Atoha PMPPRO S10 - Procurement

PROCUREMENT
Session 10
12.1 Plan Procurement Management [P] — The process of
documenting project procurement decisions, specifying the approach,
and identifying potential sellers.
12.2 Conduct Procurements [E] — The process of obtaining seller

responses, selecting a seller, and awarding a contract.
12.3 Control Procurements [M&C] — The process of managing
Chapter 12
procurement relationships, monitoring contract performance, making
changes and corrections as appropriate, and closing out contracts.
PROJECT PROCUREMENT MANAGEMENT

includes the processes necessary to purchase or acquire products,
services, or results needed from outside the project team.
2
PROJECT MANAGEMENT PROCESS GROUPS
Project Management Process Groups
Knowledge Areas
Initiating Planning Executing Monitoring and Controlling Closing
4. Integration 4.1 Develop Project 4.3 Direct and Manage Project Work 4.5 Monitor and Control Project Work 4.7 Close Project
4.2 Develop Project Management Plan
Management Charter 4.4 Manage Project Knowledge 4.6 Perform Integrated Change Control or Phase
5.1 Plan Scope Management
5. Scope Management 5.2 Collect Requirements 5.5 Validate Scope
5.3 Define Scope 5.6 Control Scope
5.4 Create WBS
6.1 Plan Schedule Management
6.2 Define Activities
6. Schedule Management
6.3 Sequence Activities 6.6 Control Schedule
6.4 Estimate Activity Durations
6.5 Develop Schedule
7.1 Plan Cost Management
7. Cost Management 7.2 Estimate Costs 7.4 Control Costs
7.3 Determine Budget
8. Quality Management 8.1 Plan Quality Management 8.2 Manage Quality 8.3 Control Quality
9.3 Acquire Resources
9.1 Plan Resource Management
9. Resource Management 9.4 Develop Team 9.6 Control Resources
9.2 Estimate Activity Resources
9.5 Manage Team
10. Communications
10.1 Plan Communications Management 10.2 Manage Communications 10.3 Monitor Communications
Management
11.1 Plan Risk Management
11.2 Identify Risks
11. Risk Management 11.3 Perform Qualitative Risk Analysis 11.6 Implement Risk Responses 11.7 Monitor Risks
11.4 Perform Quantitative Risk Analysis
11.5 Plan Risk Responses
12. Procurement
12.1 Plan Procurement Management 12.2 Conduct Procurements 12.3 Control Procurements
Management
13. Stakeholder
13.1 Identify Stakeholders 13.2 Plan Stakeholder Engagement 13.3 Manage Stakeholder Engagement 13.4 Monitor Stakeholder Engagement 3
Management
PROJECT PROCUREMENT
MANAGEMENT
includes the processes necessary to purchase or acquire
products, services, or results needed from outside the
project team; and the management and control
processes required to develop and administer
agreements such as contracts, purchase orders,
memoranda of agreements (MOAs), or internal service
level agreements (SLAs). 4
KEY CONCEPTS FOR PROJECT PROCUREMENT MANAGEMENT
Project Procurement Management includes the management and control processes required to develop and administer agreements such as contracts, purchase orders, memoranda
of agreements (MOAs), or internal service level agreements (SLAs). The personnel authorized to procure the goods and/or services required for the project may be members of the
project team, management, or part of the organization’s purchasing department if applicable.
There can be significant legal obligations and penalties tied to the procurement process.
The project manager does not have to be a trained expert in procurement management laws and regulations but should be familiar enough with the procurement process to make
intelligent decisions regarding contracts and contractual relationships.
The project manager is typically not authorized to sign legal agreements binding the organization; this is reserved for those who have the authority to do so.
Agreements can be as simple as the purchase of a defined quantity of labor hours at a specified labor rate, or they can be as complex as
multiyear international construction contracts.
Contract should clearly state the deliverables & results expected, including any knowledge transfer from the seller to the buyer
Anything NOT in the contract CANNOT be legally enforced
When working internationally, project managers should keep in mind the effect that culture and local law have upon contracts and
their enforceability, NO MATTER how clearly a contract is written.
Purchasing contract includes terms & conditions & may incorporate other buyer specifics as to what the seller is to perform or provide.
It is the project management team’s responsibility to make certain that all procurements meet the specific needs of the project
while working with the procurement office to ensure organizational procurement policies are followed.
Depending on the application area, an agreement can be a contract, an SLA, an understanding, an MOA, or a purchase order.
Procurement Department Most organizations document policies and procedures specifically defining procurement rules and specifying who has authority to
sign and administer such agreements on behalf of the organization
= purchasing, contracting, procurement, acquisitions
PROJECT PROCUREMENT MANAGEMENT 5

Managing procurements requires legal knowledge, negotiation skills, and an understanding of the procurement process. If there is not a procurement department in the
organization, the responsibilities of managing procurements are assumed by the project manager.
When a decision has been made to procure goods or services from an outside source, the project manager will facilitate the creation of a plan for the overall procurement process
(procurement management plan), a plan for how each contract will be managed (procurement strategy), and a description of the work to be done by each seller (procurement
statement of work - SOW).
The procurement department may review the scope of the work for completeness (always a good idea), and the project manager might add scope related to project management
activities (such as specific reporting requirements or required attendance at meetings), resulting in the finalized procurement SOW. Procurement SOW should be combined with the
contract terms to make up the finalized bid documents (RFP - request for proposal, RFI - request for information, or RFQ - request for quotation) that are sent to prospective sellers.
All of these make up common procurement documents.
The type of bid document used is influenced by the contract type selected and the content within the procurement SOW.
At this point, the prospective sellers take action, and the buyer waits for their responses. The prospective sellers review the bid documents and determine whether they are
interested in submitting a response or proposal to try to win the work. They may have the opportunity to participate in a bidder conference or a pre-proposal meeting. As part of
the procurement process, prospective sellers may also have the opportunity to submit questions; buyer responses are then shared with all prospective sellers. As a best practice, all
questions should be in writing and should relate to the bid documents. Sellers need to submit these questions to the buyer before the submission deadline for bids or proposals.
The prospective sellers carefully review the buyer's SOW and all the terms of the proposed contract contained in the bid documents, including the selection criteria. During this
review, the sellers develop a full understanding of what the buyer wants, and assess the risks involved in the project. If the scope is incomplete or unclear, if a prospective seller is
aware of the buyer having a history of poorly managing projects, or if any other risks are identified, a prospective seller may decide not to respond, or may adjust the price and/or
schedule submitted to the buyer to account for these risks. When a fixed-price contract is required, sellers should include these risks in the total detailed cost estimate, as well as
other costs, such as overhead, and then add profit to come up with a bid or quote. In any case, the risk of the project is formally or informally assessed before sending the bid or
proposal to the buyer.
The amount of time that a prospective seller may need to respond to the bid documents can be substantial (sometimes taking several months), and the buyers project manager
must plan this time into the project schedule.

Organizations may use several different methods to select a seller. These methods may be dictated by law or internal policies. If a buyer receives competing submissions from many
prospective sellers, the buyer might ask for presentations from all the candidates. Another option is to shorten the list of prospective sellers first and then request presentations. If
presentations will not add value for the buyer, the buyer may just move into negotiations with the preferred seller or sellers. All terms and conditions in the proposed contract, the
entire procurement statement of work (SOW), and any other components of the bid documents can be negotiated. Negotiations can take a lot of time, and they require the
involvement of the project manager.
At the end of negotiations, one or more sellers are selected, and a contract is signed. The procurement management plan and procurement strategy created earlier may also be
updated.
Once the contract is signed, the procurement must be managed and controlled. This involves making sure all the requirements of the contract are met. It also means keeping
control of the contract and making only approved changes. As the procurement work is being completed, questions may arise, such as, “What is and what is not in the contract?” or
“What does a particular section of the contract really mean?” The procurement department will help the project manager resolve these issues.
When the procurement work is complete, the procurement will be closed. The required actions to close each procurement need to be done soon after the final deliverables of the
procurement are accepted. This can happen within any phase of the project life cycle, as the contracted work is completed. For example, in a project to renovate a house, a seller
may be contracted to install new plumbing, another may be contracted to install new landscaping, and still another may be contracted to paint the house. Activities to close out a
procurement include an analysis of the procurement process to determine lessons learned (formally called a procurement audit). Final reports are submitted, lessons learned are
documented, and final payment is made.
If no point of view is mentioned, assume you are on the buyer's side of the project.
Unless an exam question indicates otherwise, assume the seller is providing all of the work external to the buyer's team rather than supplying resources to supplement
the team. [in the exam]

i The buyer-seller relationship may exist at many levels on any one project, and between organizations internal to and external to the acquiring organization.
The seller can be viewed during the contract life cycle: first as a bidder => then as the selected source => then as the contracted supplier or vendor.
Seller may be identified as a contractor, vendor, service provider, or supplier.
Buyer may be the owner of the final product, a subcontractor, the acquiring organization, a service requestor, or the
purchaser.
Decentralized purchasing For smaller organizations or startup companies and those without a purchasing, contracting, or procurement
department, the project manager may assume the purchasing authority role to negotiate and sign contracts directly
Centralized purchasing For more mature organizations, the actual procurement and contracting functions will be carried out by a separate
department with the specific role to purchase, negotiate, and sign contracts
There is one procurement department, and the procurement manager reports organizationally to the head of the
procurement department, not to the project manager. The procurement manager may handle procurements on
In the exam: Assume a centralized contracting
many projects. When working with a procurement manager, you should know what authority the procurement
environment unless otherwise stated. manager has and how the procurement department is organized. In a centralized contracting environment, the
project manager contacts the department when they need help or to ask questions.
Advantages of Centralized Contracting Disadvantages of Centralized Contracting

- Because they are part of a department that focuses on procurements, centralized - One procurement manager may work on many projects, so this individual must divide
contracting can result in procurement managers with higher levels of expertise. their attention among all of those projects. The procurement manager will likely have
- A procurement department will provide its employees with continuous improvement, less time to spend working on your project and under standing its unique needs, and is
training, and shared lessons learned. more likely to forget important details about the project.
- Standardized company practices allow efficiency and help improve understanding. - It maybe more difficult for the project manager to obtain contracting help when
- Individuals in this department have a clearly defined career path in procurement. needed.

Logistics and supply chain For long-lead items, both the manufacture of the items and their transportation to the project site become schedule-drivers. In the IT field,
management a long-lead item may require ordering 2 to 3 months in advance. In complex construction projects, long-lead items may require ordering 1
to 2 years in advance or longer.
For these projects, long-lead items may be procured in advance of other procurement contracts to meet the planned project completion
date. It is possible to begin contracting for these long-lead materials, supplies, or equipment before the final design of the end product
itself is completed based on the known requirements identified in the top-level design.
Trial engagements Not every seller is well suited for an organization’s environment.
Therefore, some projects will engage several candidate sellers for initial deliverables and work products on a paid basis before making the
full commitment to a larger portion of the project scope.
This accelerates momentum by allowing the buyer to evaluate potential partners, while simultaneously making progress on project work.
Master services agreement Larger projects may use an adaptive approach for some deliverables and a more stable approach for other parts. In these cases, a
(MSA) governing agreement such as a master services agreement (MSA) may be used for the overall engagement, with the adaptive work being
placed in an appendix or supplement. This allows changes to occur on the adaptive scope WITHOUT impacting the overall contract.
When answering situational questions involving contracts, keep in mind the following general rules, especially if the answer to the question is not immediately apparent:
Contracts require formality. What this means is that any correspondence, clarification, and notifications related to the contracts should be formal written communication,
which can be followed up with verbal communication, if necessary.
If issues develop that require arbitration, mediation, or litigation, the formal written communications will be more enforceable and supportable than verbal communications.
All product and project management requirements for the procurement work should be specifically stated in the contract.
If it is not in the contract, it can only be required to be done if a formal change order to the contract is issued.
If it is in the contract, it must be done or a formal change order to remove it must be approved by both parties.
Changes to contracts must be submitted and approved IN WRITING.
Contracts are legally binding; the seller must perform as agreed in the contract, or face the consequences for breach of contract.
Contracts should help DECREASE/DIMINISH PROJECT RISK.
Most governments back all contracts that fall within their jurisdiction by providing a court system for dispute resolution.

Project Manager’s Role in Procurement
Know the procurement process so you understand what will happen when and can make the necessary plans.
Make sure the contract includes all the scope of work and all the project management requirements, such as attendance at meetings, reports, actions,
and communications deemed necessary to minimize problems and miscommunications with the seller(s).
Identify risks, and incorporate mitigation and allocation of risks into the contract to decrease project risk.
While it is being written, help tailor the contract to the unique needs of the project.
Estimate the time and cost of each procurement, including the time required to complete the procurement process, and include these estimates in the
project schedule and budget.
Be involved during contract negotiations to protect the relationship with the seller. A contentious negotiation process — often created when the seller
feels that they have had to give up too much profit or agree to terms and conditions they do not like in order to win the contract — can create a win-lose
relationship with the procurement manager and the seller, which can negatively affect the project. The project manager will have to manage the sellers
delivery to the contract, and bad feelings on the part of the seller can create extra challenges. By staying involved in the negotiations, the project manager
can promote the best interests of the project.
Protect the integrity of the project and the ability to get the work done by making sure the procurement process goes as smoothly as possible.
Understand what contract terms and conditions mean so you can read and understand contracts. This will help you plan and manage the monitoring and
controlling of procurements.
Help make sure all the work in the contract is done, such as reporting, inspections, and legal deliverables, including the release of liens and ownership of
materials, not just the technical scope.
Do not ask for something that is not in the contract without making a corresponding change to the contract.
Work with the procurement department to manage necessary changes to the contract.
Project managers should be assigned on both the buyer’s and seller’s sides before a contract is signed!

12.1 Plan Procurement Management
the process of documenting project procurement decisions, specifying the approach and
identifying potential sellers
11
12.1 PLAN PROCUREMENT MANAGEMENT
the process of documenting project procurement decisions, specifying
?
the approach and identifying potential sellers.
1/ determines whether to acquire goods and services from outside the

project, if so, what to acquire as well as how and when to acquire it.
Goods and services may be procured from other parts of the
performing organization or from external sources.
This process is performed once or at predefined points in the project.

Procurement management
Project charter Expert judgment
plan
Business documents Data gathering Procurement strategy
Project management plan Data analysis Bid documents
Project documents Source selection analysis Procurement SoW
EEFs Meetings Source selection criteria
Organizational process assets Make-or-buy decisions
Independent cost estimates
Change requests
Project documents updates
OPAs updates
INPUTS TOOLS & TECHNIQUES OUTPUTS
12.1 PLAN PROCUREMENT MANAGEMENT 12

12.1 PLAN PROCUREMENT MANAGEMENT (Cont.)
Procurement Defining roles and responsibilities related to procurement should be done early in the Plan Procurement Management
i process. The project manager should ensure that the project team is staffed with procurement expertise at the level required
for the project. Participants in the procurement process may include personnel from the purchasing or procurement
department as well as personnel from the buying organization’s legal department. These responsibilities should be
documented in the procurement management plan.
Typical steps might be:

1. Prepare the procurement statement of work (SOW) or terms of reference (TOR).
2. Prepare a high-level cost estimate to determine the budget.
3. Advertise the opportunity.
4. Identify a short list of qualified sellers.
5. Prepare and issue bid documents.
6. Prepare and submit proposals by the seller.
7. Conduct a technical evaluation of the proposals including quality.
8. Perform a cost evaluation of the proposals.
9. Prepare the final combined quality and cost evaluation to select the winning proposal.
10. Finalize negotiations and sign contract between the buyer and the seller.
The requirements of the project schedule can significantly influence the strategy during the Plan Procurement Management
process. Decisions made in developing the procurement management plan can also influence the project schedule and are
integrated with the Develop Schedule process, the Estimate Activity Resources process, and make-or-buy decisions.

12.1 PLAN PROCUREMENT MANAGEMENT – INPUTS
1
Project charter contains the objectives, project description, summary milestones, and the preapproved financial resources.
2
Business documents Business case The procurement strategy and business case need to be aligned to ensure the
business case remains valid
Benefits management plan describes when specific project benefits are expected to be available, which will
drive procurement dates and contract language
3
Project management plan Scope management plan describes how the scope of work by the contractors will be managed through
the execution phase of the project
Quality management plan contains the applicable industry standards and codes the project is required to
follow, which is used in bidding documents such as the RFP and will eventually
be referenced in the contract and may be used in supplier prequalification or as
part of the selection criteria.
Resource management plan has information on which resources will be purchased or leased, along with any
assumptions or constraints that would influence the procurement
Scope baseline contains the scope statement, WBS, and WBS dictionary. Early in the project,
the project scope may still be evolving. The elements of the scope that are
known are used to develop the statement of work (SOW) and the terms of
reference (TOR).

4
Project documents Milestone list This list of major milestones show when the sellers are required to
deliver their results.
Project team assignments contain information on the skills and abilities of the project team and their
availability to support the procurement activities.
If the project team does not have the skills to perform the procurement
activities for which they are responsible, additional resources will need to be
acquired or training will need to be provided, or both.
Requirements documentation Requirements documentation may include:

• Technical requirements that the seller is required to satisfy, and
The FIRST PROCESS of PLANNING PG • Nontechnical requirements which are requirements with contractual and
in any KA, we need at least 4 inputs: legal implications that may include health, safety, security, performance,
• Project charter environmental, insurance, intellectual property rights, equal employment
opportunity, licenses, permits, and other.
• Project management plan
• EEF Requirements traceability Links product requirements from their origin to the deliverables that satisfy
• OPA matrix them.
Resource requirements contain information on specific needs such as team and physical resources that
may need to be acquired
Risk register provides the list of risks, along with the results of risk analysis and risk response
planning. Some risks are transferred via a procurement agreement.
5 Stakeholder register provides details on the project participants and their interests in the project,
Enterprise environmental factors including regulatory agencies, contracting personnel,
and legal personnel.
6
Organizational process assets

6
Organizational process assets The various types of contractual agreements used by the organization also influence decisions for the Plan
Procurement Management process.
Preapproved seller lists (*) Lists of sellers that have been properly vetted can streamline the steps needed
to advertise the opportunity and shorten the timeline for the seller selection
process
Formal procurement policies, Most organizations have formal procurement policies and buying organizations.
procedures, and guidelines When such procurement support is not available, the project team should
supply both the resources and the expertise to perform such procurement
activities.
Contract types (*) All legal contractual relationships generally fall into one of two broad
families: either fixed-price or cost-reimbursable. Also, there is a third hybrid
type commonly used called the time and materials contract.

Contract types Definitions The risk Use for
is a type of contractual agreement in which the buyer agrees to pay for the a fixed agreed The risk is higher on the seller as For well-defined projects
total price for a defined product, service, or result to be provided. the seller needs to absorb any
These contracts should be used when the requirements are well defined and no significant omissions, reworks, inflation and Fixed Price contracts are
Fixed Price changes to the scope are expected other external risks. suitable where the project is
Incentives may be offered according to mutual agreement The seller is most concerned with simple or the scope is very well
It is one of the most common types of contract, though it’s less likely to be used in the procurement statement of defined and changes are not
something like information technology than in construction work (SOW) in a fixed-price expected.
contract. This is going to help
The most commonly used contract type is the FFP. It is favored by most buying them accurately estimate time
Firm Fixed Price (FFP) organizations because the price for goods is set at the outset and not subject to change and cost for the work involved, Project Manager would make
unless the scope of work changes. and allow them to determine a use of Fixed Price contracts
when controlling costs is top
This fixed-price arrangement gives the buyer and seller some flexibility in that it allows for price that includes a fair and
reasonable profit. priority.
deviation from performance, with financial incentives tied to achieving agreed-upon
Fixed Price Incentive The buyer has the least cost risk
metrics. Typically, such financial incentives are related to cost, schedule, or technical
Fee (FPIF) in this type of contract because
performance of the seller. Under FPIF contracts, a price ceiling is set, and all costs above
the price ceiling are the responsibility of the seller. the scope is well-defined. (Note,
however, that when fixed-price
This type is used whenever the seller’s performance period spans a considerable period of contracts are entered into and
years, or if the payments are made in a different currency. It is a fixed-price contract, but the statement ofwork is not
Fixed Price with with a special provision allowing for predefined final adjustments to the contract price due
Economic Price sufficiently detailed, claims and
to changed conditions, such as inflation changes or cost increases (or decreases) for disputes over what is in and out
Adjustment (FPEPA) specific commodities. of the contract create higher risk
This contract type offers more protection for cost increase on the seller side. of cost overruns or delay
A purchase order is the simplest type of fixed-price contract. This type of contract is
normally unilateral (signed by one party) instead of bilateral (signed by both parties).
Purchase Order
Purchase orders become contracts when the buyer accepts the terms. The seller then
performs or delivers according to those terms (for example, equipment or products).

Advantages of Fixed-Price Contract Disadvantages of Fixed-Price Contract
- This type of contract requires less work for the buyer to manage. - If the seller underprices the work, they may try to make up profits by
- The seller has a strong incentive to control costs. charging more than is necessary on change orders.
- Companies usually have experience with this type of contract. - The seller may try to not complete some of the procurement statement
of work (SOW) if they begin to lose money.
- The buyer knows the total price before the work begins.
- This contract type requires more work for the buyer to write the
procurement SOW.
- A fixed-price contract can be more expensive than a cost-reimbursable
contract if the procurement statement of work is incomplete. In addition,
the seller needs to add to the price of a fixed-price contract to account
for the increased risk.

involves payments (cost reimbursements) to the seller for all legitimate actual costs The risk is higher on the buyer for complex/not well-defined
incurred for completed work, plus a fee representing seller profit. This type should be projects
Cost Reimbursable used if the scope of work is expected to change significantly during the execution of the as the buyer needs to bear the
(a.k.a. Cost Plus) contract. risk of over budget. Cost Reimbursable contracts are
Buyer’s fee = Seller’s profit (If the scope increases the cost suitable where the project is
Price = Cost + Fee would increase and the buyer complex and the scope is not
needs to bear all) very well defined and changes
Cost Plus Fixed Fee the buyer would need to pay the actual cost of the work plus a fixed fee calculated based
are expected.
(CPFF) on the initial estimation
the buyer would need to pay the actual cost of the work plus an incentive fee if the The buyer has the most cost risk
because the total costs are Project Manager would make
performance of seller meets mutually agreed pre-defined performance targets (objective use of Cost Reimbursable
evaluation) unknown. The seller provides an
Cost Plus Incentive estimate to the buyer; the buyer contracts when completing the
In CPIF contracts, if the final costs are less or greater than the original estimated costs, tasks on schedule is top priority.
Fee (CPIF) can use the estimate for planning
then both the buyer and seller share costs from the departures based upon a and cost management purposes,
prenegotiated cost-sharing formula, for example, an 80/20 (Buyer/Seller ratio) split
but it is not binding. What is
over/under target costs based on the actual performance of the seller. binding is the buyer’s
The buyer would need to pay the actual cost of the work plus an award based on responsibility to compensate the
subjective evaluation on the seller’s performance by the buyer. seller for legitimate costs for
Cost Plus Award Fee work and materials as described
The determination of fee is based solely on the subjective determination of seller
(CPAF) in the contract. R&D or IT
performance by the buyer and is generally not subject to appeals.
projects in which the scope is
The incentive is a potential award, and there is no possibility of a penalty.
unknown are typical examples of
Cost Plus Percentage the buyer would need to pay the actual cost of the work plus a fee calculated based on a cost- reimbursable contracts.
of Costs (CPPC) percentage of actual cost => bad for buyer
no profit would be earned by the seller and this type of contract is seen as a kind of
Cost Contract
volunteering service for NPO

Advantages of Cost-Reimbursable Contract Disadvantages of Cost-Reimbursable Contract
- This contract type allows for a simpler procurement SOW. - This contract type requires auditing the seller's invoices.
- It usually requires less work to define the scope for a cost-reimbursable - This contract type requires more work for the buyer to manage.
contract than for a fixed-price contract. - The seller has only a moderate incentive to control costs.
- A cost-reimbursable contract is generally less costly than a fixed-price - The total price is unknown.
contract because the seller does not have to add as much for risk.

is a type that is somewhere between Cost Reimbursable and Fixed Price. Buyer has a medium amount of usually for small projects or
It is a contractual agreement that specifies the price based on a per-hour or per-item basis cost risk as compared to cost- there is trust between the two
only WITHOUT fixing the total amount. reimbursable and fixed-price parties
A ceiling price may be put in the contract contracts.
Time and Material contracts are
suitable where the project is
small or the scope is expected to
be highly variable at the time of
Time and Material signing the contract.
(a.k.a. Unit Price)
Project Manager would make use
of Time and Material contracts
when the project is not well
defined at the beginning of the
project in order to keep the cost
to be under control (e.g. by
limiting the project scope based
on funding availability).

Advantages of Time and Material Contract Disadvantages of Time and Material Contract
- This type of contract can be created quickly, because the SOW may be - There is profit for the seller in every hour or unit billed.
less detailed. - The seller has no incentive to control costs.
- The contract duration is brief. - This contract type is appropriate only for work involving a small level of
- This is a good choice when you are hiring “bodies,” or people to augment effort.
your staff. - This contract type requires a great deal of day-to-day oversight from the
buyer.

Risk and Contract Type
Question. Who has the risk in a cost-reimbursable contract — the buyer or seller?
Answer. The buyer. If the costs increase, the buyer pays the added costs.
Question. Who has the cost risk in a fixed-price contract — the buyer or seller?
Answer. The seller. If costs increase, the seller pays the costs and makes less profit.

CONTRACTS: THEIR INFlUENCE ON PROJECTS
The final decision on whether to trade off cost, time, or

performance can vary depending on the type of contract.
There are seven common types of contracts and the order
in which trade-offs will be made:
=> the most important factor
The firm-fixed-price (FFP) contract: Time, cost, and performance are all specified within the contract, and are the contractor’s responsibility. Because all
constraints are equally important with respect to this type of contract, the sequence of resources sacrificed is the same as for the project-driven organization.
The fixed-price-incentive-fee (FPIF) contract: cost is measured to determine the incentive fee, and thus is the last constraint to be considered for trade-off.
Because performance is usually more important than schedule for project completion, time is considered the first constraint for trade-off, and performance is
the second.
The cost-plus-incentive-fee (CPIF) contract: The costs are reimbursed and measured for determination of the incentive fee. Thus cost is the last constraint to
be considered for trade-off. As with the FPIF contract, performance is usually more important than schedule for project completion, and so the sequence is the
same as for the FPIF contract.
The cost-plus-award-fee (CPAF) contract: The costs are reimbursed to the contractor, but the award fee is based on performance by the contractor. Thus cost
would be the first constraint to be considered for trade-off, and performance would be the last constraint to be considered.
The cost-plus-fixed-fee (CPFF) contract: costs are reimbursed to the contractor. Thus, cost would be the first constraint to be considered for trade-off. Although
there are no incentives for efficiency in time or performance, there may be penalties for bad performance. Thus time is the second constraint to be considered
for trade-off, and performance is the third.

Other Term
Incentives Sellers are usually focused on the profits to be made on a project.
Buyer may be focused on total cost, performance, schedule, or a combination of these concerns. The buyer will provide an additional fee if the
a bonus for the seller
seller meets some cost, performance, or schedule objectives.
are designed to motivate the seller’s efforts and to discourage seller inefficiency and waste in the areas in which the incentives are designated.
Payments may be made as work is completed and accepted, as costs are incurred,
according to a payment schedule, or only after the successful completion of all the work required in the contract.
The project manager:

• needs to know when payments must be made in order to plan for the time required to review and make these payments.
• ensure the funds will be available to make the payments as scheduled
Price the amount the seller charges the buyer. [Price = Cost + Fee]
Profit (fee) In a fixed-price or time and materials contract: a seller builds a profit margin into the amount they charge the buyer
In cost-plus contracts: the “plus” represents the profit, and that amount is typically negotiated by the buyer and seller.
Cost A seller’s costs include an item costs for the seller to create, develop, or purchase.
A buyer’s costs include a seller’s costs and profits
Target price This term is often used to compare the end result (final price) with what was expected (the target price).
Target price is a measure of success.
[Target Price = Target Cost + Target Fee] [from buyer’s point of view]

Other Term
Sharing ratio describes how the cost savings or cost overrun will be shared [Sharing ratio = buyer/seller]
Ceiling price the highest price the buyer will pay; setting a ceiling price is a way for the buyer to encourage the seller to control costs.
is a condition of the contract that must be agreed to by both parties before signing.
Point of total assumption (PTA) This only relates to fixed price incentive fee contracts (FPIF), and it refers to the amount above which the seller bears all the loss of a cost overrun
!"#$#%& '(#)" – +,(&"- '(#)"
PTA = ./0"(’2 23,(" (,-#4
+ Target cost
More at: https://www.atoha.com/blogs/kien-thuc/pta-point-of-total-assumption
In a fixed price incentive fee contract, the target cost is estimated at $150,000, the target fee is $30,000, and the
ceiling price is $200,000; sharing ratio is 60 percent to the buyer and 40 percent to the seller. The project is over,
and the buyer has agreed that the costs were, in fact, $210,000. Calculate the final fee, the final price, and PTA?
Answer:
Target cost = 150,000; Target fee = 30,000 (it’s also seller’s target profit); Buyer/Seller sharing ratio = 6/4
Target price = Target cost + Target fee = 150,000+30,000 = 180,000
Actual cost = 210,000
Cost variance = Target cost - Actual cost = 150,000-210,000 = -60,000 [Cost overrun]
Seller get less because of cost overrun. Sharing the cost overrun from seller’s side = (-60,000)*0.4=-24,000
Seller’s profit = 30,000-24,000 = 6,000 (semi-final fee from buyer’s side)
Semi-final price = Final cost (actual cost) + semi-final fee = 210,000+6,000 = 216,000 > 200,000 ceiling price
Þ Final price = ceiling price = 200,000
Þ Final fee = Final price - Final cost = 200,000-210,000 = -10,000 (it’s also seller’s final profit)
Þ PTA = (Ceiling Price – Target Price) / Buyer’s Share Ratio + Target Cost
= (200,000-180,000)/0.6 + 150,000 = 183,333

12.1 PLAN PROCUREMENT MANAGEMENT – TOOLS & TECHNIQUES
1
Expert judgment
2
Data gathering market research includes examination of industry and specific seller capabilities.
The team may also refine specific procurement objectives to leverage maturing
technologies while balancing risks associated with the breadth of sellers who
can provide the desired materials or services.
3
Data analysis make-or-buy analysis is used to determine whether work or deliverables
(1) can best be accomplished by the project team or
(2) should be purchased from outside sources
may use payback period, return on investment (ROI), internal rate of return
(IRR), discounted cash flow, net present value (NPV), benefit/ cost analysis
(BCA), or other techniques in order to decide whether to include something as
part of the project or purchase it externally
4
Source selection analysis It is necessary to review the prioritization of the competing demands for the project before deciding on the
selection method.
Since competitive selection methods may require sellers to invest a large amount of time and resources
upfront, it is a good practice to include the evaluation method in the procurement documents so bidders know how
they will be evaluated
Least cost Qualifications only Quality-based/highest technical proposal score
Quality and cost-based Sole source Fixed budget
5
Meetings Research alone may not provide specific information to formulate a procurement strategy without additional
information interchange meetings with potential bidders

12.1 PLAN PROCUREMENT MANAGEMENT – OUTPUTS
1
Procurement management plan A procurement management plan can be formal or informal, can be highly detailed or broadly framed, and is based
upon the needs of each project
A component of the project or program management
plan that describes how a project team will acquire The procurement management plan can include guidance for:
goods and services from outside of the performing • How procurement will be coordinated with other project aspects, such as project schedule development and
organization. control processes;
• Timetable of key procurement activities;
• Procurement metrics to be used to manage contracts;
• Stakeholder roles and responsibilities related to procurement, including authority and constraints of the project
team when the performing organization has a procurement department;
• Constraints and assumptions that could affect planned procurements;
• The legal jurisdiction and the currency in which payments will be made;
• Determination of whether independent estimates will be used and whether they are needed as evaluation
criteria;
• Risk management issues including identifying requirements for performance bonds or insurance contracts to
mitigate some forms of project risk; and
• Prequalified sellers, if any, to be used

2 is to determine the project delivery method, the type of legally binding agreement(s), and how the procurement will
Procurement strategy
advance through the procurement phases
Delivery methods. Delivery methods are different for professional services versus construction projects.
• For professional services, delivery methods include: buyer/services provider with no subcontracting, buyer/
services provider with subcontracting allowed, joint venture between buyer and services provider, and buyer/
services provider acts as the representative.
• For industrial or commercial construction, project delivery methods include but are not limited to: turnkey, design
build (DB), design bid build (DBB), design build operate (DBO), build own operate transfer (BOOT), and others.
Contract payment types. Contract payment types are separate from the project delivery methods and are
coordinated with the buying organization’s internal financial systems. They include but are not limited to these
contract types plus variations: lump sum, firm fixed price, cost plus award fees, cost plus incentive fees, time and
materials, target cost, and others.
Procurement phases. The procurement strategy can also include information on procurement phases. Information
may include:
• Sequencing or phasing of the procurement, a description of each phase and the specific objectives of each phase;
• Procurement performance indicators and milestones to be used in monitoring;
• Criteria for moving from phase to phase;
• Monitoring and evaluation plan for tracking progress; and
• Process for knowledge transfer for use in subsequent phases.

3 are used to solicit proposals from prospective sellers
Bid documents
• Terms such as bid, tender, or quotation: are generally used when the seller selection decision is based on price
(as when buying commercial or standard items)
• Term such as proposal: is generally used when other considerations such as technical capability or technical
approach are the most important.
Request for information (RFI) Request for quotation (RFQ) Request for proposal (RFP)
is used when more information on is commonly used when more is used when there is a problem in
the goods and services to be information is needed on how the project and the solution is not
acquired is needed from the sellers. vendors would satisfy the easy to determine. This is the most
It will typically be followed by an requirements and/or how much it formal of the “request for”
RFQ or RFP. will cost. documents and has strict
procurement rules for content,
timeline, and seller responses.
The complexity and level of detail of the procurement documents should be consistent with the value of, and risks
associated with, the planned procurement. Procurement documents are required to be sufficiently detailed to
ensure consistent, appropriate responses, but flexible enough to allow consideration of any seller suggestions for
better ways to satisfy the same requirements.

4
Procurement statement of work (SOW) The statement of work (SOW) for each procurement is developed from the project scope baseline and defines only
that portion of the project scope that is to be included within the related contract.
Describes the procurement item in sufficient detail to
allow prospective sellers to determine if they are Information included in a SOW can include specifications, quantity desired, quality levels, performance data, period
capable of providing the products, services, or results. of performance, work location, and other requirements.
should be clear, complete, and concise; includes any collateral services required, such as performance reporting or
post-project operational support for the procured item
can be revised as required as it moves through the procurement process until incorporated into a signed agreement.
Terms of reference (TOR) is sometimes used when contracting for services.

includes the work the seller will perform, standards the seller is expected to
achieve, and the data and services that will be provided to the buyer, definition
of the schedule for initial submission and the review/approval time required.
5
Source selection criteria In choosing evaluation criteria, the buyer seeks to ensure that the proposal selected will offer the best quality for
the services required.
The specific criteria may be a numerical score, color-code, or a written description of how well the seller satisfies
the buying organization’s needs.
The criteria will be part of a weighting system that can be used to select a single seller that will be asked to sign a
contract and establish a negotiating sequence by ranking all the proposals by the weighted evaluation scores
assigned to each proposal.
For international projects, evaluation criteria may include “local content” requirements, for example, participation
by nationals among proposed key staff.

6
Make-or-buy decisions A make-or-buy analysis results in a decision as to whether particular work (1) can best be accomplished by the
project team or (2) should be purchased from outside sources
7
Independent cost estimates For large procurements, the procuring organization may elect to either prepare its own independent estimate or
have a cost estimate prepared by an outside professional estimator to serve as a benchmark on proposed responses
8
Change requests Significant differences in cost estimates can be an indication that the procurement SOW was deficient or
ambiguous, or that the prospective sellers either misunderstood or failed to respond fully to the procurement SOW.
9
Project documents updates Lessons learned register Milestone list Requirements documentation
Risk register Stakeholder register Requirements traceability matrix

10
Organizational process assets updates
Comparison of Procurement Documentation

Terms and Conditions
• Acceptance. How will you specifically know if the work is acceptable ?
• Agent. Who is an authorized representative of each party?
• Arbitration. This method to resolve disputes uses private third parties to render a decision on the dispute. Arbitration is paid for by the parties and is used because it is usually faster and
cheaper than the courts.
• Assignment. This refers to the circumstances under which one party can assign its rights or obliga tions under the contract to another.
• Authority. Who has the power to do what?
• Bonds. These are the payment or performance bonds, if any, that must be purchased. For example, a payment bond would protect the buyer from claims of nonpayment by the seller.
• Breach/default. This occurs when any obligation of the contract is not met. Watch out - a breach on the seller’s part cannot be fixed by a breach on the buyer’s part. For example, failure to
complete an item in the procurement SOW (seller’s breach) cannot be handled by the buyer stopping all payments (buyer’s breach). A breach is an extremely serious event. The exam may
present situations in which seemingly little things in the contract are not done. The response to a breach must always be to issue a letter formally notifying the other party of the breach.
The project manager must understand the legal implications oftheir actions. Ifthey do not watch out for and send an official notice ofbreach, the project manager’s company could lose its
right to claim breach later.
• Changes. How will changes be made? What forms will be used? What are the timeframes for notice and turnaround?
• Confidentiality/nondisclosure. What information must not be made known or given to third parties?
• Dispute resolution. How will any disputes regarding the contract be settled? Some options for dispute resolution are to use the courts or an arbitrator.
• Force majeure. A provision in a contract that excuses the parties involved from any liability or contractual obligations because of acts of god, wars, terrorism, or other such events. This
refers to a situation that could be considered an act of nature, such as a fire or freak electrical storm, and it is an allowable excuse for either party not meeting contract require ments. If a
force majeure occurs, it is considered to be neither party’s fault. It is usually resolved by the seller receiving an extension of time on the project. Who pays for the cost of the items
destroyed in a fire or other force majeure? Usually the risk of loss is borne by the seller and is hopefully covered by insurance. (See also “Risk of loss” below.)
• Good Faith. Honesty and fair dealings between all parties involved in the contract.
• Incentives. These are benefits the seller may receive for achieving the buyer's objectives of schedule, cost, quality, risk, and performance.
• Indemnification(liability). Who is liable for personal injury, damage, or accidents?
• Independent contractor. This term means the seller is not an employee of the buyer.
• Infringement. A violation of someone’s legally recognized right.
• Inspection. Does anyone have a right to inspect the work during execution of the project? Under what circumstances?
• Intellectual property. Who owns the intellectual property (for example: patents, trademarks, copy rights, processes, source code, or books) used in connection with or developed as part
of the contract? This may include warranties of the right to use certain intellectual property in performance of the contract.
33
• Invoicing. When will invoices be sent? What supporting documents are required? To whom are they sent?
• Liquidated damages. These are estimated damages for specific defaults, described in advance.
• Management requirements. Examples of management requirements include attendance at meetings and approval of staff assigned to the project.
• Material breach. This breach is so large that it may not be possible to complete the work under the contract.
• Negligence. The failure to exercise one’s activity in such a manner that a reasonable person would do in a similar situation.
• Noncompete Clause. A covenant providing restrictions on starting up a competing business or working for a competitor within a specified time period.
• Nonconformance. Performance of work in such a manner that it does not conform to contractual specifications or requirements.
• Nondisclosure Clause. A covenant providing restrictions on certain proprietary information such that it cannot be disclosed without written permission.
• Notice. To whom should certain correspondence be sent?
• Ownership. Who will own the tangible items (such as materials, buildings, or equipment) used in connection with or developed as part of the contract?
• Payments. When will payments be made? What are the late payment fees? What are reasons for nonpayment? Watch out for questions regarding payment management. For example, as
a response to inaccurate invoices, the buyer cannot stop all payments; this would be a breach. They can, however, stop payments on disputed amounts.
• Penalty Clause. An agreement or covenant, identified in financial terms, for failure to perform.
• Procurement statement of work (SOW). If it is not a separate document, this will be included as part of the contract.
• Reporting. What reports are required? At what frequency? To and from whom?
• Retainage. This is an amount of money, usually 5 percent or 10 percent, withheld from each payment. This money is paid when the final work is complete. It helps ensure completion.
• Risk of loss. This allocates the risk between the parties to a contract in the event goods or services are lost or destroyed during the performance of a contract.
• Site access. This describes any requirements for access to the site where the work will be performed.
• Termination. Termination is stopping the work before it is completed.
• Time is of the essence. [critically important] Delivery dates are strictly binding. The seller is on notice that time is important and that any delay is a material breach.
• Waivers. These are statements saying that rights under the contract may not be waived or modified other than by express agreement of the parties. A project manager must realize that
they can inten tionally or unintentionally give up a right in the contract through conduct, inadvertent failure to enforce, or lack of oversight. Therefore, a project manager must understand
and enforce all aspects of the contract, even if a procurement manager is involved in administering the contract.
• Warranties. These are promises of quality for the goods or services delivered under the contract, usually restricted to a certain time period.
• Work for hire. The work provided under the contract will be owned by the buyer.
34
Letter Of Intent. Negotiating a contract and getting final signatures can take time. In some instances, the seller may need to start hiring people or ordering equipment and materials before
the contract is signed in order to meet the contract requirements. If the contract is not signed in time, the seller may ask the buyer to provide a letter of intent. Correctly defined, a letter of
intent is not a contract, but simply a letter stating that the buyer intends to hire the seller. It is intended to give the seller confidence that the contract will be signed soon and to make them
comfortable with taking the risk of ordering the equipment or hiring the staff that will eventually be needed.
Privity of Contract. The relationship that exists between the buyer and seller of a contract.
Noncompetitive Forms of Procurement

• Single source [There is a Preferred Seller]. In this type of procurement, you contract directly with your preferred seller without going through the full procurement process. You may have
worked with this company before, and, for various reasons, you do not want to look for another seller. In some cases, there may be a master service agreement (MSA) in place between an
organization and a particular seller: this is an established, ongoing contract between the organization and a seller for a particular type of service the organization may require regularly.
• Sole source [There is Only One Seller]. In this type of procurement, there is only one seller. This might be a company that owns a particular patent.
35
12.2 Conduct Procurements
the process of obtaining seller responses, selecting a seller, and awarding a contract.
36
12.2 CONDUCT PROCUREMENTS
the process of obtaining seller responses, selecting a seller, and
? awarding a contract
1/ selects a qualified seller and implements the legal agreement for

delivery
2/ The end results of the process are the established agreements
including formal contracts
This process is performed periodically throughout the project as needed
Project management plan Expert judgment Selected sellers

Project documents Advertising Agreements
Procurement documentation Bidder conferences Change requests
Project management plan
Seller proposals Data analysis
updates
Enterprise environmental
Interpersonal and team skills Project documents updates
factors
updates
12.2 CONDUCT PROCUREMENTS 37

12.2 CONDUCT PROCUREMENTS – INPUTS
1
Project management plan Scope management plan Requirements management plan Communications management plan
Risk management plan Procurement management plan Configuration management plan
Cost baseline
2
Project documents Lessons learned register Lessons learned register
Project schedule identifies the start and end dates of project activities, including procurement
activities. It also defines when contractor deliverables are due
Requirements documentation Requirements documentation may include:

• Technical requirements that the seller is required to satisfy, and
• Nontechnical requirements which are requirements with contractual and
legal implications that may include health, safety, security, performance,
environmental, insurance, intellectual property rights, equal employment
opportunity, licenses, permits, and other.
Risk register Each approved seller comes with its own unique set of risks, depending on the
seller’s organization, the duration of the contract, the external environment, the
project delivery method, the type of contracting vehicle chosen, and the final
agreed-upon price
Stakeholder register provides the list of project stakeholders including additional classification data
and other information

12.2 CONDUCT PROCUREMENTS – INPUTS
3
Procurement documentation Bid documents. Procurement documents include the RFI, RFP, RFQ, or other documents sent to sellers so they can
develop a bid response.
Procurement statement of work (SOW). provides sellers with a clearly stated set of goals, requirements, and
outcomes from which they can provide a quantifiable response.
Independent cost estimates. are developed either internally or by using external resources and provide a
reasonableness check against the proposals submitted by bidders.
Source selection criteria. describe how bidder proposals will be evaluated, including evaluation criteria and
weights. For risk mitigation, the buyer may decide to sign agreements with more than one seller to mitigate damage
caused by a single seller having problems that impact the overall project.
4 Seller proposals, prepared in response to a procurement document package -> form the basic information -> that
Seller proposals
will be used by an evaluation body to select one or more successful bidders (sellers).
If the seller is going to submit a price proposal, good practice is to require that it be separate from the technical
proposal.
The evaluation body reviews each submitted proposal according to the source selection criteria => selects the seller
that can best satisfy the buying organization’s requirements
5
Enterprise environmental factors
6

12.2 CONDUCT PROCUREMENTS – TOOLS & TECHNIQUES
1
Expert Judgment
2
Advertising is communicating with users or potential users of a product, service, or result.
Existing lists of potential sellers often can be expanded by placing advertisements in general circulation publications
such as selected newspapers or in specialty trade publications.
Most government jurisdictions require public advertising or online posting of pending government contracts
3
Bidder conferences are meetings between the buyer and prospective sellers PRIOR to proposal submittal.
contractor conferences, vendor conferences, are used to ensure that all prospective bidders have a clear and common understanding of the procurement and no
and pre-bid conferences bidders receive preferential treatment
4
Data analysis proposal evaluation Proposals are evaluated to ensure they are complete and respond in full to the bid
documents, procurement SOW, source selection criteria, and any other documents
that went out in the bid package.
5
Interpersonal and team skills negotiation is a discussion aimed at reaching an agreement
Procurement negotiation clarifies the structure, rights, and obligations of the parties
and other terms of the purchases so that mutual agreement can be reached PRIOR to
Main items to negotiate (usually in order): Objectives of negotiation: signing the contract.
1. Scope Obtain a fair and reasonable price
2. Schedule Develop a good relationship between the The negotiation should be led by a member of the procurement team that has the
3. Price buyer and the seller authority to sign contracts. The project manager and other members of the project
Other items: Risk, Responsibilities, Authority, management team may be present during negotiation to provide assistance as needed
Applicable law, Project management process
Negotiation Tactics Buyers and sellers may use negotiation tactics such as delaying or withdrawal to get
to be used, Payment schedule, Quality
what they want.

12.2 CONDUCT PROCUREMENTS – OUTPUTS
1 Final approval of complex, high-value, high-risk procurements will generally require organizational senior
Selected sellers
management approval prior to award.
are those who have been judged to be in a competitive range
based on the outcome of the proposal or bid evaluation
2 A contract is a mutually binding agreement that obligates the seller to provide the specified products, services, or
Agreements
results; obligates the buyer to compensate the seller; and represents a legal relationship that is subject to remedy in
the courts.
Major components in an agreement: • Warranty and future product support;

• Procurement statement of work (SOW) or major • Incentives and penalties;
deliverables; • Insurance and performance bonds;
• Schedule, milestones, or date by which a schedule is • Subordinate subcontractor approvals;
required; • General terms and conditions;
• Performance reporting; • Change request handling; and
• Pricing and payment terms; • Termination clause and alternative dispute
• Inspection, quality, and acceptance criteria; resolution mechanisms.
Changes to the contract must be made formally in writing, and submitted to integrated change control.
A contract, offer, or acceptance may be verbal or written, though written is preferred.
What Do You Need to Have a Legal Contract?

3 • An offer
Change requests • Acceptance
4 • Consideration (a transfer of something of value, but not necessarily money)
Project management plan updates • Legal capacity (separate legal parties that are all legally competent)
• Legal purpose (you cannot have a legal, enforceable contract for the sale of illegal goods or services)
5
6

12.3 Control Procurements
the process of managing procurement relationships; monitoring contract performance, and making changes
and corrections as appropriate; and closing out contracts
42
12.3 CONTROL PROCUREMENTS
the process of managing procurement relationships; monitoring
? contract performance, and making changes and corrections as
appropriate; and closing out contracts
1/ it ensures that both the seller’s and buyer’s performance meet the
project’s requirements according to the terms of the legal agreement
This process is performed throughout the project as needed
Project management plan Expert judgment Closed procurements

Project documents Claims administration Work performance information
Procurement documentation
Agreements Data analysis
updates
Procurement documentation Inspection Change requests

Approved change requests Audits
updates
Work performance data Project documents updates
Enterprise environmental Organizational process assets
factors updates
12.3 CONTROL PROCUREMENTS 43

12.3 CONTROL PROCUREMENTS (Cont.)
Both the buyer and the seller administer the procurement contract for similar purposes. Each is required to ensure that both parties meet their contractual
obligations and that their own legal rights are protected
Administrative activities may include:
• Collection of data and managing project records, including maintenance of detailed records of physical and financial performance and establishment of
measurable procurement performance indicators
• Refinement of procurement plans and schedules
• Set up for gathering, analyzing, and reporting procurement-related project data and preparation of periodic reports to the organization
• Monitoring the procurement environment so that implementation can be facilitated or adjustments made
• Payment of invoices.
The quality of the controls, including the independence and credibility of procurement audits, is critical to the reliability of the procurement system. The
organization’s code of ethics, its legal counsel, and external legal advisory arrangements including any ongoing anti-corruption initiatives can contribute to
proper procurement controls.
Control Procurements has a financial management component that involves monitoring payments to the seller. This ensures that payment terms defined
within the contract are met and that compensation is linked to the seller’s progress as defined in the contract. A principal concern when making payments
is to ensure there is a close relationship of payments made to the work accomplished. A contract that requires payments linked to project output and
deliverables rather than inputs such as labor hours has better controls.
Agreements can be amended at any time prior to contract closure by mutual consent, in accordance with the change control terms of the agreement. Such
amendments are typically captured in writing.

Control Procurements involves managing the legal relationship between the buyer and seller, and ensuring that both parties perform as
required by the contract and that each contract is closed when completed or terminated
Throughout this process:

• the seller is focused on completing the work
• the buyer is focused on measuring the performance of the seller and comparing actual performance to the
contract, other procurement documents, and management plans.
Because of the legal aspect, many organizations treat contract administration as an organizational function that is
SEPARATE from the project.
While a procurement administrator may be on the project team, this individual typically reports to a supervisor
from a different department.
Conflict The buyer’s project manager may want to initiate a change to the scope or sequence of work identified in the
procurement SOW (an area seemingly under the project manager’s control), but CANNOT do so without the
procurement manager’s approval
Sometimes exam questions ask how project control is different in a procurement environment. These types of questions can be particularly difficult for those with little procurement
experience. Some possible answers include:
The seller’s organization has a different culture and different procedures than the buyer’s organization.
The buyer and seller have different objectives. The seller’s objective is to generate revenue, and the buyer’s objective is to complete the work.
It is not as easy to see problems on the project when the contracted work is being done in a different location.
There is a greater reliance on reports to determine if a problem exists.
There is a greater reliance on the relationship between the buyer’s project manager and the seller’s project manager in terms of resolving issues not covered in the wording of the
contract.

i During this Process, what the project manager should be doing at any point in time.
• Review invoices. Were they correctly submitted? Do they have all the required • Understand the legal implications of actions taken.
supporting information? Are the charges allowable under the contract? • Control quality according to what is required in the contract.
• Evaluate whether a change is needed and is within the approved scope of the project. • Issue claims and review claims submitted by the seller.
• Submit changes through integrated change control as necessary. • Authorize the seller’s work to start at the appropriate time, coordinating the seller’s
• Document and record everything. This includes phone calls with the seller, emails, work with the work of the project as a whole.
requested changes, and approved changes. • Communicate with the seller and with others.
• Manage and integrate approved changes. • Manage interfaces among all the sellers on the project.
• Authorize payments to the seller. • Send copies of changes to the appropriate parties.
• Interpret what is and what is not in the contract. • Accept verified deliverables.
• Interpret what the contract means. • Validate that the correct scope is being done.
• Resolve disputes. • Validate that changes are giving the intended results.
• Make sure only authorized people are communicating with the seller. • Perform inspections and audits.
• Work with the procurement manager on requested and approved changes and contract • Identify risks to the completion of future work.
compliance. • Re-estimate risks, costs, and schedule.
• Hold procurement performance review meetings with your team and the seller. • Monitor and control risk.
• Report on performance - this means your own performance as well as the seller’s • Perform contract closure for each contract as it is complete or terminated.
performance. • Analyze the procurement process for lessons learned, and make recommendations to
• Monitor cost, schedule, and technical performance against the contract, including all of the organization for improvement.
its components, such as terms and conditions and the procurement SOW. • Accept final deliverables from the seller, and make final payments

i Management efforts, issues, and potential trouble spots are different under each type of contract. Watch out!
Fixed-Price Contract Time and Material Contract Cost-Reimbursable Contract
• Look for the seller cutting scope. • Provide day-to-day direction to the seller. • Audit every invoice.
• Watch for the seller cutting quality. • Attempt to get concrete deliverables. • Make sure all the costs are applicable and chargeable
• When the contract requires the seller’s costs to be • Make sure the project length is not extended. to your project.
transparent, make sure the costs are real costs that • Confirm that the number of hours spent on work is • Monitor to confirm the seller’s work is progressing
have been incurred (not future costs) - unless there is reasonable. efficiently.
an agreement stating otherwise. • Watch for situations in which switching to a different • Watch for the seller adding resources to your project
• Be alert for overpriced change orders. form of contract makes sense (for example, you that do not add value or perform real work.
• Check for scope misunderstandings. determine a design SOW under a T&M contract and • Look for resources being shifted from what was
then switch to a fixed-price contract for completion of promised in the original proposal.
the work). • Disallow seller charges that were not part of the
original plan.
• Re-estimate the cost of the project.

12.3 CONTROL PROCUREMENTS – INPUTS
1 Requirements management Describes how contractor requirements will be analyzed, documented, and
plan managed.
Risk management plan describes how risk activities created by sellers will be structured and performed
for the project.
Procurement management plan Contains the activities to be performed during the Control Procurement
process.
Change management plan contains information about how seller-created changes will be processed
Schedule baseline If there are slippages created by sellers that impact overall project performance,
the schedule may need to be updated and approved to reflect the current
expectations
2
Project documents Assumption log Milestone list Lesson learned register Requirements documentation
Risk register Quality reports Stakeholder register Requirements traceability matrix
3 understandings between parties, including understanding of the duties of each party. The relevant agreements are
Agreements
reviewed to verify terms and conditions are met.
4
Procurement documentation contains complete supporting records for administration of the procurement processes.
includes the SOW, payment information, contractor work performance information, plans, drawings, and other
correspondence.
5
Approved change requests All procurement-related changes are formally documented in writing and approved before being implemented
through the Control Procurements process
The project should have the capability of identifying, communicating, and resolving changes that impact the work of
multiple sellers.

12.3 CONTROL PROCUREMENTS – INPUTS
6 contains seller data on project status such as technical performance; activities that have started, are in progress, or
Work performance data
have completed; and costs that have been incurred or committed.
can also include information on the seller invoices that have been paid.
7
Enterprise environmental factors
8

12.3 CONTROL PROCUREMENTS – TOOLS & TECHNIQUES
1
Expert judgment
2
Claims administration Contested changes and potential constructive changes are those requested changes where the buyer and seller
cannot reach an agreement on compensation for the change or cannot agree that a change has occurred. These
contested changes are called claims.
When they cannot be resolved, they become disputes and finally appeals.
Claims are documented, processed, monitored, and managed throughout the contract life cycle, usually in
accordance with the terms of the contract.
If the parties themselves do not resolve a claim, it may have to be handled in accordance with alternative dispute
resolution (ADR) typically following procedures established in the contract.
Settlement of all claims and disputes through negotiation is the preferred method.
3
Data analysis Performance Reviews Earned Value Analysis (EVA) Trend Analysis
4
Inspection is a structured review of the WORK BEING PERFORMED BY THE CONTRACTOR.
This may involve a simple review of the deliverables or an actual physical review of the work itself.
On a construction/engineering/infrastructure project, inspections involve walkthroughs of the site by both the
buyer and the contractor to ensure a mutual understanding of the work in progress
5
Audits are a structured review of the PROCUREMENT PROCESS.
Rights and obligations related to audits should be described in the procurement contract.
Resulting audit observations should be brought to the attention of the buyer’s project manager and the seller’s
project manager for adjustments to the project, when necessary

12.3 CONTROL PROCUREMENTS – OUTPUTS
1 The buyer, usually through its authorized procurement administrator, provides the seller with formal written notice that the contract
Closed procurements
has been completed. Requirements for formal procurement closure are usually defined in the terms and conditions of the contract
and are included in the procurement management plan.
Typically, all deliverables should have been provided on time and meet technical and quality requirements, there should be no
outstanding claims or invoices, and all final payments should have been made.
The project management team should have approved all deliverables prior to closure.
Closing procurements consists of:
• tying up all the loose ends,
• verifying that all work and deliverables are accepted,
• finalizing open claims, and
• paying withheld retainage for each of the procurements on the project.
There may be some obligations, such as warranties, that will continue after the procurement is closed
Procurements are closed:
When a contract is completed
When a contract is terminated before the work is completed
Terminate for cause: The buyer may terminate a contract for cause if the seller breaches the contract (does not perform according to
the contract). This illustrates another reason the contract should clearly identify all the work required by the buyer. The seller is
generally paid for completed work but not for work in process. The seller may also be subject to claims from the buyer for damages.
Terminate for convenience: The buyer can terminate the contract before the work is complete if they no longer want the work done
(termination for convenience). In a termination for convenience, the seller is usually paid for work completed and work in process.
All procurements must be closed out, no matter the circumstances under which they stop, are terminated, or are completed. Closure
is a way to accumulate some added benefits, such as lessons learned. It provides value to both the buyer and the seller and should not
be omitted under any circumstances

2
Work performance information
3 includes the contract with all supporting schedules, requested unapproved contract changes, and approved change
Procurement documentation updates
requests. Procurement documentation also includes any seller-developed technical documentation and other work
performance information such as deliverables, seller performance reports and warranties, financial documents
including invoices and payment records, and the results of contract-related inspections.
4
Change requests Changes to the contract may be requested throughout the procurement process, and are handled as part of the
projects integrated change control efforts, along with all other project changes.
Constructive change Requested but unresolved changes can include:

• direction provided by the buyer or
• actions taken by the seller,
which the other party considers a constructive change to the contract.
5
Project management plan updates
6

7 Payment schedules and All payments should be made in accordance with the procurement contract
requests terms and conditions.
Seller performance evaluation is prepared by the buyer and documents the seller’s ability to continue to
documentation perform work on the current contract, indicates whether the seller can be
allowed to perform work on future projects, or rates how well the seller is
performing the project work or has performed in the past
Prequalified seller lists updates Prequalified seller lists are lists of potential sellers who are previously qualified
(approved). These lists will be updated according to the Procurement Control
process outcomes because sellers could be disqualified and removed from the
lists based on poor performance.
Lessons learned repository Lessons learned should be archived in the lessons learned repository to improve
procurements on future projects.
Procurement file A complete set of indexed contract documentation, including the closed
contract, is prepared for inclusion with the final project files.

KEY ACTIONS
Plan Procurement Management Conduct Procurements Control Procurements
• Perform make-or-buy analysis. • Find potential sellers through advertising, a • Understand the legal implications of your actions.
• Create a procurement management plan. preapproved seller list, or other means. • Hold procurement performance reviews.
• Create a procurement strategy for each procurement. • Send procurement documents. • Request changes.
• Create a procurement SOW for each procurement. • Hold a bidder conference. • Administer claims.
• Select the appropriate contract type. • Answer sellers’ questions. • Manage interfaces among sellers.
• Create terms and conditions, including standard and • Receive the seller responses. • Monitor, analyze, and report on performance against
special conditions. • Compare the proposals to the source selection criteria the contract.
• Create bid documents. using a weighting or screening system to pick/shortlist • Review cost submittals, and make payments.
• Determine source selection criteria. the sellers. • Perform inspections and audits.
• Gather and analyze data on prospective sellers, the • Receive presentations from seller(s). • Maintain records of everything.
market, and market price. • Compare to independent estimates. • Manage relationships.
• Estimate time and cost for contract and work. • Hold negotiations. • Accept verified deliverables.
• Use interpersonal and team skills, such as negotiation. • Perform procurement audits.
• Allocate risk to sellers when appropriate. • Negotiate settlements.
• Create lessons learned.
• Complete final contract performance reporting.
• Validate the product.
• Issue formal acceptance.
• Update records.
• Create a procurement file.
• Perform financial closure.

KEY OUTPUTS
Plan Procurement Management Conduct Procurements Control Procurements
• Make-or-buy decisions • Selected sellers • Substantial completion of contract requirements and
• Procurement management plan • Signed contracts deliverables
• Procurement statements of work • Resource calendars • Work performance information
• Procurement strategies • Change requests • Change requests
• Bid documents • Project management plan updates • Project management plan updates
• Selected contract type • Project documents updates • Project documents updates (including updates to
• Source selection criteria • Recommendations and updates to the processes and procurement documents)
• Change requests procedures for organizational procurement practices • Organizational process assets updates
• Independent contract estimates • Organizational process assets updates • Formal acceptance
• Closed procurements
• Lessons learned and records updates

Questions
1. You are preparing procurement documents for the building of a community center. There will be government standards, guidelines, and possibly
regulations involved. You need to structure the procurement documentation in order to get proposals from qualified prospective sellers interested in doing
business on a particular project. All the following statements concerning procurement docu ments are incorrect except:
A. Well-designed procurement documents can simplify comparison of responses.
B. Procurement documents must be rigorous with little flexibility to allow consideration of seller suggestions.
C. In general, procurement documents should not include selection criteria.
D. Well-designed procurement documents do not include a procurement statement ofwork.
Answer A
Explanation Often, the seller is required to inform the buyer of anything that is missing or unclear in the procurement documents. It is in the buyer’s best
interest to discover missing items, since it will save the buyer money and trouble to correct the problem early. Procurement documents must include terms
and conditions and selection criteria, as well as documentation of all the work that is to be done (which includes the procurement statement of work). This is
so the seller can price the project and know what is most important to the buyer. Well-designed procurement documents can simplify comparison of
responses. This is an important point and is the best answer. This question relates real-world situations to risk types. Did you realize the entire first paragraph
is extraneous? Based on the question, you cannot remove the work to avoid it, nor can you insure or outsource it to transfer the risk. This leaves acceptance
as the only correct choice.
2. A seller is working on a cost-reimbursable (CR) contract when the buyer decides he would like to expand the scope of services and change to a fixed-price
(FP) contract. All the following are the seller’s options except:
A. Completing the original work on a cost-reimbursable basis and then negotiating a fixed price for the additional work
B. Completing the original work and rejecting the additional work
C. Negotiating a fixed-price contract that includes all the work
D. Starting over with a new contract
Answer D
Explanation The seller can try to negotiate changes or simply continue the original contract and refuse requests to complete additional work, but the seller
cannot unilaterally decide to start over with a new contract. Both parties have to agree to this option through negotiations.
56
Thank You
Atoha Institute of Project Management
+84 28 6684 6687
cs@atoha.com

Atoha PMPPRO S10 - Procurement

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PROCUREMENT

12.2 Conduct Procurements [E] — The process of obtaining seller

12.3 Control Procurements [M&C] — The process of managing

PROJECT PROCUREMENT MANAGEMENT

Anything NOT in the contract CANNOT be legally enforced

= purchasing, contracting, procurement, acquisitions

PROJECT PROCUREMENT MANAGEMENT 5

PROJECT PROCUREMENT MANAGEMENT 6

PROJECT PROCUREMENT MANAGEMENT 7

Seller may be identified as a contractor, vendor, service provider, or supplier.

Advantages of Centralized Contracting Disadvantages of Centralized Contracting

PROJECT PROCUREMENT MANAGEMENT 8

PROJECT PROCUREMENT MANAGEMENT 9

PROJECT PROCUREMENT MANAGEMENT 10

1/ determines whether to acquire goods and services from outside the

This process is performed once or at predefined points in the project.

INPUTS TOOLS & TECHNIQUES OUTPUTS

12.1 PLAN PROCUREMENT MANAGEMENT 12

Typical steps might be:

12.1 PLAN PROCUREMENT MANAGEMENT 13

12.1 PLAN PROCUREMENT MANAGEMENT 14

Requirements documentation Requirements documentation may include:

12.1 PLAN PROCUREMENT MANAGEMENT 15

12.1 PLAN PROCUREMENT MANAGEMENT 16

12.1 PLAN PROCUREMENT MANAGEMENT 17

Advantages of Fixed-Price Contract Disadvantages of Fixed-Price Contract

12.1 PLAN PROCUREMENT MANAGEMENT 18

12.1 PLAN PROCUREMENT MANAGEMENT 19

Advantages of Cost-Reimbursable Contract Disadvantages of Cost-Reimbursable Contract

12.1 PLAN PROCUREMENT MANAGEMENT 20

12.1 PLAN PROCUREMENT MANAGEMENT 21

12.1 PLAN PROCUREMENT MANAGEMENT 22

12.1 PLAN PROCUREMENT MANAGEMENT 23

The final decision on whether to trade off cost, time, or

=> the most important factor

12.1 PLAN PROCUREMENT MANAGEMENT 24

The project manager:

A buyer’s costs include a seller’s costs and profits

12.1 PLAN PROCUREMENT MANAGEMENT 25

More at: https://www.atoha.com/blogs/kien-thuc/pta-point-of-total-assumption

12.1 PLAN PROCUREMENT MANAGEMENT 26

Quality and cost-based Sole source Fixed budget

12.1 PLAN PROCUREMENT MANAGEMENT 27

12.1 PLAN PROCUREMENT MANAGEMENT 28

12.1 PLAN PROCUREMENT MANAGEMENT 29

12.1 PLAN PROCUREMENT MANAGEMENT 30

Terms of reference (TOR) is sometimes used when contracting for services.

12.1 PLAN PROCUREMENT MANAGEMENT 31

Risk register Stakeholder register Requirements traceability matrix

12.1 PLAN PROCUREMENT MANAGEMENT 32

Noncompetitive Forms of Procurement

1/ selects a qualified seller and implements the legal agreement for

Project management plan Expert judgment Selected sellers

INPUTS TOOLS & TECHNIQUES OUTPUTS

12.2 CONDUCT PROCUREMENTS 37

Risk management plan Procurement management plan Configuration management plan

Requirements documentation Requirements documentation may include:

12.2 CONDUCT PROCUREMENTS 38

12.2 CONDUCT PROCUREMENTS 39

12.2 CONDUCT PROCUREMENTS 40

Major components in an agreement: • Warranty and future product support;

What Do You Need to Have a Legal Contract?

12.2 CONDUCT PROCUREMENTS 41