SHAH & ANCHOR KUTCHHI ENGINEERING

COLLEGE

Subject: Software Project Management

PROJECT PROCUREMENT MANAGEMENT
Class/Div = TE-4

NAME
DIMPLE MALDE
PANCHAM MAMANIA

ROLL NUMBER
25
26

Projects generally require resources, products, or services that must be

purchased or acquired
externally. In this section, we will focus on another PMBOK knowledge
area called project
procurement management.
According to the PMBOK Guide, project procurement management
includes:
The processes necessary to purchase or acquire products, services, or
results
needed from outside the project team. (313)
Again, it is important to keep in mind that the project team can be both a
buyer and a
seller of products and services. Even though we will mainly use the terms
buyer and seller
in this chapter, a buyer could be a client or a customer, while a seller could
be a consultant,
contractor, vendor, supplier, or a subcontractor. For example, an
organization may enter into
a contract by outsourcing a specific project to a consulting firm. In this
case, the organization
would be the buyer of the consulting firms (i.e., sellers) services. In turn,
the consulting firm
can also be a buyer of products (i.e., computers, software, paperclips) and
services that could
in turn be outsourced or subcontracted to other firms who specialize in a
particular service
(e.g., programming, system testing, printing of user manuals). In addition,
Project Procurement
Management also includes contract management and change control
processes needed to create
or oversee contracts or purchase orders to support the project team.
The Project Procurement Management Processes
The PMBOK Guide outlines four processes to support project
procurement management. These

processes are summarized in Table 12.1 and are then discussed in more
detail. It is also a good
idea for the project manager and team to seek out the advice of
specialists such as lawyers,
accountants, or purchasing agents early in the project or as necessary to
avoid potential problems
and conflicts.
Plan Procurements :-The process of identifying and documenting the
project needs that can or
must be met by acquiring products, services, or results outside of the
project
organization. It also includes identifying potential sellers, vendors,
suppliers,
contractors, subcontractors, etc., to obtain bids, quotes, proposals, or
other
information to make the procurement decisions.
Conduct Procurements :-The process of obtaining seller responses,
selecting a seller, and then negotiating and awarding a contract to a seller
for a specific product or service.
Administer Procurements :-The process of managing the relationship and
contract between the buyer and seller. This includes monitoring contract
performance and making changes or
taking corrective actions when needed.
Close Procurements :-The process of completing and settling each contract
or project procurement.This may include resolving any open items if
necessary.
Plan Procurements
The first process, plan procurements, begins by determining which project
needs can be fulfilled
internally by the project team and which can best be met externally.
Moreover, the project
manager and team must not only decide what project needs can be met
internally or externally,

but also how, when, how many, and where these products and services
will be acquired.
The decision to go outside of the project team for products and services
depends on several
factors. First, the project manager and team may want to consider what
products or services
are available in the marketplace as well as the associated cost, quality,
terms, and conditions.
However, the most important consideration depends on the projects
deliverables or scope. Often
the project manager and team are faced with limited funds, resources,
expertise, or tight delivery
schedules and technology constraints. Given these factors, an external
party may provide better
opportunities to meet these challenges effectively and efficiently.
The decision whether to purchase or outsource specific project needs is
similar to a make or
buy decision that compares the total direct and indirect costs of
making a particular product
or performing a particular service internally to the total direct and indirect
costs of buying
or contracting externally. The same qualitative and quantitative tools for
comparing various
alternatives that were described in Chapter 2 to develop the business case
can be used to make
this decision. However, this decision can be viewed from a risk
management perspective using
the risk management framework presented in Chapter 8. For example, one
reason for going to
an outsider could be to transfer risk to the seller. In many respects, this
may be a good idea
if the seller has a particular expertise or more experience than the project
team. Unfortunately,

when you transfer control over to someone else, you may lose your control
over the project
schedule and budget if the external party cannot meet its promised
obligations.
Depending on the needs of the project, the project manager and team may
develop a formal
or informal project procurement plan. This plan may be separate or it may
become an integral
part of the projects plan, scope, and work breakdown structure (WBS). In
addition, the same
or very similar project processes for managing scope changes, schedule,
budget, quality, and
communication must be in place and understood by all the project
stakeholders.
The plan procurement also focuses on developing some type of
procurement document,
such as a request for proposal (RFP), that will be used to solicit bids,
quotes, or proposals from
prospective sellers. These documents are generally structured by the
buyer so that a common
means and set of measures can be used to compare and evaluate the
responses from the different
sellers. The complexity or rigor of these documents can be high when
dealing with a government
agency or if the product or service to be acquired is highly regulated.
This also includes the development of criteria for evaluating bids,
proposals, and so forth
after they are received from the sellers. While price might be one
important factor, a seller
or contractor may be chosen based on their experience, expertise,
understanding of the sellers
needs, management approach, financial strength, technical capability, or
references from previous clients or customers.
Conduct Procurements

The general idea of the conduct procurements process is for the buyer to
obtain a reasonable
number of high-quality, competitive proposals. To achieve this objective, a
buyer-organization
may hold a conference with bidders, contractors, vendors, and so on.
These preliminary meetings
allow the sellers to have a better understanding of what products or
services are needed and
how to go about submitting the procurement document. Many times the
governing policies and
procedures for the buyers organization entail a lengthy and public
process to solicit bids from
a number of prospective sellers. This may include advertising in
newspapers, trade journals,
or even the Web to let other parties know that requests for proposals,
bids, or quotations are
being sought. Alternatively, in many cases, the buyer may contact the
seller directly for a bid,
quotation, or request.
The proposal developed by the seller generally includes the price of the
requested product
or service as well as a description of the sellers ability and willingness to
provide what
was requested. Depending on the nature or the product or service
requested, this could entail
something as simple as a phone call or a lengthy, complex, and formal
written document and a
formal presentation to the buyer.
Contracts between Sellers and Buyers
Once the bids, proposals, or quotations are received, the buying
organization begins the process
of analyzing, evaluating, and selecting a seller. The criteria developed in
the plan purchases and

acquisition process are used as a basis. Again, price or cost may be an

important consideration,
but other factors should be considered because a decision on price or cost
alone may prove
moot if the seller is unable to provide a quality product or service in a
timely manner.
A number of qualitative and quantitative approaches can be used to select
a particular seller.
For example, many of the tools and techniques for developing a business
case in Chapter 2 or
analyzing risk in Chapter 8 would be well suited for the task of choosing a
seller. In general,
a risk management approach for identifying and assessing risks, and then
coming up with a
risk strategy and response would be useful for not only selecting a seller
but for managing the
relationship as well.
Once a seller is selected, the buyer may enter into contract negotiations
so that a mutual
agreement can be reached. A contract is a document signed by the buyer
and seller that defines
the terms and conditions of the buyerseller relationship. It serves as a
legally binding agreement
that obligates the seller to provide specific products, services, or even
results, while obligating
the buyer to provide specific monetary or other consideration. A contract
defines the terms and
conditions or such things as responsibilities and authorities, technical and
project management
approaches, proprietary rights, financing, schedule, payments, quality
requirements, and price, as
well as remedies and process for revisions to the contract. A contract can
be simple or complex,

informal or formal, depending on the nature of the relationship. For

example, a purchase order
would be an example of a simple contract, while an outsourcing
agreement between two firms
would require a more lengthy and detailed document.
Organizational policies and procedures usually govern how these
relationships are created
and who is authorized to enter into and manage these various
agreements. Today, many projects
also involve multiple contracts and subcontracts with many buyer and
seller relationships that
must be managed actively throughout the entire project life cycle.
Given that you may be the buyer or seller of procurement services, it is
important that
you understand types of contracts that exist and that one may be more
appropriate for a given
situation. The PMBOK Guide outlines three general categories for
procurement-type contracts:
1. Fixed-price or lump-sum contractsA total or fixed price is negotiated
or set as the
final price for a specific product or service. For example, an organization
may decide
to outsource the development of an application system to a consulting
firm. Based on
the projects scope, the consulting firm will develop an estimated schedule
and budget.
Both firms may then negotiate a final cost of the project based on this
triple constraint.
On the other hand, the cost of a particular product or service may be fixed
with little
or no opportunity for negotiation. For example, lets say that a project
team member
requests a new laptop computer. Although policy and procedures vary
greatly among

organizations, usually some process is in place for acquiring products or

services and
involves requests, authorizations, and purchase orders. This process could
be simple and
straightforward or an inefficient, bureaucratic mess. Fixed-price or lumpsum contracts
may include incentives for meeting certain objects or penalties if those
objectives are
not met.
2. Cost-reimbursable contractsFor these types of contracts a payment or
reimbursement
is made to the seller to cover the sellers actual costs. These costs include
direct costs
(e.g., direct labor, materials) and indirect costs (e.g., administrative
salaries, rent, utilities,
insurance). However, an additional fee is added to the total direct and
indirect
costs as a profit to the seller. Cost-reimbursable contracts can also include
incentives
for meeting specific objectives or penalties if specific objectives are not
met. In general,
there are three types of cost-reimbursable projects:
a. Cost-plus-fee (CPF) or cost-plus-percentage of cost (CPPC)The seller is
paid for
the costs incurred in performing the work as well as a fee based on an
agreed-upon
percentage of the costs. For example, lets say that you take your car to a
mechanic
for a tune up. The mechanic might say that the cost of the tune up will
include parts
and labor plus a 20 percent fee. So if the mechanic charges $50 an hour to
cover
direct and indirect costs, works 2 hours on your car, and uses $100 worth
of parts,

the cost of parts and labor would be $200 (i.e., 2 $50 + $100). Your bill
would
be $240 after the 20 percent fee is added on. Unless the mechanic is
someone you
can trust, you might want to take precautions such as getting an estimate
in writing
before the repair work begins; otherwise, an unscrupulous mechanic could
increase
the fee (i.e., profit) by driving up the costs of labor and/or parts.
b. Cost-plus-fixed-fee (CPFF)In this case, the seller is reimbursed for the
total direct
and indirect costs of performing the work, but receives a fixed amount.
This fixed
amount does not change unless the scope changes. For example, you may
take your
car to your friend who says that he will work on your car. In this case, the
arrangement
may be that you pay for all the parts needed for the tune up, but your
friend
will do the work for $20 as a favor. If your car needs $100 in parts, then
the cost
of having your friend work on your car will be $120. However, if you can
find the
same parts for $80 at an automotive superstore, then the cost of having
your car
tuned up will be $100, since your friend will receive $20 for his time
regardless of
the cost for the parts.
c. Cost-plus-incentive-fee (CPIF)Under this type of contract, the seller is
reimbursed
for the costs incurred in doing the work and receives a predetermined fee
plus an
incentive bonus for meeting certain objectives. In this case, lets say that
while your

friend is working on your car, you receive a call from another friend who
offers you
two free tickets to a concert that starts in a couple of hours. You might
offer the
extra ticket as an incentive to complete the repairs in an hour or less so
that you
can take your car to the concert and make it in time for the start of the
show.
3. Time and materials (T&M) contractsA T&M contract is a hybrid of costreimbursable
and fixed-price contracts. Under a T&M contract, the buyer pays the seller
for both
the time and materials required to complete the work. In this case, it
resembles a costreimbursable
contract because it is open-ended and the full cost of the project is not
predetermined before the work begins. However, a T&M contract can
resemble a fixedprice
arrangement if unit rates are set. For example, lets say that you want to
have
your house painted. A painting contractor may tell you that the cost of
painting your
house will be $20 an hour plus the cost of paint. If a gallon of paint costs
$10, the cost
of painting your house will depend on how many gallons of paint are used
and how
long it takes. If one person works on your house for 20 hours and uses 5
gallons of
paint, then the cost for the painters time and the materials used will be
$450.
Administer Procurements
Once the contract is signed, both the buyer and seller enter into a
relationship in which each
must fulfill their contractual obligations. The administer procurements
process makes sure that

both parties are performing in accordance to the terms of the contract. In

general, this process
includes:
Authorizing and coordinating the contracted work at the appropriate
time
Monitoring the contractors performance with respect to scope,
schedule, budget, and
quality
Managing scope in terms of its definition and change control
Risk identification, assessment, and control
Monitoring that all payments, as stipulated in the contract, are made
Reviewing and evaluating the sellers performance both in terms of
fulfilling contract
obligations but also the sellers response when problems arise and require
corrective
action
Determining whether the contract needs to be amended
Deciding if the contract should be terminated early for just cause,
convenience, or when
the seller is in default
Close Procurements
The process called close procurements verifies that all of the work
outlined in the contract is
finished. Close procurements also includes updating records to reflect the
final results, archiving
information for future use, as well as other administrative activities.
Closure of the contract can result when the buyer and seller mutually
agree that the obligations
of the contract have been fulfilled. The seller may give the buyer a formal
notice that all
deliverables specified in the contract have been provided, and the buyer
may provide the seller
with a notice that the deliverables have been received and are acceptable.
On the other hand,

early termination of the project may occur when one party is unable to
fulfill their rights and
responsibilities. Based on the terms and conditions outlined in the
contract, the other party may
have the right to terminate the contract or seek punitive damages.
Regardless of whether the
contract was closed as planned or prematurely, the project manager and
team should document
any lessons learned so that best practices can be identified and made part
of the organizations
project methodology.