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
Procurement document ( bid document)
After the contract type is selected this is put together and Describes the buyers needs to the seller; why they want the work done; what needs to be done to win the work
Types:
Request for proposal
Invitation for bid
Request for quotation
Well designed procurement documents can: Easier comparison of sellers responses More complete responses More accurate pricing Decreased number of changes to the project
Request for proposal (RFP)
Request a detailed proposal on now the work will be accomplished who will do it, experience, price etc
Invitation for bid (IFB)
Require a total price to do all the work
Request for quotation
Request a price quote per item, hour, meter or other unit of measure
Source selection criteria
Included in procurement documents to give the seller an understanding of the buyers needs
Lowest price Experience Number of years in business Financial stability Technical ability
Nondisclosure Agreement
Agreement between the buyer and seller identifying the information or document they will hold confidential and control and who in the organization will have access to the confidential information
Standard contract
Contract terms and conditions are created by the buyer who usually put their terms and conditions into a standard format that is used over and over
Special provisions
Additions to standard terms and conditions; PM must be able to read standard terms and conditions and decide what needs to be added changed or removed
Force majure
Situation that is an act of nature; fire, flood
Letter of intent
A letter without legal binding that says the buyer intends to hire the seller
Used when a seller may need to star hiring people or ordering equipment materials before the contract is signed
Privity
Contractual relationship
Noncompetitive forms of procurement
Single source - you contract directly with your preferred seller without going through the full procurement process
Sole source - there is only one seller
Advertising
Ads may be placed in newspapers to attract sellers, magazines on the Internet or through company website, or media releases
Qualified seller list
Find investigate and check the credentials of prospective sellers in advance which will speed up the purchase and make sure the sellers qualifications are well researched before they are awarded procurements
Bidder conference
Buyer invites seller to attend a meeting in which they can tour the buyers facility and ask questions about the procurement
What to watch out for:
Collusion
Sellers not asking questions in front of the competition
Making sure all questions and answers are put in writing and issued to all sellers by the buyer as addenda to the procurement documents
Seller proposal
Sellers response to the procurement documents and represents an official prefer from the seller
Proposal review
After receiving the proposal the buyer uses the source selection criteria to assess the potential sellers ability and willingness to provide the requested products or services
Weighting system
Select a seller by weighting the word source selection criteria according to the evaluation criteria
Independent estimates
Buyer may compare the sellers proposal cost with an estimate created in house or without assistance
Screening system
Eliminates sellers who do not meet the minimum requirements of the source selection criteria
Past performance history
Buyer may consider their past history with the prospective sellers in determining which seller to award the procurement to
Presentations
Some sellers will be asked to make presentations of their proposals to the buyer so the buyer can select the most appropriate seller
Present proposals and approach to completing work
Negotiations
Not usually needed on fixed price negotiations but used with cost reimbursable and time and material contracts are used
Objectives
Obtain a fair and reasonable price
Develop a good relationship with the seller
PMs must be involved because they are responsible for facilitating project management and resolution of technical issues on the project and must be involved in any issues that affect the key objectives of the project and not being involved in negotiation a contract may be signed that the pm later discovers cannot be completed
Main items to negotiate
Scope
Schedule
Price
Price is not usually the primary selection criteria or the major concern while negotiating
Contact
Entire agreement between both parties; boilerplate language business terms regarding payments reporting requirements marketing literature the proposal and procurement statement of work
Purpose
Define roles and responsibilities
Make things legally binding
Mitigate or allocate risk
Needs of a legal contract
An offer Acceptance Consideration Legal capacity Legal purpose
Centralized contracting
There is one procurement department and a procurement manager will handle multiple projects.
Pros: higher level of expertise; standardized company practices
Cons: hard to obtain contracting help for PM; less time spent on your individual project time is divided between many projects
Control procurements - fixed price contracts
Watch for seller cutting scope Watch for the seller cutting quality Watch for overpriced change orders Check for scope misunderstandings Make sure cost are real that have been incurred and not just future cost
Control procurements - time and management contract
Provide day to day direction to the seller
Attempt to get concrete deliverables
Make sure the project length is not extended
Make sure the number of hours spent is reasonable
Watch for situations when switching to a different form of contract makes sense
Control procurements - cost reimbursable contracts
Audit every invoice
Make sure all the costs are applicable and chargeable to your project
Make sure the sellers work is progressing efficiently
Reestimate the cost of the project
Watch for seller chargers that were not part of the original plan
Watch for the seller adding resources to your project that do not add value or perform real work
Watch for resources being shifted from what was said in the original proposal
Procurement performance review
Buyers project manager analyzes all data to verify that the seller is performing as they should; seller may be present for this meeting and talk about what they can do differently
Review is used to determine if changes are needed to improve the buyer seller relationship
Claims administration
An assert action that the buyer did something that hurt the seller and is asking for compensation
Records management system
Records relating to the contract; is critical if actions taken or situations that occurred during procurement are ever questioned after the work is completed
Sometimes every email payment and verbal communication must be kept
Contract interpretation
Based on an analysis of the intent of the parties to the contract and a few guidelines; one guideline is that the contact supersedes any memos conversations or discussions that may have occurred prior to contract signing
Contract change control system
Change procedures forms dispute resolution processes and tracking systems and is specified in the contract
Contract types
Fixed price
Time and material
Cost reimbursable
