Chapter 12

Introducing Project Procurement Management

CERTIFICATION OBJECTIVES

12.01   Planning for Purchases

12.02   Conducting Procurements

12.03   Controlling Procurements

   Two-Minute Drill

Q&A     Self Test

Projects routinely require procurements. They need materials, equipment, consultants, training, and many other goods and services. Project procurement management is the process of purchasing the products necessary for meeting the needs of the project scope. It involves planning, sourcing and acquiring the products or services administering the contract, and closing out the contract. Procurement management, as far as the PMP exam is concerned, can include the practices from the point of view of the buyer or the seller (for example, contractor, subcontractor, vendor, or supplier). In some instances, you’ll have to answer the question from the perspective of the buyer, and in others you’ll look at the scenario from the seller’s point of view.

Your organization may have a specific method established for procuring goods or services from a vendor. For example, you may need to create a purchase order, a memoranda of agreements (MOA), or a service level agreement (SLA) through the project organization channels. For all of these instances, when you organization is buying anything from a vendor, the buyer needs a contract, which becomes a key input to many of the processes that occur within the project. The contract, more than anything else, specifies the rules and agreements for the project.

Here’s a neat twist: When the seller is completing their obligations to supply a product, PMI treats those obligations as a project itself. In other words, if ABC Electricians were wiring a building for your company, ABC Electricians would be the performing organization completing its own project. Your company becomes the customer of their project—and your company is, of course, a stakeholder in their project. When the vendor is completing work for a portion of your project, the contract-closing activities don’t wait until the end of the project—they happen as needed.

In the scenarios described in this chapter, the seller will be outside of the performing organization. The buyer will be managing a project and procuring resources from a vendor. However, all of the details in this chapter can be applied to internal work orders, internal service level agreements, formal agreements, and contracts between organizational units within a single entity.

For the PMI examination, you’ll need to be familiar with three processes dealing with project procurement management. First, like all of the project management knowledge areas, is the associated planning. Once the procurement management plan has been created, you’ll actually do the procurement. You’ll control the procurement process to ensure that all parties are meeting the terms of the agreement.

Building the Project Procurement Foundation

Procurement is a special project management knowledge area for many reasons, but a key principle is that procurement may not be actually managed by the project manager, but by a procurement office or centralized contracting. Procurement is also unique from the other knowledge areas because your organization, through your project, is entering into a legal agreement with another entity. The contract, which is key to procurement decisions, holds both parties accountable for what’s being delivered by the seller and what’s being paid for by the buyer.

Contracts define the obligations of both parties: the buyer and the seller. Contracts should be written to define clearly what everyone in the relationship is required to do: services and/or materials provided and in consideration of the payment. Contracts can stipulate timelines, payment conditions, how disputes and claims are managed, the court that will be utilized should the relationship go sour, and many other considerations. Contracts must be signed by someone who has the authority to represent the organization in the contract—this may be called the delegation of authority. In your organization, this person may or may not be you, the project manager. More likely, a contracting officer or an attorney for your organization will write the contract and someone higher in the organization will sign the contract.

Considering Procurement Practices for Projects

One of the predominant changes over the past few years for project procurement management has been the availability of online tools for managing the procurement process. Some organizations, such as universities or government agencies, are required to advertise projects that are open for bids. This can be much work for the organization to write and post the ad in newspapers, online, and in magazines. Now software can streamline the process, communicate with bidders, and provide a holistic view of the entire process. Organizations are also adapting the construction industry’s building information model (BIM) to help cut claims in construction projects, save time, and improve performance on costs and schedule.

Contracts can also address risks, as you saw in Chapter 11 on risk transference, so that organizations that specialize in managing certain types of risks manage the risk for the client. The contract can specify the risk and set the risk management process entirely upon the seller or management. Contracts can also be used for positive risk agreements, as in sharing, by creating teaming agreements and joint partnerships for specific projects.

Multibillion-dollar projects, sometimes called megaprojects, can span countries and introduce threats and opportunities for buyers and sellers. Contracts can be written to address the span of the project, currency exchange rates, and pricing for bulk purchasing. If the project does span multiple countries, however, the complexity of the contracting increases; considerations are given for international legalities, management of work in different countries, regulations, and even holidays, language, and culture.

Large construction projects also address logistics and supply chain management through contracting. Procurement lead times, lead time to produce the materials needed, and then delivery of materials to job sites can become complex and will likely require expert judgment to help guide the process, planning, and execution of the contracted work. Logistics can include one- or two-year lead times for materials; the procurement processes could start even before the entire design of the product is complete based entirely on the early requirements in the project. Delays in delivery of the material can cost a project millions, so there are often backup vendors and suppliers to alleviate the risk of missed opportunities. In addition, some countries’ regulations require that the organization purchase materials from suppliers in the country where the project work is occurring rather than importing goods from suppliers outside the country.

A popular trend in public projects is transparency—regarding not only the projected cost of the project, but also the actual cost of the project work. Right now, you can search the web to view live webcams of construction projects, to access job reports, and to view web sites dedicated to information about public projects. Webcams can serve not only as good public relations by the seller for communities and taxpayers, but they can also alleviate claims, because there’s video evidence of what has actually happened on the job site.

Organizations are also contracting with sellers on a trial basis, rather than committing to a long contract on their first engagement. During the trial period, each party can learn how the other works. Sellers would contribute to a portion of the project and, based on their performance, could then go on to be awarded additional project work if their work is acceptable to the buyer.

Agile projects have considerations for procurement, too. Often in agile projects, the project team consists of both internal developers and contract-based developers. All members of the project team, regardless of whether they are in-house or from the outside, should be treated as part of the team and not succumb to an “us-against-them” mentality. Agile projects might also be treated as a part of a master service agreement, where the agile project is an addendum or supplement to the contract—this allows the change-driven approach to agile while still abiding by the terms of the contract.

Procurement, more than any other knowledge area, generates the most questions when I teach my PMP boot camps. I’ve designed this chapter to address exactly what you should know for your PMP exam, and for your role as a project manager.

Tailoring the Procurement Processes

Of course, you can tailor the three procurement processes, because every organization is different, and every project is different. You tailor the process to fit your organization, not the other way around. There are four considerations for tailoring procurement:

   Complexity As the number of suppliers involved in a project increase, so, too, will the complexity. Consider a general contractor in a house construction project: this involves scheduling with the foundation company, framers, plumbers, electricians, finishers, roofers, and more.

   Physical location Where the project work takes place can affect the procurement process, as can the locale of the supplier(s). Currency exchange rates, language barriers, time zones, and other considerations come into play with this facet of the contract and project.

   Regulations There may local, national, and international regulations and laws that affect the procurement process and auditing process. Consider government-based contracts, for example.

   Contractor schedule The availability of the contractors may, or may not, mesh with your plans, and that needs to be addressed. A delay within your organization can also affect the vendor, who may have scheduled the work or delivery according to your plan for your current project and with consideration for their other customers.

CERTIFICATION OBJECTIVE 12.01

Planning for Purchases

Procurement planning is the process of identifying which part of the project should be procured from resources outside of the organization. Generally, procurement decisions are made early on in the planning processes. Procurement planning centers on four elements:

   Whether procurement is needed

   What to procure

   How much to procure

   When to procure

When the project manager begins the procurement process, she’ll rely on more enterprise environmental factors and organizational process assets than she needs for any other process. For example, the project manager has to consider the marketplace conditions, the availability of the needed items or services in the marketplace, and how the procurement process works within the performing organization. If the project manager’s organization has forms, policies, and management guidelines that direct the procurement process, she must follow those established processes.

Often, an organization will have resources for managing the procurement process, including contracting and negotiating on behalf of the project. If, however, the performing organization has no such resources for the project manager to rely upon, it is up to the project manager to supply the procurement management resources, including capabilities for negotiating and for obtaining, in a fiscally responsible way, the right products or services for a fair price on behalf of the performing organization.

There are six inputs to procurement planning:

   Project charter

   Business documents (business case and benefits management plan)

   Project management plan (scope management plan, quality management plan, resource management plan, and the scope document)

   Project documents (milestone list, project team assignments, requirements documentation, requirements traceability matrix, resource requirements, risk register, and stakeholder register)

   Enterprise environmental factors

   Organizational process assets

Evaluating the Market Conditions

Part of procurement management involves determining what sources are available to provide the required products or services for the project. An evaluation of the marketplace is needed to determine what products and services are available and from whom and on what terms and conditions they are available.

Although in most free-market enterprise societies, multiple vendors offer comparable products, there may be times when your choices of vendors are limited. The following are three specific terms to know for the PMP exam that you may encounter:

   Sole source Only one qualified seller exists in the marketplace.

   Single source The performing organization prefers to contract with a specific seller.

   Oligopoly There are very few sellers, and the actions of one seller will have a direct effect on the other sellers’ prices and the overall market condition.

Referring to the Scope Baseline

The project’s scope statement, work breakdown structure (WBS), and WBS dictionary all serve as input in making procurement decisions, although the PMBOK Guide lumps these into the project management plan. Because the project scope baseline defines the project work, and only the required work, to complete the project, it also defines the limitations of the project work. Knowing the limits of what the project includes can help the project manager, the contract specialists, and other procurement professionals determine what needs to be purchased and what does not.

The WBS and the WBS dictionary define the details and requirements for acceptance of the project. This information also serves as valuable input regarding what needs to be procured and what does not. The WBS defines what the end result of the project will be. When dealing with vendors to procure a portion of the project, you must ensure that the work to be procured supports the requirements of the project customer.

A statement of work (SOW) or terms of reference (TOR) may define the work to be accomplished within the project, but it generally does not define the product description as a whole. However, when an entire project is to be procured from a vendor, the SOW and the product description become one and the same. Along with the SOW, you may need to reference the requirements documentation to ensure that the procurement planning process defines exactly what’s needed and adheres to any relevant laws, regulations, and standards.

Relying on the Project Management Plan

The project management plan is also needed during the procurement planning processes, because it will guide how the project should progress, and each subsidiary plan may need to be referenced for procurement guidelines. For example, the resource management plan, the scope management plan, the quality management plan, and the staffing management plan may all be needed for effective procurement planning.

One of the biggest things you’ll need to consider during procurement management is the reliance on the risk response transference. Recall that transference is the assignment of a risk to a third party—typically with a fee involved. Insurance and contractors for dangerous work are two common examples of transference. The risk register will help identify the costs associated with the identified risks, and the contractual agreements for transference will be referenced as part of the project costs.

The project documents also include the project schedule and milestone list—and the project manager needs to consider procurement leads, fulfillment time for vendors, and when resources are needed to keep the project moving along. Couple the project schedule with the activity cost estimate and the cost performance baseline, and the project manager can do cash flow forecasting, communicate with management about upcoming expenses, and ensure that vendors are paid on time.

Teaming with Other Organizations

If your organization and another organization agree to partner on an opportunity, it’s called a teaming agreement. It’s a legally binding venture between two or more organizations that plan to complete a defined set of work or to seize an opportunity or some other venture that the parties involved couldn’t necessarily complete on their own. Teaming agreements end when the venture ends. You might have heard these agreements loosely defined as “coop-etition”—a fun way to describe cooperating with the competition, although teaming doesn’t have to be just a partnership with the competition.

Teaming agreements should define in a contract the roles, buyer-and-seller relationships, and how the teaming agreement ends. The parties must all be in agreement with one another as to who does what, how communication occurs, and how decisions in the partnership will be made.

Planning for the Project Requirements

When it comes to project procurements, you’ll specifically need the project requirements to determine what you’ll purchase from vendors. The requirements are also needed to determine whether any aspects may affect the contracting process, such as licenses, permits, intellectual property rights, nondisclosure agreements, and insurance. Basically, anything that affects the project’s performance, the project environment, or the people involved in the project should be considered when it comes to project procurement and the project requirements.

You’ll also need to consider the risks within the project, the project schedule, the costs of the activities within the project, and the overall project budget. The project schedule must be considered because the vendor can affect the project schedule if they don’t complete their contractual obligations on time. The project budget is needed because you’ll need to determine how much you can afford to spend on the vendor—and whether your internal project estimates are accurate or way, way off base.

Completing Procurement Planning

Procurement planning should occur early in the planning processes, with certain exceptions. As needs arise, as project conditions change, or as other circumstances demand, procurement planning may be required throughout the project. Whenever procurement planning happens early in the project, as preferred, or later in the project, as needed, a logical approach to securing the proper resources is necessary.

Determining to Make or Buy

The decision to make or buy a product is a fundamental aspect of management. Under some conditions, it is more cost-effective to buy; in other cases, it makes more sense to create an in-house solution. The make-or-buy analysis should occur in the initial scope definition to determine whether the entire project should be completed in-house or procured. As the project evolves, additional make-or-buy decisions may be needed.

The initial costs of the solution for the in-house or procured product must be considered, but so, too, must the ongoing expenses of the solutions. For example, a company may elect to lease a piece of equipment. The ongoing expenses of leasing the piece of equipment should be weighed against the expected ongoing expenses of purchasing the equipment and the monthly costs to maintain, insure, and manage the equipment.

Here’s an example: Figure 12-1 shows the mathematical approach for determining whether it is better to create a software program in-house or buy one from a software company. The in-house solution will cost your company $25,000 to create your own software package and (based on historical information) another $2500 per month to maintain the software.

FIGURE 12-1 Make-or-buy formulas are common exam questions.

The development company has a solution that will cost your company $17,000 to purchase, but the development company requires a maintenance plan for each software program installed, which will cost your company $2700 per month. The initial difference between making the software and buying the software is $8000. The difference between supporting the software the organization has made and allowing the external company to support their software is only $200 per month.

The $200 per month is divided into the difference between creating the software internally and buying the software—which is $8000 divided by $200—which equates to 40 months. If the software is to be replaced within 40 months, the company should buy the software. If the software will not be replaced within 40 months, it should build the software.

An organization may choose to make or buy for multiple reasons. The following table shows some common examples or reasons for making and buying.

Using Expert Judgment

Procurement planning can rely on expert judgment. Roles and responsibilities for procurement should happen during procurement management planning to ensure that you’ve the right experts to make the best decisions for procurement. Yes, it may be beneficial to rely on the wisdom of others—those in the performing organization or subject matter experts—to determine the need for procurement. Expert judgment for procurement management planning can come from the following:

   Units or individuals within the performing organization

   Consultants and subject matter experts

   Professional, trade, or technical associations

   Industry groups

You’re at the second-to-the-last knowledge area. Congrats! In my experience teaching PMP boot camps, most candidates are worn out by this topic. And they rationalize that because they personally don’t handle much of the procurement, they can ease off in this chapter. Wrong! You can expect plenty of questions on procurement on your PMP exam—don’t take it easy. You’re almost there, but you’re not there yet. Keep going—think of how good you’ll feel when you’re done with this exam.

Determining the Contract Type

There are multiple types of contracts when it comes to procurement. The project work, the market, and the nature of the purchase determine the contract type. The following are some general rules that PMP exam candidates, and project managers, should know:

   A contract is a formal agreement between the buyer and the seller. Contracts can be oral or written—though written is preferred.

   The United States and most developed countries back all contracts through the court system.

   Contracts should clearly state all requirements for product acceptance.

   Any changes to the contract must be formally approved, controlled, and documented.

   A contract is not fulfilled until all of the requirements of the contract are met.

   Contracts can be used as a risk mitigation tool, as in transferring the risk. All contracts have some level of risk; depending on the contract type, the risk can be transferred to the seller. If a risk response strategy is to transfer, risks associated with procurement are considered secondary risks and must go through the risk management process.

   Legal requirements govern contracts. In order for a contract to be valid, it must

   Contain an offer

   Have been accepted

   Provide for a consideration (payment)

   Be for a legal purpose

   Be executed by someone with capacity and authority

   The terms and conditions of the contract should define breaches, copyrights, intellectual rights, and force majeure. Force majeure is French for superior force—sometimes called “acts of God.” You might know these as tornados, earthquakes, and hurricanes.

See the video “Contracts.”

Fixed-Price Contracts

Fixed-price contracts (also known as firm fixed-price and lump-sum contracts) are agreements that define a total price for the product the seller is to provide. These contracts must clearly define the requirements the vendor is to provide. These contracts may also provide incentives for meeting or exceeding contract requirements—such as meeting deadlines—and require the seller to assume the risk of cost overruns, as Figure 12-2 demonstrates.

FIGURE 12-2 Fixed-price contracts transfer the risk to the seller.

You should know three types of fixed-priced contracts:

   Firm fixed-price contract This contract type defines the exact amount for the goods or services provided by the vendor. It’s the most common and most preferred contract type for organizations, as the risk for the buyer is relatively low. For the seller, however, the risk is that if their cost of materials, doing business, or completing the work defined in the contract increases, they cannot pass on that cost to the customer. A firm fixed-price contract is also known as a lump-sum contract.

   Fixed-price incentive fee contract This contract type is similar to the firm fixed-price contract in that a lump sum amount is agreed upon between the buyer and the seller for the work to be performed. However, this contract type allows the contract to include incentives for the project, such as a bonus for completing the project work early, saving costs in the project, or meeting other performance objectives. This contract can also have penalties for the vendor if they’re late on the project work or their performance is less than it should be.

   Fixed-price with economic price adjustment This contract type is for long-term projects that may span years to complete the project work. The contract does define a fixed price, with caveats for special categories of price fluctuation over the life of the project, including inflation, electricity, shipping, labor costs, cost of materials, or other resources that could affect the feasibility of the vendor completing the work. The contract must define the financial indexes that will be used to determine the fluctuation in the identified cost categories.

Cost-Reimbursable Contracts

These contract types pay the seller for the product. In the payment to the seller, there is a profit margin—the difference between the actual costs of the product and the sales amount. Cost-reimbursable contracts require the buyer to assume the risk of cost overruns. You might use a cost-plus type contract if there are many unknowns in the project or many changes are expected in the work. There are four types of cost-reimbursable contracts:

   Cost plus fixed fee The buyer is responsible for all costs the contracted work incurs plus a predetermined fee for the vendor to manage and complete the contracted work. The fee for the work is usually tied to a percentage of the estimated project costs, but not always. For example, I’ll remodel your condo, but you have to pay for all the materials and labor I’ll need, which should be close to $80,000. In addition, you’ll have to pay me 15 percent of the costs, which will be $12,000. You’ll pay the costs as the project progresses and pay my fee based on milestones completed in the project. If I don’t finish the project, you don’t finish paying me. You do have some risks, though—if I waste materials, you have to buy more and you’ll still have to pay my fee for the work.

   Cost plus incentive fee This contract type requires that the buyer pay for all the preapproved costs for materials and labor in the project plus an incentive fee for completing the project early, saving on project costs, managing certain risks, or meeting other performance objectives. The contract will define how the incentives are determined. One popular method attaches dollar amounts to completed milestones and dates. If the vendor delivers the milestones ahead of the promised dates on a consistent basis, the value of the work increases and so will the incentive fee for the vendor. If the contract is based on cost savings for the project and early completions are cost savings, the contract must define how the cost savings are split between the buyer and the seller. Usually, the seller receives 20 percent of the cost savings in what’s called an “80/20 split.”

   Cost plus award fee This contract requires the buyer to pay for all the project costs and gives the seller an award fee based on the project performance, certain project criteria, or other goals established by the buyer. The award fee can be tied to any factor the buyer determines, and the factor doesn’t have to be exact. For example, the buyer can set an award fee of up to $100,000 for a $1 million project based on the technical ingenuity of the project solution, the quality of the work, or the actual cost savings the solution creates for the organization.

   Cost plus percentage of costs This contract type is the absolute pits for the buyer, and most organizations won’t participate in these contracts. In this case, the buyer has to pay for all of the costs of the materials plus a predetermined percentage for the cost of the materials. The obvious risk is that the vendor can waste materials and the buyer will have to buy new materials and pay the percentage of costs for the materials again. It’s easy for the vendor to run up the total project costs just by wasting materials.

The only time it might be appropriate, and I stress the word might, to use a cost plus percentage of costs contract is when the vendor is working with a highly specialized material and type of work. For example, imagine an artist who’s sculpting a marble statue for the lobby of a building or a scientist who’s working with a highly complex chemical. The nature of this type of work is so specialized that the artist and the scientist are unlikely to waste materials on purpose just to crank up their project costs. Having said that, I doubt you will see this on the PMP exam. As a general rule, avoid the cost plus percentage of costs contract.

Time and Materials Contracts

Time and materials (T&M) contracts are sometimes called time and means contracts. Time and materials contracts are considered a hybrid contract because they require the buyer to pay for the costs and a fixed fee. They are ideal when an organization contracts out a small project when smaller amounts of work within a larger project are to be completed by a vendor. T&M contracts, however, can grow dangerously out of control as more work is assigned to the seller. T&M contracts should have a not-to-exceed clause (NTE clause) to put a ceiling on the procured work. Figure 12-3 shows an example of how T&M contracts can pose a risk for the buyer.

FIGURE 12-3 Time and materials contracts must be kept in check, or costs can skyrocket.

Summary of Contract Types

On the PMP examination, you can expect a few questions on contract types. Familiarize yourself with the information in Table 12-1.

TABLE 12-1 Project Contracts Advantages and Risks for Buyer and Seller

Using the Statement of Work

In the contract SOW, the seller fully describes the work to be completed and/or the product to be supplied. The contract SOW becomes part of the contract between the buyer and the seller. The contract SOW is typically created as part of the procurement planning process, and it allows the seller to determine whether they can meet the written requirements of the SOW. You might also see the SOW called a TOR, for terms of reference.

Particular industries have different assumptions about what constitutes an SOW. What one industry calls an SOW may be a statement of objectives (SOO) in another. An SOO is a document describing a problem to be solved by the seller. The SOW, what you’ll most likely see on the PMP exam, defines the project specifications, requirements for vendor qualification, and details about the project work, location, expected time frame, and similar conditions.

Determining the Source Selection Criteria

Another output of contracting planning is the evaluation criteria to determine which source the organization will purchase from. The evaluation criteria is used to rate and score proposals from the sellers. In some instances, such as a bid or quote, the evaluation criterion is focused just on the price the seller offers. In other instances, such as a proposal, the evaluation criteria can be multiple values: experience, references, certifications, and more.

It’s essential for the project manager and the project team to create selection criteria that will guide their decision-making later in the project. Common questions that should be considered prior to vendor selection include the following:

   Does the vendor understand the project need?

   What is the overall project and/or life-cycle cost?

   What is the vendor’s technical capability?

   What is the vendor’s management and technical approach to the project work?

   What is the vendor’s financial capacity to complete the project work?

   What risk is associated with the work and how will the vendor manage the risk?

   Does the vendor qualify in areas that may help in rewarding the contract (such as a small business, veteran-owned business, or minority-owned business)?

   What are the proprietary rights and intellectual property rights associated with the project work?

   Will the vendor provide a warranty for the work they complete?

The source selection analysis is a review of the selection methods you’ll use when choosing a seller for the project. Selection methods include the following:

   Least cost The lowest bid is awarded the contract.

   Qualifications only Based on a short list of sellers, the buyer chooses the vendor with the best qualifications for the contract.

   Quality-based/highest technical proposal score Seller submits proposal for the work and a proposed cost to do the work. If the buyer likes the technical proposal, the seller and the buyer will negotiate the pricing.

   Quality and cost-based Cost and quality are considered important, though in projects that are likely to have many risks and uncertainties, quality can take a higher priority than cost in source selection.

   Sole source A specific seller is asked to do the work. This could be based on the marketplace conditions or past experience with the vendor.

   Fixed budget The buyer shares the budget for the project work with the seller. The seller then prepares a proposal based on the predefined budget—or declines to participate as the fixed budget may not be realistic. In addition, the SOW must be well-defined and little changes to the project are expected so the seller can work with the expectation of exactly what’s needed to satisfy the contract requirement within the fixed budget.

Reviewing the Procurement Management Plan

Procurement planning should happen early in the planning processes. The outputs of procurement planning enable the project manager and the project team to proceed with confidence in the procuring of products and services needed to complete the project successfully. If it is determined early in the project that there is no need for procurements, then, obviously, the balance of the procurement processes is not necessary for the project.

This subsidiary project plan documents the decisions made in the procurement planning processes. It specifies how the remaining procurement activities will be managed. The procurement plan details the following:

   The coordination between sellers and the project team and among project activities, project reporting, scheduling, business operations, and other project concerns

   How vendors will be selected

   The types of contracts to be used

   The process of independent estimating (also known as should-cost estimates)

   The relationship between the project team and the procurement office within the performing organization (if one exists)

   Planning for the timetable and lead time requirements between the vendor and the organizational purchasing processes

   Requirements for performance bonds and insurance requirements for the vendors

   The procurement forms, such as contracts, that the project team is required to use

   How multiple vendors will be managed to supply their contracted product

   Metrics to be used to determine which vendors qualify for project work and to complete vendor selection

   Requirements for vendors’ proof-of-insurance certificates, bonds, licenses, or other risk-mitigation qualifications

   Enterprise environmental factors that affect which vendors may participate in the bidding process, vendor selection, and other internal rules and processes you’re required to follow as the project manager

   Roles and responsibilities for procurement, including the project manager, project team, and procurement office

   Definition of the legal jurisdiction and how the vendor will be paid and in what currency

   Constraints, assumptions, risk management, and prequalified sellers, if applicable

Creating the Procurement Documents

These documents guide the relationship between the buyer and the seller. Communication between the buyer and the seller should always be specific as to the requirements and expectations of the buyer and seller. In initial communications, especially when requesting a price or proposal, the buyer should include the SOW, relevant specifications, and, if necessary, any nondisclosure agreements (NDAs). A project may also include independent cost estimates and source selection criteria, if applicable to the organization. Requests from buyers to sellers should be specific enough to give the seller a clear idea of what the buyer is requesting, but general enough to allow the seller to provide viable alternatives.

Following are some specific terms the project manager—and the PMP candidate—should be familiar with:

CERTIFICATION OBJECTIVE 12.02

Conducting Procurements

Once the contracting planning has been completed, the actual process of contracting can begin. Fortunately, the sellers, not the buyers, perform most of the activity in solicitations—usually at no additional cost to the project. The sellers are busy trying to win the business. The process of conducting procurements has six inputs:

   Project management plan (scope management plan, requirements management plan, communications management plan, risk management plan, procurement management plan, configuration management plan, and cost baseline)

   Project documentation (lessons learned register, project schedule, requirements documentation, risk register, and stakeholder register)

   Procurement documents

   Proposals from sellers

   Enterprise environmental factors

   Organizational process assets

Procuring Goods and Services

There are five tools and techniques used to conduct procurement within an organization:

   Expert judgment A consultant or expert from your organization can often help you make the best decision as to which seller you should select. Reviewing bids and proposals can be a cumbersome task as you’ll often need to compare and contrast proposals, delivery dates, pricing, experience, and other factors that will affect your decision.

   Advertising In many circumstances, advertisements inviting bidders are expected. These advertisements can run in newspapers or trade journals specific to the industry of the organization. Some government agencies require advertisements inviting sellers to acquire the project work, attend a bidder conference, or present a proposal for the described work.

   Bidder conferences A bidder conference, also called a contractor conference, pre-bid conference, or vendor conference, is a meeting with prospective sellers to ensure that all sellers have a clear and common understanding of the product or service to be procured and are on equal footing. Bidder conferences enable sellers to query the buyer on the details of the product to help ensure that the seller’s proposal is adequate and appropriate for the proposed agreement. At this point of the process, all sellers are considered equal.

   Data analysis When you create an invitation for bid, request for quote, or request for proposal and send that out to sellers, you’ll likely receive lots of information back from the sellers. Data analysis is the sorting, comparing, and contrasting of the information to help you make the best decision. This is really proposal evaluation and may be done with the tool and technique of expert judgment to help you make the best decision.

   Interpersonal and team skills The big category of interpersonal and team skills is really, for this process, negotiation. Negotiation is the act of seeking a fair agreement for both parties in the contract. Negotiation is more than just finding a price; it can include negotiation materials, resources, access to the site, the schedule, and any other condition for the contracted work. Negotiation should be led by someone within the organization who has the authority to sign the contract.

A standard of procurement is that bids and quotes are looking for sellers to provide a price. Proposals are asking the sellers to provide solutions.

Examining the Results of Contracting

The end result of contracting, as expected, is a collection of proposals, bids, and quotations. These documents indicate the sellers’ ability and preparedness to complete the project work. The proposals should be in alignment with the buyer’s stated expectations, and they may be presented orally, electronically, or in hard-copy format. Of course, the relationship between the buyer and the seller—and the type of information being shared—will determine which modality is the best choice for communication.

Selecting the Seller

Once the sellers have presented their proposals, bids, or quotes (depending on what the buyer requested of them), their documents are examined so that the project manager or the organization’s decision-maker can select which sellers are the best choice for the project work. In many instances, price may be the predominant factor for choosing a particular seller—but not always. Factors other than price may also be taken into consideration:

   The cost of an item may not reflect the true cost to the performing organization if the item cannot be delivered in a timely manner. If a seller promises to have a product on site by a specific date and fails to do so, the project can be delayed, costing the organization thousands—or more—in losses.

   Proposals can be separated into two categories: technical and commercial. The technical category describes the approach and methodology to complete the project work, and the commercial category delves into the price to complete the project work. An evaluation takes into consideration both categories to determine the best choice for the project.

   Critical, high-priority projects may rely on multiple sellers to complete the project work. This redundancy can balance risk, cost, and opportunity among multiple vendors.

Preparing for Source Selection

Source selection weighs and evaluates the proposals, bids, and quotes for the procured portions of the project and then makes a determination as to which seller is the best for the project work. The source selection decision-making process involves three inputs:

   Proposals The proposals, bids, and quotations provided by the sellers are key inputs. These are the documents the performing organization will evaluate to determine which seller is the best provider for the project.

   Evaluation criteria The evaluation criteria, such as referrals, samples of previous work, and references, are considered. The evaluation criteria are evidence of the quality, depth, and experience of work the seller has performed in the past and, hopefully, is capable of performing on the current project. Evaluation criteria are developed in contracting planning and are applied in source selection.

   Organizational policies The performing organization likely has procurement policies and procedures that the project manager is expected to follow in regard to source selection. The organizational policies should be known before starting the source selection process to avoid any discrepancies, conflicts of interest, or other breaches of policies. For example, some organizations’ procurement policies do not allow project managers to accept any gifts worth more than $25 in value.

Completing the Seller Selection Process

For the performing organization to finalize the process of seller selection, there must first be eligible sellers. Assuming more than one seller can satisfy the demands of the project, the project manager can rely on several tools and techniques when making a selection:

   Weighting system A weighting system takes out the personal preferences of the decision-maker in the organization to ensure that the best seller is awarded the contract. A weighting system creates a matrix, as shown in Figure 12-4. Weights are assigned to the values of the proposals, and each proposal is scored. Because the weights are determined before the decision-maker reviews the proposals, the process is guaranteed to be free of personal preferences and bias. The seller with the highest score is awarded the contract.

FIGURE 12-4 Weighting systems remove personal preference from the selection process.

   Independent estimates These estimates are often referred to as “should-cost” estimates. They are created by the performing organization or by outside experts to predict what the cost of the procured product should be. If there is a significant difference between what the organization has predicted and what the sellers have proposed, the statement of work was inadequate, the sellers misunderstood the requirements, or the price provided by the sellers is too high.

   Screening system A screening system can remove sellers from consideration if they do not meet given conditions. For example, screening could require that sellers be certified by a specific organization, have prior experience with the project technology, or meet other values. Sellers that don’t meet the requirements are removed from the selection process and their proposals are not considered.

   Contract negotiation The performing organization creates an offer, and the seller considers it. The contract negotiation process is an activity to create a fair price for the work the seller is to complete. The performing organization and the seller must be in agreement on the expectations, requirements, authorities, terms, technical and business management approaches, price, and any other pertinent factors covered within, and by, the contract prior to signing it.

   Seller rating systems How the vendor has performed in the past may guide current and future project procurement decisions. Consider a vendor that has offered poor performance in quality, delivery, and contractual compliance versus a vendor that has scored high marks in quality, delivery, and contract compliance; which should the project manager choose? That’s the goal of the seller rating system: to collect and disseminate information on the performance of sellers in order to guide project decisions.

   Expert judgment Often, the project manager and the project team may not be knowledgeable in the discipline the vendor is offering and that the project requires. In these instances, the project manager can rely on expert judgment to help make the best decisions regarding the project’s welfare.

   Proposal evaluation techniques There are many different approaches to evaluating vendors’ proposals—from weighting systems to screening systems—but all will rely on expert judgment and some sort of evaluation criteria.

Examining the Results of Conducting Procurement

The primary output of conducting procurement is a contract between the buyer and the seller. A contract is a legally binding agreement between the buyer and the seller in which the seller provides the described product and the seller pays for the product. Contracts are known by many names:

   Agreement

   Subcontract

   Purchase order

   Memorandum of understanding

Contracts have to be signed by a person with the power to authorize the requirements and payment specified in the contract. This role is called the delegation of procurement authority. Whether or not this person is the project manager depends on the procurement policies of the performing organization.

In some organizations, all contracts flow through centralized contracting. Centralized contracting requires all contracts for all projects to be approved through a central unit within the performing organization. Other organizations use a decentralized contracting approach, which assigns a contract administrator or contract officer to the project. Agreements will include the following:

   Procurement SOW

   Schedule and milestones for the seller

   How performance is reported and tracked

   Pricing and payment agreements

   Inspection of the work and what constitutes success

   Warranty

   Incentives and penalties

   Insurance and performance bonds

   Subcontractor permissions and approvals for subcontractors

   General terms and conditions

   How change requests will be managed

   Termination and alternative dispute resolution terms

Should there be any changes to the project manager plan, the schedule, or the project documents, the changes should flow through the project’s integrated change control process. For example, a contract could be created for services in the project, but the date the vendor can do the work is a week later than what was planned in the project. Through negotiations, the organization has agreed to this date and will need to change its project management plan and schedule to accommodate this contracted agreement.

Updates to project documents can include updating the lessons learned register, but also, more importantly, the requirements documentation. Through the contracting process, technical and legal requirements could be added to the requirements documentation and requirements traceability matrix. You might also need to update the resource calendars to reflect any new resources brought onto the project through the contract, update the risk register for any newly identified risks, and update the stakeholder register by adding the selected seller.

CERTIFICATION OBJECTIVE 12.03

Controlling Procurements

Controlling procurement is the process of ensuring that the seller and the buyer live up to the agreements in the contract. The project manager and the contract administrator must work together to make certain the seller meets their obligations. If the seller does not fulfill their contractual requirements, legal remedies may ultimately be pursued. This process is based on the terms of the contract—the contract overrides everything else between the buyer and the seller.

Another aspect of controlling procurement, especially on larger projects with multiple sellers providing various products, is the coordination between the contractors. The project manager or contract officer schedules and confirms the performance of the sellers so that the deliverables, schedule, and performance of a contractor do not infringe or adversely affect the performance of another contractor.

There are eight inputs to control procurements:

   Project management plan

   Project documents

   Agreements

   Procurement documentation

   Approved change requests

   Work performance data

   Enterprise environmental factors

   Organizational process assets

Perhaps the most important consideration is the contract. The contract must also include the terms of payment. Typically, the performance and progress of the seller is directly linked to payments they receive. The project manager must track performance and quality to approve or decline payment as needed. The contract should define the metrics for acceptance to avoid disagreements on performance and to ensure that vendors get paid on time.

Preparing for Contract Administration

The contract and the procurement management plan are needed to guide effective contract administration. The contract dictates the requirements and expectations of the seller and the buyer. The obligations of both parties should be in alignment with the contract—if they are not, disagreements, delays, and even work stoppage can ensue. Contract administration includes the following:

   Performance reports Within the contract, the terms for acceptance are defined. Reports on the seller’s performance are needed to compare with the requirements of the contracted work.

   Records management Date of the work performed, quality of the work, financial records, performance, and other procurement data is gathered and documented.

   Invoice payment According to the terms of the contract, the vendor will submit an invoice and the buyer will pay the invoice.

   Change requests Change requests can complicate contract administration. The performing organization’s change control system must somehow mesh with the seller’s change control system. Changes to the project that affect the contracted work require changes to the contract, addendums to the contract, or a new contract for the additional or changed work. In some instances, the seller and the buyer may disagree about the cost of the changes. These differences may be labeled as claims, disputes, or appeals, and may ultimately slow the project’s progress if not remedied.

If the seller’s performance is unacceptable and a resolution to the problem cannot be found, the performing organization may elect to cancel the contract. This termination of the contract is also handled as a change request within the change control system. The contract should include the terms for how cancellation can occur and alternative dispute resolution methods, such as a mediator, may happen.

Completing Contract Administration

The actual process of completing contract administration relies heavily on communication among the project manager, the contract officer, and the seller. The communications plan may have considerations for how and when the communication between the buyer and the seller should take place and what the purpose of the communication should be. There are six primary concerns, in addition to communication, within contract administration:

   Integrated change control Changes to the contract will follow the terms of the contract as this defines the procedures for how the contract may be changed. The process for changing the contract includes the forms; documented communications; tracking; conditions within the project, business, or marketplace that justify the needed changes; dispute resolution procedures; and the procedures for getting the changes approved within the performing organization.

   Performance reviews and audits As the vendor completes the contracted work, the seller will need to inspect the work for progress, compliance with contract requirements, and adherence to agreed-to schedule, cost, and quality constraints.

   Performance reporting Performance reporting is the communication between the project manager and management on how the seller is performing with regard to the guidelines in the contract. This is part of communications and should be documented within the communications management plan. Earned value analysis and trend analysis can be used to monitor performance of the seller.

   Payment system Sellers like to be paid when they have completed their obligations. How the sellers are paid is controlled by the payment system, which includes interactions between the project manager and the accounts payable department. The performing organization may have strict guidelines for how payment requests are submitted and approved, and how payments are completed. On larger projects, the project management team may have specific procedures for submitting the payment requests.

   Claims administration This is not fun. Claims result from contested changes, such as disagreements about a change that has occurred and who should pay for that change. Although these go by various names—claims, disputes, and appeals—they all mean the same thing: The buyer and the seller are in disagreement over who should pay for the changes to the project work. Resolution may come through negotiation, mediation, or arbitration, as defined by the contract.

   Records management system This is part of the project management information system that is designed to track all contracting documentation. This is essential, since it assists the project manager in managing procurement documents and records, and serves as a point of reference regarding communications and procurement paperwork.

Inspecting and Auditing the Procurement Process

Like controlling quality and scope validation, inspection is also needed for the goods and services the seller provides to the buyer. An inspection, depending on the size of the procured work and services, might be a walk-through or an in-depth inspection of the work and its quality. In some projects, a government official may act on behalf of the customer and inspect the work, such as electrical and plumbing work in construction.

The successes and failures within the procurement process of the project are reviewed from the procurement planning stage through contract administration. The intent of the audit is to learn what worked and what didn’t during the procurement processes. This knowledge can then be applied to other areas within the current project and to other projects within the performing organization. The documentation of the procurement process should become part of the records management system, which in turn will become part of organizational process assets.

Audits examine the entire procurement process to ensure that all parties are abiding by the terms of the contract. From the buyer’s perspective, they want to make certain that all is delivered according to the terms of the contract prior to payment terms. On large, complex projects and contracts an audit may examine the billing and the deliverables by the seller, and identify any variances that exist. A reconciliation happens to ensure that what was purchased was actually delivered. The terms of the contract define up front the audit process and sets expectations for both parties.

Reviewing the Results of Procurement Control

Once the deliverables have been accepted and the contract has been closed, it’s essential to collect all of the contract information and record it in the contract file. A contract file is a complete indexed set of records of the procurement process and is incorporated into the administrative closure process. These records include financial information as well as information on the performance and acceptance of the procured work.

Assuming the procured work is acceptable and meets the requirements of the contract, the contract can be closed. The formal closure of a project comes in a written notice from the contract officer to the seller. The notice informs the seller that its work is acceptable and that the contract is considered closed. The formal closure process may vary according to the size of the project. The requirements for contract closeout should be documented within the contract. Closing procurement is an enterprise process and is an output of the control procurement process.

Within the contract, the terms for payment are specified. The terms for payment may stipulate under what conditions the seller will provide an invoice for the work completed. In addition, the buyer may specify when and how the invoices are paid (for example, “Net 30 days from receipt of the invoice”). If the project is using an external payment system, there will be communication between the buyer and the seller, and between the buyer and the external payment system. If the performing organization is handling its own payment processing, this output would simply be payments.

Termination of the contract may not always be caused by something the vendor did wrong. The buyer may no longer need the goods or services being provided, but the buyer may still be contractually obligated to pay the vendor. The contract overrides everything. When there is a dispute, technically a claim, the contract even directs the claims administration process.

Should the buyer and the seller not be able to work out their differences themselves, things are escalated. This means the buyer and the seller will participate in alternative dispute resolution—a nice way of not having to say, “Here come the attorneys!” Alternative dispute resolution includes mediation, arbitration, and aims to avoid litigation.

Both approved and declined changes are documented as to their cost, time, and effect on the project and the procured work. Changes that are approved require updates to the project plan, subsidiary plans, and possibly to other project documentation. Remember that all changes must flow through the project’s integrated control system. Changes to the project management plan can include updates to the following:

   Risk management plan

   Procurement management plan

   Schedule baseline

   Cost baseline

   Project documents

The performance of the contracted work, the contract obligations, and the procedures of the performing organization generate correspondence between the buyer and the seller. The correspondence often takes the form of warnings, letters of discontent, and project performance reviews from the buyer to the seller. This correspondence can serve as documentation for legal action if disputes arise between the buyer and the seller. All of the invoices, seller performance information, and lessons learned are updated and become part of the organizational process assets updates. You’ll also include a procurement file that includes all contract documentation as part the final project files for archiving.

CERTIFICATION SUMMARY

Project procurement management enables a project to obtain resources, materials, equipment, services, and other components needed to complete the project successfully. It is the process of finding sellers that can supply the needed products or services at a fair rate and that meet the quality, schedule, and cost expectations of the project. The product description will help the project manager and the vendor determine the best solution for the procurement need.

One of the first activities the project manager and the project team complete together before procuring products is to decide the need to buy versus the ability to make the product in-house. A decision tree can help the project manager determine which decision is most cost-effective, reliable, and best for the project. A make-or-buy analysis can compare the benefits of buying versus creating in-house—including attributes other than just price and time.

Bidder conferences allow the bidders to meet with the project managers and other officials representing the seller to confirm the details of the contract statement of work. Recall that the statement of work (SOW) is provided to all vendors that may be creating bids or proposals for the seller. The bidder conference enables the bidders to obtain any additional information they may need to create a full and complete bid, quote, or proposal and for all bidders to hear the same information. It is part of the contracting process and proceeds to source selection.

PMP candidates—and project managers—must be familiar with the different contract types and when to use each one. Here’s a recap of the most common contract types:

   Cost plus fixed fee Details the fixed cost of the contract, which includes a profit margin for the seller.

   Cost plus percentage of cost Has a price for the contracted product or service, but cost overruns are assigned to the buyer.

   Cost plus award feeRequires the buyer to pay for all the project costs and give the seller an award fee based on the project performance, including meeting certain project criteria or other goals established by the buyer. The award fee can be tied to any factor the buyer determines, and the factor doesn’t have to be exact.

   Cost plus incentive fee The seller determines a price for the product or service but includes an incentive reward for completing the procured work on time or ahead of schedule.

   Fixed-price A simple fixed price for the contract. This can also include incentives for the seller to complete the project early or ahead of schedule, or for other savings shared between the buyer and the seller.

   Fixed-price with economic price adjustment Ideal for long-term projects that may span years to complete the project work. The contract defines a fixed price, with caveats for special categories of price fluctuation.

   Time and materials A price is assigned for the time and materials provided by the seller.

KEY TERMS

To pass the PMP exam, you will need to memorize the following terms and their definitions. For maximum value, create flashcards based on these definitions and review them daily. The definitions can be found within this chapter and in the glossary.

bid   A document presented by the seller to the buyer. Used when price is the determining factor in the decision-making process.

bidder conference   A meeting with prospective sellers to ensure that they all have a clear and common understanding of the product or service to be procured. Bidder conferences enable sellers to query the buyer on the details of the product to help ensure that the proposal the seller creates is adequate and appropriate for the proposed agreement.

centralized contracting   All contracts for all projects need to be approved through a central contracting unit within the performing organization.

contract   A legal, binding agreement, preferably written, between a buyer and the seller, detailing the requirements and obligations of both parties. Must include an offer, an acceptance, and a consideration.

contract administration   The process of ensuring that the buyer and the seller both perform to the specifications within the contract.

contract change control system   Defines the procedures for how contracts may be changed. Includes the paperwork, tracking, conditions, dispute resolution procedures, and procedures for getting the changes approved within the performing organization.

contract closeout   A process for confirming that the obligations of the contract were met as expected. The project manager, the customer, the key stakeholders, and, in some instances, the seller complete the product verification together to confirm that the contract has been completed.

contract file   A complete indexed set of records of the procurement process incorporated into the administrative closure process. These records include financial information as well as information on the performance and acceptance of the procured work. This is also known as the procurement file and it becomes part of organizational process assets.

cost plus award fee contract   A contract that requires the buyer to pay for all the project costs and gives the seller an award fee based on the project performance, meeting certain project criteria, or meeting other goals established by the buyer. The award fee can be tied to any factor the buyer determines, and the factor doesn’t have to be exact.

cost-reimbursable contracts   A contract that pays the seller for the product. In the payment to the seller is a profit margin of the difference between the actual costs of the product and the sales amount.

direct costs   Costs incurred by the project in order for it to exist. Examples include equipment needed to complete the project work, salaries of the project team, and other expenses tied directly to the project’s existence.

evaluation criteria   Used to rate and score proposals from sellers. In some instances, such as a bid or quote, the evaluation criterion is focused just on the price the seller offers. In other instances, such as a proposal, the evaluation criteria can be multiple values: experience, references, certifications, and more.

fixed-price contracts   Fixed-price contracts are also known as firm fixed-price and lump-sum contracts. These contracts have a preset price for which the vendor is obligated to perform the work or to provide materials for the agreed-upon price.

fixed-price with economic price adjustment contract   A contract for long-term projects that may span years to complete the project work. The contract does define a fixed price, with caveats for special categories of price fluctuation.

force majeure   A powerful and unexpected event, including “acts of God,” such as a hurricane or another disaster.

invitation for bid   A document from the buyer to the seller that asks the seller to provide a price for the procured product or service.

letter of intent   A document that expresses the intent of the buyer to procure products or services from the seller. Not equivalent to a contract.

make-or-buy analysis   Used in determining what part of the project scope to make and what part to purchase.

oligopoly   A market condition in which the actions of one competitor affect the actions of all the other competitors.

procurement   The process of a seller soliciting, selecting, and paying for products or services from a buyer.

procurement audit   Reviews what worked and what did not work during the procurement processes. The successes and failures within the procurement process are reviewed from procurement planning through contract administration.

procurement management plan   A subsidiary project management plan that documents the decisions made in the procurement planning processes. It specifies how the remaining procurement activities will be managed.

proposal   A document from the seller to the buyer responding to a request for proposal or other procurement document.

qualified sellers list   A list that generally includes contact information, history of past experience with the seller, and other pertinent information. The performing organization may have lists of qualified sellers, preferred sellers, or approved sellers.

quote   A document from the seller to the buyer; used when price is the determining factor in the decision-making process.

request for proposal   A document from the buyer to the seller that asks the seller to provide a proposal for completing the procured work or for providing the procured product.

request for quote   A document from the buyer to the seller asking the seller to provide a price for the procured product or service.

should-cost estimates   Estimates created by the performing organization to predict what the cost of the procured product should be. If there is a significant difference between what the organization has predicted and what the seller has proposed, the statement of work was inadequate, the seller has misunderstood the requirements, or the price is too high.

single source   A specific seller that the performing organization prefers to contract with.

sole source   The only qualified seller that exists in the marketplace.

statement of work   A document that fully describes the work to be completed, the product to be supplied, or both. The SOW becomes part of the contract between the buyer and the seller. It is typically created as part of the procurement planning process and is used by the seller to determine whether they can meet the project’s requirements. This is also known as a TOR, terms of reference.

time and materials   A contract type whereby the seller charges the buyer for the time and materials for the work completed. T&M contracts should have a not-to-exceed (NTE) clause to contain costs. These contracts are also called time and means contracts. They are considered a hybrid contract because they require the buyer to pay a fixed fee for the time and a variable fee for the materials purchased.

TWO-MINUTE DRILL

Planning for Purchases

   Procurement planning involves determining which aspects of the project can best be fulfilled by procuring the specified products or services.

   A clearly defined product description is needed to procure the product successfully.

   A make-or-buy analysis calculates and predicts which is better: for the performing organization to make the product in-house or to hire an entity outside of the organization to make the product.

   Some contracts can transfer the risk to the seller, while other contract types require the buyer to retain the risk of cost overruns.

   The procurement management plan describes the procedures for procuring work or products.

   Bids and quotes are needed when the decision will be made based on price. Proposals are needed when decisions are based on other factors, such as experience, qualifications, and approaches to the project work.

   The buyer should provide the seller with an SOW; details on the type of response needed such as a proposal, quote, or bid; and any information on contractual provisions, such as nondisclosure agreements or a copy of the model contract that the buyer intends to use.

   Contracting is requesting the potential sellers to provide bids, proposals, or quotes to complete the project work or supply the described product.

   An organization may retain a qualified sellers list from which the project team is forced to select a vendor. In other instances, the project team can rely on trade associations, industry directories, and other resources to locate qualified sellers.

   Advertisements for the procurement needs in newspapers and trade publications can increase the list of sellers from which the buyer can choose. Many government entities must publish procurement opportunities.

   Bidder conferences enable sellers to meet with the buyer to query the buyer on details of the procurement process. The goal of the bidder conference is to ensure that all prospective sellers have the same information and all the needed information to complete an accurate bid or proposal.

Conducting Procurements

   Samples of the sellers’ previous related products or services can serve as evaluation criteria.

   Contract negotiation focuses on finding a fair and reasonable price for both the buyer and the seller.

   Weighting systems are unbiased approaches to determine which seller has the best offer to complete the procured product or service.

   Screening systems enable an organization to screen out sellers that do not qualify for the procured product or service.

   “Should-cost” estimates are completed by the performing organization to determine whether sellers completely understand the requirements of the project work.

Controlling Procurements

   Controlling the contract ensures that the sellers are meeting their contractual obligations.

   Change requests may require updates to the contract between the buyer and the seller. Contract change requests are part of the integrated change control system.

   The project manager must document and report to the seller and management on how the seller is meeting its contract obligations.

   Procurement audits are intended to review, document, and share the successes and failures of the current project’s procurement process. The information can be applied to other projects within the organization.

   A contract procurement file is created and is included with the project records as part of the historical information of the current project.

SELF TEST

1.   You are the project manager of the GHY Project for your organization. A portion of this project includes dangerous work; although members of the project team could likely complete the work, your sponsor doesn’t want to accept the risk. In this situation, which of the following may be used as a risk mitigation tool?

A.   A vendor proposal

B.   A contract

C.   A quotation

D.   Project requirements

2.   As a PMP candidate, you must understand the provisions of project procurement even if your typical projects do not include procurements. Based on the information in this chapter, a contract cannot have provisions for which one of the following?

A.   A deadline for the completion of the work

B.   Illegal activities

C.   Subcontracting the work

D.   Penalties and fines for disclosure of intellectual rights

3.   You are the project manager for the 89A Project. You have created a contract for your customer. The contract must have which two things?

A.   An offer and consideration

B.   Signatures and the stamp of a notary public

C.   The value and worth of the procured item

D.   A start date and an acceptance of the start date

4.   The WBS and the WBS dictionary can help a project manager plan for purchases and acquisitions. Which one of the following best describes this process?

A.   The WBS defines the specific contracted work.

B.   The WBS defines the requirements for the specific contracted work.

C.   The WBS defines the specific contracted work, which must support the requirements of the project customer.

D.   Both parties must have and retain their own copy of the WBS.

5.   Yolanda has outsourced a portion of the project to a vendor. The vendor has discovered some issues that will influence the cost and schedule of its portion of the project. How must the vendor and Yolanda update the agreement?

A.   As a new contract signed by Yolanda and the vendor

B.   By submitting the change request to the contract change control system

C.   As a memo and SOW signed by Yolanda and the vendor

D.   By submitting the change request to the cost change control system

6.   You are the project manager of the HHQ Project for your company. You have hired a vendor to complete a portion of the project, but the vendor doesn’t seem to have met the project requirements as defined in the contract. You have tried alternative dispute resolutions to no avail, and you think the claims administration may have to be escalated. The United States backs all contracts through which of the following?

A.   Federal law

B.   State law

C.   Court system

D.   Lawyers

7.   Terry is the project manager of the MVB Project. She needs to purchase a piece of equipment for her project. The accounting department has informed Terry that she needs a unilateral form of contract. Accounting is referring to which of the following?

A.   The SOW

B.   A legally binding contract

C.   A purchase order

D.   An invoice from the vendor

8.   Bonnie is the project manager for the HGH Construction Project. She has contracted a portion of the project to the ABC Construction Company and has offered a bonus to ABC if they complete their portion of the work by August 30. This is an example of which one of the following?

A.   A project requirement

B.   A project incentive

C.   A project goal

D.   A fixed-price contract

9.   You are a project manager for your organization and are progressing through the procurement management processes. Who should receive the procurement document package?

A.   Your client

B.   Your project sponsor

C.   Your accounting/finance department

D.   Each seller that will participate in the bidding

10.   You are the project manager for a company that completes the installation of electrical fixtures in manufacturing environments. Part of your typical contractual agreement included coverage of intellectual rights and privity. Privity is what?

A.   The relationship between the project manager and a known vendor

B.   The relationship between the project manager and an unknown vendor

C.   The contractual, confidential information between the customer and vendor

D.   The professional information regarding the sale between the customer and vendor

11.   Sammy is the project manager of the DSA Project. He is considering proposals and contracts presented by vendors for a portion of the project work. Of the following, which contract is least dangerous to the DSA Project?

A.   Cost plus fixed fee

B.   Cost plus percentage of cost

C.   Cost plus incentive fee

D.   Fixed-price

12.   Bennie is the project manager for his company and he’s working with his project stakeholder to determine the pros and cons of the different contract types for a portion of his project. Of the following contract types, which one requires the seller to assume the risk of cost overruns?

A.   Cost plus fixed fee

B.   Cost plus incentive fee

C.   Lump sum

D.   Time and materials

13.   Benji is the project manager of the PLP Project. He has hired an independent contractor for a portion of the project work. The contractor is billing the project $120 per hour, plus materials. This is an example of which one of the following?

A.   Cost plus fixed fee

B.   Time and materials

C.   Unit price

D.   Lump sum

14.   Mary is the project manager of the JHG Project. She has created a contract statement of work (SOW) for a vendor. All of the following should be included in the contract SOW except for which one?

A.   The items being purchased

B.   The signatures of both parties agreeing to the SOW

C.   The expected quality levels

D.   A description of the collateral services required

15.   You are the project manager for a software development project for an accounting system that will operate over the Internet. Based on your research, you have discovered it will cost you $25,000 to write your own code. Once the code is written, you estimate you’ll spend $3000 per month updating the software with client information, government regulations, and maintenance. A vendor has proposed to write the code for your company and charge a fee based on the number of clients using the program every month. The vendor will charge you $5 per month per user of the web-based accounting system. You will have roughly 1200 clients using the system each month. However, you’ll need an in-house accountant to manage the time and billing of the system, so this will cost you an extra $1200 per month. How many months can you use the system before it’s better to write your own code rather than hire the vendor?

A.   3 months

B.   4 months

C.   6 months

D.   15 months

16.   You are the project manager of a project that will span six years in Columbus, Ohio. You are negotiating with your project customer for considerations for inflation, cost of utilities, and other cost factors that will likely fluctuate over the course of the project. What type of contract should your project have?

A.   Cost plus award fee

B.   Fixed-price with economic price adjustments

C.   Lump sum

D.   Fixed-price incentive fee

17.   A contract between an organization and a vendor may include a clause that penalizes the vendor if the project is late. The lateness of a project has a monetary penalty. Thus, the penalty should be enforced or waived based on which one of the following?

A.   Whether the project manager could have anticipated the delay

B.   Whether the project manager knew the delay was likely

C.   Whether the delay was because of an unseen risk

D.   Who caused the delay and the reason why

18.   A project manager is considering the marketplace and how it may affect the pricing on the procured portion of her project. She determines that in her market, there is only a single-source seller. A single-source seller means what?

A.   There is only one qualified seller.

B.   There is only one seller the company wants to do business with.

C.   There is a seller that can provide all aspects of the project procurement needs.

D.   There is only one seller in the market.

19.   Thomas is the project manager for his organization, and he is preparing the procurement process for his project. Several enterprise environmental factors and organizational process assets assist Thomas in making the vendor selection. In the enterprise environmental factors are several evaluation criteria that Thomas must consider when he chooses a vendor for the project. Which one of the following is not a valid evaluation criterion for source selection?

A.   The age of the contact person at the seller

B.   The technical capability of the seller

C.   Financial capacity

D.   Price

20.   Henry has sent the ABN Contracting Company a letter of intent. This means which one of the following?

A.   Henry intends to sue the ABN Contracting Company.

B.   Henry intends to buy from the ABN Contracting Company.

C.   Henry intends to bid on a job from the ABN Contracting Company.

D.   Henry intends to fire the ABN Contracting Company.

21.   Martha is the project manager of the MNB Project. She wants a vendor to offer her one price to do all of the detailed work. Martha needs to prepare which type of document?

A.   A request for proposal

B.   A request for information

C.   A proposal

D.   An invitation for bid

22.   In your organization, all project procurement must pass through a centralized contracting office. All correspondence between you and the vendors must be recorded and stored as part of the procurement records management system. These rules also provide instructions for the project’s procurement document packages from procurement planning through contract closure. Which one of the following is true about procurement document packages?

A.   They offer no room for bidders to suggest changes.

B.   They ensure the receipt of complete proposals.

C.   They inform the performing organization why the bid is being created.

D.   The project manager creates and selects the bid.

23.   A key component of the project procurement management knowledge area is the actual seller selection. Seller selection is based on many inputs and enterprise environmental factors by which the project manager must abide. From a PMP candidate’s perspective, in what process group does source selection happen?

A.   Initiating

B.   Planning

C.   Executing

D.   Closing

24.   Within your organization, all project managers are required to document the performance quality ratings, delivery performance, and contractual compliance of each vendor with which they interact. This is known as what?

A.   A requirement

B.   A seller rating system

C.   Procurement selection

D.   An incentive contract

25.   You are the project manager for a seller, but you are managing another company’s project as well. Things have gone well on the project, and the work is nearly complete. There is still a significant amount of funds in the project budget. The buyer’s representative approaches you and asks that you complete some optional requirements to use up the remaining budget. You should do which one of the following?

A.   Negotiate a change in the contract to take on the additional work.

B.   Complete a contract change for the additional work.

C.   Submit the proposed change through the integrated change control system.

D.   Deny the change because it was not in the original contract.

SELF TEST ANSWERS

1.   You are the project manager of the GHY Project for your organization. A portion of this project includes dangerous work; although members of the project team could likely complete the work, your sponsor doesn’t want to accept the risk. In this situation, which of the following may be used as a risk mitigation tool?

A.   A vendor proposal

B.   A contract

C.   A quotation

D.   Project requirements

2.   As a PMP candidate, you must understand the provisions of project procurement even if your typical projects do not include procurements. Based on the information in this chapter, a contract cannot have provisions for which one of the following?

A.   A deadline for the completion of the work

B.   Illegal activities

C.   Subcontracting the work

D.   Penalties and fines for disclosure of intellectual rights

3.   You are the project manager for the 89A Project. You have created a contract for your customer. The contract must have what two things?

A.   An offer and consideration

A.   Signatures and the stamp of a notary public

A.   The value and worth of the procured item

A.   A start date and an acceptance of the start date

4.   The WBS and the WBS dictionary can help a project manager plan for purchases and acquisitions. Which one of the following best describes this process?

A.   The WBS defines the specific contracted work.

B.   The WBS defines the requirements for the specific contracted work.

C.   The WBS defines the specific contracted work, which must support the requirements of the project customer.

D.   Both parties must have and retain their own copy of the WBS.

5.   Yolanda has outsourced a portion of the project to a vendor. The vendor has discovered some issues that will influence the cost and schedule of its portion of the project. How must the vendor and Yolanda update the agreement?

A.   As a new contract signed by Yolanda and the vendor

B.   By submitting the change request to the contract change control system

C.   As a memo and SOW signed by Yolanda and the vendor

D.   By submitting the change request to the cost change control system

6.   You are the project manager of the HHQ Project for your company. You have hired a vendor to complete a portion of the project, but the vendor doesn’t seem to have met the project requirements as defined in the contract. You have tried alternative dispute resolutions to no avail, and you think the claims administration may have to be escalated. The United States backs all contracts through which of the following?

A.   Federal law

B.   State law

C.   Court system

D.   Lawyers

7.   Terry is the project manager of the MVB Project. She needs to purchase a piece of equipment for her project. The accounting department has informed Terry that she needs a unilateral form of contract. Accounting is referring to which of the following?

A.   The SOW

B.   A legally binding contract

C.   A purchase order

D.   An invoice from the vendor

8.   Bonnie is the project manager for the HGH Construction Project. She has contracted a portion of the project to the ABC Construction Company and has offered a bonus to ABC if they complete their portion of the work by August 30. This is an example of which one of the following?

A.   A project requirement

B.   A project incentive

C.   A project goal

D.   A fixed-price contract

9.   You are a project manager for your organization and are progressing through the procurement management processes. Who should receive the procurement document package?

A.   Your client

B.   Your project sponsor

C.   Your accounting/finance department

D.   Each seller that will participate in the bidding

10.   You are the project manager for a company that completes the installation of electrical fixtures in manufacturing environments. Part of your typical contractual agreement included coverage of intellectual rights and privity. Privity is what?

A.   The relationship between the project manager and a known vendor

B.   The relationship between the project manager and an unknown vendor

C.   The contractual, confidential information between the customer and the vendor

D.   The professional information regarding the sale between the customer and the vendor

11.   Sammy is the project manager of the DSA Project. He is considering proposals and contracts presented by vendors for a portion of the project work. Of the following, which contract is least dangerous to the DSA Project?

A.   Cost plus fixed fee

B.   Cost plus percentage of cost

C.   Cost plus incentive fee

D.   Fixed-price

12.   Bennie is the project manager for his company and he’s working with his project stakeholder to determine the pros and cons of the different contract types for a portion of his project. Of the following contract types, which one requires the seller to assume the risk of cost overruns?

A.   Cost plus fixed fee

B.   Cost plus incentive fee

C.   Lump sum

D.   Time and materials

13.   Benji is the project manager of the PLP Project. He has hired an independent contractor for a portion of the project work. The contractor is billing the project $120 per hour, plus materials. This is an example of which one of the following?

A.   Cost plus fixed fee

B.   Time and materials

C.   Unit price

D.   Lump sum

14.   Mary is the project manager of the JHG Project. She has created a contract statement of work (SOW) for a vendor. All of the following should be included in the contract SOW except for which one?

A.   The items being purchased

B.   The signatures of both parties agreeing to the SOW

C.   The expected quality levels

D.   A description of the collateral services required

15.   You are the project manager for a software development project for an accounting system that will operate over the Internet. Based on your research, you have discovered it will cost you $25,000 to write your own code. Once the code is written, you estimate you’ll spend $3000 per month updating the software with client information, government regulations, and maintenance. A vendor has proposed to write the code for your company and charge a fee based on the number of clients using the program every month. The vendor will charge you $5 per month per user of the web-based accounting system. You will have roughly 1200 clients using the system each month. However, you’ll need an in-house accountant to manage the time and billing of the system, so this will cost you an extra $1,200 per month. How many months can you use the system before it’s better to write your own code rather than hire the vendor?

A.   3 months

B.   4 months

C.   6 months

D.   15 months

16.   You are the project manager of a project that will span six years in Columbus, Ohio. You are negotiating with your project customer for considerations for inflation, cost of utilities, and other cost factors that will likely fluctuate over the course of the project. What type of contract should your project have?

A.   Cost plus award fee

B.   Fixed-price with economic price adjustments

C.   Lump sum

D.   Fixed-price incentive fee

17.   A contract between an organization and a vendor may include a clause that penalizes the vendor if the project is late. The lateness of a project has a monetary penalty. Thus, the penalty should be enforced or waived based on which one of the following?

A.   Whether the project manager could have anticipated the delay

B.   Whether the project manager knew the delay was likely

C.   Whether the delay was because of an unseen risk

D.   Who caused the delay and the reason why

18.   A project manager is considering the marketplace and how it may affect the pricing on the procured portion of her project. She determines that in her market, there is only a single-source seller. A single-source seller means what?

A.   There is only one qualified seller.

B.   There is only one seller the company wants to do business with.

C.   There is a seller that can provide all aspects of the project procurement needs.

D.   There is only one seller in the market.

19.   Thomas is the project manager for his organization, and he is preparing the procurement process for his project. Several enterprise environmental factors and organizational process assets assist Thomas in making the vendor selection. In the enterprise environmental factors are several evaluation criteria that Thomas must consider when he chooses a vendor for the project. Which one of the following is not a valid evaluation criterion for source selection?

A.   The age of the contact person at the seller

B.   The technical capability of the seller

C.   Financial capacity

D.   Price

20.   Henry has sent the ABN Contracting Company a letter of intent. This means which one of the following?

A.   Henry intends to sue the ABN Contracting Company.

B.   Henry intends to buy from the ABN Contracting Company.

C.   Henry intends to bid on a job from the ABN Contracting Company.

D.   Henry intends to fire the ABN Contracting Company.

21.   Martha is the project manager of the MNB Project. She wants a vendor to offer her one price to do all of the detailed work. Martha is looking for which type of document?

A.   A request for proposal

B.   A request for information

C.   A proposal

D.   An invitation for bid

22.   In your organization, all project procurement must pass through a centralized contracting office. All correspondence between you and the vendors must be recorded and stored as part of the procurement records management system. These rules also provide instructions for the project’s procurement document packages from procurement planning through contract closure. Which one of the following is true about procurement document packages?

A.   They offer no room for bidders to suggest changes.

B.   They ensure the receipt of complete proposals.

C.   They inform the performing organization why the bid is being created.

D.   The project manager creates and selects the bid.

23.   A key component of the project procurement management knowledge area is the actual seller selection. Seller selection is based on many inputs and enterprise environmental factors by which the project manager must abide. From a PMP candidate’s perspective, in what process group does source selection happen?

A.   Initiating

B.   Planning

C.   Executing

D.   Closing

24.   Within your organization, all project managers are required to document the performance quality ratings, delivery performance, and contractual compliance of each vendor with which they interact. This is known as what?

A.   A requirement

B.   A seller rating system

C.   Procurement selection

D.   An incentive contract

25.   You are the project manager for a seller, but you are managing another company’s project as well. Things have gone well on the project, and the work is nearly complete. There is still a significant amount of funds in the project budget. The buyer’s representative approaches you and asks that you complete some optional requirements to use up the remaining budget. You should do which one of the following?

A.   Negotiate a change in the contract to take on the additional work.

B.   Complete a contract change for the additional work.

C.   Submit the proposed change through the integrated change control system.

D.   Deny the change because it was not in the original contract.