Project Procurement, Contract Management, and

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Lecture 45

• Project Procurement, Contract Management, and
• Ethics
• in
• Project Management

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Lecture 44 contents

• What is Risk?
• Primary Components
• Tolerance of Risk
• Risk Management
• Cat of Risk
• Risk Planning
• Risk Assessment (identification and analysis)
• Risk Handling
• Risk Monitoring
• Qualitative Risk Rating

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Lecture 45

• Procurement
• Procurement Cycles
• Requirement cycle
• Requisition Cycle
• Solicitation cycle
• Award Cycle
• Admin cycle
• 2. Type of contract
• Six Categories of Contract
• Ethics in Project Management

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• Self-pity is our worst enemy
• if we yield to it,
• we can never do anything wise in this world
• - Helen Keller

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• To be prepared is half the victory.
•  Miguel de Cervantes Saavedra

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• Treat people as if they were
• what they ought to be,
• you
• help them to become
• what
• they are
• capable of being
• - Johann Wolfgang von Goethe

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• The quality of a person's life is in direct
  production to their commitment to excellence,
• regardless of their chosen field of endeavor.

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• The race is not always to the swift...
• but to those
• who keep
• on running.

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• In three words,
• I can sum up everything I've learned about life
  It goes on.- Robert Frost

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Action in Your Project

• Action may not
• always bring
• happiness,
• but there is
• no happiness
• without Action
• - Benjamin Disraeli

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Procurement

• Acquisition of goods/services.
• Procurement ( contracting)
• is a Process that involves
• -Two Parties with
• Different objectives
• Who Interact in
• a given market segment.

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• Good Procurement Practices includes
• Corporate profitability by
• Taking advantage of
• Quantity discounts,
• Minimize Cost/Financial Problems,
• Seeking out Quality Suppliers.

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• As Procurement Contributes To Profitability
  Procurement is Often Centralized,
• -Results in Standardized practices
• -Lower Paper work Cost

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• Objectives of Procurement Planning are to select
  one of following for the Procurement of all
  Goods/Services
• From Single Source.
• From Multiple/source.
• Procure only small portion of Goods/Services
• Procure none of Goods/Services

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• Environment in which Procurement Take Place is
  Critical factor.
• There are two environments
• Macro
• Micro.
• Macro environment includes General external
  variables that can Influence How When we do
  Procurement and it Includes
• Recessions,
• Inflation,
• Cost of borrowing money,
• Unemployment.

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• Micro environment is the internal to Firm Include
  Procurement /Contract System five cycles
• Requirement Cycle Defines boundaries of Project
• Requisition Cycle analysis of sources
• Solicitation Cycle Bidding process
• Award cycle Contractor selection Contract
  Award
• Contract Admin Cycle Managing subcontractor
  until Completion of the Contract.

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• Several Activities of Procurement Process that
  overlaps Several of Cycles.
• These cycles are conducted In parallel,
  especially Requisition Solicitation.

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• 1. Requirement Cycle
• First Step in Procurement Process Definition of
  Project Specifically Requirements

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• Requirement Cycle Includes
• Defining the need for the project
• Development of the statement of work,
  specifications, and work breakdown structure
• Performing a make or buy analysis
• Laying out the major milestones and the
  timing/schedule
• Cost estimating, including life-cycle costing
• Obtaining authorization and approval to proceed

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• Specifications
• Written Pictorial or graphic Information describe
  define or specify services/item to be procured
• Design (physical Characteristics)
• Performance (measurable capabilities)
• Functional Specification ( subset of Functional ,
  risk is on contractor)

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• 2. Requisition Cycle
• Once the Requisition identification,
  Requisition form sent to Procurement to begin
  Requisition Process.

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• Requisition cycle Include
• Evaluation confirming specification.
• Confirming sources
• Reviewing past performance of sources
• 4. Producing Solicitation Package (S/P)
• Solicitation Package sent to each possible
  Supplier for Playing Field is level.

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• Specification Package Includes
• Bid documents (usually standardized)
• Listing of qualified vendors (expected to bid)
• Proposal evaluation criteria
• Bidder conferences
• How change requests will be managed
• Supplier payment plan

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• 3. Solicitation Cycle
• Selection of Acquisition Method is the Critical
  Element in Solicitation Cycle.
• Three Acquisition Methods
• Advertising
• Negotiation
• Small Purchases (off supplies)

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• Advertising company goes out for sealed bids.
• There are no negotiations. Competitive market
  forces determine the price and the award goes to
  the lowest bidder.

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• Negotiation is when the price is determined
  through a bargaining process. In such a
  situation, the customer may go out for a
• Request For Information (RFI)
• Request For Quotation (RFQ)
• Request For Proposal (RFP)
• The request for Proposal (RFP) is the most costly
  endeavor for the vendor.

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• Large proposals contains
• separate volumes for cost, technical Performance,
  Management History, Quality, facilities,
  subcontractor Management, Others.

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• On Large contracts the Negotiation Process may
  Also Includes Price, Quantity, Quality Timing.
• Vendor Relations are critical during contract
  negotiations.
• Can Shorten Process due to
• Integrity of relationship
• Previous history

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• Award Cycle (A/C)
• Result in a signed contract. Several types of
  Contracts.
• So Negotiation process also Include selection
  of the Type of Contract.

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• Objectives of Award Cycle is to negotiate a
  contract
• -Type Price
• -Result in reasonable Contractor risk Provide
  Contractor risk with Greatest Incentive for
  Efficient Economic Performance.

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• There are certain basic elements of most
  contracts.
• Mutual Agreement There must be an offer and
  acceptance.
• Consideration There must be a down payment.
• Contract Capability The contract is binding only
  if the contractor has the capability to perform
  the work.
• Legal Purpose The contract must be for a legal
  purpose.
• Form Provided By Law The contract must reflect
  the contractor's legal obligation, or lack of
  obligation, to deliver end products.

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• The Two Most Common Contract Forms are completion
  contracts and term contracts.
• Completion Contract The contractor is required
  to deliver a DEFINITIVE END PRODUCT. Upon
  delivery and formal acceptance by the customer,
  the contract is considered complete, and final
  PAYMENT CAN BE MADE.

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• 2. Term contract
• The Contract Is Required To Deliver A Specific
  "Level Of Effort," Not An End Product.
• The effort is expressed in Woman/Man-days (Months
  Or Years) over a Specific Period Of Time using
  Specified Personnel Skill Levels And Facilities.
• When The Contracted Effort Is Performed, the
  contractor is under no further obligation. Final
  payment is made, irrespective of what is actually
  Accomplished Technically.

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• Final Contract also called Definitive contract,
  
• Follows normal Contracting Procedures. E.g.
  Negotiation of all Contractual Terms
  Condition on Cost Schedule prior to
  Initiation of Performance.

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• Negotiating of contract and preparing it for
  signatures may require months of preparation. If
  the customer needs the work to begin immediately
  or if long-lead procurement is necessary, then

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• Customer may provide the contractor with a
  letter contract or letter of intent (LOI). The
  letter contract is a preliminary written
  instrument authorizing the contractor to begin
  immediately
• The Manufacture Of Supplies Or
• The Performance Of Services.

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• Final contract price
• Must be negotiated
• after performance begins,
• Definitive contract
• must
• still be negotiated.

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• Types of contract selection based upon following
• Overall degree of Cost Schedule Risk
• Type complexity of Requirement (technical Risk)
• Extent of Price Competition
• Cost/Price Analysis
• Urgency of Requirements
• Performance period
• Contractor's Responsibility (and Risk)
• Contractor's Accounting System (Report Earn
  Value reporting?)
• Concurrent Contract (contract take A back seat to
  existing work?)
• Extent of Subcontracting (how much work
  contractor out source?)

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• General six types of contracts
• Fixed-price (FP),
• Cost -plus-fixed-fee (CPFF),
• Cost-plus-percentage-fee (CPPF),
• Guaranteed Max-Shard Savings (GMSS),
• Fixed-price Incentive- Fee (FPIF),
• Cost-Plus-Incentive-Fee (CPIF)

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• First Category
• Fixed-price or
• Lump-sum contract

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• Contractor carefully Estimate Target Cost.
• Contractor required to Perform work at negotiated
  Contract Value.

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• If Estimated target cost is low then Total
  Profit reduced may vanish.
• Contractor may not be able to underbid
  competitors So Contractor assumes a Large risk.

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• Lump-sum
• Provides Max Protection to Owner for ultimate
  Cost of Project.
• Disadvantage
• Requiring a Long Period For Preparation
  Adjudications of Bids.

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• Because of a Lack of knowledge of
• Local conditions,
• all contractors Include
• Excessive
• Contingency.

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• Chang Requested
• By owner after Award of contract Lead to
  Troublesome Sometimes Costly extras

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• 2nd Category
• Cost-Plus-
• Fixed-Fee
• (CPFF)

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• Cost Plus Fixed Fee (CPFF)
• If Accurate Pricing Not Possible in Any Other
  way.
• So we use CPFF, so Cost may vary but Fee remains
  same.
• Contractor agrees only to use Best Efforts to
  Performance
• Good/Poor Performance
• Rewarded equally.

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• Total Rs/ Profit likely To Produce Low Rate of
  Return reflects Small Amount of Risk By
  contractor.
• Fixed Fee - small Age Of Tot/true Cost.
• CPFF Required Company books
• be audited.

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• 3 Cost-Plus-Percentage
• fee Contract

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• Provides Maximum flexibility to owner Permits
  Owner Contractor to work together
  cooperatively on All Technical, Commercial,
  Financial Problems.
• -No Financial Assurance of Ultimate Cost.

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• No financial incentive to contractor this
  because of High building cost (Compared with
  other forms).
• Only meaningful Incentive can be
• Inc competition
• Prospects for
• Follow-on contracts.

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• 4th Category of Contracts
• Guaranteed
• Maximum-Share Savings

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• Contractor-Gets Fixed Fee for his Profit and
  Reimbursed for the Actual Cost of Engineering,
  Materials, Construction Labor, all Other Job
  Costs,
• But only up to Ceiling figure established as
  Guaranteed maximum"

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• Savings below the" Guaranteed Maximum are Shared
  between Owner Contractor, where as Contractor
  Assumes the Responsibility
• For any Overrun beyond Guaranteed Maximum
  Price.

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• Contract form Combines advantages as well as
  disadvantages of Both Lump Sum Cost-Plus
  Contracts.
• Best form for Negotiated Contract as it
  Establishes a Maximum Price At Earliest Possible
  Date

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• Though contract awarded without Competitive
  Tenders.
• -Yet Protects owner Against being Overcharged,

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• Unique in that Owner Contractor share
  Financial Risk Both have Real incentive To
  Complete Project At lowest Possible Cost.

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5th Category of Contract

• Fixed-Price-
• Incentive-fee Contracts

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• These are Same as Fixed-Price contracts Except
  have some Provision for Adjustment of the
  Total Profit by a formula.
• This Formula Depends on Final Total Cost at
  Completion of Project

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• Formula Agreed to in advance By Owner
  Contractor.
• To use this Both Project or Contract
  Requirements Must be firmly established

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• Provides An incentive to Contractor To
• a) Reduce Cost
• b) Increase profit
• Both Owner Cost Share in Risk Savings.

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• 6th Cat.
• Cost-Plus-Incentive-
• Fee Contracts

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• Same as Cost Plus Contracts, Except have
  Provide for Adjustment of Fee as Determined
  By a Formula
• Compares Total Project Cost to Target Cost.
• Formula agreed to in advance by Owner
  Contractor. Used for Long Duration or RD
  Type Project.

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• 5. Contract Admin Cycle
• Contract Administrator is Responsible for
  Compliance By the Contractor to Contract's Terms
  Conditions
• To Make Sure Final Product is Fit for Use.

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• Functions of contract administrator Include
• Change Management
• Specification interpretation
• Adherence to Quality
• Warranties
• Subcontractor Management
• Production surveillance
• Waivers
• Contract breach
• Resolution of disputes
• Project Termination
• Payment Schedule
• Project Closeout

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• Part Two
• Ethics

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Ethical Origins

• Societal Ethics
• Standards of Members of Society
• use when dealing with
• each other.
• Based on
• Values standards

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Societal Ethics

• Found in Societys
• Legal Rules,
• Norm, Mores.
• Codified in the
• Form of Law
• Society Customer.

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• Norms dictate
• how people
• Should behave.
• Societal ethics vary based
• On a given Society.
• Strong beliefs in one country
• differ elsewhere.

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• Professional Ethics
• Values standards used by
• Group of Managers in workplace.
• Applied when Decision
• not Clear-Cut Ethically.
• Physicians/Lawyers
• Professional Associates
• (PMA, Bar Council)

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Values

• An individuals Basic
• convictions of
• What is Right Wrong

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• Values
• Basic beliefs About what
• one should or
• should not do?
• What is
• is not important?

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• Individual Ethics
• Values of an individual
• resulting from their
• family upbringing.

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• Behavior
• not illegal,
• Yet People still
• disagree
• If not
• ethical.

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• Ethics of top Project Manager
• set the
• tone for
• Project

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• Ethics Codes
• Policies
• Provide sign of top Managements desires in
• Project Based
• Organizational culture

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Why Behave Ethically?

• Project Manager should behave ethically
• To Avoid Harming others. Managers Responsible for
  Protecting Nurturing Resources
• In their Charge.

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• Leadership, Culture, Incentive
• Compensation Plans help Shape
• Individual Ethical behavior
• in Project Management

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Promoting Ethics

• Evidence Showing Ethical Managers
• benefit
• over long term .

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• Ethical Control System in Project Management
• Formal System to encourage
• Ethical Management.
• Project Management Firms appoint an Ethics
  Ombudsman to monitor practices. Communication
  standards
• To all employees.

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• Ethical culture firms increasingly seek to make
  good ethics part of norm organizational culture.

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• Ethical decisions involve
• Normative Judgment implies
• something is good or bad,
• right or wrong, better or worse.
• Morality Societys accepted
• norms of behavior

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• Should you pay compensation pay to laid off
  workers?
• May December Stakeholder Return.
• Should you buy goods from overseas firms that
  hire children?
• If you dont Children may not earn enough money
  to eat.

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Views of Ethical Decision-Making
Utilitarian
Rights
Justice
Decision makers seek to impose and enforce
rules fairly and impartially
Decisions made solely on the basis of outcomes
or consequences
Decisions are concerned with respecting and
pro- tecting basic rights of individuals
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• Code of Ethics
• Professional organizations Project Management
  Institute (PMI)
• Taking a serious look at developing
• Requirements for a Professional Project manager.

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Ethics obligation matrix.
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• CODE OF ETHICS FOR PROJECT MANAGERS
• PREAMBLE Project Managers, in the pursuit of
  their profession, affect the quality of life for
  all people in our society. Therefore, it is vital
  that Project Managers conduct their work in an
  ethical manner to earn and maintain the
  confidence of team members, colleagues,
  employees, clients and the public.

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• ARTICLE I Project Managers shall maintain high
  standards of personal and professional conduct.
• Accept responsibility for their actions.
• Undertake projects and accept responsibility only
  if qualified by training or experience, or after
  full disclosure to their employers or clients of
  pertinent qualifications.
• Maintain their professional skills at the state
  -of-the-art and recognize the importance of
  continued personal development and education.
• Advance the integrity and prestige of the
  profession by practicing in a dignified manner.
• Support this code and encourage colleagues and
  co-workers to act in accordance with this code.
• Support the professional society by actively
  participating and encouraging colleagues and
  coworkers to participate.
• Obey the laws of the country in which work is
  being performed.

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• ARTICLE II Project Managers shall, in their
  work
• Provide the necessary project leadership to
  promote maximum productivity while striving to
  minimize costs.
• Apply state-of-the-art management tools and
  techniques to ensure schedules are met and the
  project is appropriately planned and coordinated.
• Treat fairly all project team members, colleagues
  and co-workers, regardless of race, religion,
  sex, age or national origin.
• Protect project team members from physical and
  mental harm.
• Provide suitable working conditions and
  opportunities for project team members.
• Seek, accept and offer honest criticism of work,
  and properly credit the contribution of others.
• Assist project team members, colleagues and
  co-workers in their professional development.

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• ARTICLE III Project Managers shall, in their
  relations
• with employers and clients
• Act as faithful agents or trustees for their
  employers or clients in professional or business
  matters.
• Keep information on the business affairs or
  technical processes of an employer or client in
  confidence while employed, and later, until such
  information is properly released.
• Inform their employers, clients, professional
  societies or public agencies of which they are
  members or to which they may make any
  presentations, of any circumstances that could
  lead to a conflict of interest.
• Neither give nor accept, directly or indirectly,
  any gift, payment or service of more than nominal
  value to or from those having business
  relationships with their employers or clients.
• Be honest and realistic in reporting project
  cost, schedule and performance.

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• ARTICLE IV Project Managers shall, in fulfilling
  their responsibilities to the community
• Protect the safety, health and welfare of the
  public and speak out against abuses in those
  areas affecting the public interest.
• Seek to extend public knowledge and appreciation
  of the project management profession and its
  achievements.

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• Part Two ends

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Social Responsibility

• Social Power
• Social Responsibility Concept
• Project Management Organization must behave
  Proactively Business has certain social
  responsibility because power it wields
• Be a Good Corporate Citizen

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Social Responsibility Pyramid
Good Corporate Citizen
Do What is Right, Just
Obey the Law
Make Enough Money To Survive
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Levels of Social Responsibility
Reactive (Obstruction)
Proactive
Defensive
Accommodative
High
Level of Social Responsibility
Low
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Social Responsiveness

• Accommodative Response Managers realize need
  for social responsibility.
• Try to balance interests of all S/H.
• Proactive response Manager actively embrace
  social responsibility.
• Go out of their way to learn about help
  Stakeholders
• Good Corporate Citizen

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Why be Responsible?

• Managers accrue benefits by being responsible.
• Workers Society benefit.
• Quality of Life in Society improve.
• It is the right thing to do.
• Whistleblowers a per reporting illegal
• or unethical acts.
• Now protected by law
• Social audit Managers specifically take ethics
  business into account when making decisions.

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The Social Audit

Profitability
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Arguments For Social Responsiveness

• Business is
• involved in
• social issues

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• Business resources to
• tackle todays complex societal problems

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• A better society means
• a better environment for doing business
• Corporate social action
• will prevent
• Government intervention

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How Firms Can Improve Their Social Responsiveness
(Ethical Performance)

• Establish and publish their own Code of Ethics
• Ombudsmen - (committee, task force) to review the
  corporate past behavior
• Protect whistle-blowing - when an employee
  discloses an illegal, immoral, or unethical
  action committed by a member of the organization
• Training programs - ethical sensitivity training
• Controlling compliance - corporate social audit
  (or ethics audit)
• Leadership - demonstrate commitment from leaders
• Involve personnel at all levels

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• Part Three
• Recap of the course

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• Management
• Project Management
• Project Manager
• Project Proposal
• Project Feasibility
• Project Selection Method
• Project Planning
• Scope
• Charter
• Quality ( 3-4 )
• Productivity

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• Leadership
• Communication
• Ethics
• Costing
• Pricing
• Risk Management
• Procurement
• Close out Note

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• Part Four
• Project Management Institute (PMI)

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• Procurement Management Processes
• Project Procurement Management involves engaging
  in a systematic process to purchase or acquire
  the needed products, services, or results from an
  outside source which will perform the work.
  Procure Management encompasses contract
  management and control processes necessary to
  administer contracts or purchase orders. It also
  includes processes which assist in administering
  a contract to assure the buyer/seller
  relationships are properly managed. The
  procurement management processes are

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• Plan Purchases and Acquisitions Plan Purchases
  and Acquisitions process involves ascertaining
  what is needed, and when it is needed. Then how
  to assure you have what you need when you need
  it. (Novel concept!) This is completed as a part
  of the planning process group.

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• Plan Contracting The Plan Contracting process
  involves documenting the products, services, and
  results requirements and identifies potential
  sellers. Plan Contracting is commonly first
  engaged in the planning process group.

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• Request Seller Responses Request Seller
  Responses process obtains information,
  quotations, bids, offers, or proposals from
  sellers as appropriate. This is a part of the
  executing process group

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• Select Sellers The Select Sellers process is
  where the offers are reviewed, and a chosen
  vendor rises to the top of the Analytical
  Hierarchy Process. Commonly negotiations are
  started in written form. This is commonly a part
  of the executing process group.

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• Contract Administration - The Contract
  Administration Process manages all aspects of the
  contract and the relationship between the buyer
  and the seller including managing seller
  performance and changes, providing a basis for
  future work, and managing the relationship with
  the projects buyer. This is a part of the
  monitoring and controlling process grouping.

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• Contract Closure - The Contract Closure Process
  assures completion and settling terms of any
  contracts including resolving any open items and
  closing each contract.

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• Each Procurement Management process results in a
  specific deliverable which is used as the
  foundations for the subsequent process. Combined
  the procurement management processes provide a
  best practice pattern for managing contracts and
  vendor relationships on a project.