project procurment management

Plan Procurement Management

Prepared byArch. Saad Al Jabri, PMP

Plan Procurement Management

It identifies those project needs which can best be, or must be, met by acquiring products, services, or results outside of the project organization.Q: How will you decide whether to outsource or not ?

Make or buy

analysis

Make or buy Decisio

n

Purchas or lease

Procurement Statement of Work (SOW)

Procurement Documents Scope baselin

e

1.Cost-Benefit Analysis (financial justification)2.Organizational capability and availability of resources

Make

buy

Out put

Input Scope Statement WBS WBS Dictionary

Make or buy exampleMake Option Buy Option

Cost Difference

Make

$25,000

Buy

$17,000Make

$8,000

Monthly fees

$2,500

Monthly fees

$2,700 Service$200

solutionMonths of support to pay

for in-house solution8000/200 = 40

Make if software will not be

replaced within 40 months

Buy if software will be replaced within

40 months

Reasons to make Reasons to buyLess costly Less costlyCan use in-house skills In-house skills aye not

available or don’t existCan control the work Small volume of workCan control intellectual property

More efficient

Learn new skills Transfer risksAvailable staff Available vendorCan focus on core project work Project team can focus on

other work items

Reasons to make or buy

Procurement Statement of Work (SOW)

Is a key output of this process which describes the procurement items in sufficient detail to allow prospective sellers to determine If they can provide the products, services, or results.

Procurement Documents

Used to solicit proposals from prospective sellers. Should include the following :• Relevant Procurement Statement of Work• Desired form of response from sellers• Any contractual provisions

(e.g., Non Disclosure/Confidentiality Agreements)

Procurement Documents

Here are some specific documents the PM should be familiar with:• Invitation For Bid (IFB) : is a document that tells

sellers that you want them to submit proposals.• Request For Quote (RFQ) : This is a way to tell

sellers that you want them to give you a quote on a fixed-price contract to do the work.

• Purchase Order (PO) : is something you’ll send out to a seller who you know that you want to work with. It’s an agreement to pay for certain goods or services.

Procurement Documents• Request For Information (RFI) : Requests the

seller to provide more information about the seller’s products, services or results.

• Bid : Price is the determining factor in the decision making process.

• Quotation : are generally used when the seller selection decision will be based on price (as when buying commercial or standard items).

• Proposal : is generally used when other considerations, such as technical capability or technical approach are paramount.

Determining the contract type• A contract is a formal agreement between the

buyer and the seller.• Fixed Price contracts: must clearly define the

requirements the vendor is to provide• Cost Reimbursable contracts: pays the seller for

the product. The payment includes a profit margin (difference between the actual costs of the product and the sales amount.

• Time & materials contracts: are sometimes called unit price contracts.

Contract Type Attribute Risk Issues

Fixed Price FP Agreed price for contracted product. Can include incentives for the seller.

Seller assumes risk.

. المج�ازفة البائع يتح�مل

Firm Fixed Price FFP

Agreed price for contracted product.

Seller assumes risk.

. المج�ازفة البائع يتح�مل

• Favored by most buyers because the price is set at the outset

• Price is not subject to change unless the scope of work changes.

Fixed Price Incentive Fee FPIF

Agreed price for contracted product. Can include incentives for the seller.

Seller assumes risk.. المجازفة البائع يتحمل

• Some flexibility for both parties.

• Allows for deviation performance.

• Financial incentives tied to achieving agreed upon metrics.


Cost Plus Fixed Price CPFP

Actual costs plus profit margin for seller.

Cost overruns represent risk to the buyer.

مجازفة هي التكاليف تجاوزللمشتري.

Cost Plus Percentage of Price CPPC


Cost overruns risk to the buyer. This is the most dangerous contract type for the buyer.

مجازفة هي التكاليف تجاوزمن. نوع أخطر هذا للمشتري

. للمشتري بالنسبة العقودCost Plus Incentive Fee CPIF


Cost overruns represent risk to the buyer.

مجازفة هي التكاليف تجاوزللمشتري.

• The seller receives a predetermined incentive fee.

• Both parties share costs based upon a % cost sharing formula, e.g., 80/20 split over/under target costs

Cost Plus Award Fee CPAF

Actual costs plus a buyer determined award for completing the project.

Award is at the discretion of the buyer, and the seller may be disappointed in the award fee.

المكافئة المشتري يقدرالبائع أمل يخيب أن ويمكن

لقيمتها.


Lump Sum LS Agreed price for contracted product. Cain include incentives for the seller.

Seller assumes risk.. المج�ازفة البائع يتح�مل

Time and Materials T&M

Price assigned for the time and materials provided by the seller.

Contracts without “not-to-exceed” clauses can lead to cost overruns.

Unit Price UP Price assigned for a measurable unit of product or time.

Risk varies with the product. Time represent the biggest risk if the amount needed is not specified in the contract.

For example $130 for engineer's time on the project.

Contract types Vi. Transfer risk to Seller

Common Contract Clauses

• Force Majeure:War, strike, crime or an event described by the legal term “act of God”

• Liquidated Damages:Monetary compensation for a loss, detriment, or injury to a person or a person's rights or property, awarded by a court judgment or by a contract stipulation regarding breach of contract

Common Contract Clauses

• Changes:The Changes clause is perhaps the most significant feature of the Government contract that distinguishes it from the conventional con tract

• Escalator:Provision in a contract allowing cost increases to be passed on

Conduct procurements

• Procurement management plan

• Procurement documents • Source selection criteria

Advertising. Analytical techniques, bidder conference .

• Seller proposal

• Selected sellers

• Agreements

Advertising. Analytical techniques, bidder conference .

Procurement negotiations

Inputs

Tools & techniques

Outputs

Control Procurements

• The buyer and seller use an automated tool Records Management System to manage all the Procurement Documentation,

• The buyer makes payments to the seller throw a Payment System at regular intervals,

• The seller provides regular project performance information through Performance Reporting to management and the buyer about the project progress,

• The buyer conducts Procurement Performance Reviews, as well as Inspections and Audits to ensure that the procurement contract is being executed properly.

Control Procurements

•Any changes to the contract should go through the Contract Change Control System.

• If there are any disputes or claims between the buyer and seller, they should follow the Claims Administration process (defined in the contract) to address such claims.

•Unresolved claims may have to go through an Alternative Dispute Resolution (ADR) process.

Close Procurements

It supports the Close Project or Phase process, since it involves verification that all work and deliverables were acceptable.• Procurement Audits• Procurement Negotiations• Procurement File• Deliverables Acceptance• Closed Procurements• Contract/Procurement Closure

Procurements CalculationTerm Definition Formula

Target Cost TC Predicted cost only portion of the contracted work (specified in the contract)

Target Fee TF Predicted incentive fee to be paid to the seller (specified in the contract)

Target Price TP Predicted overall price of the contract

TC + TF

Actual Cost AC Actual amount spent by the seller for doing the work (determined when the contract is complete)

Actual Fee AF Seller’s actual incentive fee (determined when the contract is complete)

{(TC—AC)SSR}+TF

Final Price FP Final overall price of the contract (total amount to be paid to the seller)

AC + AF

Procurements CalculationTerm Definition Formula

Sharing Ratio The ratio at which extra costs (or savings) will be distributed between buyer and seller; the buyer has a higher percentage; e.g., For a 60/40 Sharing Ratio, Buyer Share Ratio (BSR) is 60% and Seller Share Ratio (SSR) is 40%.Convert SSR to a decimal value for AF formula (e.g., 0.4)

Point of Total Assumption PTA

Portion of the actual cost incurred by the buyer when the contract reaches or exceeds the CP; any amount above the CP will be paid by the seller.

{(CP— TP) /BSR} + TC

Procurements Calculation

Q1. You are supposed to make payment for successful installation of 50 generator which were procured as a Cost Plus Incentive Fee contract. According to the seller, the actual cost was $220,000. The contract specified a $50,000 incentive fee to be paid to the seller for successful installation. The target cost of the installation is $200,000 and the sharing ratio specified in the contract is 60/40. How much payment should the buyer make to the seller ? (Final Price)

Procurements Calculation

Q2. What should the final price be if the actual cost was $190,000 ? FP

Q3: If the ceiling price is $310,000, what will be the Point To Total Assumption ? PTA

project procurment management

Leadership & Management