The Project Procurement Management questions on the PMP® certification exam tend to be more process oriented than legally focused. You do not need to know any country’s specific legal code; however, some non-U.S. exam takers complain that the nature of many of the questions requires an understanding of U.S. contract law. Although an occasional question relating to the U.S. system may appear on the exam, such questions do not seem to be problematic for most exam takers. A firm understanding of the procurement process usually will help you to find the correct answer. Moreover, the questions will be worded such that the project manager or project team is the “buyer.”
The exam requires you to know the basic differences between the three broad categories of contracts (fixed-price, cost-reimbursement, and time-and-materials) and the risks inherent in specific contract types for both the buyer and the seller. Several questions will also test your knowledge of the various types of contracts within each category (for example, firm-fixed-price versus fixed-price-incentive-fee contracts). A question or two may also be included on international contracting, such as the timing of foreign currency exchange and duty on goods delivered to a foreign country.
PMI® views Project Procurement Management as a four-step process comprising plan procurement management, conduct procurements, control procurements, and close procurements. See PMBOK® Guide Figure 12-1 for an overview of this structure. Know this chart thoroughly.
Following is a list of the major Project Procurement Management topics. Use it to help focus your study efforts on the areas most likely to appear on the exam.
Project procurement management overview
Plan procurement management
Conduct procurements
Control procurements
Close procurements
Organizing for contract management
Privity of contract
Foreign currency exchange
INSTRUCTIONS: Note the most suitable answer for each multiple-choice question in the appropriate space on the answer sheet.
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Under the doctrine of waiver, a party can relinquish rights that it otherwise has under the contract. If the seller offers incomplete, defective, or late performance, and the buyer’s project manager knowingly accepts that performance, the buyer has waived its right to strict performance. In some circumstances, the party at fault may remain liable for provable damages, but the waiver will prevent the buyer from claiming a material breach and, thus, from terminating the contract. [Executing]
Adams et al. 1997, 275
Kerzner, 2009, 850
The nature of an indirect cost is such that it is neither possible nor practical to measure how much of the cost is attributable to a single project. These costs are allocated to the project by the performing organization as a cost of doing business. [Planning]
PMI®, PMBOK® Guide, 2013, 202, 365
Buyers prefer the firm-fixed-price contract because it places more risk on the seller. Although the seller bears the greatest degree of risk, it also has the maximum potential for profit. Because the seller receives an agreed-upon amount regardless of its costs, it is motivated to decrease costs by efficient production. [Planning]
Adams et al. 1997, 229–231
PMI®, PMBOK® Guide, 2013, 363
Comparing actual costs with the target cost shows an $80,000 overrun. The overrun is shared 80/20 (with the buyer’s share always listed first). In this case 20% of $80,000 is $16,000, the seller’s share, which is deducted from the $40,000 target fee. The remaining $24,000 is the fee paid to the seller. [Planning and Closing]
Garrett 2007, 123
PMBOK® Guide, 2013, 364
A breach of contract is a failure to perform either express or implied duties of the contract. Either the buyer or the seller can be responsible for a breach of contract. [Executing]
Adams et al. 1997, 278
Ward 2008, 45
Kerzner, 2009, 849
A contract can end in successful performance, mutual agreement, or breach of contract. Contract closeout by mutual agreement or breach of contract is called contract termination. [Closing]
Garrett 2007, 185, PMBOK® Guide, 2013, 387
The contract type is typically dictated by the procurement SOW and chosen by the contracting officer. Independent estimates are a tool and technique in conduct procurements. [Executing]
PMI®, PMBOK® Guide, 2013, 376
The person responsible for procurement administration should provide, in writing, formal notification that the contract has been completed. Requirements for formal acceptance and closeout should be defined in the contract. [Closing]
PMI®, PMBOK® Guide, 2013, 389
Direct costs are always identified with the cost objectives of a specific project and include salaries, travel and living expenses, and supplies in direct support of the project. [Planning]
PMI®, PMBOK® Guide, 2013, 202, 207, and 365
Punitive damages are designed to punish a guilty party and, as such, are considered penalties. Because a breach of contract is not unlawful, punitive damages are not awarded. The other remedies listed are available to compensate the buyer’s loss. [Closing]
Ward 2008, 357
Procurement documents are used to solicit proposals from prospective sellers. A request for information is generally used by the buyer to have potential sellers propose various pieces of information related to a product, service, or result or to a seller capability. [Planning]
PMI®, PMBOK® Guide, 2013, 368
All payments due must be settled by the seller before the contract can be officially closed. The other items listed are activities performed by the buyer. [Closing]
Garrett 2007, 128–133
Advertising in newspapers or specialty trade publications is an excellent way to identify qualified bidders. Detailed information about specific sources may require more extensive effort, such as site visits or contact with previous customers. [Executing]
PMI®, PMBOK® Guide, 2013, 376
In most organizations, a procurement audit is conducted after the contract has been closed. Therefore, the project manager would not have a procurement audit report to review. Contract document for the contract being closed, invoice and payment records, and seller performance reports are examples of the documents that should be available to the project manager and should be reviewed at closeout. [Closing]
PMI®, PMBOK® Guide, 2013, 388–389
A make-or-buy analysis is a plan procurement management tool and technique used to determine whether a particular product, service, or result can be produced or performed cost effectively by the performing organization or should be contracted out to another organization. The analysis includes both direct and indirect costs and any administrative costs incurred to manage the contractor. [Planning]
PMI®, PMBOK® Guide, 2013, 365
A time-and-materials contract is a type of contract that provides for the acquisition of supplies or services on the basis of direct labor hours, at specified fixed hourly rates for wages, overhead, general and administrative expenses, and profit; and materials at cost, including materials-handling costs. [Planning]
PMI®, PMBOK® Guide, 2013, 364
The contract terms and conditions typically describe the procedure the buyer will employ to close the contract. [Closing]
PMI®, PMBOK® Guide, 2013, 377–378, 387
The selection criteria are typically included in procurement documents and are then used to rate or score proposals. [Planning]
PMI®, PMBOK® Guide, 2013, 368–369
The following elements must be present for a contract to be legally enforceable: legal capacity, mutual assent, consideration, legality, and an appropriate contract form that follows applicable laws governing businesses. [Executing]
Adams et al. 1997, 240
The purchase order is a unilateral (one signature) offer that includes a promise to pay upon delivery. [Planning]
Adams et al. 1997, 231
Contract change control entails ensuring that contract changes are properly approved and that everyone who needs to know is made aware of such changes. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 383
Contracts are awarded to obtain goods and services in accordance with the buyer’s stated requirements. Although there are multiple purposes in the control procurements process, ensuring that the seller delivers what is stated in the contract is of paramount importance. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 379
Liquidated damages are considered negative incentives because they result in a loss of revenue for the seller if it fails to perform rather than a gain in revenue if it performs well. [Closing]
Ward 2008, 251
Kerzner, 2009, 849
A warranty is one party’s assurance to the other that goods will meet certain standards of quality, including condition, reliability, description, function, or performance. This assurance may be express or implied. [Executing]
Adams et al. 1997, 272
Kerzner, 2009, 850
PMI®, PMBOK® Guide, 2013, 369
In a firm-fixed-price contract, the seller receives a fixed sum of money for the work performed regardless of costs. This arrangement places the greatest financial risk on the seller and encourages it to control costs. [Planning]
Adams et al.1997, 229
PMI®, PMBOK® Guide, 2013, 363
Alternative dispute resolution, or dispute resolution, is a relatively informal way to address differences of opinion on contracts. Its purpose is to address such issues without having to seek formal legal redress through the courts. [Executing, Monitoring and Controlling, and Closing]
Ward 2008, 15–17
PMI®, PMBOK® Guide, 2013, 378, 384, 388
A no-cost settlement can be used in lieu of formal termination procedures when the seller has indicated that such an arrangement is acceptable, no buyer property has been furnished under the contract, no payments are due the seller, no other obligations are outstanding, and the product or service can be readily obtained elsewhere. [Closing]
Garrett 2007, 191
A buyer under a fixed-price contract should pay a seller for work delivered rather than time expended. Linking payment with progress ensures that the seller will focus on results and not on effort expended. [Planning]
Garrett 2007, Chapter 8
PMI®, PMBOK® Guide, 2013, 362–363
To calculate the fee that the buyer must pay, actual costs are compared with the target cost. If actual costs are less than the target cost, the seller will earn profit that is additional to the target profit. If actual costs are more than the target cost, the seller will lose profit from the target profit. The amount of profit is determined by the share ratio (with the buyer’s share listed first). In this example, the seller is under target cost by $30,000. That amount will be split 70/30. So the buyer keeps $21,000, and the seller receives an additional $9,000 added to the target profit, which is the incentive. Total fee is $39,000. [Planning and Closing]
Garrett 2007, 123
PMI®, PMBOK® Guide, 2013, 362–363
Two important components of any contract include what the buyer wants to buy and how the buyer defines acceptance of the products or services delivered. For contract closure to occur, deliverable acceptance must be completed. [Closing]
PMI®, PMBOK® Guide, 2013, 389
Payment bonds, which are required by the buyer, are issued by guarantors to prime contractors. The buyer wants to ensure that subcontractors of the prime contractor receive payment so that work is not disrupted. [Closing]
Adams et al. 1997, 273
Force majeure clauses can be used to protect either party from events that are outside their control and not a result of their negligence, such as acts of nature, war, civil disobedience, or labor disruption. [Executing]
Garrett 2007, 56
Kerzner, 2009, 849
First, developing contract clauses is done during contract formation, not control procurements, which begins at contract signing. Second, contract specialists and attorneys—given their legal expertise—are typically the individuals who write contract clauses, not project managers. [Monitoring and Controlling]
Verma 1995, 63
PMI®, PMBOK® Guide, 2013, 381–384
While there are a variety of ways to settle claims, disputes, and changes, the preferred approach is negotiation. It is a strategy to work toward compromise or to reach an agreement that both parties can accept. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 384, 517
The order of precedence specifies that any inconsistency in the contract shall be resolved in a given order. This avoids confusion and debate, which could lead to litigation. [Monitoring and Controlling]
Kerzner 2009, 860
When people know and trust one another, and in particular have worked with each other before, the negotiation process can be significantly shortened. Three major factors of negotiation should be followed: compromise ability, adaptability, and good faith. [Executing]
Kerzner 2009, 848
When using the sealed bid method, competitive market forces determine the price, and the award goes to the lowest bidder, provided all other terms and conditions of the contract are met. [Executing]
Kerzner 2009, 847
The contracts (legal) representative is responsible for the preparation of the contract portion of the proposal. Generally, contracts with the legal department are handed through or in coordination with the proposal group. Before the proposal is submitted to the client, contract terms and conditions should be reviewed and approved. [Executing]
Kerzner 2009, 866
On a firm-fixed-price contract, the seller absorbs 100 percent of the risks; while on a cost-type contract, the buyer carries the most risk. Cost-plus-fixed-fee contracts have less risk to sellers than cost-plus-award-fee or cost-plus-incentive-fee contracts because the fee is fixed based on costs, so the seller is guaranteed a certain level of profit. [Planning]
PMI®, PMBOK® Guide, 2013, 364
In this situation the fixed-fee of $10,000 does not change but now represents a seller profit of 12.5 percent on incurred costs. This means that the total cost to the project is $90,000. [Closing]
Fleming 2003, 97
PMI®, PMBOK® Guide, 2013, 363–364