Project procurement management—an overview

Project procurement management is more important to project management than most nonproject managers realise. Project managers tend to work on one of two types of projects:

1. internally-funded—i.e. projects where an organisation wants to change its operations and commissions a project manager to make that change
2. externally-funded—i.e. projects where a project organisation is contracted to supply a specified product, e.g. a subsystem or a consumable service to the customer organisation.

A tiered arrangement is not uncommon in large complex projects with a customer, a supplier (often called the prime contractor) and component suppliers (often called subcontractors), each with a project manager looking after the interests of their employers. As part of this fiduciary responsibility, each project manager needs to understand and manage procurement from both the buying side of obtaining services and equipment and from the selling side, in terms of preparing tenders or quotes to their particular customer.

Project procurement management is a fairly simple activity comprising four main processes; however, it can easily trip up a project manager and cause major delays that may result in payouts. The PMBOK Guide project procurement management processes comprise:
* plan procurements
* conduct procurements
* administer procurements
* close procurements.

Plan procurements is where the project manager makes the decisions about what has to be bought and how it is to be bought. Starting with the WBS, the project manager has to:
* decide what items will be made within the project and what will be sourced from outside of the project
* produce a statement of work (SOW) specifying each item so that the project team can build their components and suppliers can prepare proposals to supply project components
* decide, and obtain agreement about, how to select the best proposal
* decide what type of contractual arrangement is best for each project item to be purchased.

Project procurement tools and techniques

The project team and the organisation, needs to decide whether to make the required item in-house or to buy the capability from an outside source. To make this decision, the project manager and the organisation needs to assess whether making the item is within the organisation's capability. If not, the organisation will have to decide if the ability to make the item and support it throughout its life, is in the strategic interests of the organisation.

Project managers will need to draw support and guidance from a range of subject matter experts when making procurement decisions. A project manager will generally need guidance with:
* procurement process
* contract
* technical content

Many project procurements are simple product purchases where the seller sets the conditions and the buyer (the project) agrees, purchases the item and pays the bill.
Documentation is likely to consist of a purchase order, receipt of goods, invoice and statement. Fundamentally, this is not much more complex than buying groceries. However, a reasonable portion of project procurement involves buying complex goods and services that require the construction of a purchase-specific contract by a lawyer or procurement expert.

Simplistically, a contract is a commercial agreement, of legal standing, between two parties identifying what each will do for or expects from the other.

Broadly, there are three types of contracts, with many variations based upon this dichotomy. The difference lies in the level of commercial risk borne by each party and the type of work management undertaken by each of the parties. The basic contract types are:
* fixed price (sometimes referred to as firm fixed price)—the buyer pays the seller a set amount regardless of the seller's costs; the seller bears the risk of any cost overruns
* cost reimbursement—the buyer pays to the seller the seller's actual costs, plus a fee typically representing the seller's profit; the buyer bears the risk of any cost overruns
* time and material (T&M)—strictly speaking a cost-reimbursement contract. T&M contracts are treated as a special case of cost plus usually used for activities such as professional services.

It should be noted, that in Australia at least, it is impossible to include punitive penalties in a contract. In a failed contract, an Australian court will only award real and incurred costs (and sometimes lost profits), but not penalties.

While cost plus contracts are common for labour hire, including professionals (doctors, dentists, contractor and consultants)—the goals of the seller and the goals of the buyer are not aligned. The buyer wants to keep their costs (the price) down, but the seller wants to increase the overall price to increase their profit. Therefore, cost plus contracts involve a need for the buyer to control the work being done by the seller. This is relatively easy when one or two people are involved, but virtually impossible when tens or even hundreds are people are involved across multiple sites.

The types of cost plus contracts.
Cost plus fee (CPF) or cost plus percentage fee (CPPF)
Cost plus fixed fee (CPFF)
Cost plus incentive fee (CPIF)
Cost plus award fee (CPAF)

Time and material contracts (T&M contracts) are similar to cost plus contracts in that they reimburse for cost and effort, although T&M contracts often have a fixed contract element within them.

In addressing the tools and techniques of conduct procurements we will change the order included in the PMBOK Guide and follow a logical, sequential approach.

Expert guidance
The project manager will need to seek expert guidance to determining the best method to engage with the market to ensure that a wide range of sellers are aware of the project's procurement need.

Independent estimates
This is another form of expert judgment. When you receive the responses to your RFT or RFP, how do you know if the prices are reasonable? How do you avoid paying too much? One tool to help with this is the independent estimate.

Advertising
One of the key success factors to procurement is ensuring that the market knows that the project is actually seeking some form of goods and/or services.

Bidder's conference
This is a briefing the buyer provides to the potential sellers. The briefing generally gives an overview of the statements of work and how bids will be evaluated and offers bidders the opportunity to ask questions.

Proposal evaluation techniques
Evaluation of complex responses will require evaluation by a team of different subject matter experts. This often results in a wide range of opinions between the subject matter experts as to which is the best proposal. One of the best ways for the project manager to address differing opinions and objectivity is to use a weighted decision-making technique such as Hurwicz Decision Criteria or the Kepner-Tregoe method.

Procurement negotiation
Negotiation occurs after the best submission or proposal has been selected. Negotiation involves the buyer and seller meeting to discuss and resolve any differences in understanding the statement of work. The objective of the negotiation is to end up with a contract that both organisations can execute so the work can be delivered to the project.

Records management
Within project procurement, a records management system (a subset of the project management information system—PMIS) must be developed to keep track of:
* the contract baseline
* approved contract changes
* performance reports
* claims
* payments

Performance assurance
Often some form of action is taken, especially on larger projects, to ensure that what the seller represents in their performance reports is what actually has happened. This is not an expression of distrust of the seller, but just prudent management to ensure the broader project does not receive unpleasant surprises

Tools that can be used for performance assurance are:
* procurement performance review—formal review of progress against schedule, cost and scope baselines involving both seller and buyer personnel who know about the project checking that work has been done correctly
* inspections/audits—a more formal review that checks compliance of performance against requirement specifications. This is sometimes undertaken by a third party acting on behalf of the buyer.

Procurement audit
At the end of a contract the seller will obviously seek final payment to close the contract. This is often initiated in the form of a completion certificate

Negotiated settlement
Unfortunately, at times, no agreement can be reached about how to resolve any remaining procurement issues. Options then available to the project manager are:
* Escalation to the buyer's and seller's management teams to negotiate resolution of the issue.
* Seek a resolution through a formal mediation or arbitration process whereby the seller and buyer agree to whatever outcome the mediator deems fair.
* As a last resort, legal action through the court system.

Project procurement management artefacts

INPUTS
The key inputs to project procurement management are:
* project management plan
* project schedule
* scope baseline
* activity cost estimates
* activity resource requirements
* cost performance baseline
* requirements documentation
* risk register
* make-or-buy decisions
* procurement documents
* source selection criteria
* qualified seller list
* seller proposals
* teaming agreements
* risk-related contract decisions
* contracts
* work performance information
* performance reports
* approved change requests (Topic 2—Project scope management)
* enterprise environmental factors (Topic 10—Project integration management)
* organisational process assets (Topic 10—Project integration management).

The key outputs include the:
* procurement management plan
The procurement management plan is subordinate to and part of the overarching project management plan (refer to Topic 10—Project integration management). The procurement management plan contains the project's intentions and plan for any procurement needed by the project, the processes to be followed and the associated roles, responsibilities and authorities.

* statements of work
The statement of work (SOW) is the document provided to potential sellers that describes the work to be undertaken as part of that procurement contract.

* make-or-buy decisions
This artefact is the documentation that captures the output of all make-or-buy decisions.

* procurement documents
Procurement documents are simply the documents provided to a potential seller that specify
the work that the buyer is seeking a proposal for.

* source selection criteria
This is the criteria that the buyer intends to use in evaluating each proposal. The criteria are often given to the sellers to enable them to understand what factors are central to the buyer's procurement; however, the relative importance or weighting of criteria is not shared.

* change requests
When the contract is awarded, there may or may not be a need to update a range of plans to reflect any variation to cost, schedule or scope that resulted from the contract's negotiation. This should be fed through the project's change management system to ensure that all impacts are fully assessed and all parties are aware of these changes.

* selected sellers
This involves preparing an evaluation report for senior management approval. This explains why a particular seller has been selected to provide products to the project.

* procurement contract award
* resource calendars
* project management plan updates
* project document updates
* organisational process assets updates
The organisational process assets are to be updated to reflect the completion of the procurement, i.e. archiving copies of the contract, contract changes, completion certificate, copies of all correspondence, payment records, seller performance assessment and any
lessons learned.

* closed procurements

Project procurement management process

The process for procurement management comprises:
* plan procurements
* conduct procurement
* administer procurements
* close procurements.

In most functional organisations, there are very few people who can place orders for equipment or services and those few people tend to have a number of checks and processes designed to ensure that they are doing the right thing. The project's stakeholders are also likely to want to know who is making the decision on prime items of equipment and how that person will be making those decisions.

The procurement plan needs to initially identify:
* what products or services need to be procured
* how the project will decide which products or services do need to be procured
* the process for advising the market of the procurement
* the process for selection of the candidate seller
* the process for approving the purchase decision.

When conducting procurement a project manager is exposed to a number of potential sellers all of whom want the project manager's business. Conducting procurements involves releasing procurement documents to the market, collecting proposals, analysing those proposals, evaluating them and selecting the preferred seller.

Having selected a seller and negotiated a contract, the project manager needs to administer the contract, i.e. track progress, and ensure that what was requested is in fact delivered and that payments are made as appropriate. Often this is left to other parts of the organisation to manage; however, it is the project and, thereby the project manager, who experiences any contract mismanagement impacts. As such, the project manager needs to be fully aware of contract progress.

Close procurements is the formal end of the contract. This is where the project accepts that it has received all the goods and services requested under the contract, in a fit-for-purpose condition and then pay the seller any remaining monies owed.