Project Procurement, Contract Management, and Ethics

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Transcript Project Procurement, Contract Management, and Ethics

Lecture 45 Project Procurement, Contract Management, and Ethics in Project Management

Lecture 44 contents

• • • • • • • • • •

What is Risk?

Primary Components Tolerance of Risk Risk Management Cat of Risk Risk Planning Risk Assessment

(identification and analysis)

Risk Handling Risk Monitoring Qualitative Risk Rating

Lecture 45

• •

Procurement Procurement Cycles

–

Requirement cycle

–

Requisition Cycle

–

Solicitation cycle

–

Award Cycle

–

Admin cycle

•

2. Type of contract

–

Six Categories of Contract

•

Ethics in Project Management

“Self-pity is our worst enemy & if we yield to it, we can never do anything wise in this world” - Helen Keller

“

To be prepared is half the victory.

”

Miguel de Cervantes Saavedra 5

“Treat people as if they were what they ought to be, & you help them to become what they are capable of being” - Johann Wolfgang von Goethe

The quality of a person's life is in direct production to their commitment to excellence, regardless of their chosen field of endeavor.

The race is not always to the swift...

but to those who keep on running.

In three words, I can sum up everything I've learned about life: It goes on.

- Robert Frost

Action in Your Project

“Action may not always bring happiness, but there is no happiness without Action” - Benjamin Disraeli

Procurement

Acquisition of goods/services. Procurement (& contracting) is a

Process that involves

-Two Parties with: Different objectives Who Interact in a given market segment.

Good Procurement Practices includes

Corporate profitability by:

Taking advantage of:

1. Quantity discounts, 2. Minimize Cost/Financial Problems, 3. Seeking out Quality Suppliers. 12

As Procurement Contributes To Profitability Procurement is Often Centralized, -Results in “Standardized practices” ”Lower Paper work Cost”

Objectives of Procurement Planning are to select one of following for the Procurement of all Goods/Services: 1. From Single Source.

2. From Multiple/source.

3. Procure only small portion of Goods/Services 4. Procure none of Goods/Services 14

Environment in which Procurement Take Place is Critical factor.

There are two environments: 1. Macro & 2. Micro

Macro environment includes General external variables that can Influence “How & When” we do Procurement and it Includes:

– Recessions, – Inflation, – Cost of borrowing money, – Unemployment.

Micro environment is the internal to Firm Include “Procurement /Contract System” five cycles: Requirement Cycle

: Defines boundaries of Project

Requisition Cycle

: analysis of sources

Solicitation Cycle:

Bidding process

Award cycle:

Contractor selection & Contract Award

Contract Admin Cycle:

Managing subcontractor until Completion of the Contract.

Several Activities of Procurement Process that overlaps Several of Cycles. These cycles are conducted In parallel, especially “Requisition & Solicitation”.

1. Requirement Cycle

First Step in Procurement Process “Definition of Project Specifically

‘Requirements”

Requirement Cycle Includes

1. Defining the need for the project 2. Development of the statement of work, specifications, and work breakdown structure 3. Performing a make or buy analysis 4. Laying out the major milestones and the timing/schedule 5. Cost estimating, including life-cycle costing 6. Obtaining authorization and approval to proceed 19

Specifications Written Pictorial or graphic Information describe define or specify services/item to be procured: 1. Design (physical Characteristics) 2. Performance (measurable capabilities) 3. Functional Specification ( subset of Functional , risk is on contractor)

2. Requisition Cycle

Once the “Requisition identification”,

‘Requisition form’

sent to Procurement to begin

“Requisition Process”.

Requisition cycle Include

1. Evaluation confirming specification.

2. Confirming sources 3. Reviewing past performance of sources 4. Producing Solicitation Package (S/P)

Solicitation Package sent to each possible

“Supplier for Playing” Field is level.

Specification Package Includes:

1. Bid documents (usually standardized) 2. Listing of qualified vendors (expected to bid) 3. Proposal evaluation criteria 4. Bidder conferences 5. How change requests will be managed 6. Supplier payment plan 23

3. Solicitation Cycle

Selection of

“Acquisition Method”

is the Critical Element in

“Solicitation Cycle”.

Three Acquisition Methods :

• Advertising • Negotiation • Small Purchases (off supplies) 24

Advertising company

goes out for sealed bids.

There are no negotiations. Competitive market forces determine

the price and the award goes to the

“lowest bidder”

Negotiation

is when the price is determined through a bargaining process. In such a

situation, the customer may go

out for a: – Request For Information (RFI) – Request For Quotation (RFQ) – Request For Proposal (RFP) The request for Proposal (RFP) is the most costly endeavor for the vendor.

Large proposals contains:

separate volumes for cost, technical Performance, Management History, Quality, facilities, subcontractor Management, & Others.

On Large contracts the Negotiation Process may

Also Includes

Price, Quantity, Quality & Timing. Vendor Relations are critical

contract negotiations. during

Can Shorten Process due to:

1. Integrity of relationship & 2. Previous history 28

Award Cycle (A/C) Result in a “signed contract”. Several types of Contracts. So Negotiation process also Include “selection” of the Type of Contract.

Objectives of Award Cycle is to negotiate a contract: -Type & Price Result in reasonable “Contractor risk” & Provide Contractor risk with Greatest Incentive for Efficient & Economic Performance.

• • • • • There are

certain basic elements

of most contracts.

Mutual Agreement:

acceptance.

There must be an offer and

Consideration:

There must be a down payment.

Contract Capability:

The contract is binding only if the contractor has the capability to perform the work.

Legal Purpose:

purpose.

The contract must be for a legal

Form Provided By Law:

The contract must reflect the contractor's legal obligation, or lack of obligation, to deliver end products.

• The

Two Most Common Contract Forms

are completion contracts and term contracts.

Completion Contract:

The

contractor is required to deliver a DEFINITIVE END PRODUCT

. Upon delivery and

formal acceptance by the customer

, the contract is considered complete, and final

PAYMENT CAN BE MADE

. 32

2. Term contract:

The

Contract Is Required To Deliver A Specific "Level Of Effort," Not An End Product

. The effort is expressed in

Woman/Man-days (Months Or Years)

over a

Specific Period Of Time

using

Specified Personnel Skill Levels And Facilities

When The Contracted Effort Is Performed

, the contractor is under no further obligation. Final payment is made,

irrespective of what

is actually

Accomplished Technically

Final Contract also called

“Definitive contract”

Follows normal Contracting Procedures. E.g. Negotiation of all Contractual “Terms & Condition” on Cost & Schedule prior to “Initiation of Performance”.

Negotiating of contract

and

preparing it for signatures

may require

months of preparation

. If the customer needs the work to begin immediately or if

long-lead procurement is necessary

, then: 35

“Customer may provide the contractor”

with a

letter contract

letter of intent (LOI)

. The letter contract is a

preliminary written instrument

authorizing the contractor to

begin immediately:

1. The

Manufacture Of Supplies

Or 2. The Performance Of Services. 36

Final contract price Must be negotiated after performance begins, ‘Definitive contract” must still be negotiated.

Types of contract selection based upon following:

1. Overall degree of

Cost & Schedule

Risk 2. Type & complexity of Requirement (technical Risk) 3. Extent of Price Competition 4. Cost/Price Analysis 5. Urgency of Requirements 6. Performance period 7. Contractor's Responsibility (and Risk) 8. Contractor's Accounting System (Report Earn Value reporting?) 9. Concurrent Contract (contract take A back seat to existing work?) 10. Extent of Subcontracting (how much work contractor out source?) 38

General six types of contracts :

Fixed-price (FP), Cost -plus-fixed-fee (CPFF), Cost-plus-percentage-fee (CPPF), Guaranteed Max-Shard Savings (GMSS), Fixed-price Incentive- Fee (FPIF), Cost-Plus-Incentive-Fee (CPIF) 39

**First Category Fixed-price or**

Lump-sum contract

Contractor carefully

“Estimate Target Cost”

Contractor required to Perform work at

negotiated Contract Value.

If “Estimated target cost” is low then “Total Profit reduced”

& may vanish. Contractor may not be able to

“underbid competitors” So

Contractor assumes a Large risk.

Lump-sum

Provides

“Max Protection to Owner”

for ultimate

“Cost of Project”.

Disadvantage:

Requiring a Long Period For Preparation & Adjudications of Bids.

Because of a Lack of knowledge of Local conditions, all contractors Include Excessive Contingency.

Chang Requested

By owner after

“Award of contract” Lead to Troublesome

& Sometimes

“Costly extras”

2 Category Cost-Plus Fixed-Fee (CPFF)

Cost Plus Fixed Fee (CPFF)

Accurate Pricing

Not Possible in Any Other way. So we use CPFF, so

Cost may vary but

Fee remains same.

Contractor agrees only to use

Best Efforts to Performance

Good/Poor Performance

Rewarded equally. 47

Total Rs/$ Profit likely

To Produce Low

“Rate of Return” reflects

Small

“Amount of Risk”

By contractor.

Fixed Fee - small % Age

“Tot/true Cost”

CPFF Required Company books

be audited.

3: Cost-Plus Percentage

– fee Contract

Provides Maximum flexibility to owner Permits “Owner & Contractor” to work together cooperatively on All “Technical, Commercial, Financial Problems”. -No Financial Assurance of “Ultimate Cost”.

“No financial incentive to contractor” this because of “High building cost” (Compared with other forms). Only meaningful Incentive can be: 1. Inc competition & 2. Prospects for Follow-on contracts.

4 Category of Contracts

“Guaranteed Maximum-Share Savings”

Contractor Gets “Fixed Fee” “Actual Cost” of

for his

“Profit” and Reimbursed for the

Engineering, Materials, Construction Labor, all

Other Job Costs,

But only up to

“Ceiling figure established”

“Guaranteed maximum"

Savings below the" Guaranteed Maximum”

are Shared between

“Owner & Contractor”, where as Contractor Assumes the Responsibility

For any

“Overrun beyond”

Guaranteed

“Maximum Price”

Contract form Combines advantages as well as disadvantages of Both “Lump Sum” & “Cost-Plus Contracts”.

Best form for Negotiated Contract as it Establishes a Maximum Price At Earliest Possible Date

Though contract awarded without “Competitive Tenders”.

-Yet Protects owner Against being Overcharged,

Unique in that “Owner & Contractor” share Financial Risk & Both have Real incentive

To Complete Project At lowest

“Possible Cost”.

5 th Category of Contract

Fixed-Price Incentive-fee

Contracts

These are Same as “

Fixed Price contracts”

Except have some “

Provision for Adjustment”

of the

“Total Profit”

by a

formula.

This Formula Depends “Final Total Cost”

at Completion of Project on 59

Formula “

Agreed to”

in advance By

“Owner & Contractor”

.

To use this Both “Project or Contract”

Requirements Must be firmly established

Provides An incentive to Contractor To:

a) Reduce Cost b) Increase profit Both

“Owner & Cost” “Risk & Savings”

Share in 61

6 Cat.

“Cost-Plus Incentive Fee C

ontracts”

Same as:

“Cost” Plus Contracts

, Except have “Provide for” Adjustment of

“Fee as”

Determined By a Formula: Compares

“Total Project Cost to Target Cost”

. Formula agreed to in advance

by “Owner & Contractor”.

Used for

“Long Duration”

“R&D Type Project”

5. Contract Admin Cycle

Contract Administrator is

Responsible for Compliance

By the Contractor to Contract's “Terms & Conditions” To Make Sure Final Product is

“Fit for Use”

Functions of contract administrator Include:

Change Management Specification interpretation Adherence to Quality Warranties Subcontractor Management Production surveillance Waivers Contract breach Resolution of disputes Project Termination Payment “Schedule” Project Closeout 65

•

Part Two

•

Ethics

Ethical Origins

Societal Ethics:

Standards of Members of Society use when dealing with each other.

Based on “Values & standards”

Societal Ethics:

Found in Society’s Legal Rules, Norm, & Mores.

Codified in the “Form of Law”

& Society Customer.

Norms dictate how people Should behave.

Societal ethics vary based On a given Society.

Strong beliefs in one country differ elsewhere.

Professional Ethics:

“Values & standards used by Group of Managers in workplace”.

Applied when Decision not “Clear-Cut Ethically”.

Physicians/Lawyers Professional Associates

–

(PMA, Bar Council)

Values

An individual’s Basic convictions of What is “Right & Wrong”

Values

Basic beliefs About what

one

should or should not do?

& What is & is not important?

Individual Ethics:

Values of an individual resulting from their family & upbringing.

Behavior not illegal, Yet People still disagree If not ethical.

Ethics of top Project Manager

–

set the

–

tone for

–

Project

Ethics Codes & Policies Provide sign of top Management’s desires in Project Based Organizational culture

Why Behave Ethically?

Project Manager should behave ethically To Avoid Harming others. Managers Responsible for “Protecting & Nurturing Resources ” In their Charge.

“Leadership, Culture, Incentive Compensation Plans” help Shape “Individual Ethical behavior” in Project Management

Promoting Ethics

“Evidence” Showing “Ethical Managers” benefit over long term .

Ethical Control System in Project Management

Formal System to encourage Ethical Management.

Project Management Firms appoint an

Ethics Ombudsman

to monitor practices.

“Communication standards”

To all employees.

Ethical culture:

culture

firms increasingly seek to make good ethics part of norm & organizational

Ethical decisions involve Normative Judgment

implies

“something is good or bad, right or wrong, better or worse.” Morality Society’s accepted norms of behavior

Should you pay compensation pay to laid off workers?

–

May December Stakeholder Return.

–

Should you buy goods from overseas firms that hire children?

If you don’t Children may not earn enough money to eat.

Views of Ethical Decision-Making Decisions are Decisions made concerned with solely on the basis respecting and pro of outcomes or tecting basic rights consequences of individuals Decision makers seek to impose and enforce rules fairly and impartially

Code of Ethics Professional organizations Project Management Institute (PMI)

Taking a serious look at developing Requirements for a Professional Project manager. 85

Ethics obligation matrix.

CODE OF ETHICS FOR PROJECT MANAGERS PREAMBLE:

Project Managers, in the pursuit of their profession, affect the quality of life for all people in our society. Therefore, it is vital that Project Managers conduct their work in an ethical manner to earn and maintain the confidence of team members, colleagues, employees, clients and the public.

ARTICLE I: Project Managers shall maintain high standards of personal and professional conduct.

a) b) c) Accept responsibility for their actions.

Undertake projects and accept responsibility only if qualified by training or experience, or after full disclosure to their employers or clients of pertinent qualifications.

Maintain their professional skills at the state -of-the-art and recognize the importance of continued personal development and education.

d) e) f) g) Advance the integrity and prestige of the profession by practicing in a dignified manner.

Support this code and encourage colleagues and co workers to act in accordance with this code.

Support the professional society by actively participating and encouraging colleagues and coworkers to participate.

Obey the laws of the country in which work is being performed.

ARTICLE II: Project Managers shall, in their work:

a) Provide the necessary project leadership to promote maximum productivity while striving to minimize costs.

b) Apply state-of-the-art management tools and techniques to ensure schedules are met and the project is appropriately planned and coordinated.

c) Treat fairly all project team members, colleagues and co workers, regardless of race, religion, sex, age or national origin.

d) Protect project team members from physical and mental harm.

e) Provide suitable working conditions and opportunities for project team members.

f) Seek, accept and offer honest criticism of work, and properly credit the contribution of others.

g) Assist project team members, colleagues and co-workers in their professional development.

ARTICLE III: Project Managers shall, in their relations with employers and clients:

a) b) c) d) e) Act as faithful agents or trustees for their employers or clients in professional or business matters.

Keep information on the business affairs or technical processes of an employer or client in confidence while employed, and later, until such information is properly released.

Inform their employers, clients, professional societies or public agencies of which they are members or to which they may make any presentations, of any circumstances that could lead to a conflict of interest.

Neither give nor accept, directly or indirectly, any gift, payment or service of more than nominal value to or from those having business relationships with their employers or clients.

Be honest and realistic in reporting project cost, schedule and performance.

ARTICLE IV: Project Managers shall, in fulfilling their responsibilities to the community:

a) Protect the safety, health and welfare of the public and speak out against abuses in those areas affecting the public interest.

b) Seek to extend public knowledge and appreciation of the project management profession and its achievements.

•Part Two ends

Social Responsibility Social Power Social Responsibility Concept Project Management Organization must behave Proactively Business has certain social responsibility because power it wields Be a “Good Corporate Citizen”

Social Responsibility Pyramid Good Corporate Citizen Do What is Right, Just Obey the Law Make Enough Money To Survive

Levels of Social Responsibility Reactive (Obstruction) Defensive Accommodative Proactive Low Level of Social Responsibility High

Social Responsiveness

•

Accommodative Response:

Managers realize need for social responsibility. – Try to balance interests of all S/H.

Proactive response :

Manager actively embrace social responsibility.

– – Go out of their way to learn about & help Stakeholders

“Good Corporate Citizen”

Why be Responsible?

Managers accrue benefits by being responsible.

– –

Workers & Society benefit.

Quality of Life in Society improve.

–

It is the right thing to do.

Whistleblowers:

a per reporting illegal or unethical acts.

Now

protected by law

Social audit:

Managers specifically take ethics & business into account when making decisions.

Negative Low Medium High The Social Audit Negative High Favored Strategies

Arguments For Social Responsiveness

Business is involved in social issues

Business resources to tackle today’s complex societal problems

100

A better society means a better environment for doing business Corporate social action will prevent Government intervention

101

How Firms Can Improve Their Social Responsiveness (Ethical Performance)

• Establish and publish their own

Code of Ethics

• •

Ombudsmen -

corporate past behavior • Protect (committee, task force) to review the

whistle-blowing -

when an employee discloses an illegal, immoral, or unethical action committed by a member of the organization

Training programs -

ethical sensitivity training •

Controlling compliance -

ethics audit) corporate social audit (or •

Leadership -

demonstrate commitment from leaders • Involve personnel

at all levels

102

•

Part Three

•

Recap of the course

103

• Management • Project Management • Project Manager • Project Proposal • Project Feasibility • Project Selection Method • Project Planning • Scope • Charter • Quality ( 3-4 ) • Productivity 104

• Leadership • Communication • Ethics • Costing • Pricing • Risk Management • Procurement • Close out Note 105

• •

Part Four Project Management Institute (PMI)

106

•

Procurement Management Processes

• Project Procurement Management involves engaging in a systematic process to purchase or acquire the needed products, services, or results from an outside source which will perform the work. Procure Management encompasses contract management and control processes necessary to administer contracts or purchase orders. It also includes processes which assist in administering a contract to assure the buyer/seller relationships are properly managed. The procurement management processes are: 107

•

Plan Purchases and Acquisitions

Purchases and Acquisitions process – Plan involves ascertaining what is needed, and when it is needed. Then how to assure you have what you need when you need it. (Novel concept!) This is completed as a part of the planning process group. 108

•

Plan Contracting

– The Plan Contracting process involves documenting the products, services, and results requirements and identifies potential sellers. Plan Contracting is commonly first engaged in the planning process group. 109

•

Request Seller Responses

– Request Seller Responses process obtains information, quotations, bids, offers, or proposals from sellers as appropriate. This is a part of the executing process group 110

•

Select Sellers

– The Select Sellers process is where the offers are reviewed, and a chosen vendor rises to the top of the Analytical Hierarchy Process. Commonly negotiations are started in written form. This is commonly a part of the executing process group.

111

•

Contract Administration

- The Contract Administration Process manages all aspects of the contract and the relationship between the buyer and the seller including managing seller performance and changes, providing a basis for future work, and managing the relationship with the project’s buyer. This is a part of the monitoring and controlling process grouping.

112

•

Contract Closure

- The Contract Closure Process assures completion and settling terms of any contracts including resolving any open items and closing each contract.

113

• Each Procurement Management process results in a specific deliverable which is used as the foundations for the subsequent process. Combined the procurement management processes provide a best practice pattern for managing contracts and vendor relationships on a project.

114