Procurement Management

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Procurement Management
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Procurement Management

• Includes the processes required to acquire goods
  and services from outside the performing
  organization

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Procurement Management
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Step 1 Procurement planning

• Make or buy?
• Buy to reduce risk
• Cost
• Time
• Scope
• Performance
• Contract type selection
• But 1st what is a contract?

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What is the purpose of a contract?

• Change the risk profile of the project transfer
  some of the risk to the supplier
• Implement policy share the project opportunity
  with others especially public sector projects
  small business, minority business, etc.

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What is a contract?

• Legally binding documents
• All terms and conditions in the contract MUST be
  met
• Entire agreement between two parties
• Legal language
• Payments
• Reporting requirements
• Proposal
• Scope of work

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What do you need to have a contract?

• An offer from the seller
• Acceptance from the buyer
• Consideration something of value not
  necessarily money
• Legal capacity separate, legal, competent
  parties
• Legal purpose cannot be for illegal goods or
  services
• Offer or acceptance may be spoken or written,
  written is preferred.

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Contract type selection

• 4 general types
• CR cost reimbursable
• TM time and materials
• FP fixed price
• Purchase order
• Selection based on
• How well-defined the scope is
• Amount or frequency of changes expected
• Level of effort and expertise the buyer can
  devote to managing the seller
• Industry standards

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Cost reimbursable

• Sellers costs are reimbursed
• Buyer has the most cost risk b/c total costs are
  unknown
• Used when buyer can only describe what they need
  rather than what to do
• Seller often writes the scope of work
• Applied in research-type projects

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Types of CR contracts

• CPFF cost plus fixed fee
• Most common CR contract
• Profit is the fixed fee
• CPPC cost plus percentage of costs
• Illegal contract for US government
• Bad deal for buyers

• CPIF cost plus incentive fee
• Costs plus fee plus bonus for beating an
  incentive
• CPAF cost plus award fee
• Costs plus fee plus bonus based on performance

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CPFF - Cost plus fixed fee example

• Estimated cost 100,000
• Fixed Fee 8,000
• Case 1
• Actual cost 90,000
• Case 2
• Actual cost 110,000

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CPIF Cost plus incentive fee example

• Target cost 100,000
• Incentive fee 8,000
• Target price 108,000
• Sharing ratio 70/30
• No ceiling price

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CPIF Case 1

• Actual cost 90

CPIF Case 2

• Actual cost 110

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Assignment due Thursday

• Calculate the ROC for the two cases for the last
  two examples CPFF and CPIF
• Compare the risk to the buyer in CPFF and the
  CPIF examples. Use the risk range (high - low
  for each contract type) to discuss

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Fixed price

• Also called lump sum, firm fixed price
• Most common type of contract
• One price is agreed upon for all work
• Buyer has the least cost risk in this type of
  contract b/c risk of higher cost is borne by the
  seller
• Use when buyers can completely describe the scope
  of work

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Types of FP contracts

• FP Fixed price
• FPIF fixed price incentive fee
• Like CR
• FPEPA fixed price economic price adjustment
• Used for multiple year project
• Tied to CPI or some other standard

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FP example

• Contracted price is 100,000
• Schedule 120 days
• Actual cost is 80,000
• What does the buyer pay the seller?

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FPIF Example

• Target price 100,000
• Target cost 85,000
• Target fee 15,000
• Ceiling price 110,000
• Sharing ratio 80/20
• Schedule is 120 days

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FPIF Example Case 1

• Actual cost 80,000
• What does the buyer pay the seller?

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FPIF Example Case 2

• Actual cost 95,000
• What does the buyer pay the seller?

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FPIF Example Case 3

• Actual cost 105,000
• What does the buyer pay the seller?

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Time Materials

• Used for small dollar amounts
• Priced per hour or per item basis
• Hybrid of fixed price and cost reimbursable
• hourly labor is like fixed price
• Materials is reimbursable and total cost unknown

• Used
• Buyer wants more control than CR but scope is not
  known or incomplete
• For short-term services
• In an emergency to initiate work quickly

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TM Example 1

• Developer 50 hours _at_ 75/hr
• Tester 100 hours _at_ 50/hr
• Tool rental 500
• Training expense 300
• 2 fee on materials

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TM Example 2

• Above example
• 2 developers not at the standard rate
• Tom _at_ 65/hour
• Mary _at_ 76/hour
• Tester not at the standard rate
• Susan _at_ 48/hour

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Purchase order

• Unilateral contract
• Signed by one party
• Used for simple commodity purchases

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Advantages of contract types
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Disadvantages of Contract Types
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What type of contract?
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Risks and Contract types

• Who has the cost risk in a cost reimbursable
  contract, the buyer or seller?
• Who has the cost risk in a fixed price contract,
  the buyer or seller?

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Seller Risk for FP
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Buyer Risk in CR
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Incentives

• Help bring the sellers objectives in-line with
  those of the buyers
• Example The cost is estimated at 210,000 and
  the fee at 25,000. If the seller beats that
  cost they will share the savings 80 to the
  buyer and 20 to the seller. The actual costs
  came in at 200,000. What is the final fee and
  final price?

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Incentive Example
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Types of scope of work

• Performance conveys what the final product
  should be able to accomplish rather than how it
  should be built or what its design
  characteristics should be
• Function or detailed conveys the end purpose or
  results rather than the specific procedures, etc.
  It is to be used in the performance of the work
  and may also include a statement of the minimum
  essential characteristics of the product
• Design conveys precisely what work is to be done

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Types of scope of work

• Performance and functional used for
• Information systems
• Information technology
• Hi-tech
• Research
• Project never done before
• Design
• Construction
• Equipment purchasing

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STEP 2 Solicitation Planning

• Procurement documents
• Request for proposal RFP requests a price but
  also a detailed proposal on how the work will be
  accomplished, who will do it, resumes, company
  experience, etc.
• Invitation for bid IFB requests one price to
  do all the work
• Request for quotation RFQ requests a price
  quote per item, hour, or foot.

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General approach to procurement docs, contract
types, and scope of work
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Standard Contract

• Also called boilerplate contract
• Standard, preauthorized contracts
• Require no further legal review if used without
  modification
• If signed as is they are legally sufficient and
  will form a contract

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Special provisions

• Take a standard contract and modify add, change,
  or remove from standard provisions so that
  particular needs of project are addressed

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Terms and Conditions

• Familiarity with all

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Privity

• Contractual relationship
• Company A hires Company B to do some work for
  them. Company B subcontracts to Company C.
• The project manager for A is at the job site and
  tells Company C to stop work. Generally, goes
  company C have to listen?

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Evaluation Criteria

• Described in the RFP, IFB, or RFQ
• Understanding of need
• Overall or life cycle cost
• Technical ability
• Management approach
• Financial capacity

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STEP 3 Solicitation

• Q A answer the sellers questions as the
  seller prepares a proposal

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STEP 4 Source Selection

• Seller proposal comparison
• Weighting system
• Screening system eliminate proposals that dont
  meet minimum requirements
• Independent estimate
• Past performance history
• Negotiate if appropriate

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Negotiate

• Responsibilities
• Authority
• Applicable law under whose law will the
  contract fall
• Technical and business management approaches
• Contract financing
• Price

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STEP 5 Contract Administration

• Assuring that the sellers performance meets the
  contractual requirements
• PM must assure not just scope of work but also
  terms and conditions

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Contract interpretation

• The contract supersedes any memos, conversations
  or discussion that may have occurred prior to the
  contract signing. Therefore, if a requirement is
  not in the contract, even if it was agreed upon,
  it does not have to be met.

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Which would win?
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What should a PM watch for during contract
administration?

• Fixed Price
• Checking to make sure all the work in the scope
  of work is actually being done
• Watching for overpriced change orders
• Checking for scope misunderstandings
• Time and Materials
• Providing day-to-day direction to the seller
• Attempting to get concrete deliverables
• Paying close attention to project schedule
• Making sure the project length is not extended
• Watching for situations when switching to a
  different form of contract makes sense

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What should a PM watch for during contract
administration?

• CPFF
• Auditing the sellers costs
• Making sure all costs are applicable and
  chargeable to your project
• Making sure the sellers work is progressing
  efficiently
• Watching for the seller adding resources to your
  project that do not add value or perform real
  work
• Watching for resources being shifted from what
  was said in the original proposal (more
  experienced people proposed by less experienced
  used, but charged at the higher rate)
• Watching for seller charges that were not part of
  the original plan
• Re-budgeting the project

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STEP 6 Contract closeout

• When a contract ends
• When a contract is TERMINATED before the work is
  completed
• Activities
• Product verification
• Financial closure
• Update records
• Final contract performance reporting
• Contract file