Procurement Management

Project managers need to know how to help create, read, and manage contracts. Procurement is the formal process of obtaining goods and services. Its outputs include a Procurement Management Plan, a procurement statement of work (SOW), procurement documents, change requests, additional procurement records, and lessons learned.

Procurement Management Overview

The department that handles and controls procurements is usually called the procurement department. Some organizations call it contracting, purchasing, or legal. Managing procurements takes legal knowledge, negotiation skills, and an understanding of the procurement process.

When the project needs to buy goods or services, find out what information the procurement specialists need, provide it, and work with them throughout the life of the procurement.

From Planning to Final Payment

Once the decision to buy is made, the procurement manager guides the following sequence.

1. Help create the Procurement Management Plan.
2. Create the procurement statement of work.
3. Determine the contract type.
4. Choose the procurement document: Request for Proposal (RFP), Invitation for Bid (IFB), or Request for Quotation (RFQ).
5. Send the documents to the seller.
6. The seller reviews the documents, requests any additional information, and sends the required response.
7. Negotiate with the seller and sign a contract with the selected seller.
8. Administer the procurement.
9. Monitor and control procurement administration.
10. Close the procurement with an audit and lessons learned.
11. Make the final payment.

Buyers, Sellers, and Contracts

Sellers may also be called contractors, subcontractors, designers, or vendors.

• Contracts require formality. State all project management requirements explicitly in the contract.
• Use a formal change management procedure to add work outside the existing contract.
• Contracts are legally binding, and the seller must perform as agreed.
• Contracts help mitigate project risks.
• Most governments provide a court system to resolve disputes over contracts within their jurisdiction.

The Project Manager’s Role

• Read and understand contracts.
• Make sure the contract covers the scope of work and project management requirements.
• Identify risks and plan appropriate responses to mitigate them.
• Tailor the contract to the project’s needs.
• Take part in negotiations to maintain the relationship with the seller.
• Protect the integrity of the contract.
• Verify that the required work, reporting, inspections, and legal deliverables are complete. Address the release of liens and ownership of materials.
• Manage contract changes with the procurement manager.

Centralized and Decentralized Contracting

In centralized contracting, one procurement department serves the organization, and a procurement manager handles multiple procurements across different projects. In decentralized contracting, a procurement manager works full-time on one project and reports directly to the project manager.

Four Procurement Management Processes

The procurement process aims to find a seller at a reasonable price. It takes time for sellers to review the project’s needs and respond. This type of procurement can take one to three months. Plan for that lead time and stay involved throughout the process.

1. Plan Procurements
2. Conduct Procurements
3. Administer Procurements
4. Close Procurements

Inputs to Procurement Management

• Assigned procurement manager. Assign a procurement manager when the amount of procurement is high.
• Scope baseline. The WBS, WBS dictionary, and project scope statement help the team understand why the procurement is needed.
• Risk Register. Review the risks identified so far.
• Existing procurements. Manage the interfaces between multiple sellers and procurements on the same project.
• Resources unavailable within the performing organization. Identify gaps to determine whether services need to be procured.
• Project schedule. Determine when the goods or services are needed.
• Initial cost estimates. Prepare an estimate for each piece of work to compare with seller prices.
• Cost baseline. Check that the procurement fits within baseline costs.

Plan Procurements

The buyer creates procurement documents to explain what it needs and how it will select the seller. This process also sets out the Procurement Management Plan.

1. Perform a make-or-buy analysis.
2. Establish the procurement management process.
3. Write a procurement statement of work for each procurement.
4. Select a contract type for each procurement.
5. Create the procurement documents.
6. Determine the source selection criteria.

Make-or-Buy Analysis

Consider cost and other constraints when deciding whether to do the work in-house or buy services for some or all of it. Buying can reduce project constraints. Do the work in-house when the organization has an idle plant or workforce, the work involves proprietary information or procedures, or the organization wants to retain control.

Procurement Management Plan

Once the organization decides to buy goods or services from outside, plan how to carry out and control the procurement.

Procurement Statement of Work

The procurement statement of work describes the work required for each procurement. Keep it clear, complete, and concise. Describe every activity the seller must complete, including meetings, reports, and communications.

Types of Statements of Work

• Performance. States what the final product must be able to accomplish.
• Functional. Describes the end purpose or results and leaves the procedures or approach open.
• Design. Specifies exactly what work must be done.

Design statements of work are most common in construction and equipment purchasing. Performance and functional statements of work are used for work that has never been done before, such as new work in information systems, information technology, and research and development.

Contract Types

When choosing a contract, consider whether you are buying a product or a service, how complete the statement of work is, the effort and expertise the buyer can devote to working with the seller, whether the seller will receive incentives, and the enterprise environmental factors.

The three broad contract categories are fixed price (FP), time and material (T&M), and cost reimbursable (CR).

Fixed Price (FP, Lump Sum, or Firm Fixed Price)

Use a fixed price contract for goods or services with well-defined specifications or requirements when competition is sufficient to establish a fair and reasonable price. This is the most common contract type and gives the buyer the least cost risk. The seller bears costs above the agreed price and pays close attention to the specifications in the procurement statement of work.

A fixed price contract is inappropriate when either party lacks the expertise or experience to prepare the procurement statement of work or lacks detailed accounting records.

Asking for a fixed price before the buyer fully understands the work or completes the scope puts considerable risk on the seller. The seller may add large reserves, causing the buyer to pay more. A seller can also increase profit by cutting scope and claiming that work the buyer wants is outside the contract and requires a change.

A seller that expects no profit may try to drop contracted work, cut costs, lower quality, or move its best people off the project.

• Fixed Price Incentive Fee (FPIF). Adjusts profit based on performance criteria such as completing work at lower cost, faster, or to a higher standard. The seller receives successive incentive targets, with a new target set after the first is reached.
• Fixed Price Award Fee (FPAF). The buyer pays a fixed price plus a performance-based award or bonus. The total possible award is set in advance and apportioned based on performance. This distinguishes it from the FPIF approach.
• Fixed Price Economic Price Adjustment (FPEPA). A buyer may use economic price adjustments in a multiyear fixed price contract when future conditions and the costs of required supplies or equipment are hard to predict.
• Purchase order. The lesson describes a purchase order as the simplest fixed price contract and as unilateral because only one party signs it.

Time and Material (T&M) or Unit Price

The buyer pays per hour or per item. This type of contract is frequently used for services when the level of effort cannot be determined at the time of award.

Cost Reimbursable (CR)

Use a cost reimbursable contract when the scope is uncertain and costs cannot be estimated accurately enough for a fixed price contract. The buyer reimburses the seller for allowable costs to the extent specified in the contract. Common forms include the following.

• Cost contract. The seller receives no fee or profit.
• Cost Plus Fee (CPF) or Cost Plus Percentage of Cost (CPPC). The buyer pays all costs plus a fee calculated as a percentage of costs.
• Cost Plus Fixed Fee (CPFF). The buyer pays actual costs plus a negotiated fee fixed before work begins. The fee stays the same as actual costs change.
• Cost Plus Incentive Fee (CPIF). The buyer pays actual costs plus a fee adjusted according to whether the seller meets the contract’s performance objectives. Set an initial estimated cost (target cost) and an initial fee (target fee). The seller receives a share of any savings below the target cost or shares overruns with the buyer.
• Cost Plus Award Fee (CPAF). The buyer pays all costs and a base fee plus a potential performance award. The total award is set in advance and apportioned based on performance. Like CPIF, this is a form of incentive contract. Its incentive is a potential award, with no penalty.

Incentives and Payments

Incentives are bonuses that encourage sellers to focus on areas they might otherwise give less attention to. They also discourage inefficiency and waste in the areas covered by the incentive.

The contract sets when the seller will be paid. It may provide for payment as work is completed, as costs are incurred, according to a schedule, or only after successful completion.

Pricing and Cost Terms

• Price. The amount the seller charges the buyer.
• Profit (fee). The amount the seller plans into its price and has left after paying its costs.
• Cost. The buyer’s cost includes the seller’s cost plus profit. The seller’s cost is what it pays to create, develop, or purchase the product, service, or raw materials.
• Target price. The price used to compare the final price with what was expected.
• Sharing ratio. A ratio such as 90/10 describes how the buyer and seller share cost savings or overruns.
• Ceiling price. The highest price the buyer will pay.
• Point of Total Assumption (PTA). Applies only to fixed price incentive fee contracts. Above this point, the seller bears the full loss from a cost overrun.

Procurement Documents (Bid Documents)

After selecting the contract type and writing the statement of work, the buyer prepares procurement documents that explain its needs to sellers as clearly as possible.

• Request for Proposal (RFP). Requests a detailed proposal describing how the work will be done and who will do it.
• Invitation for Bid (IFB). Usually requests a total price for all the work.
• Request for Quotation (RFQ). Requests a price per item, hour, meter, or other unit.

Include background on why the buyer wants the work done, the procedure for winning the work, response preparation guidelines and formats, the criteria the buyer will use to evaluate responses, and pricing forms. Also include the procurement statement of work and the proposed legal and business terms and conditions.

Source Selection Criteria

Include these criteria in the procurement documents to help sellers understand what the buyer needs and decide whether to bid or submit a proposal. The buyer uses them to evaluate responses.

• Number of years in business
• Financial stability
• Understanding of the need
• Price or life cycle cost
• Technical ability
• Quality of past performance
• Ability to complete the work on time
• Project management ability

Agreements and Provisions

• Nondisclosure agreement. The buyer and prospective sellers agree which information or documents they will keep confidential and control, and who will have access.
• Teaming agreement (joint venture). Two sellers who believe they have a better chance of winning the work together may sign a teaming agreement to address the arrangement’s legal and business aspects.
• Standard contract. Buyers usually create the terms and conditions, and may reuse a standard format for similar procurements. The lesson describes standard contracts used as written as needing no further legal review.
• Special provisions (special conditions). Read the standard terms and decide what to add, change, or remove so the contract meets the customer’s particular needs.

Terms and Conditions

Common categories of standard and special provisions include the following.

• Acceptance. Defines what is acceptable.
• Agent. Names each party’s authorized representative.
• Arbitration. The parties pay a private third party to decide a dispute. This is usually faster and less expensive than going to court.
• Assignment. Specifies when a party can transfer its rights or obligations to another party.
• Authority. Names people and specifies their roles during the project life cycle.
• Bonds. Specifies any payment or performance bonds that must be purchased.
• Breach or default. Occurs when a party fails to meet a contractual obligation.
• Changes. Incorporates the change management procedure.
• Confidentiality. Classifies information and determines who receives it.
• Dispute resolution. States how disputes will be settled.
• Force majeure. Covers events considered acts of God, such as a fire or an unusual electrical storm, for which neither party is considered at fault.
• Incentives. Benefits for the seller for meeting the buyer’s objectives for time, cost, quality, risk, and performance.
• Indemnification (liability). Identifies who is liable for personal injury, damage, or accidents.
• Independent contractor. States that the seller is an independent contractor and has no employee relationship with the buyer.
• Inspection. Specifies the audit process during execution.
• Intellectual property. Addresses patents, trademarks, copyrights, books, and similar items.
• Invoicing. Specifies invoices, recipients, and required supporting documents.
• Liquidated damages. Specifies estimated damages for particular defaults in advance.
• Management requirements. Covers attendance, meetings, approval of project staff, and related requirements.
• Material breach. A breach so serious that completing the contracted work may be impossible.
• Notice. Identifies where or to whom correspondence must be sent.
• Ownership. Specifies who owns tangible items, such as materials, buildings, and equipment, used or developed under the contract.
• Payments. Sets the payment schedule, any late payment charges, and reasons for withholding payment.
• Procurement statement of work. Includes the SOW in the contract when it is not a separate document.
• Reporting. Lists required reports, formats, frequency, and recipients.
• Retainage. Usually withholds 5% to 10% from each payment until all final work is complete. This helps ensure completion.
• Risk of loss. Allocates risk between parties if goods or services are lost or destroyed during contract performance.
• Site access. Sets the requirements for accessing the work site.
• Termination. Covers stopping the work before completion.
• Time is of the essence. Makes the timing of deliverables strictly binding.
• Waivers. States that rights under the contract can be waived or modified only by express agreement of the parties.
• Warranties. Promise a level of quality for delivered goods or services, usually for a specified period.
• Work for hire. States that the buyer will own work provided under the contract.

Letter of Intent and Privity

In this lesson, a letter of intent is a nonbinding letter that signals the buyer intends to hire the seller and gives the seller confidence that a contract will be signed soon. Privity is a contractual relationship.

Noncompetitive Procurement

Work may be awarded without competition when the project manager is under extreme pressure, a seller has unique qualifications, only one seller can supply the goods or services, a seller holds a patent for a needed item, or other mechanisms can ensure reasonable pricing.

• Single source. Contact a preferred seller directly without going through the competitive procurement process.
• Sole source. There is only one source.

Conduct Procurements

Send the procurement documents to sellers, answer their questions, let them prepare responses, and review the responses to select a seller.

Attracting and Preparing Sellers

• Advertising. Place advertisements in newspapers, magazines, or on the internet.
• Qualified seller list. If the buyer regularly buys the same kind of service, find and investigate potential sellers and check their credentials in advance.
• Bidder conferences. Use a conference to discover gaps in the procurement documents. It can help make sure the sellers’ prices reflect the required work and help the buyer obtain the lowest price.
• Seller proposals. A seller submits a proposal in response to an RFP, RFQ, or IFB.

Reviewing Proposals

Use the source selection criteria from Plan Procurements to assess whether sellers are able and willing to provide the requested goods or services. An evaluation committee usually reviews and compares proposals or selects a seller using one or more formal methods.

• Weighting system. Assign different weights to the source selection criteria.
• Independent estimates. Compare the seller’s proposed cost with an estimate prepared in-house or with outside help.
• Screening system. Eliminate sellers that fail to meet minimum selection requirements.
• Past performance history. Consider the buyer’s previous experience with the seller.
• Presentations. Ask sellers to present their proposals when that helps select the most appropriate seller.

Negotiations

The objective is to obtain a fair and reasonable price and build a good relationship with the seller. The following tactics may come up during negotiations.

• Attacks. “If your organization cannot provide the right details for the bid, perhaps it should not have responded to our RFP.”
• Personal insults. “If you cannot perform even after 10 months in the organization, you should leave.”
• Good guy/bad guy. One person is helpful to the other side and the other person is difficult to deal with.
• Deadline. “We need this task completed by 4:30 p.m. today.”
• Lying. Falsehoods may be concealed or obvious.
• Limited authority. A person claims they can make only certain decisions. The claim may be genuine or false.
• Missing man. Someone acts as though the decision maker is unavailable and presents the current options as preferable.
• Fair and reasonable. Take an impartial and practical approach.
• Delay. Defer a point, discussion, or decision to a later date.
• Extreme demands. Make demands that are inappropriate for the contract.
• Withdrawal. Show less interest by withdrawing emotionally or physically.
• Fait accompli. Present a matter as already decided.

The main items to negotiate are scope, schedule, and price. Also consider responsibilities, authority, applicable law, project management processes, and payment schedules.

Contract

The contract is the entire agreement between the parties. It defines roles and responsibilities, makes the agreement legally binding, and helps mitigate risk. It also includes such items as payment terms, reporting requirements, marketing literature, the proposal, and the procurement statement of work. Make contract changes formally in writing.

A legal contract requires an offer, acceptance of that offer, consideration, legal capacity, and a legal purpose.

Administer Procurements

Manage the relationship between buyer and seller and make sure both parties perform as required by the contract.

• Review invoices and authorize payments to the seller.
• Perform integrated change control and manage changes.
• Document every record.
• Interpret the contract, understand its legal implications, and resolve disputes.
• Review and report procurement performance.
• Monitor cost, schedule, and technical performance against the contract, and control quality.

Conflict and Contract Change Control

If conflict arises, the procurement manager or contract administrator has authority to change the contract. The project manager can request a change, which requires approval from the procurement manager.

The contract change control system includes the procedures, forms, dispute resolution processes, and tracking systems specified in the contract.

Procurement Performance Reviews

The buyer’s project manager analyzes all available data to verify that the seller is performing as required.

Claims Administration

A claim can arise when the seller asserts that the buyer’s actions caused harm and requests compensation. Use negotiation or the dispute resolution process to settle claims.

Records Management System

Keep complete records in case an action or event during the procurement is questioned after the work is complete. A records management system may include extensive indexing, archiving, and retrieval systems.

Contract Interpretation

Interpreting a contract correctly is important and may require help from a lawyer.

Termination

A contract may be terminated for cause or for convenience. Include provisions for termination in the contract.

Close Procurements

Close Procurements belongs to the Closing Process Group. Close every procurement when the contract is completed or when work ends early, regardless of how it stops or why it is terminated.

• Product verification. Verify that all work was completed correctly and satisfactorily.
• Negotiated settlement. Settle outstanding claims, invoices, and other issues.
• Financial closure. Make final payments and complete cost records.
• Procurement audit. Conduct a structured review of the procurement process itself.
• Records updates. Make sure project records are complete and accessible in the records management system.
• Final contract performance reporting. Prepare the final performance report.
• Lessons learned. Document lessons from everyone involved, including the seller.
• Procurement file. Keep the contract, changes, seller submittals, financial information, inspection results, and lessons learned.

Formal Acceptance and Closure

The procurement is closed once closure activities are complete and the seller receives the buyer’s formal sign-off accepting the products of the procurement.