Procurement Management Flashcards
Decentralized contacting
Procurement manager is assigned to your project full time and reports directly to this project manager
Pros: easier access to the procurement manager; loyalty to your project; better understanding of your project
Cons: “no home” for procurement manager after project; no level of high expertise; no standardization; no career path for procurement manager
Make or buy analysis
Company makes a decision about whether to do the project work themselves or outsource some or all of the work
Pros of buying - decrease the risk to the projects constraints
Pros of making - you want to retrain control; work involves proprietary information; you have an idle plant or workforce
Procurement statement of work
Must be clear, complete and concise as possible and it must describe all the work and activities the seller is required to complete including meetings, reports and communications and acceptance criteria
Types of statements of work
Performance - conveys what the final product should be able to accomplish; ex: I want a car that will go from zero to 100mph in 5 seconds.
Functional - conveys the end purpose or result rather than the specific procedures or approach; ex: I want a car with 23 cup holders
Design - conveys precisely what work is to be done and includes materials used and how work should be done; ex: build it exactly as shown on these drawings
Fixed price contract
Used for acquiring goods products or services with well defined specifications or requirements; buyer has least cost risk in this type of contract; less work for buyer to manage
If scope is not well defined this type on contract can create a higher risk
Used to buy a product
High amount of detailed procurement sow
Used in construction
No negotiation required
Fixed price incentive fee
Profits can be adjusted based on the seller meeting performance criteria such as getting the work done faster cheaper or better
Example; contract is 100,000 for every month early the project is completed an additional 10,000 is paid to the seller.
Fixed price award fee
The buyer pays a fixed price plus an award amount based on performance; total possible award amount it determined in advance and appropriated based on performance.
Example; contract is 100,000. For every month performance exceed the planned level by more than 15% an additional 5,000 is awarded to the seller with a maximum award of 50,000.
Fixed price economic price adjustment
If a contract will cover multi year period there may be uncertainties about future economic conditions and cost of supplies the seller is required to provide may change therefore a buyer may choose this type of contract.
Example; contract is 100,000 but a price increase will be allowed in year 2 based on the us consumer price index report for year 1.
Remember economy whenever you see this on the exam
Purchase order
Simplest type of fixed price contract; normally unilateral ( signed by one party ).
Example; contract is 30 meters of wood at $9 per meter.
Time and materials contract
Buyer pays on a per hour or per item bases and are frequently used for service efforts in which the level of effort cannot be defined when the contract is rewarded.
Sellers profit is built into the rate so they have no incentive to get the work done quickly or efficiently. Used for services Low detailed procurement sow Low amount of negotiation Medium level of management for buyer
Pros
lasting a short amount of time; Contract can be created quickly
Buyer has a medium amount of cost risk with these contracts
Example; $100 per hour plus expenses of materials at cost
Cost reimbursable contracts
Used when the exact scope of work is uncertain and costs cannot be estimated accurately; allows for the buyer to pay incurred costs to the extent prescribed in the contract;
used for services Costs are variable Profit is listed separately and known to buyer Low level of detailed procurement sow It and research and development
Cons:
Buyer has the most cost risk
Seller has moderate incentive to control risk
Requires auditing of invoices high level of effort to manage seller
High level of negotiation
Pros:
Simpler procurement statement of work
Requires less work to define the scope
Cost contract
The seller receives no fee (profit) and is used for work in a non profit.
Cost plus fee ( CPF )or cost plus percentage of costs (CPPC)
Requires the buyer to pay for all costs plus a percentage of costs as a fee.
Normally not allowed for us federal procurements and is bad for buyers
Sellers profit is based on a percentage of everything billed to the buyer for the project
Example; contract is cost plus 10% of costs as fee
Cost plus fixed fee (CPFF)
Provides payment to the seller of actual costs plus a negotiated fee that is fixed before the work begins
Example; cost plus a fee of $100,000
Cost plus incentive fee ( CPIF )
Provides for the seller to be paid for actual costs plus a fee that will be adjusted based on whether the specific performance objectives stated in the contract are met.
Example; $500,000 target cost plus $50,000 target fee. The buyer and seller share any cost savings or overruns at 80% to the buyer and 20% to the seller
Cost plus award fee (CPAF)
The buyer pays all costs and a base fee plus an award amount based on performance.
Example; cost plus a base fee plus award for meeting buyer-specified performance criteria. Maximum award available is $50,000
Incentives
Used to bring the seller and buyers objectives inline; designed to motivate the sellers efforts
The buyer will provide an additional fee if the seller meets some cost performance or schedule objectives
Price
The amount the seller charges the buyer
Profit (fee)
Planned into the price the seller provides the buyer
Cost
How much the item costs the seller to create develop or purchase
Target price
Measure of success; used to compare the end result (final price) with what was expected (target price)
Sharing ratio
Describes how the cost savings or cost overruns will be shared; example 80/20
Ceiling price
The highest price the buyer will pay and is a way for the buyer to encourage the seller to control costs
Point of total assumption (PTA)
PTA = (ceiling price - target price) / buyers share ratio + (target cost)
Relates to fixed price incentive fee contracts and refers to the a son t above which the seller bears all the loss of a cost overrun
