12
Project
Procurement
Management |
Project Procurement Management
includes the processes required to acquire goods and
services from outside the performing organization. For
simplicity, goods and services, whether one or many, will
generally be referred to as a "product." Figure
121 provides an overview of the following major
processes:
12.1 Procurement Planningdetermining
what to procure and when.
12.2 Solicitation Planningdocumenting
product requirements and identifying potential sources.
12.3 Solicitationobtaining
quotations, bids, offers, or proposals as appropriate.
12.4 Source Selectionchoosing from
among potential sellers.
12.5 Contract Administrationmanaging the
relationship with the seller.
12.6 Contract Close-outcompletion
and settlement of the contract, including resolution of
any open items.
These processes interact with each other and with the
processes in the other knowledge areas as well. Each
process may involve effort from one or more individuals
or groups of individuals based on the needs of the
project. Although the processes are presented here as
discrete elements with well-defined interfaces, in
practice they may overlap and interact in ways not
detailed here. Process interactions are discussed in
detail in Chapter 3, Project Management Processes.
Project Procurement Management is discussed from the
perspective of the buyer in the buyer-seller
relationship. The buyer-seller relationship can exist
at many levels on one project. Depending on the
application area, the seller may be called a contractor,
a vendor, or a supplier.
The seller will typically manage their work as a
project. In such cases:
- The buyer
becomes the customer and is thus a key
stakeholder for the seller.
- The sellers
project management team must be concerned
with all the processes of project management, not
just with those of this knowledge area.
- The
terms and conditions of the contract become a key
input to many of the sellers processes. The
contract may actually contain the input (e.g.,
major deliverables, key milestones, cost
objectives) or it may limit the project
teams options (e.g., buyer approval of
staffing decisions is often required on design
projects).
This
chapter assumes that the seller is external to the
performing organization. Most of the discussion, however,
is equally applicable to formal agreements entered
into with other units of the performing organization.
When informal agreements are involved, the processes
described in Project Human Resource Management, Chapter
9, and Project Communications Management, Chapter 10, are
more likely to apply.
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12.1
Procurement
Planning |
Procurement planning is the process of identifying which
project needs can be best met by procuring products or
services outside the project organization. It involves
consideration of whether to procure, how to procure, what
to procure, how much to procure, and when to procure it.
When the project obtains products and services from
outside the performing organization, the processes from
solicitation planning (Section 12.2) through contract
close-out (Section 12.6) would be performed once for each
product or service item. The project management team
should seek support from specialists in the disciplines
of contracting and procurement when needed.
When the project does not obtain products and services
from outside the performing organization, the processes
from solicitation planning (Section 12.2) through
contract close-out (Section 12.6) would not be
performed. This often occurs on research and development
projects when the performing organization is reluctant to
share project technology, and on many smaller, in-house
projects when the cost of finding and managing an
external resource may exceed the potential savings.
Procurement planning should also include consideration of
potential subcontracts, particularly if the buyer wishes
to exercise some degree of influence or control over
subcontracting decisions.
12.1.1
Inputs to Procurement Planning
.1
Scope statement. The scope statement
(see Section 5.2.3.1) describes the current project
boundaries. It provides important information about
project needs and strategies that must be considered
during procurement planning.
.2 Product description. The
description of the product of the project (described in
Section 5.1.1.1) provides important information about any
technical issues or concerns that would need to be
considered during procurement planning. The product
description is generally broader than a statement of
work. A product description describes the ultimate
end-product of the project; a statement of work
(discussed in Section 12.1.3.2) describes the portion of
that product to be provided by a seller to the project.
However, if the performing organization chooses to
procure the entire product, the distinction between the
two terms becomes moot.
.3 Procurement resources. If the
performing organization does not have a formal
contracting group, the project team will have to supply
both the resources and the expertise to support project
procurement activities.
.4 Market conditions. The
procurement planning process must consider what products
and services are available in the marketplace, from whom,
and under what terms and conditions.
.5 Other planning outputs. To
the extent that other planning outputs are available,
they must be considered during procurement planning.
Other planning outputs which must often be considered
include preliminary cost and schedule estimates, quality
management plans, cash flow projections, the work
breakdown structure, identified risks, and planned
staffing.
.6 Constraints. Constraints
are factors that limit the buyers options. One of
the most common constraints for many projects is funds
availability.
.7 Assumptions. Assumptions
are factors that, for planning purposes, will be
considered to be true, real, or certain.
12.1.2 Tools and Techniques for Procurement
Planning
.1 Make-or-buy analysis.
This is a general management technique which can
be used to determine whether a particular product can be
produced cost-effectively by the performing organization.
Both sides of the analysis include indirect as well as
direct costs. For example, the "buy" side of
the analysis should include both the actual out-of-pocket
cost to purchase the product as well as the indirect
costs of managing the purchasing process.
A make-or-buy analysis must also reflect the perspective
of the performing organization as well as the immediate
needs of the project. For example, purchasing a capital
item (anything from a construction crane to a personal
computer) rather than renting it is seldom cost
effective. However, if the performing organization has an
ongoing need for the item, the portion of the purchase
cost allocated to the project may be less than the cost
of the rental.
.2 Expert judgment. Expert
judgment will often be required to assess the inputs to
this process. Such expertise may be provided by any group
or individual with specialized knowledge or training and
is available from many sources including:
- Other
units within the performing organization.
- Consultants.
- Professional
and technical associations.
- Industry
groups.
.3
Contract type selection. Different types of contracts
are more or less appropriate for different types of
purchases. Contracts generally fall into one of three
broad categories:
- Fixed
price or lump sum contractsthis category of
contract involves a fixed total price for a
well-defined product. To the extent that the
product is not well-defined, both the buyer and
seller are at riskthe buyer may not receive
the desired product or the seller may need to
incur additional costs in order to provide it.
Fixed price contracts may also include incentives
for meeting or exceeding selected project
objectives such as schedule targets.
- Cost
reimbursable contractsthis category of
contract involves payment (reim-bursement) to the
seller for its actual costs. Costs are usually
classified as direct costs or indirect costs.
Direct costs are costs incurred for the exclusive
benefit of the project (e.g., salaries of
full-time project staff). Indirect costs, also
called overhead costs, are costs allocated to the
project by the performing organization as a cost
of doing business (e.g., salaries of corporate
executives). Indirect costs are usually
calculated as a percentage of direct costs. Cost
reimbursable contracts often include incentives
for meeting or exceeding selected project
objectives such as schedule targets or total
cost.
- Unit
price contractsthe seller is paid a preset
amount per unit of service (e.g., $70 per hour
for professional services or $1.08 per cubic yard
of earth removed), and the total value of the
contract is a function of the quantities needed
to complete the work.
12.1.3
Outputs from Procurement Planning
.1 Procurement management plan.
The procurement management plan should describe
how the remaining procurement processes (from
solicitation planning through contract close-out) will be
managed. For example:
- What
types of contracts will be used?
- If
independent estimates will be needed as
evaluation criteria, who will prepare them and
when?
- If
the performing organization has a procurement
department, what actions can the project
management team take on its own?
- If
standardized procurement documents are needed,
where can they be found?
- How
will multiple providers be managed?
- How
will procurement be coordinated with other
project aspects such as scheduling and
performance reporting?
A
procurement management plan may be formal or informal,
highly detailed or broadly framed, based on the needs of
the project. It is a subsidiary element of the overall
project plan described in Section 4.1, Project Plan
Development.
.2 Statement(s) of work. The
statement of work (SOW) describes the procurement item in
sufficient detail to allow prospective sellers to
determine if they are capable of providing the item.
"Sufficient detail" may vary based on the
nature of the item, the needs of the buyer, or the
expected contract form. Some application areas recognize
different types of SOW. For example, in some government
jurisdictions, the term SOW is reserved for a procurement
item that is a clearly specified product or service, and
the term Statement of Requirements (SOR) is used for a
procurement item that is presented as a problem to be
solved.
The statement of work may be revised and refined as it
moves through the procurement process. For example, a
prospective seller may suggest a more efficient approach
or a less costly product than that originally specified.
Each individual procurement item requires a separate
statement of work. However, multiple products or services
may be grouped as one procurement item with a single SOW.
The statement of work should be as clear, as complete,
and as concise as possible. It should include a
description of any collateral services required, such as
performance reporting or post-project operational support
for the procured item. In some application areas, there
are specific content and format requirements for a SOW.
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12.2
Solicitation
Planning |
Solicitation
planning involves preparing the documents needed to
support solicitation (the solicitation process is
described in Section 12.3).
12.2.1
Inputs to Solicitation Planning
.1 Procurement management plan.
The procurement management plan is described in
Section 12.1.3.1.
.2 Statement(s) of work. The
statement of work is described in Section 12.1.3.2.
.3 Other planning outputs. Other
planning outputs (see Section 12.1.1.5), which may have
been modified from when they were considered as part of
procurement planning, should be reviewed again as part of
solicitation. In particular, solicitation planning should
be closely coordinated with the project schedule.
12.2.2 Tools and Techniques for Solicitation
Planning
.1 Standard forms. Standard
forms may include standard contracts, standard
descriptions of procurement items, or standardized
versions of all or part of the needed bid documents (see
Section 12.2.3.1). Organizations that do substantial
amounts of procurement should have many of these
documents standardized.
.2 Expert judgment. Expert
judgment is described in Section 12.1.2.2.
12.2.3 Outputs from Solicitation Planning
.1 Procurement documents.
Procurement documents are used to solicit
proposals from prospective sellers. The terms
"bid" and "quotation" are generally
used when the source selection decision will be
price-driven (as when buying commercial items), while the
term "proposal" is generally used when
non-financial considerations such as technical skills or
approach are paramount (as when buying professional
services).
However, the terms are often used interchangeably and
care should be taken not to make unwarranted assumptions
about the implications of the term used. Common names for
different types of procurement documents include:
Invitation for Bid (IFB), Request for Proposal (RFP),
Request for Quotation (RFQ), Invitation for Negotiation,
and Contractor Initial Response.
Procurement documents should be structured to facilitate
accurate and complete responses from prospective sellers.
They should always include the relevant statement of
work, a description of the desired form of the response,
and any required contractual provisions (e.g., a copy of
a model contract, non-disclosure provisions). Some or all
of the content and structure of procurement documents,
particularly for those prepared by a government agency,
may be defined by regulation. Procurement documents
should be rigorous enough to ensure consistent,
comparable responses, but flexible enough to allow
consideration of seller suggestions for better ways to
satisfy the requirements.
.2 Evaluation criteria. Evaluation
criteria are used to rate or score proposals. They may be
objective (e.g., "the proposed project manager must
be a certified Project Management Professional") or
subjective (e.g., "the proposed project manager must
have documented, previous experience with similar
projects"). Evaluation criteria are often included
as part of the procurement documents. Evaluation criteria
may be limited to purchase price if the procurement item
is known to be readily available from a number of
acceptable sources ("purchase price" in this
context includes both the cost of the item and ancillary
expenses such as delivery). When this is not the case,
other criteria must be identified and documented to
support an integrated assessment. For example:
- Understanding
of needas demonstrated by the sellers
proposal.
- Overall
or life cycle costwill the selected seller
produce the lowest total cost (purchase cost plus
operating cost)?
- Technical
capabilitydoes the seller have, or can the
seller be reasonably expected to acquire, the
technical skills and knowledge needed?
- Management
approachdoes the seller have, or can the
seller be reasonably expected to develop,
management processes and procedures to ensure a
successful project?
- Financial
capacitydoes the seller have, or can the
seller reasonably be expected to obtain, the
financial resources needed?
.3
Statement of work updates. The
statement of work is described in Section 12.1.3.2.
Modifications to one or more statements of work may be
identified during solicitation planning.
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12.3
Solicitation |
Solicitation
involves obtaining information (bids and proposals) from
prospective sellers on how project needs can be met. Most
of the actual effort in this process is expended by the
prospective sellers, normally at no cost to the project.
12.3.1
Inputs to Solicitation
.1 Procurement documents.
Procurement documents are described in Section
12.2.3.1.
.2 Qualified seller lists. Some
organizations maintain lists or files with information on
prospective sellers. These lists will generally have
information on relevant experience and other
characteristics of the prospective sellers. If such lists
are not readily available, the project team will have to
develop its own sources. General information is widely
available through library directories, relevant local
associations, trade catalogs, and similar sources.
Detailed information on specific sources may require more
extensive effort, such as site visits or contact with
previous customers. Procurement documents may be sent to
some or all of the prospective sellers.
12.3.2 Tools and Techniques for Solicitation
.1 Bidder conferences.
Bidder conferences (also called contractor
conferences, vendor conferences, and pre-bid conferences)
are meetings with prospective sellers prior to
preparation of a proposal. They are used to ensure that
all prospective sellers have a clear, common
understanding of the procurement (technical requirements,
contract requirements, etc.). Responses to questions may
be incorporated into the procurement documents as
amendments.
.2 Advertising. Existing lists of
potential sellers can often be expanded by placing
advertisements in general circulation publications such
as newspapers or in specialty publications such as
professional journals. Some government jurisdictions
require public advertising of certain types of
procurement items; most government jurisdictions require
public advertising of subcontracts on a government
contract.
12.3.3 Outputs from Solicitation
.1 Proposals. Proposals
(see also discussion of bids, quotations, and proposals
in Section 12.2.3.1) are seller-prepared documents that
describe the sellers ability and willingness to
provide the requested product. They are prepared in
accordance with the requirements of the relevant
procurement documents.
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12.4
Source
Selection |
Source
selection involves the receipt of bids or proposals and
the application of the evaluation criteria to select a
provider. This process is seldom straightforward:
- Price
may be the primary determinant for an
off-the-shelf item, but the lowest proposed price
may not be the lowest cost if the
seller proves unable to deliver the product in a
timely manner.
- Proposals
are often separated into technical (approach) and
commercial (price) sections with each evaluated
separately.
- Multiple
sources may be required for critical products.
The tools and techniques described below may be
used singly or in combination.
For
example, a weighting system may be used to:
- Select
a single source who will be asked to sign a
standard contract.
- Rank
order all proposals to establish a negotiating
sequence.
On major
procurement items, this process may be iterated. A short
list of qualified sellers will be selected based on a
preliminary proposal, and then a more detailed evaluation
will be conducted based on a more detailed and
comprehensive proposal.
12.4.1
Inputs to Source Selection
.1 Proposals. Proposals
are described in Section 12.3.3.1.
.2 Evaluation criteria. Evaluation
criteria are described in Section 12.2.3.2.
.3 Organizational policies. Any
and all of the organizations involved in the project may
have formal or informal policies that can affect the
evaluation of proposals.
12.4.2 Tools and Techniques for Source Selection
.1 Contract negotiation.
Contract negotiation involves clarification and
mutual agreement on the structure and requirements of the
contract prior to the signing of the contract. To the
extent possible, final contract language should reflect
all agreements reached. Subjects covered generally
include, but are not limited to, responsibilities and
authorities, applicable terms and law, technical and
business management approaches, contract financing, and
price.
For complex procurement items, contract negotiation may
be an independent process with inputs (e.g., an issues or
open items list) and outputs (e.g., memorandum of
understanding) of its own. Contract negotiation is a
special case of the general management skill called
"negotiation." Negotiation tools, techniques,
and styles are widely discussed in the general management
literature and are generally applicable to contract
negotiation.
.2 Weighting system. A
weighting system is a method for quantifying qualitative
data in order to minimize the effect of personal
prejudice on source selection. Most such systems involve
(1) assigning a numerical weight to each of the
evaluation criteria, (2) rating the prospective sellers
on each criterion, (3) multiplying the weight by the
rating, and (4) totaling the resultant products to
compute an overall score.
.3 Screening system. A screening system involves
establishing minimum requirements of performance for one
or more of the evaluation criteria. For example, a
prospective seller might be required to propose a project
manager who is a Project Management Professional (PMP)
before the remainder of their proposal would be
considered.
.4 Independent estimates. For
many procurement items, the procuring organization may
prepare its own estimates as a check on proposed pricing.
Significant differences from these estimates may be an
indication that the SOW was not adequate or that the
prospective seller either misunderstood or failed to
respond fully to the SOW. Independent estimates are often
referred to as "should cost" estimates.
12.4.3 Outputs from Source Selection
.1 Contract. A contract is
a mutually binding agreement which obligates the seller
to provide the specified product and obligates the buyer
to pay for it. A contract is a legal relationship
subject to remedy in the courts. The agreement may be
simple or complex, usually (but not always) reflecting
the simplicity or complexity of the product. It may be
called, among other names, a contract, an agreement, a
subcontract, a purchase order, or a memorandum of
understanding. Most organizations have documented
policies and procedures defining who can sign such
agreements on behalf of the organization.
Although all project documents are subject to some form
of review and approval, the legally binding nature of a
contract usually means that it will be subjected to a
more extensive approval process. In all cases, a primary
focus of the review and approval process should be to
ensure that the contract language describes a product or
service that will satisfy the need identified. In the
case of major projects undertaken by public agencies, the
review process may even include public review of the
agreement.
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12.5
Contract
Administration |
Contract
administration is the process of ensuring that the
sellers performance meets contractual requirements.
On larger projects with multiple product and service
providers, a key aspect of contract administration is
managing the interfaces among the various providers. The
legal nature of the contractual relationship makes it
imperative that the project team be acutely aware of the
legal implications of actions taken when administering
the contract.
Contract administration includes application of the
appropriate project management processes to the
contractual relationship(s) and integration of the
outputs from these processes into the overall management
of the project. This integration and coordination will
often occur at multiple levels when there are multiple
sellers and multiple products involved. The project
management processes which must be applied include:
- Project
plan execution, described in Section 4.2, to
authorize the contractors work at the
appropriate time.
- Performance
reporting, described in Section 10.3, to monitor
contractor cost, schedule, and technical
performance.
- Quality
control, described in Section 8.3, to inspect and
verify the adequacy of the contractors
product.
Change control, described in Section 4.3, to
ensure that changes are properl approved and that all
those with a need to know are aware of such changes.
Contract administration also has a financial management
component. Payment terms should be defined within the
contract and should involve a specific linkage between
progress made and compensation paid.
12.5.1 Inputs to Contract
Administration
.1 Contract. Contracts
are described in Section 12.4.3.1.
.2 Work results. The sellers work
resultswhich deliverables have been completed and
which have not, to what extent are quality standards
being met, what costs have been incurred or committed,
etc.are collected as part of project plan execution
(Section 4.2 provides more detail on project plan
execution).
.3 Change requests. Change
requests may include modifications to the terms of the
contract or to the description of the product or service
to be provided. If the sellers work is
unsatisfactory, a decision to terminate the contract
would also be handled as a change request. Contested
changes, those where the seller and the project
management team cannot agree on compensation for the
change, are variously called claims, disputes, or
appeals.
.4 Seller invoices. The
seller must submit invoices from time to time to request
payment for work performed. Invoicing requirements,
including necessary supporting documentation, are usually
defined in the contract.
12.5.2 Tools and Techniques for Contract
Administration
.1 Contract change control
system. A contract change control system defines the
process by which the contract may be modified. It
includes the paperwork, tracking systems, dispute
resolution procedures, and approval levels necessary for
authorizing changes. The contract change control system
should be integrated with the overall change control
system (Section 4.3 describes the overall change control
system).
.2 Performance reporting. Performance
reporting provides management with information about how
effectively the seller is achieving the contractual
objectives. Contract performance reporting should be
integrated with the overall project performance reporting
described in Section 10.3.
.3 Payment system. Payments to the
seller are usually handled by the accounts payable system
of the performing organization. On larger projects with
many or complex procurement requirements, the project may
develop its own system. In either case, the system must
include appropriate reviews and approvals by the project
manage-ment team.
12.5.3 Outputs from Contract Administration
.1 Correspondence. Contract
terms and conditions often require written documentation
of certain aspects of buyer/seller communications, such
as warnings of unsatis-factory performance and contract
changes or clarifications.
.2 Contract changes. Changes
(approved and unapproved) are fed back through the
appropriate project planning and project procurement
processes, and the project plan or other relevant
documentation is updated as appropriate.
.3 Payment requests. This
assumes that the project is using an external payment
system. If the project has its own internal system, the
output here would simply be "payments."
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12.6
Contract
Close-out |
Contract
close-out is similar to administrative closure (described
in Section 10.4) in that it involves both product
verification (Was all work completed correctly and
satisfactorily?) and administrative close-out (updating
of records to reflect final results and archiving of such
information for future use). The contract terms and
conditions may prescribe specific procedures for contract
close-out. Early termination of a contract is a special
case of contract close-out.
12.6.1
Inputs to Contract Close-out
.1 Contract documentation. Contract
documentation includes, but is not limited to, the
contract itself along with all supporting schedules,
requested and approved contract changes, any
seller-developed technical documentation, seller
performance reports, financial documents such as invoices
and payment records, and the results of any
contract-related inspections.
12.6.2 Tools and Techniques for Contract Close-out
.1 Procurement audits.
A procurement audit is a structured review of the
procurement process from procurement planning through
contract administration. The objective of a procurement
audit is to identify successes and failures that warrant
transfer to other procurement items on this project or to
other projects within the performing organization.
12.6.3 Outputs from Contract Close-out
.1 Contract file. A
complete set of indexed records should be prepared for
inclusion with the final project records (see Section
10.4.3.1 for a more detailed discussion of administrative
closure).
.2 Formal acceptance and closure.
The person or organization responsible for
contract administration should provide the seller with
formal written notice that the contract has been
completed. Requirements for formal acceptance and closure
are usually defined in the contract.
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