Olympia WA Chapter PMP Prep

Procurement

Procurement Process Table

Process Name

Plan Procurements Conduct Procurements Administer Procurements

Process Group

Planning Executing Monitoring & Controlling

Main Outputs

         Procurement Management Plan Procurement Statements of work Make-or-Buy Decisions Procurement Documents Source Selection Criteria Selected Sellers Procurement Contract Award Resource Calendars Project Management Plan Updates    Procurement Documentation Change Requests Project Management Plan Updates  Closed Procurements Close Procurements Olympia WA Chapter PMP Prep Closing

Procurement “Must Knows”

• The Key Inputs, Tools/Processes and Outputs of each process group • Make-or-Buy process and how to calculate it • What a contract is and the components that make a contract • How to recognize and calculate, as well as know the advantages and disadvantage of the contract types • Various names for a buyer and seller • Different types of scope of work • Common Types of Contracts and When to use them Olympia WA Chapter PMP Prep

Procurement “Must Knows” (cont.)

• Understand when and why to use RFQ, RFI, RFP, IFB documents • What a Qualified Seller List is and how it’s used • What a Bidders Conference is and what occurs at it • When to use a non-competitive form of procurement • Incentive fees • Characteristics of procurement contract award Olympia WA Chapter PMP Prep

Procurement “Must Knows” (cont.)

• Key Contract Terms and Definition • Role of the Project Manager vs. Contract Administrator • Difference between centralized and decentralized contracts • What Formal Acceptance is and what can happen to the project once you have attained it Olympia WA Chapter PMP Prep

Plan Procurements (Planning Process Group)

• In Plan Procurements, a company analyzes its procurement or outsourcing needs. This planning could be for a product, result, or service needed to attain a business goal. • It’s not uncommon for a company or group to involve people specialized in law, purchasing, or contracts at this point (or soon after) in the process. • During this process, the following are created: Request for Information (RFI), Request for Quote (RFQ), Request for Proposal (RFP) and evaluation criteria for proposals comparison.

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• • • • • • • • • •

Plan Procurements

Key Inputs Scope Baseline Requirements Documentation Teaming Agreements Risk Register Plan Procurements (Planning) Key Tools & Techniques Key Outputs Procurement Management Plan Risk-Related Contract Decisions Activity Resource Requirements Project Schedule Activity Cost Estimates Cost Performance Baseline EEF and OPA Make-or-Buy Analysis Expert Judgment Contract Types Procurement Statements of Work Make-or-Buy Decisions Procurement Documents Source Selection Criteria Change Requests Olympia WA Chapter PMP Prep

Procurement Management Plan

• Helps the Project Manager and Team do the following: – Determine make vs. buy for the various needs of the project – Establish what procurement documents (RFP, RFI, RFQ) are needed for the project – Create the procurement documents for the project – Run bidders conferences – Address single source and sole source procurement – Select vendors to do work – Establish contract(s) with vendors Olympia WA Chapter PMP Prep

Make-or-Buy Decisions

• One of the basic keys of procurement is the Make-or-Buy decision. There are a number of considerations a company can use in making this decision. Some of the basic decision points are listed below:

Make Decision Qualities Buy Decision Qualities

The buyer owns intellectual property associated with the work and considers doing the work internally in order to maintain control of the information.

The buyer has excessive qualified capacity.

The buyer doesn’t possess the skills needed for the work.

The buyer doesn’t possess the capacity to do the work.

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Rent or Buy Calculation

• You may be quizzed on the calculation area of this topic.

• It is a straightforward calculation.

• The components are typically: – the purchase cost and daily maintenance with the purchase option – the daily (or weekly, monthly) rental fee, which usually includes maintenance fees.

• You should be prepared to calculate the point where it would make sense to purchase, rent, or vice versa.

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Rent or Buy Example

• You are the project manager for a housing developer. The development requires a skid loader to clean out the lots where the houses will be built.

• The skid loader is available to rent at $100 per day (including maintenance), or it can be purchased for $750 and $50 a day for maintenance. • What is the maximum time you would want to rent this tool before considering purchasing it?

• To determine the best decision, take the variables and make a formula.

• The options are 1) rental at $100 per day or 2) purchasing at $750 with $50 per day maintenance.

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Make-or-Buy Example (cont.)

• Translate this data into a formula as follows where you solve for variable X.

• The formula is $100X = $750 + $50X and solve for X as the number of days.

Step 1.

Step 2.

(-$50X)+$100X = $750 or $50X = $750 $750/$50 = X Move all of the pieces with the variable X to one side of the equation.

Divide to determine the value of X.

Step 3.

Step 4.

$750/$50 = 15 X = 15 Here is the maximum number of days you would want to rent the tool before purchasing it.

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Contract

•

A Contract is a mutually binding legal agreement between buyer and seller.

names for a contract could be a: Other – Purchase Order (PO) – Subcontract – Agreement • Know the components of a contract, plus when a contract is in place.

• A contract has five basic components (listed in the next table).

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Five Contract Components

Contract Component Capacity Consideration Offer Legal Purpose Acceptance Contract Components Description

Competency, of legal age, and individual legal entities The item to change possession from seller to buyer A proposition to exchange something, for something The reason for the contract has to be for something legal A buyer willing to accept the offer from the seller Memory Tool:

CCOLA – C

apacity

, C

onsideration,

O

ffer,

L

egal,

A

cceptance Olympia WA Chapter PMP Prep

Various Terms for Buyer and Seller

Buyer Seller

Client Customer Prime Contractor Contractor Subcontractor Vendor Contractor Acquiring Organization Government Agency Service Requestor Purchaser Service Provider Supplier The table above shows a number of terms that can be used to describe the buyer and seller. The seller’s title could also change during the project duration.

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Contract Type Selection

• • Contract type selection is key to the PMP ® Exam.

• There are four main types of contracts: – Purchase Order (PO) – Fixed-Price (FP) – Time & Materials (T&M) – Cost Reimbursable (CR) • Selecting the wrong type of contract can spell doom for a project.

It is imperative that you understand the types of contracts, their differences, where they should (and shouldn’t) be applied, and the risk for both the buyer and seller.

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Contract Types

Contract Purchase Order (PO) Firm Fixed Price (FFP) also known as Lump Sum Fixed Price Incentive Fee (FPIF) Risk for Buyer

Neutral Minimal Minimal

Risk for Seller Description

Neutral A

unilateral

agreement that requires approval by only one party because the other party has offered the product for the predefined price.

Significant A firm fixed price contract is typically used when there is a

detailed scope of work

. For the seller, the profit is everything after cost is covered and the downside is cost containment.

Significant A fixed price contract that

includes incentive fees

to motivate the seller to produce at a rate greater than the minimum required.

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Contract Fixed Price Economic Price Adjustment (FPEPA) Time and Materials (T&M) Cost Plus Fixed Fee (CPFF)

Contract Types (cont.)

Risk for Buyer

Minimal Minimal Medium

Risk for Seller Description

Significant Minimal Minimal Associated with a multi-year contract.

To compensate for economic changes from year to year,

the Economic Price Adjustment (a national economic metric) is factored in.

Used for

smaller initiatives, staff supplementation

, or the initial piece of a project where the discovery occurs before the full details of the project are known.

Used

when the buyer knows generally what is needed but lacks details

to specifically what is needed to build it. The CPFF covers the cost of the seller and includes a predefined fee.

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Contract

Contract Types (cont.)

Risk for Buyer Risk for Seller Description Cost Plus Incentive Fee (CPIF)

Medium Minimal

Used when the buyer knows generally what is needed but lacks any details

to know specifically what is needed to build it.

Cost Plus Award Fee (CPAF)

Minimal

Cost Plus Percentage of Cost (CPPC) or Cost Plus Fee (CPF)

Significant Significant Covers the seller for legitimate costs, but majority of fee is only awarded based on buyer’s satisfaction with broad subjective criteria detailed in the contract.

Minimal Covers the seller cost for building something for a buyer and pays a percentage of total costs as a fee. The more the seller spends, the higher the fees.

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Point of Total Assumption

• This calculation establishes

the point at which the seller is responsible for all cost overruns associated with a fixed-price incentive fee (FPIF) contract.

• Contrary to what fixed-price may imply, a contract of this sort can be negotiated so that the buyer agrees to share in cost overruns or under-runs. • The Point of Total Assumption is reached when all cost overruns fall to the seller. • This calculation is typically used in government or defense-type contracts.

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Point Of Total Assumption Variables

Point of Total Assumption Variables and Calculation

Purpose To calculate the maximum that a buyer pays in a fixed price incentive fee (FPIF) contract when taking into consideration the share ratio on cost overruns Target Cost (TC) The expected cost of the work in the contract. (Ex: $1M) Target Profit (TP) The expected profit of the work in the contract. (Ex: $200,000) Profit Rate at Target Cost The profit margin of the target profit compared to the target cost (Target Profit/Target Cost) (Ex: 20%) Target Price The total of the Target Cost and Target Profit; should be the total target value of the contract work barring any overruns or under runs (Ex: $1,200,000) Olympia WA Chapter PMP Prep

Point Of Total Assumption Variables (cont.)

Point of Total Assumption Variables and Calculation

Ceiling Price A percentage of the target cost (TC). This is the maximum total amount the buyer expects to pay for the work. Anything above this amount is covered by the seller. (Ex: 140% of Cost or $1,400,000) Share Ratio (SR) The ratio between the buyer and seller for any cost savings or overruns that impact the total contract amount and profit. (Ex: 70/30) Point of Total Assumption (PTA) This is the total amount of money the buyer will pay regardless of cost overrun on the contract. The formula is in the cell below. (Ex: $1,285,714.29) Point of Total Assumption Formula PTA=(Ceiling Price-Target Price)/Buyer Share + Target Cost $1,285,714.29=($1,400,000-$1,200,000)/0.70+$1,000,000

NOTE:

The difference between ceiling price and target price is indeed divided by the buyer’s share. This is not an error.

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Scope of Work

• A Scope of Work is the part of the contract that describes what the seller will do for the buyer.

• When the Scope of Work is done or completed, the main work of the project is done and closing can begin.

• Because the level of detail and planning can vary among contracts, you can take several different approaches to develop the Scope of Work in the contract.

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Scope of Work Approach: Design

Scope Of Work Scope Of Work Description Example Design A Scope of Work type in which the buyer provides the seller with the

exact details of what is required

Design is typically used when buyers know exactly what they want and want no variance from specifications. It

typically

will work with

Fixed Price contracts.

A company hires a vendor to build a prototype cabinet to house telecom equipment. The buyer provides the seller with specifications of what is to be built; it must hold a number of devices already created.

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Scope Of Work

Scope of Work Approach: Functionality

Scope Of Work Description Example Functionality A Scope of Work type in which the buyer details to the seller the

functionality needed in the new system or development

Functionality allows sellers to propose their own solutions as long as the end-results are achieved.

It typically works with Cost Plus (CP) contracts.

A company hires a vendor to implement a phone system for them. It provides the needed functionality requirements to the vendor, and as long as those are met, it allows the vendor the flexibility to build a solution as the vendor sees fit.

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Procurement Documents

• The documents associated with the procurement process lay the foundation for vendor relationships.

• They apply to the selected vendors and for those that are considering the work.

• An ideal procurement document answers the questions of the potential provider and allows them to make a well planned bid, which helps create a win/win relationship with the seller.

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Procurement Documents

Document Type Typical Purpose Request for Quote (RFQ)

Typically used to solicit proposals for a small dollar amount or used for commodity type of products that do not require a great degree of customization.

Description Example

A document that requests a price for a standard item.

There is a general assumption that negotiation is not associated with this type of procurement document.

A request for prospective sellers wishing to provide pricing for customer established server criteria: Quantity 50 XYZ Servers with 1Gig RAM, 200G hard drive to be purchased within 90 days of submittal.

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Procurement Documents

Document Type Typical Purpose Description Example Request for Information (RFI)

Typically used to solicit information to learn more about a company that could provide service for a buyer A document requesting information on a service provider’s qualifications so a buyer can review them A request from a state government to see if a consulting company has the appropriate experience in an area to bid for a potential project.

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Procurement Documents

Document Type Typical Purpose Description Example Request for Proposal (RFP) Sometimes Called Request for Tender (RFT)

Typically used to solicit proposals for bigger, higher priced, customized services or products A document that requests an approach, price, and significant detail about how the seller proposes to do the requested work Generally, the seller describes the detailed approach to the solution for the buyer, including previous experience in the area.

The general assumption is that negotiations occur based on scope, time, and cost of what the buyer requested and what the seller suggested.

A request for a proposal to prospective sellers for design, implementation, and training for a data warehouse to consolidate five different enterprise databases at fortune 500 company named Widgets Inc.

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Four Procurement Documents

Document Type Invitation for Bid (IFB) Sometimes Called Request for Bid (RFB) Typical Purpose Description

a RFP (Request for Proposal) A document that requests an approach, Used for Government sealed bidding processes with characteristics similar to those for price and significant detail about how the seller proposes to do the requested work.

The general assumption is that negotiations occur based on scope, time and cost of what the buyer requested and what the seller suggested.

Example

A request from a branch of the U.S.

Government for a proposal to sellers for design, implementation and training of an Enterprise Reporting System.

The selection process is sealed bid and the contract is awarded on May 25, 2008 Olympia WA Chapter PMP Prep

Conduct Procurements (Executing Process Group)

• Incorporates soliciting responses from the sellers, selecting a seller, and awarding a contract

.

• The team will request bids or proposals from potential sellers, apply the defined selection criteria to the bids or proposals received to determine the seller, and award the contract to the selected seller. Olympia WA Chapter PMP Prep

Conduct Procurements

Key Inputs Conduct Procurements (Executing) Key Tools & Techniques Key Outputs • Procurement Management Plan • Procurement Documents • Source Selection Criteria • Qualified Seller List • Seller Proposals • Make-or-Buy Decisions • Bidders Conferences • Proposal Evaluation Techniques • Independent Estimates • Expert Judgment • Advertising • Procurement Negotiations • Selected Sellers • Procurement Contract Award • Resource Calendars • Project Management Plan Updates Olympia WA Chapter PMP Prep

Qualified Sellers List

• The Qualified Seller List is a

list that a buyer can use as a screening mechanism in the procurement process.

• The following are advantages of having a Qualified Sellers List: – It allows a buyer to consider only sellers of services that have met some predefined qualifications.

– The list can save time by eliminating the preliminary screening process. – Allow buyers to select from vendors that have already met the predefined qualifications.

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Bidders Conference

• Bidders conferences are meetings during which companies considering bidding on a project can ask a buyer questions and get clarification on any potential issues before creation of a proposal. • A conference: – should let potential sellers ask any questions; – should make the questions and answers available to anyone considering bidding on the project.

• Buyers representatives need to be sure to make all questions and answers available to all potential sellers, as well as take all reasonable steps to ensure that potential sellers do not collude together on unfair pricing. Olympia WA Chapter PMP Prep

Non-Competitive Form of Procurement

• Non-Competitive Procurement is done when there is

only one source for the products,

or the

buyer has an established relationship with the seller

and there are mechanisms in place to ensure that the buyer of the products or services attains a fair price.

• If a vendor is selected without competition, there is a chance of inappropriate selection and unreasonable pricing, so there should be a mechanism in place to assure that appropriate actions are taken in this area.

• The two main categories in this area are: – sole source – single source.

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Non-Competitive Categories

Sole Source

Involves using a company that has no other competition for whatever is being acquired from it.

The company could be one that owns a patent or some other type of intellectual property associated with what you are purchasing.

Single Source

Involves choosing a partner you prefer to work with or deciding not to look for competition. Whatever you are purchasing from the source might be available from others, but for whatever reason, you have decided not to look at others for providing of the services. This could be a situation where there is a vendor you prefer, or when you might not have time to go through the full process to find others to do the work.

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Contract Management Plan • The Contract Management Plan helps the Project Manager and the Team:

– Define the rules for archiving contract documentation (contract file) – Establish payments for the work of the contract – Address changes to the contract – Validate that the work of the contract is complete – Close the contract when work is complete Olympia WA Chapter PMP Prep

Incentive Fees

• Incentive Fees are those that a

buyer of services can use to get the seller aligned to a similar standard of productivity.

• They are typically a premium that the buyer pays to a seller above the base price of the contract.

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Negotiations

• Negotiations can take place in a number of project management areas. If you are outsourcing something to another company such as staff supplementation or a large project, negotiations will occur to reach a deal between the parties. • One of the main keys that PMI ® has involving negotiation is that

it is a win/win situation for both the buyer and seller.

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Negotiation Strategies

Strategy Description

Using one seller (fictitious or real) against

Competition

another to attain the best price or other terms the buyer desires.

Deadline

Using a fictitious or real deadline to attempt to get a party to sign a contract.

The Boss is Missing

Stating that another person who is key to approving something is not there, is busy, or otherwise unable to be involved.

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Procurement Contract Award

• The contract is a legally binding agreement obligating the seller to provide one or more specified products, services, or results and obligating the buyer to compensate the seller.

• The contract may be simple or complex.

• Contract components may vary.

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Standard Terms and Conditions (T&C’s)

• Typically common (non-negotiable) contract items.

• Can include negotiations but will generally have a tight range of parameters from the company’s legal department.

• This range could cover items such as: – payment options – intellectual property rights – the ability to sub-contract Olympia WA Chapter PMP Prep

Special Provisions

• Added to account for any Standard Terms and Conditions that will not meet the needs of the work involved.

• The buyer and seller negotiate these provisions, which complement any workable standard terms and conditions that have already been defined in the contract as acceptable.

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Contract Interpretation

• Contract Interpretation can keep you out of court or put you right in it.

• Generally, the contract administrator should understand what is defined in the contract, with the interpretation in line with general legal opinion.

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Administer Procurements (Monitoring and Controlling Process Group)

• It is during Administer Procurements that the Contract Administrator or other staff member

manages the contract

itself. This person verifies what is to be built or provided and measures it against the contract parameters (scope, time, and cost). The cost aspect of this process involves managing payments due the seller.

• In the case of larger projects with multiple vendors,

Administer Procurements could include managing key interface points

with multiple vendors. Olympia WA Chapter PMP Prep

Administer Procurements

Administer Procurements (Monitoring and Controlling) Key Inputs Key Tools & Techniques Key Outputs • • • • • • Procurement Documents Project Management Plan Contract Performance Reports Approved Change Requests Work Performance Information • • • • • • • Contract Change Control System Procurement Performance Reviews Inspections and Audits Performance Reporting • • Payment Systems Claims Administration Records Management System • Procurement Documentation Change Requests Project Management Plan (Updates) Olympia WA Chapter PMP Prep

Contract Administrator

• • • The Contract Administrator is the manager of the contract.

• The main responsibility is to protect the integrity and purpose of the contract.

Think of the contract as the law, and The contract administrator as the contract enforcement or police.

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Project Manager Role

• • Role of the Project Manager: – helps ensure successful execution of the contract – typically work with the contract administrator to accomplish the successful execution of: • Contract scope, • Terms and conditions as defined in the contract • Contract work results are completed and delivered – responsible for delivery of the project deliverables,

BUT

they cannot change the contract

Only the Contract Administrator has the power to change the contract.

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Centralized Vs. Decentralized Contracting

• These environments have different positives and negatives for a Contract Administrator. The characteristics are similar to those of a PMO and being on a stand-alone project, or being the only Project Manager in a small company.

Centralized Contracting

Contract Administrators support each other They have career paths They have a great degree of shared expertise

Decentralized Contracting

Contract Administrator is alone on a project without support of other contract administrators The position is viewed more as a need instead of a career type position The Contract Administrator is the only one on the project.

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Close Procurements(Closing Process Group)

• In Contract Closure

,

verification validates that contract terms and conditions have been met.

• If they have, formal acceptance should be achieved, the contract file is completed, and the contract piece of the project is closed.

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Close Procurements

Close Procurements (Closing) Key Tools & Techniques Key Inputs Key Outputs • Procurement Audits • Procurement Management Plan • Negotiated Settlements • Procurement Documentation • Records Management System • Closed Procurements Olympia WA Chapter PMP Prep

Formal Acceptance

• Formal acceptance is a key piece of the contract – it involves the buyer agreement that the work (or pieces of the work) is complete on the project.

• Upon completion of formal acceptance, the seller can begin the Close Procurements process of contract completion.

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Worksheets

• Procurement Management – Plan Contracting – Purchases & Acquisitions • Contract Types • Contract Basics – Terms and Definitions – Performance Tradeoffs • Procurement During Execution • Procurement during Monitoring and Closing Olympia WA Chapter PMP Prep