Chapter 11 - Project procurement management. After reading this chapter, you will be able to: Understand the importance of project procurement management and the increasing use of outsourcing for information technology (IT) projects; describe the work involved in planning procurements for projects, including determining the proper type of contract to use and preparing a procurement management plan, statement of work, source selection criteria, and make-or-buy analysis;...
Chapter 11: Project Procurement Management adopted from PMI’s PMBOK 2000 and Textbook : Information Technology Project Management Copyright Course Technology 2001 Contents • Importance of Project Procurement Management • Project Procurement Management Processes – – – – – – Procurement planning: Solicitation planning: Solicitation: Source selection: Contract administration: Contract closeout: ) ) planning phase ) > executing phase ) } closing • Using Software to Assist in Project Procurement Management Chap 11 Importance of Project Procurement Management • Procurement means acquiring goods and/or services from an outside source • Other terms include purchasing and outsourcing • Why Outsource? – To reduce both fixed and recurrent costs – To allow the client organization to focus on its core business – To access skills and technologies – To provide flexibility – To increase accountability Chap 11 Project Procurement Management Processes • Procurement planning – • Solicitation planning – • choosing from among potential vendors Contract administration – • obtaining quotations, bids, offers, or proposals as appropriate Source selection – • documenting product requirements and identifying potential sources Solicitation – • determining what to procure and when managing the relationship with the vendor Contract closeout – completion and settlement of the contract Chap 11 Figure 111. Project Procurement Management Processes and Key Outputs Chap 11 Procurement planning • 20th of 21 planning phase process • identifying which project needs can be best met by using products or services outside the organization. It includes deciding – – – – – whether to procure how to procure what to procure how much to procure when to procure • determines how project needs can best be met by sourcing products or service outside the organization Chap 11 Inputs to Procurement planning • • • • • • • Scope statement – describes current project needs and strategies Product description – defines the end product of the project and provides important information about any technical issues or concerns Procurement resources – resources and expertise needed to support project procurement activities Market consideration – affect available products and services that have an impact on decisionmaking Other planning inputs – includes miscellaneous items such as cost and schedule estimates, quality management plans, cashflow projections, WBS, identified risks, planned staffing needs Constrains – factors that limit the buyer’s options, such as availability of funds Assumptions –factors that, for planning purposes, will be considered to be true, real, or certain Chap 11 Tools and techniques • Makeorbuy analysis – determines whether it’s more cost effective for the performing organization to produce the produce the product or purchase it form an outside vendor • Expert judgment – can be sought from groups or individuals with specialized knowledge or training. These include technical consultant company, HR consultant company • Contact type selection – an important factor to influence and control the seller’s performance. Chap 11 Types of Contracts • • • • • Fixed price or lump sum: involve a fixed total price for a welldefined product or service Cost reimbursable: involve payment to the seller for direct and indirect costs Time and material contracts: hybrid of both fixed price and cost reimbursable, often used by consultants Unit price contracts: require the buyer to pay the seller a predetermined amount per unit of service Different contracts are appropriate for different kinds of work Chap 11 Outputs from Procurement planning • Procurement management plan – part of project plan. It describes how the remaining procurement processes (solicitation planning, contract closeout) will be managed • Statements of work (SOW) – describes the procurement items in sufficient detail for prospective sellers to determine if they are capable of providing the items Chap 11 10 Inputs to Source selection • Proposals – sellerprepared document that describe the seller’s ability and willingness to provide the requested product and service. (it is output from Solicitation Planning) • Evaluation criteria – establish ratings or scores for proposals. The criteria can be objective or subjective. • Organizational policies – it may affect the project manager’s decision. These policies can come from any of the organization involved in the project Chap 11 25 Tools and technique • • • • Contract negotiations – clarification and mutual agreement on structure and requirements of a contract prior to signing. The subjects covered usually include: a) responsibilities and authorities; b) applicable terms and law; c) financing and price; technical and business management Weighting system – to quantify data in 3 steps to minimize personal prejudices of source selection. First, they assign numerical weight to evaluation criteria. Second, they rate the seller. Finally, they multiply weights by rating and totaling overall score Screening system – establish minimum performance criteria Independent estimates – prepared by the project procuring section to determine any significant differences. The differences could mean the seller didn’t understand the SOW or omitted something in the SOW Chap 11 26 Outputs from Source selection • Contract – a mutually binding agreement that obligates a seller to provide goods or services and the buyer to make payment. • It establishes a legal relationship that is subject to remedy in court. – Most organizations have policies and procedures concerning who can sign a contract, refereed as delegation of procurement authority. – Many organizations also require legal review and approval of contracts Chap 11 27 Cost Reimbursable Contracts • Cost plus incentive fee (CPIF) – the buyer pays the seller for allowable performance costs plus a predetermined fee and an incentive bonus • Cost plus fixed fee (CPFF) – the buyer pays the seller for allowable performance costs plus a fixed fee payment usually based on a percentage of estimated costs • Cost plus percentage of costs (CPPC) – the buyer pays the seller for allowable performance costs plus a predetermined percentage based on total costs Chap 11 28 Figure: Contract Types Versus Risk Chap 11 29 Contract Administration • 7th of 7 executing phase process • Ensures that the seller’s performance meets contractual requirements • It involves managing vendor relationships, especially important with change requests • It entails maintaining formal correspondence with the seller and expediting requirement for payment with performing organization • Contracts are legal relationships, so it is important that legal and contracting professionals be involved in writing and administering contracts • Many project managers ignore contractual issues, which can result in serious problems Chap 11 30 Inputs to Contract Administration • Contracts a mutually binding agreement that obligates a seller to provide goods or services and the buyer to make payment • Work results – seller’s deliverables, quality standards, and actual costs • Change requests – modifications to the contract or its description of the product or service. If the seller’s work is unsatisfactory, the project manager can terminate the contract. • Seller invoices – submitted periodically and requesting payment for work performed. The contract defines invoice requirements and supporting document Chap 11 31 Tools and technique • Contract change control system – defines how a contact may be modified. It includes paperwork, tracking system, dispute resolution procedures, and the hierarchy of approval levels • Performance reporting – tells the project management team how effective the seller is achieving the contractual objectives. Performance reporting is generated by the communications process. It is part of processes of controlling the project • Payment system – it involves the organization’s account payable process Chap 11 32 Outputs from Contract Administration ∙ Correspondence – retained as a way of documenting and clarifying the contracts’ terms and conditions. ∙ Contract changes – changes (formal and informal) are fed back through the planning and procurement processes. The project plan or other relevant documentation is updated when necessary ∙ Payment requests – Issues when project manager are using an external payment system. It is the responsibility of the project manager to interface with account payable for timely payments to sellers Chap 11 33 Contract Closeout • 2nd of 2 closing phase process • Closing takes place at the end of the project. Because projects are temporary • Project closeout briefings and lessonslearned documents provide important feedback • Contract closeout includes – product verification to determine if all work was completed correctly and satisfactorily – administrative activities to update records to reflect final results – archiving information for future use • Procurement audits identify lessons learned in the procurement process Chap 11 34 Inputs t Contract closure • Contract documentation – includes the contract along with all supporting schedules, requested and approved contract changes, any sellerdeveloped technical documentation, seller performance reports, financial documents, and the results of any contractrelated inspections Chap 11 35 Tools and technique • Procurement audits – structured reviews of the procurement process, from procurement planning through contract admin. The objective of a procurement audit is to identify success and failures that warrant transfer to other procurement items o this project or to other projects Chap 11 36 Outputs from Contract closure • Formal acceptance & closure – provides the seller with formal written notice that the contract has been completed • Contract file – a complete set of indexed records. Compile them for inclusion with the final project records Chap 11 37 Using Software to Assist in Project Procurement Management • • • Word processing software helps in writing proposals and contracts, spreadsheets help in evaluating suppliers, databases help track suppliers, and presentation software aids in presenting procurementrelated information In the late 1990s and early 2000s, many companies started using eprocurement software to do many procurement functions electronically Organizations also use other Internet tools to help find information on suppliers or auction goods and services Chap 11 38 Summary • Project Procurement Management – acquiring goods and/or services from an outside source • Project Procurement Management Processes • Procurement planning • – identifying which project needs can be best • Solicitation planning – documenting product requirements and identifying potential sources • Solicitation – obtaining quotations, bids, offers, or proposals as Chap 11 appropriate Source selection – choosing from among potential vendors • Contract administration – managing the relationship with the vendor • Contract closeout – completion and settlement of the contract 39 ...Contents • Importance of Project Procurement Management • Project Procurement Management Processes – – – – – – Procurement planning: Solicitation planning: ... > executing phase ) } closing • Using Software to Assist in Project Procurement Management Chap 11 Importance of Project Procurement Management • Procurement means acquiring goods and/or services from an outside source... completion and settlement of the contract Chap 11 Figure 111. Project Procurement Management Processes and Key Outputs Chap 11 Procurement planning • 20th of 21 planning phase process • identifying which project needs can be best met