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Procurement ManagementChapter 12

www.GLOBALSKILLUP.comChapter 12Objectives

Understand the different Procurement Management Processes

Their Inputs, Tools and Techniques, Outputs

This chapter entails one to understand the various Procurement aspects required to ensure the required resources or nature of material or labor or any other is acquired so that the Project can meet its objectives.

www.GLOBALSKILLUP.comIt includes the processes to ensure identification, acquiring and deploying services of a seller to meet the needs of buyers project.

Usually the seller is recognized as an external party other than the performing project team. This may include your internal different LOB (Lines of Business) treated as a separate legal entity or external organization.

Both the buyer and seller are bonded legally with a contract document serving as the point of reference for work to be accomplished and payments released. This contract document may be simple or as complex as it can be based on project needs and legal involvement.

A mega project may involve multiple sellers being contracted to procure various services for the needs of the mega project. Managing these many sellers on their individual contracts need a specialized team in procurement and is normally a part of the administrative or financial function in organizations, however, project teams may also be employed to administer as well.

Seller goes through a change of status in the procurement cycle.Knowledge Area: Procurement ManagementProspective Seller/BidderSelected BidderContracted SellerFuture Seller

www.GLOBALSKILLUP.comThere are 4 Procurement Management processes, namely:

Plan Procurement ManagementIt is the process of planning the identification of Sellers, how the contract will be awarded, and how the project will be executed.

Conduct Procurements Process of conducting the procurement which includes circulating proposals, obtaining seller responses, selection & award of the contract to a particular seller.

Control Procurement Controlling Procurements involve the management of executing the awarded contract on the parameters defined during the contract award. Validation of the work being performed as the criteria to release the payments.

Close Procurement Formally closing the validated work and ensuring Seller is released upon completion of the work or formal termination of contract with Seller upon dissatisfactory work as per the contract agreement. Application of recommended penal clauses upon the deviations/termination of work.Knowledge Area: Procurement Management

www.GLOBALSKILLUP.com12.1 Plan Procurement ManagementThis is the process to identify the Sellers, detail the approach to define the criteria and evaluate whether to make it internally or go for an external procurement.

Key benefit is that it determines if need to acquire an external support, what to acquire, how to acquire spending how much and when would be the appropriate period of acquire.

When an external product/service is acquired, each such product/service will go through Plan Procurement till Close Procurement processes.Any relevant IP(Intellectual Property) arising - who owns this, any legal or regulatory compliance and such detail of risks also need to be considered before the procurement is awarded to a seller. Buyer needs to ensure the details are granular to safeguard mutual interests and maximize benefits for both for best outcome.

www.GLOBALSKILLUP.comOrganizational Process AssetsContractual RelationshipsMajority of the companies with descent size, scale and maturity have a separate legal and procurement team to ensure the procurements are done in a legal, ethical practiced manner to avoid any wrong-doings during the procurement process.

Wherein such specialized teams are not available in the companies, project management team has to supplement this function with their expertise.Different types of Contracts may be clubbed for better performance and the nature of work to be accomplished.Contracts awarded are bonded by the legal agreements where in the approach (contractual relationship) could be defined as follows:

Fixed Price ContractsFFP (Firm Fixed Price)FPIF (Fixed Price Incentive Fee)FP EPA (Fixed Price Economic Price Adjustment)Cost Reimbursable ContractsCPFF (Cost Plus Fixed Fee)CPIF (Cost Plus Incentive Fee)CPAF (Cost Plus Award Fee)Time & Material Contracts

www.GLOBALSKILLUP.comOrganizational Process AssetsContractual RelationshipsFixed Price Contracts for Standard ProductsIn order to provide a fixed price contract the buyer has to perform due-diligence and define the scope of work to be done.

Sellers are subject to penalties or legal implications wherein the contractual terms are not met which may include the scope, timeline, cost involved for awarded project execution.

Any further change of scope by the buyer may be accommodated generally adopted with price changes to the original contract.

FFP (Firm Fixed Price)(Most commonly preferred)Fixed Scope with Fixed Price and Predefined Performance.

FPIF (Fixed price Incentive Fee)(Most beneficial for both buyer and seller)Fixed Scope with Fixed Price + Incentives for achieving performance at different levels

FP EPA (Fixed Price Economic Price Adjustment)Used when there are projects running over several years. And there is a need to protect both buyer and seller from the external inflation related costs.

www.GLOBALSKILLUP.comOrganizational Process AssetsContractual RelationshipsFixed Price Contracts for Standard ProductsFFP (Firm Fixed Price) Price of the Product is fixed by the Buyer to create competition amongst vendors.

Example:As a Training Institute, I would want to procure 10000 bottles of water. Regular Price of Bottle is INR20. Since I buy in bulk I dont want to pay full price and think let me create competition among vendors. So I fix the buy price at INR15.

Any Vendor who wants to supply me the bottles at INR15, can bid and provide me the delivery for 10000 bottles.

Ready to Pay INR 15 instead of MRP 20

www.GLOBALSKILLUP.comOrganizational Process AssetsContractual RelationshipsFixed Price Contracts for Standard ProductsFPIF (Fixed Price Incentive Fee) Price of the Product is fixed by Buyer & also Buyer is ready to pay Incentives extra if vendor meets extra objective.Example:As a Training Institute, I would want to procure 10000 bottles of water. Regular Price of Bottle is INR20. Since I buy in bulk I dont want to pay full price and think let me create competition among vendors. So I fix the buy price at INR15.Additionally, am looking to procure the bottles in 2 days instead of waiting for a standard delivery time of 15 days. For this objective, am ready to pay incentive of INR2 per bottle on top of Fixed Price.

Any Vendor who wants to supply me the bottles at INR15, can bid and provide me the delivery for 10000 bottles. However, if vendor supplies me bottles in 2 days instead of 15 days, I will pay per bottle delivered 15+2=17 per bottle.

Ready to Pay INR 15+2incentives = 17 for 2 day delivery of bottle instead of MRP 20

www.GLOBALSKILLUP.comOrganizational Process AssetsContractual RelationshipsFixed Price Contracts for Standard ProductsFP EPA (Fixed Price Economic Price Adjustment)

Scenario 1 Product Inflation CostMRP(Max. Retail Price) of the bottle is INR 20, we agreed to pay INR 15 per bottle.In case the MRP of the bottle become INR25 from INR20. We would need to proportionately adjust per bottle price to at least INR21 so that vendor does not go under loss.

Scenario 2 Currency FluctuationMRP(Max. Retail Price) of the bottle is INR 20, however, when drafting contract we agreed to pay in USD, considering today 1USD=INR65.The currency itself will fluctuate though due to economy.After 2 weeks, we would need to adjust accordingly the pay in USD or INR so that the currency fluctuation delta is adjusted.

Today1 USD = INR 65

Tomorrow1 USD ~ INR 90 or1 USD ~ INR 40

www.GLOBALSKILLUP.comOrganizational Process AssetsContractual RelationshipsCost Reimbursable Contracts for Custom ProductsCosts incurred on the project work along with the Seller profit are reimbursed as part of the Cost Reimbursable Contracts.

Usually these type of contracts are awarded when the work cannot be defined completely upfront and the understanding of risks involved is at preliminary stages.

CPFF (Cost Plus Fixed Fee)Project Cost plus the Fixed fee(% of Total Project Cost) is reimbursed upon completion of the prescribed scope of work. Performance may/may not be up to the mark.

CPIF (Cost Plus Incentive Fee)Project Cost plus the Additional Financial Incentives for achievement of scope of work. Different grades of quality may lead to different levels of payments and hence motivates seller financially to deliver the most possible superior project quality.

CPAF (Cost Plus Award Fee)Project Cost is reimbursed however the final award fee is subject to the buyers consent that the project has met the objectives stated. Unless the objectives are not met, the buyer may hold the payments to seller and no appeals are entertained.

www.GLOBALSKILLUP.comOrganizational Process AssetsContractual RelationshipsCost Reimbursable Contracts for Custom ProductsCPFF (Cost Plus Fixed Fee)

Cost of material to build the Ship is reimbursed on actuals along with the Fixed fee for the Ship builder.

Suppose material cost of the cruise ship is $100M, this is reimbursed on actuals.

In addition, we pay the cruise ship builder an agreed amount of $20M for his expertise and work performed.

www.GLOBALSKILLUP.comOrganizational Process AssetsContractual RelationshipsCost Reimbursable Contracts for Custom ProductsCPIF (Cost Plus Incentive Fee also known as Cost Plus Fixed Fee Plus Incentive Fee)

Cost of material to build Ship is reimbursed on actuals and with Fixed fee for Ship builder and with Incentives for any extra objectives.

Suppose material cost of the cruise ship is $100M, this is reimbursed on actuals. In addition, we pay the cruise ship builder an agreed amount of $20M for his expertise and work performed.Also, vendor built the ship in 2 months instead of 6 months upon our need. For this we agreed to pay incentives of $75M extra.

www.GLOBALSKILLUP.comOrganizational Process AssetsContractual RelationshipsCost Reimbursable Contracts for Custom ProductsCPAF (Cost Plus Award Fee also known as Cost Plus Fixed Fee Plus Award Fee)

Cost of material to build Ship is reimbursed on actuals and with Fixed fee for Ship builder.

Suppose material cost of the cruise ship is $100M, this is reimbursed on actuals. In addition, we pay the cruise ship builder an agreed amount of $20M for his expertise and work performed.Also, vendor has built excellent quality of Ship, we are so impressed that we want to order 2 more ships from the Vendor. This is an award/bonus.

www.GLOBALSKILLUP.comOrganizational Process AssetsContractual RelationshipsTime & Material Contracts for Leased Products/StaffThe fixed price per unit of labor, resource or material is applied.

Per unit cost includes seller profit margins and hence seller would like these type of contracts to run for a longer duration of time.

It is up to the buyer to ensure the resources are rightfully engaged and the end objectives are met.

Nature of contracts are open ended since the precise scope of the work to be accomplished is not defined completely upfront.

This contract type is very helpful to acquire unique skills or particular resources on a project to be engaged.

Example: 1 Resource per day billing is $ 45. Should we use the resource for 100 days, we pay 45*100 = $ 4500.

www.GLOBALSKILLUP.comRisk Sharing in Different Contract Types between Buyer and Seller

Buyer is someone who wants to buy Services, Products, Solutions and so on. The party actually looking to procure items for their Project work accomplishment.

Seller is someone who wants to sell goods, do work, provide equipment or services so that the other party can accomplish their work typically.Contract InvolvedRisk Owned byFixed Price ContractsFirm Fixed PriceSeller AloneFixed Price IncentiveSeller & BuyerFixed Price Economic Price AdjustmentSeller AloneCost Reimbursable ContractsCost Plus Fixed FeeBuyerCost Plus Incentive FeeSeller & BuyerCost Plus AwardBuyerTime & Material ContractsBuyer

www.GLOBALSKILLUP.comMake or Buy analysis is usually performed to analyze should the work be done internally or externally. In some cases though expertise lies in the organization, it may not be rightful to consider to be done it in house may be due to:Excessive cost implicationsExternally available cost effective deliveriesInternal resources tied to other projects and so on..Whenever the Buy option is thought through, along with the buy, the option of lease is also first considered.Make-or-Buy Analysis13.5 Lakh EMV or -3 Lakh EMV

Pick always the highest EMV. So the decision to choose the Buy.Make or BuyDecisionBuy80% likelyMake20% likelyOutcome1 INR65 Lakh70% likelyOutcome2

INR120 Lakh10% likelyOutcome3

INR30 Lakh20% likelyINR 50 Lakh Anticipated CostINR 35 Lakh Anticipated Cost65 - 50= 15120-50= 7030-50= -2015*70% = 10.570*10% = 7-20*20% = -410.5 + 7 4 = 13.5 Lakh EMV2 + 3 - 8 = -3 Lakh EMV

EMV (Expected Monetary Value) Technique along with the decision tree helps decide on the Make or Buy decisions.

www.GLOBALSKILLUP.comMarket Research

Market Research aids in the early exploration of the feasibility of stepping into technologies or new products or unique services. Information is gathered via events, meetings, conferences, online reviews and so on.

Risks associated with such procurement planning of latest and/or new technology, product or service need to be balanced so that the outcome should be advantageous.

Acknowledged. Source: http://www.powerdecisions.com

www.GLOBALSKILLUP.comProcurement management plan defines how the external services will be acquired and engaged over the course of the project duration. It may include the following:

Types of contracts and awards applicable for projectIdentified Risks and ImplicationsEstimates based on granular scope of outright scopeProcedures and Organizational Policies to be appliedWho or which group will perform the procurement

How the suppliers will be evaluated and finally awardedConstraints and AssumptionsWho will make the Make or Buy decisionsApproach adopted for the decisionsIdentified performance levels & associated incentives

Identified Risks and associate them to the third party financial considerations in case of guarantee, warrantee, legal obligations and maintenance issuesGuidance to establish a Seller WBS, engaging quality of resources or work to be accomplished and so on.Procurement Management Plan

www.GLOBALSKILLUP.comProcurement Statement of WorkThis is the most important document for the seller to obtain from the buyer as this defines the end objective of the contract with a high level descriptions.

Descriptions may include performance specifications, skilled resources, initial constraints, base assumptions, desired quantity, quality of the work, location of work to be performed and so on.

Further adoptions of SOW can be added as addendums to the SOW until the Final Contract is signed by both the parties(buyer and seller).

Example:Procurement SOW: Build the subsection of the complete bridge.

www.GLOBALSKILLUP.comProcurement Documents

Typically the documents floated & circulated to sellers to invite prospective competitive bids are referred as Procurement Documents.

www.GLOBALSKILLUP.comSelection Criteria is often included as part of the procurement documents to bring transparency and ensure competitiveness amongst the bidders.

The selection criteria based on which the contract will be awarded is often disclosed so that the bidders know upfront on what basis their bids will be selected.

In some cases this may be the early phase to narrow down and subsequently have a follow-on round to ensure the qualified bidders get to know more intricate details and subsequently re-bid for final award.Few of the possible sources are based :

Seller understanding of requirements betterLowest Overall Total Cost of Ownership (TCO)TCO = Purchase + Operating CostTechnical CapabilitiesLogical CapabilitiesRisk Management CapabilitiesManagement CapabilitiesFinancial CapabilitiesProduction CapacityLobbying CapabilitiesGovernment, Business & Political ReferencesIntellectual rightsProprietary rightsPast Performance historyExecution capabilities

Source Selection Criteria

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12.2 Conduct ProcurementsIt is the process of conducting the procurements to finally award a contract legally.

During the process, it may involve, how the seller responses will be availed, on what criteria a seller will be chosen and how the contract will be awarded to the selected seller.

Many projects adopt several rounds of qualifying the sellers and selections.

In every round for the selected or qualified sellers, more information is provided and based on which further evaluations are done to qualify/chose the seller.

The entire procurement process takes a lengthy approach due to this nature of procurement process and care should be taken to ensure the procurement process is triggered as soon as the project needs are identified to be realistic.

www.GLOBALSKILLUP.comBidder ConferencesAlso known as Contractor, Vendor, Pre-Bid Conferences.

Bidder Conference meetings are where the potential sellers meet the buyer.

Buyer establishes a common ground of basic understanding about the Contract and also provides necessary Questions and Answers to all the Sellers.

All questions are collected upfront and answers made available during the conference to all Sellers.Buyer performs an evaluation of all the submitted bids from the sellers based on a predefined criteria. This criteria may be public knowledge or a private affair and depends on the nature of the contract being awarded.

However, in most scenarios a generic guideline is established and circulated on how the bids will be weighted and then accordingly awarded.

Proposal Evaluation Techniques

www.GLOBALSKILLUP.comIndependent EstimatesBefore the contract is circulated for bids, buyer may perform an independent estimate and accordingly plan for circulation of the contract. The estimate could be also from professional body specialized in estimation.

Once the contract is circulated to the sellers, the estimates arrived by the sellers indicate understanding of them about contract being put in place.

Large differences in estimates mean the sellers are not in line with contract understanding.

Advertising is often used to circulate the contracts to a reach a wider seller community.

Also Government related procurements are often obligated to publish the contracts in the news papers and special industry trade journals.

Advertising

www.GLOBALSKILLUP.comMost contracts define if the contract awards will be negotiable or non-negotiable contracts.

In case of Negotiable contracts, the bidder conference and/or the contract clearly establishes the negotiable parts of the contract and what are not negotiable.

During the process of procurement, usually after the seller is being identified, the negotiations are called for and before the contract is being awarded.

Once the contract has been accepted all the negotiations end and the contract work has to proceed.

The last chance of any negotiation possible is before the contract is being inked legally.Procurement Negotiations

www.GLOBALSKILLUP.comA procurement agreement includes terms and conditions, and includes the nature of work to be executed. Project management team is responsible for:Ensure all project objectives are listed in agreementEnsure organizational procurement policies are adhered

Depending on application area, Agreement is referred to as:ContractSubcontractPurchase Order

Regardless of what it may be called, an agreement is a legally mutually binding document which entitles for the legal relationship and remedy to courts. It may include the following components or more:Agreements Statement of Work or Deliverables Schedule Baseline Performance Reporting Period Of Performance

Roles And Responsibilities Sellers Place of Performance Pricing Payment Terms Place of Delivery

Inspections and Acceptance Criteria Warranty Product Support

Limitation of Liability Fees and Retainer Penalties Incentives

Insurance and Performance Bonds Subordinate Subcontractor Approvals Change Request Handling Termination Clause Alternative Dispute Resolution (ADR) Mechanisms

www.GLOBALSKILLUP.com12.3 Control ProcurementsIt is the process of ensuring the contracts are performing as per the defined terms and conditions in the contract.

Suitable adoptions to the contract and performance related corrective/preventive actions being taken to ensure the end contract is useful towards the project objectives.

Key benefit of this process is that it ensures the defined contractual obligations (legal) are met by the seller and the buyer meets the defined contractual price definitions.

In most situations on the large projects, the procurement related activities are managed/controlled by Administrative team and Project Management team supplements them with information needed.

www.GLOBALSKILLUP.comContract Change Control SystemIt is used to ensure the contract changes required are recorded, decisions taken and adopted in to the contract to perform as per new approved changes to the contract.All payments related to the contract are authorized after satisfactory performance of the work to be done by the seller. Payment schedules are in strict accordance as defined in the contract.Payment SystemsProcurement Performance ReviewsReviews are performed during the monitoring and controlling to ensure the performance of the awarded contract are inline with the legal contractual obligations.

Seller is monitored on the various contract parameters which may include the cost, scope, timeline, quality and performance as detailed in the contract.All contentious issues are brought to resolution with seller and buyer consensus. Issues not resolved may be subject to a third party arbitrator service.Claims AdministrationAll records pertaining to the contract are recorded, stored in a information management system which also allows for retrieval of the information as needed.Records Management Systems

www.GLOBALSKILLUP.com12.4 Close ProcurementsThis is the process of ensuring formal closure of the contract and the relevant procurement processes are brought to close.

One aspect of close procurements is to document performance of seller as Organization Process Asset which helps future engagement of seller for other projects by buyer.

Key benefit of the process includes the Formal closure of the Contract. This may also include the Contract Termination as the contract may have not materialized the defined objectives of the contract.

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Chapter 12 - Debrief

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This brings to Procurement Management Completion.From what we have understood so far is:

4 Procurement Management Knowledge Area ProcessesIdentified their Inputs, Tools & Techniques, OutputsChapter 12

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www.GLOBALSKILLUP.comAcknowledgements & DisclaimerPMI, PMBOK, PMP, CAPM, PgMP, PMI-ACP, PMI-RMP, PMI-SP are registered marks of Project Management Institute, Inc.All registered trademarks, symbols, names are marks of their respective owners and acknowledged.

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