Pm session11
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The document discusses procurement management and the various cycles and strategies involved. It describes the requirement, requisition, solicitation, award, and contract administration cycles. It also covers make-or-buy analysis, contract types, risk allocation, and contract changes and termination. The goal of procurement management is to purchase necessary goods and services while managing relationships and contracts.
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Order of Precedence
A. Specifications (first priority)
B. Other instructions (second priority)
C. Other documents, such as exhibits,
attachments, appendices, SOW, contract
date requirements list [CDRL], etc.
(third priority)
D. Contract clauses (fourth priority)
E. The schedule (fifth priority)](https://image.slidesharecdn.com/pmsession11-141015193215-conversion-gate01/85/Pm-session11-39-320.jpg)
Pm session11
- 1. 1 Procurement Management Sharif Project Management Session 11 – Fall 1390
- 2. Impossible to produce everything internally! Inputs to company must be procured/managed Contracts and relationships must be managed! 2 Procurement Purchasing, Acquisition, Supply (Materials, Services, Results, Consultants) Outsourcing, Sub-contractors Contracts, Supplier Relationships
- 3. 3 Procurement Management Includes the processes to purchase or inquire the products, services, or results needed from outside the project team to perform the work. Includes the contract management & change management processes needed to administer contracts or purchase orders issued. Plan Purchases/Acquisitions o Plan Contracting Request Seller Responses o Contract Closure Select Sellers o Contract Administration
- 4. 4 The Make Decision Less costly (but not always!!) Easy integration of operations Utilize existing capacity that is idle Maintain direct control Maintain design/production secrecy Avoid unreliable supplier base Stabilize existing workforce
- 5. 5 The Buy Decision Less costly (but not always!!) Utilize skills of suppliers Small volume requirement (not cost effective to produce) Having limited capacity or capability Augment existing labor force Maintain multiple sources (qualified vendor list) Indirect control
- 6. 6 Procurement Strategies Corporate procurement strategy: the relationship of specific procurement actions to the corporate strategy Project procurement strategy: the relationship of specific procurement actions to the operating environment of the project Procure all goods/services from a single source. Procure all goods/services from multiple sources. Procure only a small portion of the goods/ services. Procure none of the goods/services.
- 7. 7
- 8. 8 Procurement Management 1. Requirement cycle: definition of the boundaries of the project 2. Requisition cycle: analysis of sources 3. Solicitation cycle: the bidding process 4. Award cycle: contractor selection and contract award 5. Contract administration cycle: managing the subcontractor until completion of the contract
- 9. 9 1. Requirement Cycle Defining the need for the project Development of the statement of work, specifications & 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/approval to proceed
- 10. 10 Specifications Specifications are written, pictorial, or graphic information that describe, define, or specify the services or items to be procured. There are three types of specifications: • Design • Performance • Functional
- 11. 11 Types of Specifications Design specifications: These detail what is to be done in terms of physical characteristics. The risk of performance is on the buyer. Performance specifications: These specify measurable capabilities the end product must achieve in terms of operational characteristics. The risk of performance is on the contractor. Functional specifications: This is when the seller describes the end use of the item to stimulate competition among commercial items, at a lower overall cost. This is a subset of the performance specification. The risk of performance is on the contractor.
- 12. 12 2. Requisition Cycle Evaluating/confirming specifications (are they current?) Confirming sources Reviewing past performance of sources Producing solicitation package
- 13. 13 3. Solicitation Cycle 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
- 14. 14 Solicitation Cycle Advertising Negotiation Small purchases (i.e., office supplies) Negotiation Processes Request for information (RFI) Request for quotation (RFQ) Request for proposal (RFP)
- 15. 15 Negotiation Planning Develop objectives (i.e., min-max positions) Evaluate your opponent Define your strategy and tactics Gather the facts Perform price/cost analysis Arrange “hygiene” factors
- 16. 16 Negotiation Objective-Setting Buyer Seller Min Objective Max Min Objective Max Price
- 17. 17 Contract Negotiations Requires Knowing When to Speak and When to Be Quiet. Negotiation Factors Compromise-ability Adaptability Good faith Research Your Supplier/ Customer Before Entering Into Contract Negotiations
- 18. 18 4. Award Cycle The objective of the award cycle is to negotiate a contract type and price that will result in reasonable contractor risk and provide the contractor with the greatest incentive for efficient and economic performance.
- 19. 19 Contract Elements Mutual agreement Consideration Contract capability Legal purpose Form provided by law Contract Forms Contract Completion Contract Terms
- 20. 20 Contract Selection Criteria Overall degree of cost and schedule risk Type and complexity of requirement (technical risk) Extent of price competition Cost/price analysis Urgency of the requirements Performance period Contractor’s responsibility (and risk) Contractor’s accounting system (is it capable of earned value reporting?) Concurrent contracts (will my contract take a back seat to existing work?) Extent of subcontracting (how much work will the contractor outsource?)
- 21. 21 Contracting Type Fixed price contract Cost plus contract Unit rates contract EPC-Turnkey contract BOOT contract
- 22. 22 Contract’s Risk and Reward Go Hand-in-Hand Negotiating wrong type of contract can be devastating!
- 23. 23 Contractor’s Risks HIGH LOW Risk On Client FFP CPFF Risk On Contractor LEGEND FFP FIRM FIXED PRICE CPFF COST PLUS FIXED FEE
- 24. 24 Cost Plus Contracts
- 25. •All costs are reimbursed (cost run-ups) •Fee is fixed (in $$$ not %) irrespective of costs •Contractor is motivated for early completion 25 Cost-Plus-Fixed-Fee Contract (CPFF) 0 % 0 % 100 % 100 % CONTRACTOR’S CUSTOMER’S RISK RISK RISK SHARING METER RISK LOCATION
- 26. 26 Cost-Plus-Award-Fee Contract (CPAF) •All costs are reimbursed (cost run-ups) •Negotiated range of possible profits •Award may be percentage of cost 0 % 0 % 100 % 100 % CONTRACTOR’S CUSTOMER’S RISK RISK RISK SHARING METER RISK LOCATION
- 27. 27 Cost-Plus-Incentive- Fee Contract (CPIF) •Contractor can earn additional profits •All costs are reimbursed (cost run-ups) •A “floor” and “ceiling” exists on profits 0 % 0 % 100 % 100 % CONTRACTOR’S CUSTOMER’S RISK RISK RISK SHARING METER RISK LOCATION
- 28. 28 Firm-Fixed-Price Contract (FFP) • Maximum risk with contractor • Higher negotiated profit margins • High likelihood of scope changes 0 % 0 % 100 % 100 % CONTRACTOR’S CUSTOMER’S RISK RISK RISK SHARING METER RISK LOCATION
- 29. Firm-Fixed-Price with Economic Price Adjustments (FPE) 29 •Adjustments for escalation factors •Adjustments for inflation •Negotiated adjustment cycle 0 % 0 % 100 % 100 % CONTRACTOR’S CUSTOMER’S RISK RISK RISK SHARING METER RISK LOCATION
- 30. 30 Incentive Contracts • Additional profits are possible by lowering cost • Customer and contractor share cost savings
- 31. 31 Principles of Incentive Contracts EXAMPLE TARGET COST: $20,000 TARGET FEE: $1500 SHARING RATIO: 80/20 % •Customer pays 80 % of overrun •Contractor pay 20 % of overrun •Profit is $1500 less CONTRACTOR’S 20 % •Customer keeps 80 % of underrun •Contractor keeps 20 % of underrun •Profit is $1500 plus CONTRACTOR’S 20 % Note: limitations may be imposed on price or profit
- 32. •Contractor can earn additional profits •Contract has a ceiling on price (or cost) paid •Incentive may be on time, quality, other factors 32 Fixed-Price-Incentive- Fee Contract (FPIF) 0 % 0 % 100 % 100 % CONTRACTOR’S CUSTOMER’S RISK RISK RISK SHARING METER RISK LOCATION
- 33. 33 Cost-Sharing Contract (CS) •No profits allowed •Customer and contractor share costs •Contractor may retain control of Proprietary knowledge after completion 0 % 0 % 100 % 100 % CONTRACTOR’S CUSTOMER’S RISK RISK RISK SHARING METER RISK LOCATION
- 34. • No profits allowed • Contractor is usually a non-profit organization • Limitations on costs allowed may be imposed 34 Cost Contract (C) 0 % 0 % 100 % 100 % CONTRACTOR’S CUSTOMER’S RISK RISK RISK SHARING METER RISK LOCATION
- 35. •COSTS INCURRED MAY BE UNLIMITED •CONTRACTORS CAN MAXIMIZE PROFITS •SCOPE CHANGES MAY BE FREQUENT AND UNLIMITED 35 Cost-Plus-Percentage-of- Cost Contract (CPPC) 0 % 0 % 100 % 100 % CONTRACTOR’S CUSTOMER’S RISK RISK RISK SHARING METER RISK LOCATION
- 36. CUSTOMER’S RISK 36 Relative Contract Risk RISK LOCATION FFP FFE FPIF CPIF CPAF CPFF CPPC CS C 100 % CONTRACTOR’S RISK 0 % 0 % 100 % RISK SHARING METER
- 37. There are several other types of contracts available. They may be derivatives of these contracts, combinations, or simply special contracts for special circumstances. 37 Other Types of Contracts
- 38. 38 5. Contract Administration Cycle Change management Specification interpretation Adherence to quality Warranties Subcontractor management Production surveillance Waivers Contract breach Resolution of disputes Project termination Payment schedules Project closeout
- 39. 39 Order of Precedence A. Specifications (first priority) B. Other instructions (second priority) C. Other documents, such as exhibits, attachments, appendices, SOW, contract date requirements list [CDRL], etc. (third priority) D. Contract clauses (fourth priority) E. The schedule (fifth priority)
- 40. 40 Type of Changes Administrative change Change order Contract modification Undefinitized contractual action Supplemental agreement Constructive change
- 41. 41 Causes of Constructive Changes Defective specification with impossibility of performance Erroneous interpretation of contract Over-inspection of work Failure to disclose superior knowledge Acceleration of performance Late or unsuitable owner or customer furnished property Failure to cooperate Improperly exercised options Misusing proprietary data
- 42. 42 Reasons for Termination For Convenience of the Customer Elimination of the requirement Technological advances in the state-of-the- art Budgetary changes Related requirements and/or procurements Anticipating profits not allowed
- 43. Reasons for Termination - For Default Due to Contractor’s Actions 43 Contractor fails to make delivery on scheduled date. Contractor fails to make progress so as to endanger performance of the contract and its terms. Contractor fails to perform any other provisions of the contract.
- 44. 44 Contract Administration Rights Reject the entire shipment Accept the entire shipment (barring latent defects) Accept part of the shipment