the following is not a tool or technique of the Control Procurements process? A. Payment system B. Configuration management system C. Contract change control system D. Records management system

B - The configuration management system is not a tool and technique of the Control Procurements process. The other choices are valid tools and techniques of this process. [PMBOK 5th edition, Page 379] [Project Procurement Management]

Which of the following is not an acceptable approach for termination of a procurement contact? A.) Termination by the buyer after the delivery of the contracted work. B.) Termination by bypassing the terminations clause of the contract. C.) Termination by either party anytime for any cause or convenience. D.) Termination by a party due to the default of other party.

B- Any reason or approach for termination of a contract is legal and acceptable if it is in accordance with the agreed terminations clause of the contract. Bypassing the terminations clause is not only an unacceptable approach for terminating a contract, it is also illegal.

A project performed under a cost reimbursable contract has finally entered the Close Procurements process. What must the buyer remember to do? A. Decrease the risk rating of the project B. Audit seller's cost submittals C. Evaluate the fee she is paying D. Make sure the seller is not adding resources.

B. Audit seller's cost submittals. Evaluation of fee should have been done during Conduct Procurements process. Making sure the seller does not add resources may be a concern during the Control Procurements process, but it is not common during Close Procurements. Auditing the seller's cost submittals is a required aspect of the Close Procurements process.

The primary objective of the contract negotiations is to: A. Get the most from the other side B. Protect the relationship C. Get the highest monetary return. D. Devine the objectives and stick to them

B. Protect the relationship. As PM you want to develop good relationship during negotiations that will last throughout the project. That doesn't mean the buyer sacrifices doing what is best for the organization.

A buyer has just received a final set of deliverables from the seller and finds that they do not conform to the specifications that were originally planned. Where should the buyer expect to find documentation on how to handle non-conforming deliverables? A. Communication Plan B. The contract C. Quality Plan D. Scope Statement

B. The contract. Requirements for formal deliverable acceptance and procedures for addressing non-conforming deliverables are usually defined in the contract. [PMBOK 5th edition, Pages 377, 378] [Project Procurement Management]

You are managing a software development project. The project will involve working with a remote team. One of the requirements is to set up a secure communication link. The lead time to set up the link is 45 days. Since the initial phase of the project involves requirements gathering, you believe that the link is only required after 3 months and you are planning accordingly. You would typically do this planning activity in: A. The Conduct Procurements process B. The Define Activities process C. The Plan Procurement Management process D. The Control Procurements process

C - Determining what, when and how to purchase or acquire is done during the Plan Procurement Management process. [PMBOK 5th edition, Page 358] [Project Procurement Management]

You have received a proposal for an RFP that was sent to vendors. One of the vendors has proposed doing the project for $12,500. The cost for the project is $10,000 and their profit will be $2,500. Which type of contract is most suitable for this situation? A. Cost Plus Fixed Fee B. Cost Plus Percentage of Cost C. Fixed price D. Cost Plus Incentive Fee

C - It looks as if the vendor is asking for a cost-plus-fixed-fee contract. However, by asking for a fixed $12,500, the vendor is actually asking for a fixed-price contract. The cost and fee are just the components the vendor has estimated to come up with a final price. [PMBOK 5th edition, Pages 362, 363] [Project Procurement Management]

Which of the following usually do not get updated in the Organizational Process Assets during the Control Procurements process? A.) Correspondence B.) Payment schedules C.) The Project Management Plan D.) Performance evaluations

C- All of the given choices are updated in the Organizational Process Assets during some stage of the project. However, the Project Management Plan does not get updated in the Organizational Process Assets during the Control Procurements process.

Contract terms and conditions require a work plan to be issued for the buyer's approval prior to commencing work, but the seller fails to provide one. Which of the following is the best thing for the buyer's project manager to do A. File a letter of intent B. Develop the work plan and issue it to the seller to move things along C. Issue a default letter D. Issue a stop work order to the seller until a work plan is prepared

C. Issue a default letter. When a seller does not perform accourding to the contract terms and conditions, they have defaulted and the PM must take action. You might prefer a choice to ask vendor what is going on and investigate first.... But, this choice is not available. You must send formal written notice as soon as you become aware of the default so that you do not give up any right to receive the work plan in the future. You contact the seller for a discussion is the second thing you do. [Breach of contract and in default are generally the same thing]

Buyer refuses a deliverable because one requirement is missed. You agree with the buyer. What is the best thing to do? A. Explain that the contract is wrong and should be changed B. Issue a change order C. Review the requirements and meet with the responsible team member to review the WBS dictionary D. Call a meeting of the team to review the missed requirement

C. Review the requirements and meet with the responsible team member to review the WBS dictionary. This is from seller's perspective. A seller cannot issue a change order (although they could request one). If requirement missed, should review the WBS to understand if cause was missing Work Package or work package failing to deliver. You should meet with responsible person to understand why (the cause). ​

All of the following must be present to have a contract except: A. A procurement statement of work B. Acceptance C. The address of the seller D. Buyer's signatures

C. The address of the seller. Don't forget a contract INCLUDES a procurement statement of work.

PM's focus when reviewing contract?

Checking that price is right. Confirming that product, service or output description is adequate (while legal team focuses on ensuring contract language is legally adequate.. E.g. Limits legal risk Also, PM should provide an understanding of project risks and make sure provisions are included in the contract to address these risks.

If worried about seller increasing profit in cost plus incentive fee (CPIF), what should you do?

Cutting scope actually decreases profit on this type of contract. But, seller might invoice for items not chargeable to the project. Therefore, all invoiced costs should be audited.

Which of the following is accurate regarding agreements in Project Procurement Management? A. Agreements can never be terminated. B. Terms and conditions never include the seller's proposal C. Agreements are informal documents. D. Agreements are legal documents between a buyer and a seller.

D - Agreements are legal and formal documents between buyers and sellers. [PMBOK 5th edition, Page 357] [Project Procurement Management]

During which procurement processes does procurement negotiation occur? A. Plan Procurement Management and Close Procurements B. Control Procurements and Close Procurements C. Conduct Procurements and Control Procurements D. Conduct Procurements and Close Procurements

D. Conduct Procurements and Close Procurements. Negotiation occurs during the Conduct Procurements process of course. Negotiation also occurs in the Close Procurements to settle any outstanding disputes.

You want to protect your company from financial risk associated with a large project that has limited scope definition. What is the best type of contract to choose? A. Fixed Price B. Cost plus percentage of cost C. Time and Material D. Cost plus fixed fee

D. Cost plus fixed fee. Of the options given, the only contract that limits fees for large projects with limited scope definition is cost plus fixed fee.

Final Price & Final Fee in Cost plus Incentive Fee?

Final Price = Actual Cost + Final Fee Final Fee = Target Fee + or - sellers portion of savings or cost overrun

Typical Contracts

Firm Fixed Price (FFP) Fixed Price Incentive Fee (FPIF) Fixed Price Economic Price Adjust (FP-EPA) Cost Plus Fixed Fee (CPFF) Cost Plus Incentive Fee (CPIF) Cost Plus Award Fee (CPAF) Time &Materials (T&M)

What are the contract modifiers?

Fixed Fee- Incentive Fee Award Fee Economic Adjusted Fee

What are the types of contracts?

Fixed Price - Scope must be well known. Requires more work from buyer to set up and write procurement SOW. But, less work for buyer to manage. Big advantage is cost risk reduction for buyer. But, changes in scope must be carefully observed, otherwise the cost of the project may be elevated significantly because it is seen that the contractors get the contract by bidding the lower price and then try to cover the cost with any opportunity, such as added scope. Cost Reimbursable - Higher cost risk for buyer. Used when scope is less understood, and you need expert resources. MUST AUDIT seller invoices. More management from buyer required than fixed. This contract is also known as a Cost Disbursable Contract. In this type of contract, the seller is reimbursed for completed work plus a fee representing his profit. Sometimes this fee will be paid if the seller meets or exceeds the selected project objectives; for example, completing the task before time or completing the task with less cost, etc. Time and Materials (T&M)- done when you need resources quick but for SHORT DURATION. Needs lot's of day to day mgmt by buyer. A Time and Materials type of contract is generally used when a precise SOW can not be quickly created. In this type of contract, the project manager or the organization will provide the qualification or experience to the contractor to provide the staff.

What type of contract involves a fixed total price for a well-defined product or service.

Fixed-price/lump-sum

Benefits of having a contract change control system and what is in this system?

Having a contract change control system will allow you to establish the processes and procedures should you need to modify a contract. It contains paperwork, tracking systems, dispute resolution procedures, and approval levels necessary for authorizing changes. [PMBOK 5th edition, Page 383] [Project Procurement Also contains an extensive procurement changes approval process?

Cost Plus Award Fee (CPAF)

Here, the seller is paid for all his legitimate costs plus some award fee. This award fee will be based on achieving satisfaction on the certain performance objectives described in the contract. The evaluation of performance is a subjective matter, and you cannot appeal it. There is a difference between the incentive fee and the award fee. An incentive fee is calculated based on a formula defined in the contract, and is an objective evaluation. An award fee is dependent on the satisfaction of the client and is evaluated subjectively. Award fee is not subjected to an appeal. Example: If the seller completes the task meeting or exceeding all quality standards, based on his performance he may be given an award of up to $10,000 USD.

Fixed Price Economic Price Adjust (FP-EPA)

If the contract is multi-year long, a Fixed Price with Economic Price Adjustment Contract is used. Here you include a special provision in a clause which protects the seller from inflation. Example: About 3% of the cost of the project will be increased after a certain time duration based on the Consumer Price Index.

Cost Plus Incentive Fee (CPIF)

In a Cost Plus Incentive Fee Contract, the seller will be reimbursed for all costs plus an incentive fee based upon achieving certain performance objectives mentioned in the contract. This incentive will be calculated by using an agreed predetermined formula. Here the risk also lies with the buyer; however, this risk is lower than the Cost Plus Fixed Fee where the buyer has to pay a fixed fee along with the cost incurred. In a Cost Plus Incentive Fee Contract, the incentive is a motivating factor for the seller. If the seller is able to complete the work with less cost or able to complete it before time, he may get some incentive. Most of the time incentive is a percentage of the savings, which is shared by the buyer and the seller. Example: If the project is completed with lesser cost, 25% of remaining fund will be given to the seller.

Fixed Price Incentive Fee (FPIF)

In this type of contract, although the price is fixed, the seller is given an additional incentive based on his performance. This incentive lowers the risk borne by the seller. The incentive can be tied to any project metrics such as cost, time, or technical performance. Example: 10,000 USD will be paid to contractor as an incentive if he completes the work before two months.

Cost Plus Fixed Fee (CPFF)

In this type of contract, the seller is paid for all his cost incurred plus a fixed fee (which will not change), regardless of his performance. Here, the buyer bears the risk. This type of contract is used in projects where risk is high, and no one is interested in bidding. Therefore, this type of contract is selected to keep the seller safe from risks. Example: Total cost plus $25,000 USD as a fee.

Sharing Ratio?

Incentives are usually expressed as a ratio such as 90/10 sharing of savings. The buyer portion is always the first number. So, in this example, buyer gets 90% of the savings while the seller gets 10%.

IFB

Invitation for bid- generally this term is equivalent to RFP, but in some application areas may have a narrower or more specific meaning. But, Usually request for just a total price to do all the work. Is usually a sealed bidding processes used by Govt. contracting Contract type- FP Procurement SOW- Design

Which technique is mandatory in Procurement Management?

Make or Buy decisioning - determining which products or services will be bought, leased, rented or made in-house. This drives which outputs need to flow through rest of Procurement Management (Conduct Procurement, Control Procurement and close procurement).

Does buyer have the right to ask for anything not in contract?

No, Seller only has to deliver what is in contract.

Is a formal written contract the only form of a binding contract?

No, binding contract can be written, verbal, a handshake, an email,etc.. All contracts are subject to remedy in the courts.

If Party A and B signed off notes during contract negotiations, if item in the signed off notes was not in the contract, and buyer identifies that the seller didn't complete that item, is the seller obligated to complete the item.

No, the seller is only obligated to complete what is in the contract (generally).

What is the cost at which contractor assumes total responsibility for each additional dollar of contract cost?

Point of Total Assumption (PTA)

What is in Procurement Management Plan

Processes to be followed by Procurement Management process, Make or buy decision, sourcing strategy, types of contracts to be used, metrics used to measure sellers, procurement document formats, risks, constraints,assumptions

Type procurement where seller organization is preferred seller?

Single Source

Type procurement where seller organization is only seller?

Sole Source (e.g. Has patent)

Point of total assumption (PTA)?

The amount above which the seller bears all the loss of cost overrun. PTA = ((Ceiling Price - Target Price) / Buyer's Share Ratio) + Target Cost

When is fixed price contract right or wrong?

The main advantage of Fixed Price Contract is that both parties know the scope of the work, and the total cost of the task before the work is started. This type of contract is very useful if the scope of work is defined accurately. If done right, risk is with seller. Fixed price contracts are good for controlling the cost. However, changes in scope must be carefully observed, otherwise the cost of the project may be elevated significantly because it is seen that the contractors get the contract by bidding the lower price and then try to cover the cost with any opportunity, such as added scope.

Some procurement related items that would be tracked in the records management system:

The proposal, procurement statement of work, contract terms and conditions, etc.

Time & Materials (T&M)

This is a hybrid contract of Fixed Price and Cost Reimbursable Contracts. A Time and Materials type of contract is generally used when a precise SOW can not be created quickly. In this type of contract, the project manager or the organization will provide the qualification or experience to the contractor to provide the staff. This type of contract is used to hire some experts or any outside support. Here the buyer can specify the hourly rate for the labor with a "not-to-exceed" limit. Example: Technician will be paid $20 USD per hour.

Firm Fixed Price (FFP)

This is the simplest type of procurement contract. In this type of contract, the fee is fixed. The seller has to complete the job within an agreed amount of money and time. Any cost increase due to bad performance of the seller will be the responsibility of the seller, who is legally bound to complete the job within the agreed amount. Since the risk is borne by the seller, the cost tends to be higher. Another drawback of a Firm Fixed Price Contract is that, if the scope is not clear, there can be disputes between the buyer and the seller. Moreover, any deviation from the original scope can cost you a lot. Example: The seller has to complete the job for $100,000 USD within 18 months.

A leading telecom network operator has signed a procurement contract with an international telecom equipment vendor company to extend their network infrastructure nationally by 50%. Network planning, civil works and equipment installation are all included as a part of the procurement contract. From the equipment vendor's point of view, which of the following needs to be applied efficiently to effectively manage this procurement contract?

This question is asking about the approach of the vendor towards an awarded contract. For the vendor, the awarded work needs to be treated as a project. However, for the buyer, the contract needs to be managed as a procurement.

Who is responsible for the negotiations of the procurement contract clauses in any organization?

This varies from organization to organization. The responsibility for project Procurement Management varies from organization to organization. The project manager and the project team may not be the lead negotiators on every project. Some organizations have dedicated Legal and Procurement departments that perform these activities.

RFP

Type of procurement document used to proposals from potential Sellers of. In some application areas may have a narrower or more specific meaning. A very detailed and specific approach to a customized solution and a total price. Contract type- CR Procurement SOW- Performance or Functional

RFQ

Type of procurement document used to request price quotations from potential Sellers of common or standard products or services. Sometimes used in place of RFPs, and in some application areas may have a narrower or more specific meaning. Usually request a price quote per item, hour, meter, or other unit of measure. Getting prices from a company for goods or services. Contract type- T & M Procurement SOW- Any

RFI

Type of procurement document whereby Buyer requests various information around potential Seller's products, services or capabilities. For finding potential vendors for consolidation of proposals or quotes.

Target price?

Used to compare the end result (final price) with what was expected (target price). Target price is a measure of success. Target Cost + Target Fee = Target Price. (this is thinking about procurements from the buyers point of view)

If project is an internal project between two departments in same company where one is the customer and other is supplier, should a formal contract Be created and agreed?

Yes (in perfect world or PMP world)

Name at least 2 reasons to turn to outsourcing.

access skills and technologies, reduce both fixed and recurrent costs, allow the client organization to focus on its core business, provide flexibility, increase accountability

_________________ - document prepared by sellers to provide pricing for standard items that buyer has clearly defined

bid

What can be identified as a meeting with prospective sellers prior to preparation of their proposals/bids; helps ensure that everyone has a clear, common understanding of buyer's desired products or services

bidders' conference

Which of the 4 main processes of project procurement management do the following outputs belong to? Closed procurements, organizational process assets updates

closing procurements

Which of the 4 main processes of project procurement management is the following? Completion and settlement of each contract or agreement, including resolution of any open items.

closing procurements

Which of the 4 main processes of project procurement management do the following outputs belong to? Selected sellers, agreements, resource calendars, change requests, updates to project management plan and other project documents

conducting procurements

Which of the 4 main processes of project procurement management is the following? Obtaining seller responses, selecting sellers, and awarding contracts

conducting procurements

_________________ - oral or written acts or omissions by someone with actual or apparent authority that can be construed to have the same effect as a written change order

constructive change orders

_______________ - mutually binding agreement that obligates the seller to provide specified products or services and obligates the buyer to pay for them

contract

If SOW is used to describe only the work required for a particular contract, it's called a __________________________.

contract statement of work

Which of the 4 main processes of project procurement management do the following outputs belong to? Work performance info, change requests, updates to project management plan, project documents, organizational process assets

controlling procurements

Which of the 4 main processes of project procurement management is the following? Managing relationships with sellers, monitoring contract performance, making changes as needed.

controlling procurements

What type of contract involves the buyer pays supplier for allowable performance costs plus award fee based on satisfaction of subjective performance criteria.

cost plus award fee contract

What type of contract involves the buyer pays supplier for allowable performance costs and fixed fee payment that's usually based on a percentage of estimated costs.

cost plus fixed fee contract

What type of contract involves the buyer pays supplier for allowable performance costs along with predetermined fee and incentive bonus.

cost plus incentive fee contract

What type of contract involves the buyer pays supplier allowable performance costs with predetermined percentage based on total costs.

cost plus percentage of costs contract

What are the 4 types of cost-reimbursable contracts?

cost plus: incentive fee, fixed fee, award fee, percentage of costs

What type of contract involves a payment to the supplier for direct and indirect actual costs.

cost-reimbursable contract

_________________ - various procurement functions that are now done electronically

e-procurement

What are the 3 broad categories of contracts?

fixed-price/lump-sum, cost reimbursable, time and material

What is a general management technique used to determine whether an organization should make a product or perform a service inside the organization or buy it from someone else?

make-or-buy analysis

What are the 3 main tools/techniques to help in planning procurement management?

make-or-buy analysis, expert judgement, market research

__________________ - organization decides whether it should make certain products and perform certain services inside the organization, or if it's better to buy those products and services from an outside organization

make-or-buy decisions

Suppliers, vendors, contractors, subcontractors, and sellers are all examples of what?

organizations/individuals who provide procurement services

Which of the 4 main processes of project procurement management do the following outputs belong to? procurement management plan, procurement statements of work, procurement documents, source selection criteria, make-or-buy decisions, change requests, project document updates

planning procurement management

Which of the 4 main processes of project procurement management is the following? Determining what to procure and when and how to do it; decide what to outsource, type of contract, and the work for potential sellers

planning procurement management

Name the 4 main processes of project procurement management.

planning procurement management, conducting procurements, controlling procurements, closing procurements

_______________ - acquiring goods and services from an outside source

procurement

Name 3 tools to assist in closing procurements.

procurement audits, negotiated settlements, records management system

What can be identified as a document that describes how the procurement processes will be managed, from developing documentation for making outside purchases or acquisitions to contract closures?

procurement management plan

What involves processes required to acquire goods and services for a project from outside the performing organization.

project procurement management

_________________ - document prepared by seller when there are different approaches to meeting buyer needs

proposal

What can be identified as a document used to solicit proposals from prospective suppliers?

request for proposal (RFP)

What are 2 common examples of procurement documents?

request for proposal (RFP), request for quote (RFQ)

What can be identified as a document used to solicit quotes/bids from prospective suppliers?

request for quote (RFQ)

_______________ - providers, contractors, suppliers who provide goods and services to other organizations

sellers

What can be identified as the description of the work required for the procurement?

statement of work (SOW)

What's the name of the contract clause that allows the buyer or supplier to end the contract?

termination clause

What type of contract is a hybrid of fixed-price and cost-reimbursable contracts?

time and material contracts

What requires the buyer to pay the supplier a predetermined amount per unit of product or service?

unit pricing

Name the 7 types of e-procurement.

web-based ERP, e-MRO, e-sourcing, e-tendering, e-reverse auctioning, e-informing, e-marketsites