Chapter 12 - Procurement Management Flashcards
Difference between contracts and agreements
Contracts
Can be written or verbal
Typically created with an external entity
Involve an exchange of goods/services for compensation
Agreements
Broader term that encompasses documents or communications outlining internal or external relationships and their intention
A contract is a type of agreement
What point of view should you assume when dealing with procurement exam questions?
Assusme you are the PM for the buyer’s side
What type of communication should any correspondence, clarification, and or notifications come in the form of?
Formal written FIRST
Can be followed up with verbal communciation if necessary
Centralized vs. Decentralized contracting environments
Centralized
A procurement manager/office exists, where the procurement manager reports to the procurement head, NOT the PM
Decentralized
No procurement department
PM does all the work
3 procurement management processes
Plan procurement management
Conduct procurements
Control procurements
Plan procurement management process
- Perform make-or-buy analysis
- Create a procurement management plan
- Create a procurement strategy for each procurement
- Create a procurement SOW for each procurement
- Select appropriate contract type
- Create bid documents
- Determine source selection criteria
Preapproved seller list
A list of preapproved sellers
Used if a buyer purchases the same type of service often
Helps to speed up the purchase
Helps to ensure the seller’s qualifications are well researched befoe they’re awared procurements
If used, procurement docs are ONLY sent to the preapproved sellers
Master service agreements
Contracts between two parties including standard terms that will govern future transactions
Time-saving approach when a buyer frequently works with the same seller
Primary types of analysis for Plan Procurement Management process
Make-or-buy analysis
Source selection analysis
Make-or-buy analysis
Analysis to decide whether the project team will do all of the work, or if some or all of the work will be outsourced
Same analysis for resources is done
Source selection analysis
Determining the criteria that will be used to select a seller by analyzing project constraints
E.g., financial stability, technical expertise, number of years in business, etc.
Procurement strategy
Procurement’s strategy has 3 elements:
- How goods/services will be delivered
- What type of contract will be used
- How the procurement will be carried out throughout each phase
Developed after the make-or-buy analysis and once acquisition of goods/services are identified
What is a key bit if information within OPAs regarding procurements?
The types of contracts approved for use
Types of contracts
Fixed-price
Fixed-Price (FP)
Fixed Price Incentive Fee (FPIF)
Fixed Price Award Fee (FPAF)
Fixed Price with Economic Price Adjustments (FPEPA)
Purchase Order
Time and Material
Time and Material (T&M)
Cost-Reimbursable
Cost Contract
Cost Plus Fixed Fee (CPFF)
Cost Plus Incentive Fee (CPIF)
Cost Plus Award Fee (CPAF)
Cost Plus Fee (CPF) or Cost Plus Percentage of Costs (CPPC)
Fixed-Price (FP) Contract
A fixed total price is set for the project
All requirements have been clearly described
Changes to scope should not occur
Example
Contract = $1,100,000
Fixed Price Incentive Fee (FPIF) Contract
The buyer pays a fixed price plus an award amount based on performance, with no cap on the total award
Example
- Contract = $1,100,000
- For every month early the project is finished, an additional $10k is paid to the seller
Fixed Price Award Fee (FPAF) Contract
The buyer pays a fixed price plus an award amount based on performance, but the total possible award is determined in advance
Example
Contract = $1,100,000
For every month early the project is finished, an additional $10k is paid to the seller, with a maximum award of $50,000
Fixed Price with Economic Price Adjustments (FPEPA)
The buyer pays a fixed price and additionally accounts for uncertainties regarding future economic conditions
Example
Contract = $1,100,000, but a price increase will be allowed in year 2 to account for increases in specific material costs
Purchase Order
Unilateral contract (signed by one party) used for simple commodity procurements
Example
Contract = 30 meters of wood at $9/meter
Time and Material (T&M) contract
Buyer pays on a per-hour or per-item basis (profits built into bill rates)
Frequently used for service efforts in which the level of effort cannot be defined
Simple T&C that allow for quick negotiations
Buyer may add a “not to exceed” clause to limit amount they must pay
Example
Contract = $100/hour plus expenses/materials at cost
Cost Contract
A contract where the buyer only pays cost for work and materials, and the seller receives no profit
Typical for nonprofit work
Cost Plus Fixed Fee (CPFF)
Buyer pays actual costs plus a negotiated fee, i.e., the seller’s profit (percentage of the estimated cost of the project)
The fee does NOT vary with actual costs
Example
Contract = Cost plus a fee of $100k
Cost Plus Incentive Fee (CPIF)
Buyer pays actual costs plus a fee that WILL be adjusted based on whether specific performance objectives are met
Original estimates (target cost) is made and a fee for the work (target fee) is determined
If actual costs are less or more than target costs, the seller shares the cost savings/overruns with the buyer (typically 80/20, buyer/seller)
Example
Contract = $500k target cost plus $50k target fee
Buyer and seller share any costs savings overruns at 80% buyer and 20% seller
Cost Plus Award Fee (CPAF)
Buyer pays actual costs plus a fee based on performance (capped)
Example
Contract = cost plus a base fee plus award for meeting buyer specified performance criteria
Maximum award available is $50k
Cost Plus Fee (CPF) or Cost Plust Percentage of Costs
Buyer pays actual costs plus a percentage of actual costs of the project as a fee
NOT allowed under federal regulations; bad for buyers everywhere…what if seller chooses higher costs for resources to net a higher profit?
Example
Contract = Cost plus 10% of actual costs
What does the best contract type do?
- Meets the needs of the procurement
- Results in reasonable seller risk
- Provides the seller with greatest incentive for efficient performance
Important Facts: FP Contracts
- Most common
-
Used to acquire goods, products, or services with well-defined specifications or requirements
- SOW absolutely needs to be well defined, or else the seller will add costs to account for risks
- Seller must bear additional costs
- Buyer has the LEAST risk because the scope is well defined
Important Facts: T&M Contracts
- Frequently used for service efforts where the level of effort can’t be defined
- Allows for quick negotiations
- Best for small dollar contracts lasting a short amount of time
- Also best for staff aug
Important Facts: CR Contracts
- Used when scope is uncertain, therefore costs cannot be accurately estimated
- Typical for R&D projects or IT projects where scope is unknown
- Requires the seller to have an accounting system that tracks costs by project
- Requires auditing seller’s invoices
- Buyer has the MOST risk because total costs are unknown
Who has the most risk in a CR contract?
Buyer
Who has the most risk in a T&M contract?
Equal
Who has the most risk in a FP contract?
Seller
Point of Total Assumption definition
The amount above which the seller bears all the loss of a cost overrun
Result of project mismanagement
ONLY APPLIES TO FIXED PRICE INCENTIVE FEE (FPIF)
Point of Total Assumption formula
PTA = ( (Ceiling Price - Target Price) / Buyer’s Share Ratio) ) + Target Cost
Final Fee Formula for cost overruns or savings
1) Target Cost - Actual Cost
2) (#1) x (buyer or seller’s share ratio)
3) (#2) + Target Fee = Final Fee
What level of effort and expertise will the buyer need to devote to managing the seller in all 3 types of contracts?
FP
Low level
T&M
Medium level
CR
High Level
When should the procurement statement of work be revised/finalized?
Revised during contract negotiation
Finalized by the time the contract is signed
When can the bid document be created?
After the contract type is selected, and after the procurement SOW is created
Bid document
A description of the buyer’s needs given to sellers
Request for Proposal (RFP)
A request for a detailed proposal that includes information on price, how the work will be accomplished, who will do it, and company experience
Invitation for Bid (IFB) or Request for Bid (RFB)
A request for a total price to do all the work
Think of this as a form of RFP where the work described in the procurement SOW is detailed enough for bidders to determine a total price
Request for Quotation (RFQ)
A request for a price quote per item, hour, meter, or other unit of measure
Request for Information (RFI)
A request to help the buyer identify which companies are qualified to handle the procurement
Used before bid documents are created
Buyers can also use to collec tinfo on what work is possible, for later inclusion in RFPs or IFBs
PURPOSE IS TO GET INFO!
Why is the proposed contract included in the procurement documents?
Creating the T&C of the contract are work that needs to be done, and there are costs associated with that work. This takes time and money, and must be understand to price the project appropriately
Special provisions
Additions, changes, or deletions to standard contracts
Where do special provisions stem from?
- Risk analysis
- Requirements of the project
- Type of project
- Admin, legal, or business requirements
What should always be the response to a breach in contract?
Issue a letter formally notifying the other party of the breach
TWO BREACHES DON’T MAKE A RIGHT!
Force Majeure
A contract T&C referring to a situation that could be considered an “act of nature” (fire, electrical storm, etc.) and is an allowable excuse for either party not meeting contract requirements
Who pays for the cost of items destroyed in a force majeure?
The seller (hopefully they’re covered by insurance)
Indemnification
Who is liabale for personal injury, damage, or accidents?
Retainage
The amount of money (usually 5%-10%) withheld from each payment
Retainage money is paid (released) when the final work is complete
Helps ensure completion
Work for hire
The work provided under the contract will be owned by the buyer
Letter of intent
Because negotiating a contract and getting final signatures can take time, letters of intent are signed to give the seller confidence that the contract will be signed and to make them comfortable with taking the risk of ordering equipment or hiring staff for the proposed work
Privity
A contractual relationship
Do subs have to listen to the client?
No - clients and subs have no contractual relationship. The Client needs to talk to the main contractor to avoid claims to the company and costs of delay
When would you award work to a company without competition?
- The project is under extreme schedule pressure
- A seller has unique qualifications
- There’s only one seller who can provide the goods/services
- A seller holds a patent for item you need
- The procurement is for a small amount of money
Noncompetitive procurements
Single source (work with only one seller of your choosing)
Sole source (there’s only one seller to work with)
Conduct Procurements process
Getting bid documents, including the procurement SOW, to prospective sellers, answering sellers’ questions, and receiving and evaluating sellers’ responses
You will then select a seller using the source selection criteria specified in the procurement management plan, and negotiate a contract
What should a PM look out for in a bidder conference?
- Collusion
- Sellers not asking questions in front of the competition
- Making sure all questions and answers are put in writing and issued to all potential sellers by the buyer as addenda to the bid documents (ensuring sellers are responding to same procurement SOW)
Seller proposal (price quote; bid)
A seller’s response to the bid documents
Represents an official offer from the seller
If a buyer is a public entity and the response is to an Invitiation for Bid (IFB), who does the work go to?
Work goes to the lowest responsive and responsible bidder
Why aren’t negotiations needed in a FP contract?
Becuase the scope is complete and the lowest bidder is selected based on price
Objectives of negotiations
- Obtain a fair and reasonable price
- Develop a good relationship between the buyer and seller
Main items to negotiate (in order)
- Scope
- Schedule
- Price
Purpose of a contract
- Define roles and responsibilities
- Make things legally binding
- Mitigate or allocate risk
What do you need to have a legal contract?
- Offer
- Acceptance
- Consideration (payment)
- Legal capacity
- Legal purpose
Can acceptance be an action? Verbal? Does it have to be written?
Contract acceptance can be an action, verbal, or written
Control Procurements process
- Managing the legal relationship between buyer and seller
- Ensuring both parties perform as required by the contract
How is project control different that procurement control?
- Seller and buyer have different cultures/procedures
- Buyer/seller have different objectives
- Greater reliance on reports to determine if a problem exists
- Greater reliance on project manager relationship from buyer and seller side to resolve issues not covered in wording of contract
Claim
An assertion that the buyer did something that has hut the seller, and the seller is now asking for compensation
Seller-initiated change request
If a requirement is not in the contract, does it have to be met?
NO! Contracts supersedes any memos, conversations, or discussions
Constructive changes
- Changes that do not result from formal change requests
- Occur when the buyer - through action or inaction - limits the seller’s ability to perform the work according to the contract
- Examples include over-inspection or failure to cooperate
- Can result in a seller claim
When can the buyer terminate the contract?
For cause if the seller breaches the contract
For convenience if they no longer want the work done
If termination for convenience/cause occurs, what is the seller paid for?
Convenience
Work completed AND WIP
Cause
Work completed, but not for WIP
