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RMC PMP Exam Prep > Chapter 12 - Procurement Management > Flashcards

Chapter 12 - Procurement Management Flashcards

1
Q

Difference between contracts and agreements

A

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

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2
Q

What point of view should you assume when dealing with procurement exam questions?

A

Assusme you are the PM for the buyer’s side

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3
Q

What type of communication should any correspondence, clarification, and or notifications come in the form of?

A

Formal written FIRST

Can be followed up with verbal communciation if necessary

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4
Q

Centralized vs. Decentralized contracting environments

A

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

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5
Q

3 procurement management processes

A

Plan procurement management

Conduct procurements

Control procurements

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6
Q

Plan procurement management process

A
  1. Perform make-or-buy analysis
  2. Create a procurement management plan
  3. Create a procurement strategy for each procurement
  4. Create a procurement SOW for each procurement
  5. Select appropriate contract type
  6. Create bid documents
  7. Determine source selection criteria
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7
Q

Preapproved seller list

A

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

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8
Q

Master service agreements

A

Contracts between two parties including standard terms that will govern future transactions

Time-saving approach when a buyer frequently works with the same seller

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9
Q

Primary types of analysis for Plan Procurement Management process

A

Make-or-buy analysis

Source selection analysis

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10
Q

Make-or-buy analysis

A

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

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11
Q

Source selection analysis

A

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.

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12
Q

Procurement strategy

A

Procurement’s strategy has 3 elements:

  1. How goods/services will be delivered
  2. What type of contract will be used
  3. 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

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13
Q

What is a key bit if information within OPAs regarding procurements?

A

The types of contracts approved for use

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14
Q

Types of contracts

A

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)

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15
Q

Fixed-Price (FP) Contract

A

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

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16
Q

Fixed Price Incentive Fee (FPIF) Contract

A

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
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17
Q

Fixed Price Award Fee (FPAF) Contract

A

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

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18
Q

Fixed Price with Economic Price Adjustments (FPEPA)

A

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

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19
Q

Purchase Order

A

Unilateral contract (signed by one party) used for simple commodity procurements

Example

Contract = 30 meters of wood at $9/meter

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20
Q

Time and Material (T&M) contract

A

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

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21
Q

Cost Contract

A

A contract where the buyer only pays cost for work and materials, and the seller receives no profit

Typical for nonprofit work

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22
Q

Cost Plus Fixed Fee (CPFF)

A

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

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23
Q

Cost Plus Incentive Fee (CPIF)

A

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

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24
Q

Cost Plus Award Fee (CPAF)

A

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

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25
Q

Cost Plus Fee (CPF) or Cost Plust Percentage of Costs

A

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

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26
Q

What does the best contract type do?

A
  • Meets the needs of the procurement
  • Results in reasonable seller risk
  • Provides the seller with greatest incentive for efficient performance
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27
Q

Important Facts: FP Contracts

A
  • 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
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28
Q

Important Facts: T&M Contracts

A
  • 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
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29
Q

Important Facts: CR Contracts

A
  • 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
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30
Q

Who has the most risk in a CR contract?

A

Buyer

31
Q

Who has the most risk in a T&M contract?

A

Equal

32
Q

Who has the most risk in a FP contract?

A

Seller

33
Q

Point of Total Assumption definition

A

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)

34
Q

Point of Total Assumption formula

A

PTA = ( (Ceiling Price - Target Price) / Buyer’s Share Ratio) ) + Target Cost

35
Q

Final Fee Formula for cost overruns or savings

A

1) Target Cost - Actual Cost

2) (#1) x (buyer or seller’s share ratio)

3) (#2) + Target Fee = Final Fee

36
Q

What level of effort and expertise will the buyer need to devote to managing the seller in all 3 types of contracts?

A

FP

Low level

T&M

Medium level

CR

High Level

37
Q

When should the procurement statement of work be revised/finalized?

A

Revised during contract negotiation

Finalized by the time the contract is signed

38
Q

When can the bid document be created?

A

After the contract type is selected, and after the procurement SOW is created

39
Q

Bid document

A

A description of the buyer’s needs given to sellers

40
Q

Request for Proposal (RFP)

A

A request for a detailed proposal that includes information on price, how the work will be accomplished, who will do it, and company experience

41
Q

Invitation for Bid (IFB) or Request for Bid (RFB)

A

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

42
Q

Request for Quotation (RFQ)

A

A request for a price quote per item, hour, meter, or other unit of measure

43
Q

Request for Information (RFI)

A

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!

44
Q

Why is the proposed contract included in the procurement documents?

A

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

45
Q

Special provisions

A

Additions, changes, or deletions to standard contracts

46
Q

Where do special provisions stem from?

A
  • Risk analysis
  • Requirements of the project
  • Type of project
  • Admin, legal, or business requirements
47
Q

What should always be the response to a breach in contract?

A

Issue a letter formally notifying the other party of the breach

TWO BREACHES DON’T MAKE A RIGHT!

48
Q

Force Majeure

A

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

49
Q

Who pays for the cost of items destroyed in a force majeure?

A

The seller (hopefully they’re covered by insurance)

50
Q

Indemnification

A

Who is liabale for personal injury, damage, or accidents?

51
Q

Retainage

A

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

52
Q

Work for hire

A

The work provided under the contract will be owned by the buyer

53
Q

Letter of intent

A

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

54
Q

Privity

A

A contractual relationship

55
Q

Do subs have to listen to the client?

A

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

56
Q

When would you award work to a company without competition?

A
  • 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
57
Q

Noncompetitive procurements

A

Single source (work with only one seller of your choosing)

Sole source (there’s only one seller to work with)

58
Q

Conduct Procurements process

A

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

59
Q

What should a PM look out for in a bidder conference?

A
  • 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)
60
Q

Seller proposal (price quote; bid)

A

A seller’s response to the bid documents

Represents an official offer from the seller

61
Q

If a buyer is a public entity and the response is to an Invitiation for Bid (IFB), who does the work go to?

A

Work goes to the lowest responsive and responsible bidder

62
Q

Why aren’t negotiations needed in a FP contract?

A

Becuase the scope is complete and the lowest bidder is selected based on price

63
Q

Objectives of negotiations

A
  1. Obtain a fair and reasonable price
  2. Develop a good relationship between the buyer and seller
64
Q

Main items to negotiate (in order)

A
  1. Scope
  2. Schedule
  3. Price
65
Q

Purpose of a contract

A
  1. Define roles and responsibilities
  2. Make things legally binding
  3. Mitigate or allocate risk
66
Q

What do you need to have a legal contract?

A
  • Offer
  • Acceptance
  • Consideration (payment)
  • Legal capacity
  • Legal purpose
67
Q

Can acceptance be an action? Verbal? Does it have to be written?

A

Contract acceptance can be an action, verbal, or written

68
Q

Control Procurements process

A
  • Managing the legal relationship between buyer and seller
  • Ensuring both parties perform as required by the contract
69
Q

How is project control different that procurement control?

A
  • 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
70
Q

Claim

A

An assertion that the buyer did something that has hut the seller, and the seller is now asking for compensation

Seller-initiated change request

71
Q

If a requirement is not in the contract, does it have to be met?

A

NO! Contracts supersedes any memos, conversations, or discussions

72
Q

Constructive changes

A
  • 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
73
Q

When can the buyer terminate the contract?

A

For cause if the seller breaches the contract

For convenience if they no longer want the work done

74
Q

If termination for convenience/cause occurs, what is the seller paid for?

A

Convenience

Work completed AND WIP

Cause

Work completed, but not for WIP

RMC PMP Exam Prep (14 decks)

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