Chapter 12 - Project Procurement Management
Variations of Cost-Reimbursable Contracts include:
- Cost plus fixed fee (CPFF): The seller is reimbursed for all allowable costs for performing the contract work and receives a fixed-fee payment calculated as a percentage of the initial estimated project costs. Fee amounts do not change unless the project scope changes. - Cost Plus Incentive Fee Contract (CPIF): The seller is reimbursed for all allowable costs for performing the contract work and receives a predetermined incentive fee based on achieving certain performance objectives set forth in the contract. In CPIF contracts, if the final costs are less or greater than the original estimated costs, then both the buyer and seller share costs from the departures based upon a prenegotiated cost-sharing formula. - Cost Plus Award Fee Contracts (CPAF): The seller is reimbursed for all legitimate costs, but the majority of the fee is earned based on the satisfaction of certain broad subjective performance criteria defined and incorporated into the contract. The determination of fee is based solely on the subjective determination of seller performance by the buyer and is generally not subject to appeals.
Types of fixed price contracts include:
- Firm Fixed Price (FFP): The most commonly used contract type. It is favored by most buying organizations because the price for goods is set at the outset and not subject to change unless the scope of work changes. - Fixed Price Incentive Fee (FPIF) (Firm Target or Successive Target): This fixed-price arrangement gives the buyer and seller some flexibility in that it allows for deviation from performance, with financial incentives tied to achieving agreed-upon metrics. Typically, such financial incentives are related to cost, schedule, or technical performance of the seller. Under these contracts, a price ceiling is set, and all costs above the price ceiling are the responsibility of the seller. - Fixed Price with Economic Price Adjustment: This type is used whenever the seller's performance period spans a considerable period of years, or if the payments are made in a different currency. It is a fixed-price contract, but with a special provision allowing for predefined final adjustments to the contract price due to changed conditions, such as inflation changes or cost increases (or decreases) for specific commodities.
Commonly used selection methods include the following:
- Least cost (for procurements of a standard or routine nature where well-established practices and standards exist and from which a specific and well-defined outcome is expected) - Qualifications only (applies when the time and cost of a full selection process would not make sense because the value of the procurement is relatively small) - Quality-based/highest technical proposal score (the selected firm is asked to submit a proposal with both technical and cost details and is then invited to negotiate the contract if the technical proposal proves acceptable. Using this method, technical proposals are first evaluated based on the quality of the technical solution offered. The seller who submitted the highest-ranked technical proposal is selected if their financial proposal can be negotiated and accepted.) - Quality and cost-based (allows costs to be included as a factor in the seller selection process. In general, when risk and/or uncertainty are greater for the project, quality should be a key element when compared to cost.) - Sole Source (the buyer asks a specific seller to prepare technical and financial proposals, which are then negotiated. Since there is no competition, this method is acceptable only when properly justified and should be viewed as an exception.) - Fixed budget (requires disclosing the available budget to invited sellers in the RFP and selecting the highest-ranking technical proposal within the budget. Because sellers are subject to a cost constraint, they will adapt the scope and quality of their offer to that budget. The buyer should therefore ensure that the budget is compatible with the SOW and that the seller will be able to perform the tasks within the budget. This method is appropriate only when the SOW is precisely defined, no changes are anticipated, and the budget is fixed and cannot be exceeded.)
Bidding Documents
- Request for information (RFI) - Request for Quotation (RFQ) - Request for Proposal (RFP) or other appropriate procurement documents
Trends and Emerging Practices in Procurement Management
1. Advances in tools (to manage the procurement and implementation phases of a project) 2. More advanced risk management (increase in trend to write contracts that accurately allocate specific risks to those entities most capable of managing them) 3. Changing contracting processes (use of internationally recognized standard contract forms to reduce problems and claims during execution due to an increase in large and international contracts) 4. Logistics and supply chain management (due to items with long lead times, many of these items are purchased in advance, sometimes based only on top-level design, to meet the planned project completion date. 5. Technology and stakeholder relations (publicly funded projects are under increasing scrutiny. An example in construction projects is the use of webcams to monitor project progress.) 6. Trial engagements (some projects will engage several candidate sellers for initial deliverables and work products on a paid basis before making the full commitment to a larger portion of the project scope. This accelerates momentum by allowing the buyer to evaluate potential partners, while simultaneously making progress on project work.
Outputs of Control Procurements
1. Closed Procurements 2. Work Performance Information 3. Procurement Documentation Updates 4. Change Requests 5. Project Management Plan Updates (risk management plan, procurement management plan, schedule baseline, cost baseline) 6. Project Documents Updates (lessons learned register, resource requirements, requirements traceability matrix, risk register, stakeholder register) 7. OPA Updates (payment schedules and requests; seller performance evaluation documentation; prequalified seller lists updates; lessons learned repository; procurement file)
Tailoring Considerations
1. Complexity of procurement 2. Physical location 3. Governance and regulatory environment 4. Availability of contractors
Tools and Techniques for Conduct Procurements
1. Expert Judgement 2. Advertising 3. Bidder Conferences 4. Data Analysis (proposal evaluation) 5. Interpersonal and Team Skills (negotiation)
Tools and Techniques for Control Procurements
1. Expert Judgement 2. Claims Administration 3. Data Analysis (performance reviews, earned value analysis, trend analysis) 4. Inspection 5. Audits
Tools and Techniques for Plan Procurement Management
1. Expert Judgement 2. Data Gathering (market research) 3. Data Analysis (make-or-buy analysis) 4. Source Selection Analysis 5. Meetings
Typical Steps in the Plan Procurement process might be:
1. Prepare the procurement statement of work (SOW) or terms of reference (TOR) 2. Prepare a high-level cost estimate to determine the budget 3. Advertise the opportunity 4. Identify a short list of qualified sellers. 5. Prepare and issue bid documents. 6. Prepare and submit proposals by the seller. 7. Conduct a technical evaluation of the proposals including quality. 8. Perform a cost evaluation of the proposals. 9. Prepare the final combined quality and cost evaluation to select the winning proposal. 10. Finalize negotiations and sign contract between the buyer and the seller.
Outputs of Plan Procurement Management
1. Procurement Management Plan 2. Procurement Strategy 3. Bid Documents 4. Procurement Statement of Work 5. Source Selection Criteria 6. Make-or-Buy Decisions 7. Independent Cost Estimates 8. Change Requests 9. Project Documents Updates (lessons learned register, milestone list, requirements documentation, requirements traceability matrix, risk register, stakeholder register) 10. OPA Updates (information on qualified sellers)
Inputs to Plan Procurement Management
1. Project Charter 2. Business Documents (business case and benefits management plan) 3. Project Management Plan (scope management plan, quality management plan, resource management plan, and scope baseline) 4. Project Documents (milestone list, project team assignments, requirements documentation, requirements traceability matrix, resource requirements, risk register, stakeholder register) 5. EEF (marketplace conditions; products, services, and results that are available in the marketplace; sellers, including their past performance or reputation; typical terms and conditions for products, services, and results or for the specific industry; unique local requirements, such as regulatory requirements for local labor or sellers; legal advice regarding procurements; contract management systems, including procedures for contract change control; established multi-tier supplier system of prequalified sellers based on prior experience; and financial accounting and contract payments system) 6. OPA (preapproved seller lists; formal procurement policies, procedures, and guidelines; contract types; cost-reimbursable contracts; time and material contracts (T&M))
Inputs to Control Procurements
1. Project Management Plan (requirements management plan, risk management plan, procurement management plan, change management plan, schedule baseline) 2. Project Documents (assumption log, lessons learned register, milestone list, quality reports, requirements documentation, requirements traceability matrix, risk register, stakeholder register) 3. Agreements 4. Procurement Documentation 5. Approved Change Requests 6. Work Performance Data 7. EEF (contract change control system; marketplace conditions; financial management and accounts payable system; and buying organization's code of ethics) 8. OPA (procurement policies)
Inputs to Conduct Procurements
1. Project Management Plan (scope management plan, requirements management plan, communications management plan, risk management plan, procurement management plan, configuration management plan, cost baseline) 2. Project Documents (lessons learned register, project schedule, requirements documentation, risk register, stakeholder register) 3. Procurement Documentation (bid documents, procurement statement of work, independent cost estimates, source selection criteria) 4. Seller Proposals 5. EEF (local laws and regulations regarding procurements; local laws and regulations ensuring that the major procurements involve local sellers; external economic environment constraining procurement processes; marketplace conditions; information on relevant past experience with sellers, both good and bad; prior agreements already in place; and contract management systems) 6. OPA (list of preferred sellers that have been prequalified; organizational policies that influence the selection of a seller; specific organizational templates or guidelines that will determine the way agreements are drafted and built; and financial policies and procedures regarding invoicing and payment processes)
Outputs of Conduct Procurements
1. Selected Sellers 2. Agreements 3. Change requests 4. Project Management Plan Updates (requirements management plan, quality management plan, communications management plan, risk management plan, procurement management plan, scope baseline, schedule baseline, cost baseline) 5. Project Document Updates (lessons learned register, requirements documentation, requirements traceability matrix, resource calendars, risk register, stakeholder register) 6. OPA Updates (listing of prospective and prequalified sellers; and information on relevant experience with sellers, both good and bad)
Procurement Management Plan
A component of the project or program management plan that contains the activities to be undertaken during the procurement process.
Bidder Conferences
A meeting between the buyer and prospective sellers prior to proposal submittal to ensure all prospective bidders (sellers) have a clear and common understanding of the procurement and no bidders receive preferential treatment.
Time and Material Contract (T&M)
A type of contract that is a hybrid contractual arrangement with aspects of both cost-reimbursable and fixed-price contracts. They are often used for staff augmentation, acquisition of experts, and any outside support when a precise statement of work cannot be quickly prescribed. (aka time and means)
Request for Information (RFI)
An RFI is used when more information on the goods and services to be acquired is needed from the sellers. It will typically be followed by an RFQ or RFP.
Request for Proposal (RFP)
An RFP is used when there is a problem in the project and the solution is not easy to determine. This is the most formal of the "request for" documents and has strict procurement rules for content, timeline, and seller responses.
Request for Quotation (RFQ)
An RFQ is commonly used when more information is needed on how vendors would satisfy the requirements and/or how much it will cost.
3 Types of Contracts
Fixed-price or lump-sum contracts Cost-reimbursable contracts Time and material contracts
Seller Proposals
Form the basic information that will be used by an evaluation body to select one or more successful bidders (sellers). The evaluation body reviews each submitted proposal according to the source selection criteria and selects the seller that can best satisfy the buying organization's requirements.
Project Procurement Management
Includes the management and control processes required to develop and administer agreements such as contracts, purchase orders, memoranda of agreements (MOAs), or internal service level agreements (SLAs).
Project Procurement Management
Project Procurement Management includes the processes necessary to purchase or acquire products, services, or results needed from outside the project team.
Closed Procurements
The buyer, usually through its authorized procurement administrator, provides the seller with formal written notice that the contract has been completed. Requirements for formal procurement closure are usually defined in the terms and conditions of the contract and are included in the procurement management plan
Procurement Strategy
The objective is to determine the project delivery method, the type of legally binding agreement(s), and how the procurement will advance through the procurement phases.
Plan Procurement Management
The process of documenting project procurement decisions, specifying the approach, and identifying potential sellers.
Control Procurements
The process of managing procurement relationships; monitoring contract performance, and making changes and corrections as appropriate; and closing out contracts.
Conduct Procurement
The process of obtaining seller responses, selecting a seller, and awarding a contract.
Independent Cost Estimates
The procuring organization may elect to either prepare its own independent estimate or have a cost estimate prepared by an outside professional estimator to serve as a benchmark on proposed responses. Significant differences in cost estimates can be an indication that the procurement SOW was deficient or ambiguous, or that the prospective sellers either misunderstood or failed to respond fully to the procurement SOW.
Cost-Reimbursable Contracts
This category of contract involves payments (cost reimbursements) to the seller for all legitimate actual costs incurred for completed work, plus a fee representing seller profit. This type should be used if the scope of work is expected to change significantly during the execution of the contract.
Fixed-priced contracts
This category of contracts involves setting a fixed total price for a defined product, service, or result to be provided. These contracts should be used when the requirements are well defined and no significant changes to the scope are expected.
The Key Benefit of the Plan Procurement Management process is that it
determines whether to acquire goods and services from outside the project and, if so, what to acquire as well as how and when to acquire it. Goods and services may be procured from other parts of the performing organization or from external sources.
The Key Benefit of the Control Procurements process is that
it ensures that both the seller's and buyer's performance meet the project's requirements according to the terms of the legal agreement
The Key Benefit of the Conduct Procurements process is that
it selects a qualified seller and implements the legal agreement for delivery.
The Plan Procurement Management process is performed
once or at predefined points in the project
The Conduct Procurements process is performed
periodically throughout the project as needed.
terms of reference (TOR)
sometimes used when contracting for services. Typically includes these elements (similar to a SOW): - tasks the contractor is required to perform as well as specified coordination requirements; - Standards the contractor will fulfill that are applicable to the project; - Data that needs to be submitted for approval - Detailed list of all data and services that will be provided to the contractor by the buyer for use in performing the contract, if applicable, and - Definition of the schedule for initial submission and the review/approval time required.
Procurement Statement of Work (SOW)
the statement of work for each procurement is developed from the project scope baseline and defines only that portion of the project scope that is to be included within the related contract. The SOW describes the procurement item in sufficient detail to allow prospective sellers to determine if they are capable of providing the products, services, or results.
The Control Procurements process is performed
throughout the project as needed
Bid Documents
used to solicit proposals from prospective sellers. - Bid, tender, or quotation generally used when the seller selection decision is based on price - term such as proposal is generally used when other considerations such as technical capability or technical approach are most important
Claims Administration
• Contested changes and potential constructive changes are those requested changes where the buyer and seller cannot reach an agreement on compensation for the change, or cannot agree that a change has occurred. • These contested changes are called claims and when they cannot be resolved, they become disputes and finally appeals. • Claims are documented, processed, monitored, and managed throughout the contract life cycle, usually in accordance with the terms of the contract. • If the parties themselves do not resolve a claim, it may have to be handled in accordance with alternative dispute resolution (ADR) typically following procedures established in the contract. • Settlement of all claims and disputes through negotiation is the preferred method
