PMP Exam Preparation Workshop. Chapter # 12 Project Procurement Management

PMP Exam Preparation Workshop Chapter # 12 Copyright 2013 PMI SOC 1

Objective & Agenda Introduction to Understanding the processes of project procurement management in the four process groups: 1. 2. 3. 4. Plan Procurement Management Conduct Procurements Control Procurements Close Procurements Inputs, tools and techniques, and outputs (ITTO s) of the four processes & interaction with other knowledge areas. Sample exam questions 2

Introduction Definitions Procurement: Acquisition of products, services, or results. Procurement Management: The processes necessary to purchase or acquire products, services, or results needed from outside of the project team. Assumptions There is an existence of a formal contract between the buyers & sellers. The Buyer of product/services/item for the project is assigned to the Project team & Seller belongs to the different organization. 3

Buyer-Seller Relationship Terms for Buyer Client Customer Prime Contractor Acquiring Organization Service Requestor Purchaser Terms for Seller Contractor Subcontractor Vendor Service provider Supplier 4

Overview PMBOK Ref # Fig 12-1 5

12.1 Plan Procurement Management The process of documenting project procurement decisions, specifying the approach, and identifying potential sellers. PMBOK Ref # Fig 12-2 6

12.1 Plan Procurement Management Data Flow PMBOK Ref # Fig 12-3 7

12.1.1 Plan Procurement Management - Inputs Project Management Plan (Section 4.2.3.1) Requirements Documentation (Section 5.2.3.1) Risk Register (Sections 11.2.3.1 & 11.5.3.2) Activity Resource Requirements Project Schedule (Section 6.4.3.1) (Section 6.6.3.2) Activity Cost Estimates (Section 7.2.3.1) Stakeholder Register (Section 13.1.3.1) Enterprise Environmental Factors (Section 2.1.5) Organizational Process Assets (Section 2.1.4) 8

12.1.1 Plan Procurement Management - Inputs Organizational Process Assets Contract Types Fixed Price Contracts Firm Fixed Price Contracts (FFP): The buyer will pay the seller one fixed fixed amount regardless of how much it costs the seller to complete the work. Fixed Price Incentive Fee Contracts (FPIF): The buyer will pay the seller one fixed amount plus financial incentives tied to achieving agreed upon metrics (performance goal). Fixed Price with Economic adjustments (FP-EPA): The buyer will pay the seller one fixed amount with a special provision allowing for predefined final adjustments based on changed conditions such as inflation & commodity price fluctuations; could be used when the seller s performance period spans a considerable period of years. 9

12.1.1 Plan Procurement Management - Inputs Organizational Process Assets Contract Types Cost-Reimbursable Contracts Cost Plus Fixed Fee (CPFF): The buyer will reimburse the seller for all allowable costs plus a fixed-fee payment calculated as a percentage of initial estimated project costs. Cost Plus Incentive Fee Contracts (CPIF): The buyer will reimburse the seller for all allowable costs plus a predetermined incentive fee based upon achieving certain performance objectives. Cost Plus Award Fee Contracts (CPAF): The buyer will reimburse the seller for all allowable costs but the majority of the fee is earned only based on the satisfaction of certain broad subjective performance criteria. 10

12.1.1 Plan Procurement Management - Inputs Contract Types- Time & Material Time and Material Contracts (T & M) Buyer will reimburse the seller with the time cost of labor (time) and the cost of materials. Contains aspects of both cost-reimbursable and fixed-price contracts. Cost-reimbursable when these costs are left open ended. Fixed-price when certain parameters are specified in the contract: Not-to-exceed values Time Limits 11

12.1.1 Plan Procurement Management - Inputs Contract Type vs. Risk CPFF: CPIF: FPIF: Cost + Fixed Fee Cost + Incentive Fee Firm Price + Incentive Fee FFP: Firm Fixed Price 12

12.1.2 Plan Procurement Management Tools & Tech. Make-or-Buy Analysis Management technique used to determine whether work can best be accomplished in-house or purchased from outside sources. Determining factors include budget, schedule, capability, resources, quality, supplier skills & abilities, contract types. Expert Judgment Often used to assess inputs/outputs from this process. Purchasing judgment is used to develop criteria to evaluate seller proposals. Legal judgment to assist with procurement terms & conditions. Market Research Examination of industry specific vendor capabilities through conferences, online reviews and other sources to identify market capabilities. Meetings Information interchange meetings with potential bidders. 13

12.1.3 Plan Procurement Management Outputs Procurement Management Plan Procurement Statement of Work Procurement Documents Source Selection Criteria Make-Or-Buy Decision Change Requests Project Document Updates 14

12.1.3 Plan Procurement Management Outputs Procurement Management Plan Component of Project Management Plan. Describes how the project team will acquire goods and services from outside the organization. Describes how the procurement processes will be managed from developing procurement documents through contract closure including: Type of contracts to be used. Risk management issues. If independent estimates will be used / are needed. Standardized procurement documents. Assumptions & constraints that could affect planned procurements. Make-or-buy decisions. Scheduled dates in each contract for contract deliverables. Direction to be provided to sellers on developing and maintaining the WBS. Prequalified sellers. Procurement metrics. More PMBOK pg 366-367 15

12.1.3 Plan Procurement Management Outputs Procurement Statement Of Work Developed for each procurement from the project scope baseline and defines only that portion of project scope that is to be included within the related contract. Describes the procurement item in a clear, complete, and concise manner to allow prospective sellers to determine if they are capable of providing the products, services, or results. Can include: Specifications. Quantity. Quality levels. Performance data. Period of performance. Work location. 16

12.1.3 Plan Procurement Management Outputs Procurement Documents Documents are used to seek proposals from prospective sellers. Common terms for procurement documents: Request for information (RFI) Invitation for bid (IFB) Request for proposal (RFP) Request for quotation (RFQ) Tender notice Invitation for negotiation Seller initial response Procurement documents are structured to facilitate an accurate and complete response from each prospective seller and to facilitate the evaluation process. Procurement documents include a description of the desired form of seller response, the relevant procurement statement of work, source selection criteria, and any contractual provisions. 17

12.1.3 Plan Procurement Management Outputs Source Selection Criteria Criteria used to rate and score proposals. Often included in procurement documents. Possible Source Selection Criteria: Understanding of need. Overall or life-cycle cost. Technical capability Risk Warranty Financial capacity Production capacity and interest Past performance of sellers References More PMBOK pg 369 18

12.1.3 Plan Procurement Management Outputs Make-Or-Buy Decisions Analysis results in a decision of whether particular work can best be accomplished by the project team or to be purchased from outside sources. A buy decision drives the process of reaching agreement with a supplier for the product or services. 19

12.1.3 Plan Procurement Management Outputs Change Requests A decision to procurement goods, services, or resources typically requires a change request. Change requests are processed for review and disposition through the Perform Integrated Change Control Process (4.5). Changes to the project management plan may result in change requests that impact procurement actions. 20

12.1.3 Plan Procurement Management Outputs Project Documents Update Project documents that may be updated include: Requirements documentation. Requirements traceability matrix. Risk register. 21

12.2 Conduct Procurements The process of obtaining seller responses, selecting a seller, and awarding a contract. PMBOK Ref # Fig 12-4 22

12.2 Conduct Procurements PMBOK Ref # Fig 12-5 23

12.2.1 Conduct Procurements - Inputs Procurement Management Plan (Section 4.2.3.1) Procurement Documents (Section 12.1.3.3) Source Selection Criteria (Section 12.1.3.4) Seller Proposals Project Documents (Section 11.5.3.2) Make-or-Buy Decisions (Section 12.1.3.5) Procurement Statement Of Work (SOW) (Section 12.1.3.2) Organizational Process Assets (Section 2.1.4) 24

12.2.2 Conduct Procurements Tools & Techniques Bidder Conferences Proposal Evaluation Techniques Independent Estimates Expert Judgment Advertising Analytical Techniques Procurement Negotiations 25

12.2.2 Conduct Procurements Tools & Techniques Bidder Conferences Also known as contractor conferences, vendor conferences and pre-bid conferences. Meetings with Prospective Sellers & Buyers prior submitting a bid/proposal. Ensure that all sellers have clear & common understanding of the procurement requirements. Fairness is addressed by techniques such as collecting questions from bidders or arranging field visits in advance of conference. 26

12.2.2 Conduct Procurements Tools & Techniques Proposal Evaluation Techniques A formal review evaluation process used for complex procurements defined by the buyer s procurement policies. Source selection will be made based on seller responses evaluated using previously defined weighted criteria. Evaluation committee will make a selection on a seller for approval by management prior to the award. 27

12.2.2 Conduct Procurements Tools & Techniques Independent Estimates Estimate prepared either by the procuring organization or by a professional estimator. Estimate serves as a benchmark on proposed response. Significant differences in estimates can be an indication that the statement of work was deficient, ambiguous, and /or that prospective sellers misunderstood or failed to respond fully to the procurement statement of work. 28

12.2.2 Conduct Procurements Tools & Techniques Expert Judgement Used to evaluate seller proposals. Evaluation proposals may be accomplished by a multi-discipline review teams with expertise in the areas covered by the procurement documents. Various functional disciplines that may be asked to provide expertise include contracting, legal, finance, accounting, engineering, design, research, development, sales, and manufacturing. 29

12.2.2 Conduct Procurements Tools & Techniques Advertising Advertising in general circulation publications or in specialty trade publications. Purpose is to extend existing list of potential sellers. Mandatory requirement in some government jurisdictions for certain types of procurement items. 30

12.2.2 Conduct Procurements Tools & Techniques Analytical Techniques Analytical techniques help organizations to identify the readiness of a vendor to: Provide the desired end state. Determine the cost expected to support budgeting. Avoid cost overruns due to changes. Involves defining a need in such a way that vendors/sellers can bring value through their offerings Examining past performance information may identify high risk areas that need to be monitored closely. 31

12.2.2 Conduct Procurements Tools & Techniques Procurement Negotiations Clarifies the structure, requirements and other terms of the purchases to reach mutual agreement prior signing the contract. Final contract language should reflect all agreements reached and should include: Responsibilities. Authority to make changes. Applicable terms and governing law. Technical and business management approaches. Proprietary rights. Contract financing. Technical solutions. Overall schedule. Payments Price 32

12.2.2 Conduct Procurements Tools & Techniques Procurement Negotiations Negotiator should not do the following: Rush the process Attempt to leave one stage incomplete Rush to the next stage too quickly 33

12.2.2 Conduct Procurements Tools & Techniques Procurement Negotiations: Protocol & Probing Stage Protocol Stage o Introductions o Negotiator get to know each other o Atmosphere for the rest of the negotiation meeting is determined Probing Stage o Beginning of search process o Each party identify their issues & concerns o Identify Strengths/Weaknesses and possible area of interest o Negotiation plan updated to take into account any new information 34

12.2.2 Conduct Procurements Tools & Techniques Procurement Negotiations: Scratch Bargaining & Closure Stage Scratch Bargaining o Bargaining Starts o Differences between both parties are discussed o Points of Consensus are identified o Efforts made to bridge gaps/ shortfalls Closure Stage o Documents final consensuses between both parties o Arrangements for recording the results initiated, leading to last stage 35

12.2.2 Conduct Procurements Tools & Techniques Procurement Negotiations: Agreement Stage Agreement Stage o Ensures that both parties have an identical understanding of the agreements reached. o Clarifications may be necessary due to difference in terminology. o Negotiations may be re-opened o Development of Plans for creating a written contract. 36

12.2.2 Conduct Procurements Tools & Techniques Procurement Negotiations: Tactics Deadline o Impose a deadline for reaching an agreement o Limits the time involved allowed for negotiating Surprise o One party takes on the other party by surprise o One party may have some information (e.g. Price change ) and present it to the other party Limited Authority o The agreement cannot be finalized due to the Limited authority with negotiator o Stalling tactic o Knowing the authority of the opponent early in the negotiation meeting 37

12.2.2 Conduct Procurements Tools & Techniques Procurement Negotiations: Tactics Missing Man o One party may claim that the person with final authority is absent. Fair & Reasonable o Comparisons to other similar situations e.g. Price is fair because other company is paying the same price for the assignment. Delays o Tactical use of delays. o Delay to get back on track. o Delay to cool down when temper flares. o Need time to further research. 38

12.2.2 Conduct Procurements Tools & Techniques Procurement Negotiations: Tactics Reasoning Together o Working out disagreements for benefit of all involved. Confusing the Opponent o One person deliberately distorts issues & figures to confuse opponent. Withdrawal o One party makes a false allegation/attack upon issue & retreats. o Usually done to avert attention from a possible area weakness. Unreasonable o Making opponent appear un-reasonable. 39

12.2.2 Conduct Procurements Tools & Techniques Procurement Negotiations: Tactics Arbitration o Involving third party to settle down issues. Fait accompli o One party may claim that what is being asked has already been accomplished and cannot be re-called/changed. o Any changes at this stage will have an monetary & schedule impact on the project. 40

12.2.2 Conduct Procurements Tools & Techniques Non-competitive Selection Single Source o Occurs when the buyer selects a single seller company to provide products or services. Sole Source o Occurs when there is only one seller that can cater to the requirements and there isn t any competition. o Buyers negotiation powers get affected due to monopoly of seller in the field. 41

12.2.2 Conduct Procurements Tools & Techniques Types of Warranties One party assures that the goods will meet certain standards. Expressed warranty is written in the contract. Implied warranty is a measure of merchantability or fitness for a particular purpose. Waiver: Provides loss of rights under a contract. 42

12.2.3 Conduct Procurements Outputs Selected Sellers o Sellers who have been judged to be in a competitive range based on the outcome of the proposal or bid evaluation. o Draft contracts will become the actual contract when an award is made. Agreements o Includes terms & conditions and other items that the buyer specifies about what the seller is to perform or provide. o Project team s responsibility to ensure that all agreements meet the specific needs of the project. 43

12.2.3 Conduct Procurements Outputs 44

12.2.3 Conduct Procurements Outputs Change Requests o Changes to the project management plan, its subsidiary plans, and other components. Project Management Plan Updates o Updates to the cost baseline, scope baseline, schedule baseline, communications management plan, procurement management plan. Project Documents Updates o Updates to requirements documentation, requirements traceability documentation, risk register, stakeholder register. 45

12.3 Control Procurements The process of managing procurement relationships, monitoring contract performance, and making changes and corrections to contracts as appropriate. PMBOK Ref # Fig 12-6 46

12.3 Control Procurements PMBOK Ref # Fig 12-7 47

12.3 Control Procurements Application of appropriate project management processes to the contractual relationship(s) with selected sellers. Integration of the outputs from these processes into the overall management of the project. Project management processes that are applied include: o Direct and manage project work. o Control quality. o Perform integrated change control. o Control risks. 48

12.3 Control Procurements Has a financial management component being the monitoring of payments to seller which ensures: Payment terms in the contract are met. Payments are linked to seller progress; close relationship of payments made to the work accomplished. Reviews and documents how well a seller is performing or has performed based on the contract. Involves capturing details to determine if corrective actions or early termination are needed. Review can be used as a measure of the seller s competency for performing similar work on future projects. 49

12.3.1 Control Procurements - Inputs Project Management Plan (Section 4.2.3.1) Procurement Documents (Section 12.1.3.3) Agreements (Section 12.2.3.2) Approved Change Requests Work Performance Reports (Section 4.4.3.2) Work Performance Data (Section 4.3.3.2) 50

12.3.2 Control Procurements Tools & Techniques Contract Change Control System Procurement Performance Reviews Inspections & Audits Performance Reporting Payment System Claims Administration Records Management System 51

12.3.2 Control Procurements Tools & Techniques Contract Change Control System Defines the process to modify procurements. Procurement Performance Reviews Structured review of the seller s progress to deliver what is defined in the contract. Inspections and Audits Performance Reporting Payment Systems 52

12.3.2 Control Procurements Tools & Techniques Claims Administration Documenting, processing, monitoring and managing instances where the buyer and seller cannot reach an agreement on compensation for a change or cannot agree that a change has occurred. Also referred to as claims, disputes, appeals. Records Management System System used to manage contract and procurement documentation and records. 53

12.3.3 Control Procurements Outputs Work Performance Information Change Requests Project Management Plan Updates Procurement Management Plan Schedule Baseline Cost Baseline Project Document Updates Organizational Process Assets Updates 54

12.4 Close Procurements The process of completing each procurement. PMBOK Ref # Fig 12-8 55

12.4 Close Procurements (cont d) PMBOK Ref # Fig 12-9 56

12.4.1 Close Procurements Inputs Project Management Plan Procurement Documents 57

12.4.2 Close Procurements Tools & Techniques Procurement Audits Structured review of the procurement process originating from Plan Procurement Management through Control Procurements. Objective is to identify successes and failures. Procurement Negotiations Final equitable settlement of all outstanding issues, claims and disputes. Settlement through negotiation is ideal. Records Management System 58

12.4.3 Close Procurements Outputs Closed Procurements Formal written notice that the contract has been completed. Organizational Process Assets Updates Procurement File. Deliverable Acceptance. Lessons Learned. 59

PMP Exam Preparation Sample test questions Copyright 2013 PMI SOC 60

Question #1 You are working on a very dynamic project. You need a specific technical skill which is not available in the team. Consequently you have hired a contractor. Market conditions which drive the requirements are fluctuating. What is the best way to handle this situation? A- Firm fixed price contract- this way your cost is fixed no matter what the requirements will be B- Cost plus fixed fee contract - this way you will pay only for the work done by the contractor C-Cost plus incentive fee contract since the contractor has an incentive to keep their costs down D-Make the contactor part of the agile team which includes the customer & the project team members E- C & D Answer: 61

Question #2 You ve been contracted by an industrial design firm to manage their contracting. Your client asks you to take over the negotiations for an important contract to design a new lighting remote control system. You ve narrowed it down to one seller, and now you re working with the legal department at the buyer to negotiate the terms of the contract. Which of the following BEST describes your goal? A.You want to make sure that the seller gets as much money as possible B.You want to get the best deal for your client by making sure the seller s price is as low as possible, no matter what it costs them C.You want to prolong the negotiation so that you earn a higher fee D.You want to get a fair deal for both the buyer and the seller Answer: 62

Question #3 Which of the following BEST explains the difference between a seller audit during Administer Procurements and a procurement audit during Close Procurements? A.The seller audit reviews the products being created, while the procurement audit is used to examine successes and failures and gather lessons learned B.The seller audit reviews the products being created, while the procurement audit reviews how well the seller is doing the job C.The procurement audit reviews the products being created, while the seller audit reviews how well the seller is doing the job D.The procurement audit reviews the products being created, while the seller audit is used to examine successes and failures and gather lessons learned Answer: 63

Question #4 You have been assigned to a project where the previous project manager left. You find the scope was documented but not the business objectives. The scope has suddenly changed but the change is not documented. In addition, a contractor was hired for a Fixed Price contract to deliver the previous scope. What tasks should you do & in what order?. 1- Negotiate with the contractor to close the FFP contract & change the contract to a cost + incentive fee 2-Meet with the stakeholders to assess the situation, understand the business objective & determine how the project will deliver the benefits 3- Document the new scope, asses where the project stands & re baseline immediately A- 3,1 B- 2, 3, 1 C- 3, 1, 2 D- 2, 1 Answer: 64

Question #5 You are managing a project that might have to contract out work, and you re comparing the relative advantages and disadvantages of finding a seller versus having your company do the work itself. Which process are you in? A.Conduct Procurements B.Plan Procurements C.Request Seller Responses D.Plan Contracting Answer: 65

Question #6 You re looking for a seller to do work for your project. When do you send out an RFP? A.Before you plan contracting, but after you Plan Procurements B.After you create the procurement documents, but before you select the seller C.During Administer Procurements D.After the bidder conference, but before you select the seller Answer: 66

Question #7 What are the Procurement processes? A. Plan, Conduct, Administer, Monitor & Control, Close B. Plan Purchases and Acquisitions, Plan Contracting, Request Seller Responses, Select Sellers, Contract Administration, Contract Closure C. Plan Procurements, Conduct Procurements, Administer Procurement, Close Procurements D. Determine, Plan, Conduct, Monitor & Control, Close Answer: 67

Question #8 The project's contractor payment system should include: A. An administrative review B. A review of work performed C. Negotiations over price D. A viable account payable system Answer: 68

Question #9 The contract administrator should provide at contract closure. A.Contract file to the contractor B.Letters of commendation to all project staff C.Formal notice of deliverable acceptance to the contractor D.Lessons learned documentation to senior management/buyer Answer: 69

Question #10 you inherited a project where some work was contracted as FFP. Your manager had signed off on the contract The stakeholders have just requested a scope change due to changing industry conditions. You were conducting a procurement audit & found the contractor performing to deliver the previous scope. What should you do next? 1- Understand the business conditions that caused the scope change & document the change 2-Request a contingency for your project to cover the FFP amount in the contract since you were not responsible for it 3-Negotiate with the contractor to close the FFP & start a time and material contract 4- Tell the stakeholder there is a fixed price contact & any change will increase the cost of the project so they are aware A- 1, 2 & 3 B- 1, 3, & 4 C- 1, 2, 4 D 1, 3 only Answer: 70

Question #11 Close Procurement documentation includes all of the following EXCEPT: A.Scope, schedule, and change documentation B.Financial documents C.The RFP or RFB and seller's working proposal D.Results of contract-related inspections Answer: 71

Question #12 Potential contract changes should be: A.Postponed as long as possible to protect the budget B.Viewed as negative, quantified, and tabulated C.Quantified and fed back through the perform integrated change control process D.Reviewed by senior management and the buyer Answer: 72

Question #13 The purpose of a procurement audit is to do all of the following EXCEPT: A.Maintain a complete file of contract-related records. B.Determine if the bid documents used were effective. C.Determine if the contract change control system was effective D.Identify successes and failures and their implications Answer: 73

Question #14 When the procurement item is available from only one supplier, all of the following evaluation criteria should be identified and documented to support an integrated assessment EXCEPT: A.Management approach B.Standard forms C.Life cycle cost D.Technical capabilities Answer: 74

Question #15 All of the following methods are available to the project manager for short-listing contractor proposals EXCEPT: A.Comparing proposals against independent estimates B.Weighting systems C.Subjective screening systems D.Resource distribution system Answer: 75

Question #16 You have been diligent in capturing lessons learned. You have just discovered a new tool that automates testing & will save you 15 % of testing cost on a given task in fact there is potential for it to be applied to all testing. You also have a contractor hired on a Fixed Price contract What should you do next? 1-Llist this as an accomplishment in the stakeholder meeting & advise them you will finish your test early by 2 weeks 2_ Share it with your team & with the contractor & your manager 3- Share it only with your manager & immediate team members but not with the contractor since they are on an FFP contract 4- Negotiate with the contractor ½ the savings achieved by the tool A 1 B 3 C- 2 D 2&4 Answer: 76

Question #17 FFP is an acronym for: A.Free Flow Performance B.Fundamentally Fixed Price C.Firm Fixed Price D.Free Form Project Answer: 77

Question #18 Which of the following item is not a Tool & Technique used in Plan Procurement Management : A.Make-or-buy analysis B.Market Research C.Contract Negotiations with the Sellers D.High level meetings with upper management involving the customer Answer: 78

Question #19 You are the PM for the Union Station Extension Project and have awarded the electrical scope to Sparky Electrical Inc. There have been numerous issues with the quality of the work performed by Sparky Electrical causing schedule delays resulting in penalty charges by the client. There is a new project starting in your organization and the project team is considering awarding electrical scope to Sparky Electrical. Which of the following would have assisted the new project team in the vendor selection process : A. Contract Change Control system B. Procurement Contract C. Performance Reporting D. Payment Systems Answer: 79

Question #20 A new hospital is being constructed and your company has been selected to deliver the entire project from design to construction. The client states that there is no room in their budget for additional charges. Your company will perform some of the work but most of the scope will be subcontracted. As the PM, you need to ensure that your subcontractors understand the budgetary constraints and are clear on the scope of work. Which of the following is the best type of contract to use on this project? A. Cost plus fixed fee B. Fixed Price C. Time and Material D. Cost plus Incentive Fee Answer: 80

PMP Exam Preparation End of session Copyright 2013 PMI SOC 81