Procurement Knowledge Area Summary
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Procurement Statement of Work (SOW)
is a legal document subject to legal reviews, legal advise should be sought
throughout the whole procurement process
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sellers are external to the project
team
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need to go through all 4 processes
for each and every procurement
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contract elements: offer (seller
offer buyer), acceptance (buyer criteria), capacity (physical/financial
capabilities), consideration (seller receive), legal purpose (must
be legal under law)
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best if contract is signed after PM
is assigned
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PM needs to understand terms and
conditions, identify risks, include procurement time in schedule and involve in
negotiations
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Centralized contracting vs
decentralized contracting
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sole source, single source (preferred),
oligopoly (very few sellers)
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procurement categories: major
complexity (high risk), minor complexity (low risk, expensive), routine
purchase (Commercial Off the Shelf Products COTS), goods and services (to
perform part of our product)
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a contract is not required to be
written, it can be verbal or handshake, for internal projects, formal contract is best
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procurement applies to actors (as a
service)
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immaterial breach is minor breach
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point of total assumption (PTA) =
Target Cost + (Ceiling Price – Target Price) / % Share of Cost Overrun
2.
Conduct Procurement
Plan
Procurement Management
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determine whether to obtain
products/services outside of organization
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identify possible sellers and
pre-meeting with them
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identify explicitly what is needed
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make-or-buy analysis is
a compulsory process, needs to take risks into considerations
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carefully written terms and
conditions can transfer/share risks
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teaming agreements or joint ventures
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procurement documents: request for
proposal (RFP), invitation for bid (IFB), request for quote (RFQ), request for
information (RFI), tender notice, invitation for negotiation, seller initial
response
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the procurement management plan
specifies how a project will acquire goods/services from outside, includes:
contract type, risk management, constraints and assumptions, insurance
requirements, form and format, pre-qualified sellers, metrics used, etc.
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Procurement Statement of Work (SOW) – performance (describe what can be accomplished), functional (convey the end purpose or result), design (convey precisely what are to be
done), can be developed by the seller or buyer – detail enough to allow the
potential sellers to decide whether they want/are qualified (at a minimum) to
pursue the work
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Contract Types:
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Firm Fixed Price (FFP) – the price is
fixed, specifications are well known, risk on the seller
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Fixed Price Incentive Fee (FPIF) –
incentives for faster/better than contracted
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Fixed Price with Economic Adjustment
/ Economic Price Adjustment (FPEA / FP-EPA) – inflation are taken into account
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Purchase Order (PO) – for
off-the-shelf goods/services with published rates
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Cost Reimbursable (CR) / Cost Plus –
buying the expertise (not the products), outcome is not clear, risk on the
buyer, little incentive to control costs on buyer, need invoice audits
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Cost Plus Fixed Fee (CPFF)
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Cost Plus Incentive Fee (CPIF) –
incentive for performance, sharing of unused money if under/over contracted
amount
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Cost Plus Award Fee (CPAF) – award to
be given based on agreed criteria, solely decided by the customer on the degree of
satisfaction
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Cost Plus Percentage of Costs (CPPC)
– illegal for contracts with US Government
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Cost Contract – no profit, for NGO
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Best Efforts – obligates the seller
to utilize best attempts, high uncertainty in meeting the goal
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Time and Materials (T&M) – (hybrid type) when scope is not known, need
constant monitoring to control schedule and cost, simple, for short duration,
good for proof-of-concept type projects
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Point of Total Assumption – (in fixed-price (incentive fee) contracts) in budget
overrun, the point at which the seller assumes all additional costs for
delivering the product/service
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PTA = (Ceiling Price – Total Price) / Buyer’s Share Ratio + Target
Cost
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target cost = total cost = estimated
cost, total price = total cost + total profit
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Request for Proposal (RFP) – cost
reimbursable contract, functional/performance SOW
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Invitation for Bid (IFB) / Request
for Bid (RFB) – fixed-price contract, design SOW
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Request for Quote – time and
material, any type of SOW
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Cancellation for Convenience – buyer can cancel and pay up to the point
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Cancellation for Cause – default by either party, may result in legal actions
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Escrow – survivability of seller in
doubt, put the product in escrow (esp. if seller not give up intellectual
properties)
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Force Majeure – standard disclaimer
refers to ‘Acts of God’
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Indemnification / Liability –
responsible party
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LOI Letter of Intent – not legally
binding
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Privity – the contractor may
use sub-contractor, no direct contractual relationship with buyer
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Retainage – amount to be withheld to
ensure delivery
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Risk of Loss – how the risk is
shoulder by the parties
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Time is of the Essence – delay in delivery will cause cardinal breach of contract
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Work Made for Hire – all work owned by the buyer
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Sole Source vs Single Source
(preferred vendor – for long-term relationship)
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Evaluation Criteria: risk,
understanding of need, life-cycle cost, technical capability, management
approach, technical approach
Conduct Procurements
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identify the sellers and award the
contracts
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PM may not be the lead negotiator on
procurement, but may be present to assist
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may need senior management approval before
awarding the contracts
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bidder’s conference is a Q&A
session with bidders, all bidders receive the same information (bidder are
careful not to expose their technical approach during the session => may not
have many questions)
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NOT to have secret meetings or
communications with individual vendors
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may set up qualified sellers lists
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review seller proposals: weighting
systems, independent estimates, screening systems (screen out non-qualified
vendors), seller ratings systems (for past performance), expert judgement
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Contract Negotiations and Tactics
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Fait Accompli – not negotiable
terms
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Deadline – deadline for deliverables
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Good Guy/ Bad Guy – one friendly, one
aggressive
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Missing Man – decision maker is missing
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Limited Authority – not given
authority
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Fair and Reasonable – what is fair?
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Unreasonable – making unreasonable
demands
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Delay – esp in critical moments
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Attack – force compliance
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Agreement is legally binding and
should include (PM should NOT attempt to write the agreement):
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statement of work, schedule baseline,
performance reporting, period of performance, roles and responsibilities,
warranty, payment terms, fees and retainers, incentives, liability, penalties,
etc.
Control Procurements
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performed by both seller and buyer
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manage procurement relationships,
monitor contract performance, make change and corrections
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the procurement administrator may be external to the project team
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may identify early signs and capture
details for pre-mature termination of contract
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the claims administration process
deals with changes/disputes, disputes is best to be settled through negotiation > ADR
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may need Alternative Dispute
Resolution (ADR) by 3rd parties in case disputes cannot be settled
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For Fixed Price contracts,
look out for Bait and Switch (replace with cheaper materials), look
out for excessive change requests
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For Cost Reimbursable contracts, audit all invoices, look
out for additional charges, tie payment to milestones, make sure people with
the required skill sets are doing the job
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For Time and Materials contracts, ensure hours are not
padded, follow the milestone dates
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Contract Change Control System: for
handling change requests (define who has the authority to approve changes
(usually not the PM, but may be assigned
the authority))
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Work performance data includes: the
cost incurred and the invoice needs to be paid
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OPA may include the seller’s
performance
Close Procurements
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all work are completed, deliverables
accepted, claims settled OR terminated by either party
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at completion / termination of
contract
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prior to administrative closure of
Close Project or Phase
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unresolved claims may be left for
litigation after closure
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settlement of claims/invoices, audit,
archive, lessons learned
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the contract is complete when all the
specifications are satisfied, no matter the customer is satisfied with the
product or not
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Procurement Audit is
the structured review of the procurement process from Plan Procurement
Management through Control Procurements, is used to capture lessons
learned from the procurement exercise
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once a procurement is cancelled, the next process will be the close procurements
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