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Lecture 45

Lecture 45. Project Procurement, Contract Management, and Ethics in Project Management. Lecture 45. Procurement Procurement Cycles Requirement cycle Requisition Cycle Solicitation cycle Award Cycle Admin cycle 2. Type of contract Six Categories of Contract

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Lecture 45

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  1. Lecture 45 Project Procurement, Contract Management, and Ethics in Project Management

  2. Lecture 45 • Procurement • Procurement Cycles • Requirement cycle • Requisition Cycle • Solicitation cycle • Award Cycle • Admin cycle • 2. Type of contract • Six Categories of Contract • Ethics in Project Management

  3. “Self-pity is our worst enemy & if we yield to it, we can never do anything wise in this world” - Helen Keller

  4. “To be prepared is half the victory.” Miguel de Cervantes Saavedra

  5. “Treat people as if they were what they ought to be, & you help them to become what they are capable of being” - Johann Wolfgang von Goethe

  6. The quality of a person's life is in direct production to their commitment to excellence, regardless of their chosen field of endeavor.

  7. The race is not always to the swift... but to those who keep on running.

  8. In three words, I can sum up everything I've learned about life: It goes on.- Robert Frost

  9. Procurement Acquisition of goods/services. Procurement (& contracting) is a Process that involves -Two Parties with: Different objectives,Who Interact in a given market segment.

  10. Project Quality Management • “The processes to purchase or acquire the products, services, or results needed from outside the project team to perform the work”

  11. Why Procurement Management? • Most all projects will need to acquire some resources from outside • Not understanding the different ways to contract could result in unnecessary risk for the project Note for Test Takers: PMI Procurement questions are from the BUYERS perspective unless noted otherwise

  12. How Do We Manage Procurement? • Four processes • Plan Procurements • Conduct Procurements • Administer Procurements • Close Procurements Administer Procurements Plan Procurements Conduct Procurements Close Procurements

  13. Plan Procurements Scope Baseline Requirements Documentation Teaming Agreements Risk Register Risk-Related Contract Decisions Activity Resource Requirements Project Schedule Activity Cost Estimates Cost Performance Baseline Enterprise Environmental Factors Organizational Process Assets Tools & Techniques Procurement Management Plan • Make or Buy Analysis • Expert Judgment • Contract Types Procurement Statements of Work Inputs Outputs Make or Buy Decisions Procurement Documents Source Selection Criteria Change Requests Administer Procurements Plan Procurements Conduct Procurements Close Procurements

  14. Conduct Procurements Tools & Techniques Project Management Plan • Bidder Conference • Proposal Evaluation Techniques • Independent Estimates • Expert Judgment • Advertising • Internet Search • Procurement Negotiations Outputs Inputs Selected Seller Procurement Contract Award Resource Calendars Change Requests Project Management Plan Updates Project Document Updates Procurement Documents Source Selection Criteria Qualified Sellers List Seller Proposals Project Documents Make-or-Buy Decisions Teaming Agreements Organizational Process Assets Administer Procurements Plan Procurements Conduct Procurements Close Procurements

  15. Types of Scopes of Work • Performance • What the project wants, how accomplished and project needs defined by seller • Functional or Detailed • Defines what end product should be as well as minimum requirements • Design • Defines exactly what is required and how to accomplish it

  16. Good Procurement Practices includes Corporate profitability by: Taking advantage of: • Quantity discounts, • Minimize Cost/Financial Problems, • Seeking out Quality Suppliers.

  17. As Procurement Contributes To Profitability Procurement is Often Centralized, -Results in “Standardized practices” -”Lower Paper work Cost”

  18. Objectives of Procurement Planning are to select one of following for the Procurement of all Goods/Services: • From Single Source. • From Multiple/source. • Procure only small portion of Goods/Services • Procure none of Goods/Services

  19. Environment in which Procurement Take Place is Critical factor. There are two environments: • Macro & • Micro. Macro environment includes General external variables that can Influence “How & When” we do Procurement and it Includes: • Recessions, • Inflation, • Cost of borrowing money, • Unemployment.

  20. Procurement Documents • Request for Proposal (RFP) • Asks for the price and how/who will do the work • Invitation for Bid (IFB) • One simple price to do the work • Request for Quotation (RFQ) • Price per unit quote

  21. Micro environment is the internal to Firm Include “Procurement /Contract System” five cycles: Requirement Cycle: Defines boundaries of Project Requisition Cycle: analysis of sources Solicitation Cycle: Bidding process Award cycle: Contractor selection & Contract Award Contract Admin Cycle: Managing subcontractor until Completion of the Contract.

  22. Several Activities of Procurement Process that overlaps Several of Cycles. These cycles are conducted In parallel, especially “Requisition & Solicitation”.

  23. 1. Requirement Cycle First Step in Procurement Process “Definition of Project Specifically ‘Requirements”

  24. Requirement Cycle Includes • Defining the need for the project • Development of the statement of work, specifications, and work breakdown structure • Performing a make or buy analysis • Laying out the major milestones and the timing/schedule • Cost estimating, including life-cycle costing • Obtaining authorization and approval to proceed

  25. Specifications Written Pictorial or graphic Information describe define or specify services/item to be procured: • Design (physical Characteristics) • Performance (measurable capabilities) • Functional Specification ( subset of Functional , risk is on contractor)

  26. 2. Requisition Cycle Once the “Requisition identification”, ‘Requisition form’ sent to Procurement to begin “Requisition Process”.

  27. Requisition cycle Include: • Evaluation confirming specification. • Confirming sources • Reviewing past performance of sources 4. Producing Solicitation Package (S/P) Solicitation Package sent to each possible “Supplier for Playing” Field is level.

  28. Specification Package Includes: • Bid documents (usually standardized) • Listing of qualified vendors (expected to bid) • Proposal evaluation criteria • Bidder conferences • How change requests will be managed • Supplier payment plan

  29. 3. Solicitation Cycle Selection of “Acquisition Method” is the Critical Element in “Solicitation Cycle”. Three Acquisition Methods : • Advertising • Negotiation • Small Purchases (off supplies)

  30. Advertising goes out for sealed bids. There are no negotiations. Competitive market forces determine the price and the award goes to the “lowest bidder”.

  31. Negotiation is when the price is determined through a bargaining process. In such a situation, the customer may go out for a: • Request For Information (RFI) • Request For Quotation (RFQ) • Request For Proposal (RFP) The request for Proposal (RFP) is the most costly endeavor for the vendor.

  32. Large proposals contains: separate volumes for cost, technical Performance, Management History, Quality, facilities, subcontractor Management, & Others.

  33. On Large contracts the Negotiation Process may Also Includes Price, Quantity, Quality & Timing. Vendor Relations are critical during contract negotiations. Can Shorten Process due to: • Integrity of relationship & • Previous history

  34. Award Cycle (A/C) Result in a “signed contract”. Several types of Contracts. So Negotiation process also Include “selection” of the Type of Contract.

  35. Objectives of Award Cycle is to negotiate a contract: -Type & Price -Result in reasonable “Contractor risk” & Provide Contractor risk with Greatest Incentive for Efficient & Economic Performance.

  36. There are certain basic elements of most contracts. • Mutual Agreement: There must be an offer and acceptance. • Consideration: There must be a down payment. • Contract Capability: The contract is binding only if the contractor has the capability to perform the work. • Legal Purpose: The contract must be for a legal purpose. • Form Provided By Law: The contract must reflect the contractor's legal obligation, or lack of obligation, to deliver end products.

  37. The Two Most Common Contract Forms are completion contracts and term contracts. • Completion Contract: The contractor is required to deliver a DEFINITIVE END PRODUCT. Upon delivery and formal acceptance by the customer, the contract is considered complete, and final PAYMENT CAN BE MADE.

  38. 2. Term contract: The Contract Is Required To Deliver A Specific "Level Of Effort," Not An End Product. The effort is expressed in Woman/Man-days (Months Or Years) over a Specific Period Of Time using Specified Personnel Skill Levels And Facilities. When The Contracted Effort Is Performed, the contractor is under no further obligation. Final payment is made, irrespective of what is actually Accomplished Technically.

  39. Final Contract also called “Definitive contract”, Follows normal Contracting Procedures. E.g. Negotiation of all Contractual “Terms & Condition” on Cost & Schedule prior to “Initiation of Performance”.

  40. Negotiating of contract and preparing it for signatures may require months of preparation. If the customer needs the work to begin immediately or if long-lead procurement is necessary, then:

  41. “Customer may provide the contractor” with a letter contract or letter of intent (LOI). The letter contract is a preliminary written instrument authorizing the contractor to begin immediately: • The Manufacture Of Supplies Or • The Performance Of Services.

  42. Final contract price Must be negotiated after performance begins, ‘Definitive contract” must still be negotiated.

  43. Types of contract selection based upon following: • Overall degree of Cost & Schedule Risk • Type & complexity of Requirement (technical Risk) • Extent of Price Competition • Cost/Price Analysis • Urgency of Requirements • Performance period • Contractor's Responsibility (and Risk) • Contractor's Accounting System (Report Earn Value reporting?) • Concurrent Contract (contract take A back seat to existing work?) • Extent of Subcontracting (how much work contractor out source?)

  44. General six types of contracts : Fixed-price (FP), Cost -plus-fixed-fee (CPFF), Cost-plus-percentage-fee (CPPF), Guaranteed Max-Shard Savings (GMSS), Fixed-price Incentive- Fee (FPIF), Cost-Plus-Incentive-Fee (CPIF)

  45. First Category Fixed-price or Lump-sum contract

  46. Contractor carefully “Estimate Target Cost”. Contractor required to Perform work at negotiated Contract Value.

  47. If “Estimated target cost” is low then “Total Profit reduced” & may vanish. Contractor may not be able to “underbid competitors” So Contractor assumes a Large risk.

  48. Lump-sum Provides “Max Protection to Owner” for ultimate “Cost of Project”. Disadvantage: Requiring a Long Period For Preparation & Adjudications of Bids.

  49. Because of a Lack of knowledge of Local conditions, all contractors Include Excessive Contingency.

  50. Change Requested By owner after “Award of contract” Lead to Troublesome & Sometimes “Costly extras”

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