Passing the #PMP Exam: Tools & Techniques—Procurement Knowledge Area (Part 1)


 1. Introduction

In this next series of posts, we move onto step 5, which is memorizing the TOOLS & TECHNIQUES associated with each process. In order to breakdown the memorizing into more bite-size chunks, I am going to break down this topic into at least 9 posts, one for each knowledge area. (There may be some knowledge areas that require more than one post.)

 This post covers chapter 12 of the PMBOK® Guide, which covers the Procurements Knowledge Area. This knowledge area contains 4 processes, one in each of the 5 process groups except for the Initiating Process Group.

  

I am splitting the discussion of the Tools & Techniques into two different posts. This post will cover the tools & techniques in the first two of these four processes, 12.1 and 12.2

Process
Number & Name
Process Description Tools & Techniques
12.1 Plan Procurements Project purchasing decisions, identifying potential sellers. 1. Make-or-buy analysis

2. Expert judgment

3. Contract types

 

12.2 Conduct Procurements Selecting a seller through bids or proposals, awarding a contract. 1. Bidder conferences

2. Proposal evaluation techniques

3. Independent estimates

4. Expert judgment

5. Advertising

6. Internet search

7. Procurement negotiations

 

12.3 Administer Procurements Managing procurement relationships, monitoring contract performance, making changes as needed. 1. Contract change control system

2. Procurement performance reviews

3. Inspections and audits

4. Performance reporting

5. Payment systems

6. Claims administration

7. Records management system

 

12.4 Close Procurements Verification that deliverables are acceptable, formal closure of contract. 1. Procurement audits

2. Negotiated settlements

3. Records management system

Let’s take a look at the tools & techniques for the processes 12.1 and 12.2 in the Procurements Knowledge Area.

12.1 PLAN PROCUREMENTS

12.1.1. Make-or-buy analysis

This is the technique used to determine whether work should be done in-house or whether it must be contracted out or purchased from outside the company.

In making this analysis, it is important to consider indirect costs. If you purchase software, you must consider the cost of the ongoing support of that software (indirect cost), and not just the direct cost of its initial purchase.

This is a crucial juncture in the project, because if there are NO procurements whatsoever, and all the work is done in-house, then there will be no processes 12.2 through 12.4. They are processes that are optional depending on the results of this analysis done early on in the project.

12.1.2. Expert judgment

There are two types of expert judgment used here. One is expert technical judgment used to develop the technical criteria for evaluating the various proposals that come back from the sellers in the next process 12.2 Conduct Procurements. The other is expert legal judgment in the crafting of the legal terms and conditions that go into the procurement contracts.

12.1.3. Contract types

There are two general types of contacts, the fixed-price contract or the cost-reimbursable contracts. The former has a greater risk for the seller, and the latter has a greater risk for the buyer.. There is a third type of contract which is a hybrid of these two types called the time and materials contract. Here’s a comparison of these types, with the arrow to the right indicating increasing risk to the buyer:

The fixed-price contract sets a total fixed price for the product or service provided by the seller. If the product or service costs more than what the seller originally bid for, then that cost is borne by the seller. That’s why it is more advantageous to the buyer. For that reason, it is the preferred type of contract for the buyer to propose.

The cost-reimbursable contract pays the seller for all legitimate costs incurred for the product or service provided. If the product or service costs more than what the seller originally estimated, then that cost is borne by the buyer. That’s why it is more advantageous to the seller. For that reason, using the cost-reimbursable form of contract would have to require some justification for its use. It may be justified whenever the scope of work is not precisely defined at the start and needs to be altered, thus requiring many changes on the part of the seller. Another reason for justification is if there is a high risk in producing the product or service, and the seller requires this form of contract in order to compensate it for essentially being transferred this risk.

Time & materials contracts may be left open-ended and subject to a cost increase by the seller, but with certain cap or not-to-exceed value to prevent unlimited cost increases. Another form of time & materials contracts can resemble fixed unit-price arrangements for labor or material rates. The unit-labor price is fixed as in a fixed-price contract, but the number of units is left open like a cost-reimbursable contract. This kind of contract is often used with acquisition of experts or support for product team activities when the precise statement of work cannot be easily described at the beginning of the project.

12.2 CONDUCT PROCUREMENTS

12.2.1. Bidder conferences

The buyer and prospective sellers meet prior to their submittal of a bid or proposal. This ensures that all prospective sellers have a clear and common understanding of the technical and legal requirements of the procurement.

12.2.2. Proposal evaluation techniques

With procurements that are more complex, criteria are set up to evaluate the responses that will come from the sellers. An evaluation committee makes their selection of the seller based on the criteria that are set up in this tool & technique.

12.2.3. Independent estimates

In order to estimate the costs of the procurement, an independent estimate can be obtained from the buyer by an outside professional estimator or it can have the estimate done in-house. If the cost estimates from the sellers come in that are significantly different from this estimate, this may indicate that the sellers did not gain a clear enough understanding of the procurement at the bidder conference (tool & technique 12.2.1).

12.2.4. Expert judgment

A review team with experience in the areas covered by the procurement documents and proposed contract can be used to evaluate the proposals. This can include functional disciplines that are technical, financial, and/or legal in nature.

12.2.5. Advertising

Advertisements can be put in newspapers or selected trade publications to elicit bids for contracts. Government contracts require public advertising of pending government contracts.

12.2.6. Internet search

Some standard components or off-the-shelf items may be procured at a fixed price on the Internet. However, this will not work for non-standard components that have to be specially made for the project.

12.2.7 Procurement negotiations

The buyer and seller must negotiate the terms of the procurement contract. Obviously the price and overall schedule must be agreed to in advance, but also those subjects need to be covered that will affect the administration of the procurement as well, such as reporting responsibilities, and the authority to make changes to the product.

The next post will be on the Tools & Techniques associated with the last two processes 12.3 and 12.4 from chapter 12 of the PMBOK® Guide covering the Procurements Knowledge Area.

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