A great help in preparing for the PMP exam
Let us start with a small practical story.. .While implementing the project the project manager goes to the procurement manager and tells him that “I need a seller now!”. What do you think the procurement manager replies? “Not a problem. We already have a procurement process in place which is designed in such a way that we can find the best seller who offers the best price and gets the work done. The complete process can take 4 to 8 weeks and I hope you have accounted for the same in your project schedule.”… This is the reason why PMP certification tests you on your knowledge of procurement management. We would like to very clearly state that the prime responsibility of the procurement process, specially the legally binded contract designing and the terms and conditions involved is the procurement manager’s responsibility but the project manager is required to be very closely involved in the whole process to assist the procurement department in the project requirements. Along with that the project manager should understand the organizations procurement procedures as he needs to plan and account for the amount of time required.
According to the ‘Wikipedia’ definition of procurement – It is an act of acquiring, buying goods, services or works from an external source. During the planning stage of your project itself or during anytime while working on the project, the project manager identifies the modules or products or services that needs to be procured. There are several reasons behind this identification process, with lack of expertise, schedule constraints, transfer of risk to name a few…
Procurement management involves all the tasks and activities right from identifying the need of outsourcing , finalizing your project’s make or buy decisions, moving on to inviting applications from prospective sellers, selecting the source, drafting and signing the contract and then reviewing the progress of the seller.
According to PMBOK, the complete procurement management knowledge area is divided into four process outline below –
- Plan Procurement Management [Planning process group] – This process is related to find answers to what, how and why’s related to procurement. Here the project manager performs the make or buy analysis, create a procurement management plan, decide upon the type of contract, defines the statement of work. Source selection criteria are also determined.
- Conduct Procurements [Execution process group] – Once the procurement statement of work is complete, this process involves actual implementation of the procurement process. Applications are invited from prospective sellers, pre bid conferences and other meetings are conducted, the seller is finally selected and the award is contracted.
- Control Procurements [Monitoring & Controlling process group] – This process primarily involves managing the relationship between the buyer and seller and ensures that both the parties perform as per the contract. The change control process is also a part of this process related to work that is procured. Disputes, if arise, are resolved as well as procurement performance review meetings are conducted.
- Close Procurements [Closing process group] – This process involves verification and acceptance of work and deliverables as per the contract and realizing the final payments. Procurement can close when a contract is completed or when a contract is terminated before work gets completed. In the latter case, project managers involved should consider and analyse closely the termination clause of the contract before proceeding for such a decision.
Since we now have a fair idea of the complete procurement process and the activities involved , let us know more about the various type of contract.
A contract is a legally enforceable agreement between two or more parties. Contracts contain the terms and conditions that set the rights and obligations of the contracting parties.
We would like to outline the three types of contracts and their purpose-
- FIXED PRICE CONTRACT – As the name suggests, a fixed fee is decided upon for the work to be done. A project manager should consider a fixed price contract only when the scope of work is very clear and defined in detail. A clearly defined project statement of work would fetch a fair and reasonable price from the prospective sellers. If the costs end up being more than the agreed amount, the seller bears the additional costs. Therefore the buyer has the least amount of cost risk in this kind of contract.
- COST REIMBURSABLE CONTRACT – A cost reimbursable contract provides the buyer to pay the seller allowable incurred costs as per the contract. This type of contract is used when the exact scope of work in uncertain or the costs cannot be calculated accurately enough. With cost reimbursable contract, the buyer has the most risks because costs are unknown.
- TIME & MATERIAL CONTRACT – This is also called a T&M contract or a unit-price contract. In this type of contract the buyer pays on a per hour or per item basis. This has the elements of a fixed price as well as a cost reimbursable contract and is frequently used when the level of effort cannot be defined when the contract is awarded. This usually involves a lot of administrative and maintenance overheads and is recommended to be changed into any of the above two type of contracts whenever possible.
TYPES OF FIXED PRICE CONTRACTS –
FFP – Firm Fixed Price
[Contract = $1,100,000]
FFIP – Fixed Price plus Incentive Fee
[Contract = $1,100,000. For every month early the project is finished, an additional $10,000 is paid to the seller]
FPAF – Fixed Price plus Award Fee
[Contract =$1,100,000. For every month performance exceeds the planned level by more than 15 percent, an additional $5000 is awarded to the seller, with a maximum award of $50,000]
FP-EPA – Fixed Price plus Economic Price Adjustment
[Contract =$1,100,000, but a price increase will be allowed in year two based on US consumer price index for year one]
TYPES OF COST REIMBURSABLE CONTRACTS –
CPFF – Cost plus Fixed Fee
[Contract = cost + a fixed fee of $100,000]
CPIF – Cost plus Incentive Fee
[Contract = $500,000 target costs plus $ 50,000 target fee. The buyer and seller share any cost savings or overruns at 80:20]
CPAF – Cost plus Award Fee
[Contract =Cost plus a base fee plus award for meeting buyer performance criteria, maximum award of $50,000]
CPPC – Cost plus percentage cost
[Contract =cost plus 10 percent of costs incurred as fee]
That covers the major concepts related to procurement and contracts as per PMBOK 5.0. Happy project management!!
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Thanks for information…..