5th Edition PMBOK® Guide—Chapter 12: Make-or-Buy Analysis

1.  Introduction

Chapter 12 of the 5th Edition PMBOK® Guide covers Procurement Management, and the first process 12.1 Plan Procurement Management has as its main output the Procurement Management Plan, which sets out the guidelines, policies, and procedures for conducting, monitoring and controlling, and then closing the procurement process.

The very first tool & technique of the process 12.1 Plan Procurement Management is the Make-or-Buy Analysis.  If the decision is made to do all the project work in-house, as opposed to purchasing some components of the project work from outside sources, then there will be no procurements.  In a way, you can say that the knowledge area of Procurement Management is the only optional knowledge area in that it is conceivable to have projects that do not require procurement management during the course of the project.

But even so, in the planning stage, it is necessary to plan for the possibility of procurements unless it is absolutely certain from the scope of the project that they are not going to be needed.  How do you know whether the possibility becomes a certainty?  Through the Make-or-Buy Analysis.

2.  Make-or-Buy Analysis:  Direct and indirect costs

The costs of producing the component of the product in-house are compared to the costs of having the component produced from outside sources.  PMI stresses the important point, however, that both direct and indirect costs must be considered.  The direct costs are those of making or acquiring the product, and the indirect costs are the support costs for the product.

For example, if you buy a software package from a company, you need to consider the support that this software package will require, in terms of training for the team members who will use it, the necessity for upgrades, and the “help desk” required for team members who have questions regarding its usage.

Another indirect cost is the cost incurred if the quality of the component does not conform to specifications, either those set by the company (i.e., some components lie outside the control limits) or worse, those set by governmental regulations (i.e., some components lie outside the specification limits).  These costs of non-conformance may include

  •  the costs of scrapping the non-conforming components or repairing them  or the warranty and product liability costs if the non-conforming components are caught in the inspection process
  • the costs of warranty or product liability claims and/or lawsuits if the non-conforming components are not caught in the inspection process and are passed on to the consumer

For this reason, a high-risk component (such as the airbags in an automobile) might be best left to a company that has specialized knowledge in producing them.  In a way, procuring high-risk components rather than producing them in-house is one form of risk response called risk transfer (purchasing insurance is yet another form of risk transfer).

3.  Make-or-Buy Analysis:  Purchase vs. Lease

If a company decides to buy a product rather than make it in-house, then another level of decision must be made, whether to purchase the product, result, or service outright or whether to lease it from the seller.

4.  Make-or-Buy Analysis:  Cost Risk

In describing the make-or-buy analysis, PMI uses the phrase “risk sharing between the buyer and seller”.  In order to avoid confusion between this kind of risk, and the risk I mentioned in paragraph 2 as one of the possible indirect costs associated with purchasing a product from a seller, let me refer to this first type of risk as “cost risk”.

How does this differ from regular risk?  To answer that question, let’s go to the textbook definition of risk:  an uncertain event or condition that, if it occurs, has a positive or negative effect on one or more project objectives.  If one of the project objectives is considered producing the overall product within the allotted budget, then the cost of purchasing a component of the product from a seller has a cost risk, i.e., the risk that the actual final cost of the component may differ from what the initial budgeted cost is for that component.  And this is where the contract type comes in.  In a previous post, I outlined the three types of procurement contract, a) fixed cost, b) cost-reimbursable, and c) time & material contracts.

In fixed cost contracts, the cost risk is borne by the seller, since if the final cost of the component differ from the initial budgeted cost, then the seller is only paid the initial budgeted amount, and the seller will end up producing the component at a loss.

In cost reimbursable contracts, the cost risk is borne by the buyer, since if the final costs of the component differ from the initial budgeted costs, then the buyer pays the seller the final costs.  The seller will end up producing the component at a profit, but the buyer is now over budget on the project.

The “uncertain event or condition” in this case has an effect on the cost objective of the project.  However, there are other types of risk to the project, for example, the risk that the schedule objective (the deadline) or the quality objective (meeting all technical requirements) that need to be considered in the make-or-buy analysis.  There are ways of modifying the fixed cost or cost reimbursable contract so that not just the cost risk, but the overall risk is shared more equally between the seller and buyer.  This is done by offering fees, awards, or other incentives for the seller to produce the product not just within the budgeted amount, but on time and in conformance with the buyer’s scope requirements.

5.  Conclusion

The three most important concepts to remember when it comes to the make-or-buy analysis are the following:

  •  to compare the cost of making the component in-house vs. purchasing the component from outside the company, you need to consider both the direct costs and the indirect costs (cost of ongoing support for the component, cost of nonconforming quality, etc.)
  • if the make-or-buy analysis leans towards “buy” rather than “make”, the type of procurement contract will depend on how the risk is to be shared between the buyer and seller; fees, awards, or incentives can be specified in the procurement contract as ways to make the risk sharing more equal between the two parties
  • in considering the risk, you need to take into account the cost risk (risk to the cost objective of the project, i.e., whether the final cost of the component will exceed the initial budgeted cost for that component), as well as the other types of risk (such as risk to the schedule, scope, and specified level of quality).

The other tools & techniques of process 12.1 Plan Procurement Management include expert judgment, market research, and possibly informational exchange meetings with potential bidders.

The output of process 12.1 Plan Procurement Management is the Procurement Management Plan, and the next post will outline the various elements that this plan entails, and how these elements relate to the other 9 knowledge areas involved in project management.

Organizing your Toastmasters Club Speech Contest-5 Lessons Learned

Tonight we had the Fall Speech Contest at our local Toastmasters Club. Some things worked out well, but there some glitches as well. I wanted to write down 5 lessons learned from this recent contest which will help us next time around.

1. Send out instructions for major roles early

I composed step-by-step directions for each of the roles, including the contestants. That worked out well. However, the major roles such as chief judge were sent by e-mail only this afternoon and people need more time to absorb the information. Next time: send it at least one week in advance.

2. Enlist help from visitors from other clubs if necessary

We had several club members not show up, which left us shot-handed. But we decided to enlist the help of those who were visiting from other clubs, and that worked out well. So in the future, we should start visiting other clubs as well to ensure that we will have visitors from other clubs in the future when we may need them again.

3. Appreciate those participants from other clubs
I had Certificates of Appreciation made for our contestants, but not for the helpers from other clubs I mentioned in the last paragraph. Luckily I had an extra blank certificate printed up just on case I needed it, which I gave to the test speaker. In the future, I’ll print out several extra certificates and give them to those whose help we enlisted.

4. Have extra dialogue ready
There are times when the contest flow stalls, for example when the judges are not ready with their ballots yet. In those cases, rather than observe a “minute of silence” which is not interesting to experience as a guest, it is best to have some jokes or conversational tidbits ready to fill in those spaces.

5. Print extra agendas
Because it was a club contest night, there were more visitors than we normally would get. That’s a good thing! However, that also meant we almost ran out of meeting agendas, which are important for a visitor to receive in order to follow what’s going on. Next time, I’ll have extras printed up!

The spring contest should go even more smoothly if I keep these five lessons in mind!,

5th Edition PMBOK® Guide—Chapter 12: Cost-reimbursable procurement contracts

1.  Introduction

In the process 12.1 Plan Procurement Management, the organization looks to the company policies, procedures, and guidelines regarding the types of procurement contract that would be available and decides which type of contract would be best for the particular project at hand.  More than one type may be used, depending on the procurement involved.

In a previous post, I described the three basic types of procurement contract: a) the fixed price, b) the cost-reimbursable, and c) time & material.  The purpose of this post is to describe the various sub-types of the second type of contract, the cost-reimbursable procurement contract.  In general, this type of contract is used under two conditions:

  • The scope of the project is not precisely defined at the start, and will need to be altered in the course of the project
  • The project has high risks

Below is a summary of the three sub-types of procurement contract that fall under the general type called “cost-reimbursable” contracts.  In all three sub-types, the seller is reimbursed for all allowable or legitimate costs for performing the contract work.

Fig. 1  Cost-reimbursable Procurement Contract Subtypes

Cost-Reimbursable Contract Subtype Description Fee to seller is determined by …
1. Cost Plus Fixed Fee (CPFF) Seller receives a fixed-fee payment for completed work Fixed percentage of initial estimated project costs, and does not change.
2. Cost Plus Incentive Fee (CPIF) Seller receives an incentive fee for completed work; final costs over the initial estimated project costs are shared by buyer and seller based on negotiated cost-sharing formula. Incentive fee is fixed amount; but this may added to or subtracted from based on whether final costs are under or over the target costs (based on the original initial estimated project costs).
3. Cost Plus Award Fee (CPAF) Seller receives an award for achieving performance criteria agreed upon beforehand. Award is fixed amount as specified in contract, based on performance of seller.

Let’s take each of these contract sub-types in turn.

2.  Cost Plus Fixed Fee (CPFF)

The cost-reimbursable contract normally favors the seller, because all costs plus an agreed-upon profit margin are reimbursed by the buyer.  This type of contract protects the seller in the case that more work is required to handle an increased scope, so that the seller will not have to produce the product at a loss.  In general, the buyer is protected by the fact that only legitimate or allowable costs are reimbursed.  In this type of contract, the buyer will normally scrutinize the seller’s account of what the costs are to make sure of this.

By adding fees as incentives, however, the buyer also gives additional incentive for the seller to produce a quality product within the time frame and budget target that the buyer requires.  In this first subtype called the Cost Plus Fixed-Fee or CPFF contract, there is a fixed fee added to the costs IF the seller completes the work as specified by the buyer.  Normally, this is not vary depending on performance criteria (like in the Cost Plus Award Fee contract mentioned below), but is given simply if the work is completed.  The fixed fee is usually some percentage of the initial estimated project costs.  If the scope remains the same, and the project costs on the part of the seller increase, then the seller will still get the production costs covered, but the fixed fee will still be calculated as a percentage of the INITIAL estimated project costs, and so will decrease percentage-wise as the project costs increase.

Of course, if the project scope changes, then the fixed fee will be calculated as a percentage of the NEW estimate of the project costs based on the increased scope of the project.

3.  Cost Plus Incentive Fee (CPIF)

In this type of cost-reimbursable contract, the seller gets reimbursed for all allowable costs (as usual with this type of contract), but then there is an incentive fee which is awarded IF the seller meets certain performance criteria, for example, getting the product completed by a certain deadline.  There is another mechanism of control in this type of contract, and that is the fact that if the final costs differ from the initial estimated project costs, then the overage (or the difference between the final costs and the initial estimated project costs) is split between the buyer and seller according to a cost-sharing formula that is negotiated and agreed upon in the contract.  For example, let’s say that the initial estimated project costs are $50,000, and the cost-sharing formula is 80/20, with the buyer’s percentage typically being stated first and the seller’s percentage typically being stated last.  Let’s also say that there is a $10,000 incentive fee for the seller IF the product is completed by a certain deadline.

How much will the seller be paid by the buyer if a) the product is completed by the deadline, and b) the final costs are $70,000?  The initial estimated project costs of $50,000 would be paid to the seller.  In addition, the seller would receive $10,000 as an incentive fee for completing the project by the deadline.  So far the seller would receive $50,000 (for the initial estimated project costs) plus $10,000 as an incentive fee, or $60,000.  However, since the seller’s final costs were $70,000, which is $20,000 OVER the initial estimated project costs of $50,000, a certain portion of that $20,000 is going to be borne by the seller.  How much?  Well, that’s where the cost-sharing formula comes in.  Since the cost-sharing formula is 80/20, that means the seller’s percentage is going to be 20% of whatever the overage is, in this case, 20% X $20,000 = $4,000.  So that $4,000 cost is borne by the seller, and 80% X $20,000 = $16,000 is paid by the buyer.  So the buyer pays the seller the following:

  • $50,000 (initial estimated project costs) +
  • $10,000 (incentive fee for on-time completion of project) +
  • $16,000 (80% of $20,000 overage paid by the buyer) –
  • $4,000 (20% of $20,000 overage paid by the seller)

which comes out to $72,000, which is like being paid for the $70,000 worth of final costs, with  only $2,000 extra for completing the project on time, because a portion of the incentive fee was eaten up by a portion of the overage costs that the seller had to absorb.  PMI loves to ask questions about this type of contract subtype on the PMP exam, by the way.

4.  Cost Plus Award Fee (CPAF)

In this type of cost-reimbursable contract, besides being paid for the usual legitimate or allowable costs, there is an award given to the seller based on performance criteria.  It differs from the cost plus fixed fee or CPFF contract in that the CPFF contract pays a fixed fee on the basis of whether the seller completes the project.  The CPAF, on the other hand, requires that the seller complete the project AND achieve certain agreed-upon performance criteria (like getting the product completed by a deadline).  The performance criteria requirement makes it somewhat like the cost plus incentive or CPIF contract, which also takes performance criteria into account, but it differs from the CPIF contract in that CPAF contract gives an award that is a fixed amount, not a incentive that can increase or decrease depending on the final costs of the project.

5.  Conclusion

In all three cases, however, the idea behind the fixed fee (CPFF), the incentive fee (CPIF), or the award fee (CPAF) is the same:  it gives additional incentive for the seller to complete the project not only within the initial estimated project amount, but also to complete it within the other major constraints specified by the buyer, either in terms of a deadline or other performance criteria set forth by the buyer.

However, even in the case of a contract where there is a fixed fee or award, the amount can change IF the scope of the project is required by the buyer, necessitating more work on the part of the seller.

The last type of contract, Time & Material (T&M), only has one type, and that is payment per unit of resources supplied by the seller, so there is no need to expand further on that third category of procurement contracts.

The next post will go into detail on the first tool & technique of the 12.1 Plan Procurement Management process, that of the Make-or-Buy Analysis.

Integral Theory and Project Management–the Concept of A Holon (tenet #2)

1.   Introduction

In his magnum opus Sex, Ecology, and Spirituality, Ken Wilber lays out the 20 fundamental tenets that he postulates for holons, which are entities that are at once a) wholes that are composed of parts, and b) parts that comprise larger wholes.  This concept of a holon is fruitful in that it bridges the divide in the history of philosophy between theories that postulate the primacy of the many vs. those that postulates the primacy of the one.

Ken Wilber, in his book A Brief Theory of Everything explicates the 20 tenets of holons in a format that is easier to read and understand, meant for people who are looking for an introduction to his other philosophical works.  In this post, I go through the second of these 20 tenets regarding the concept of a holon, and show how it can be applied to the practice of project management.

2.   Tenet #2:  Holons share two horizontal drives, agency and communion, and two vertical drives, self-transcendence and self-dissolution.

a.  Horizontal drives:  agency and communion

The horizontal drives are drives that relate to a holon’s interaction with other holons on the same level.  A holon is a whole and tries to preserve or maintain its integrity as a whole in the face of environmental pressures, including other holons, which would otherwise destroy it or break it up.  It tries to be autonomous in the face of these external pressures, and this is the drive of agency.

One of the phrases that describes evolution is “survival of the fittest”.  In the context of that phrase, the “fittest” organisms are the ones that maintain their integrity in the face of environmental pressures.  But the thing about evolution is that, in order to survive, an organism must not only be fit, but it must also fit into its environment.  So besides being “survival of the fittest”, it is also “survival of the fitting”.  A holon is a whole that must fit together with other wholes, and this is the drive of community.

How does this apply in the case of a project manager?  First of all, let’s think of holons on the level of individual team members.  Each person will want to assert himself or herself on the project by contributing not just his or her own effort, but also his or her ideas on the project.  You want to encourage this tendency towards agency or wanting to make a mark on the project.  However, each person must also get along with his or her fellow team members.  So besides being willing to put forth one’s ideas when called for at a meeting or a brainstorming session, each person must also be willing to listen to other’s ideas as well.  In this way, communication is a two-way street.

Too much “me first” attitude on a project is harmful to group cohesion.  On the other hand, if people are not self-confident enough to give their ideas on the project, then the project may suffer because a person did not have the courage to speak up with an idea that might end up saving the day.  So each person has to be willing to assert oneself and yet co-exist with one’s team members.  A good project manager will be able to nurture both tendencies in the team members.

Now let’s think of the holon at the unit of the project itself.  A project manager must be willing to stand up and be assertive when asking for the resources needed from the organization in order to be able to complete the project.  This is done by showing that giving resources to me and my project will, in turn, be good for the organization as a whole by contributing to its strategic objectives, or to put it in less prosaic terms, “the bottom line.”  The argument can also be framed negatively:  any failure by those who control the organization’s resources to give the necessary resources to me and my project will result in a failed project, which will hurt the bottom line of the company, not to mention its internal morale and external reputation.

However, besides this tendency towards agency or self-preservation of the project on the part of the project manager must also be balanced by the other horizontal tendency of self-adaptation, or fitting in with all of the other projects that an organization has to fund.  In other words, if your project has exceeded its target by using less resources than were budgeted, then release those resources to the organization as soon as possible so that they can be used by other projects.  Periodic reviews of risks, for example, may reveal risks that did not occur at certain trigger points as was predicted, in which case the contingency reserves set aside for responses to those risks will no longer be needed by your project.  Let management know about these reserves that could be released from the project budget.  Management may not decide to use them on another project, and decide to keep them in your project budget for the duration of the project—but the fact that you have been actively searching for resources to be used by the organization should win you appreciation for the effort!

b.  Vertical drives—self-transcendence and self-dissolution

The horizontal drives deal with the interaction of holons with other holons at the same level.  The vertical drives show how holons either break down into subholons (holons at the next lowest level), or come together to form holons at the next highest level.

The standard biological example Ken Wilber cites is that of cells, which, when they do breakdown, break down into their component parts or molecules:  this is the process of self-dissolution.  Under the right conditions, molecules can also come together and form cells, which is the opposite process of self-transcendence.  Cells can do things that a mere collection of molecules cannot:  they have emergent properties which are lost if the cell breaks down into molecules again.

A project is a collection of project team members that can accomplish more than those team members could do on their own:  that is the magic of projects that you can accomplish not just more not just in degree, but in kind than you could by merely collecting the individual efforts of individuals.  Your job as a project manager is to create the magic of a project that is greater than the some of its parts or team members.

Now, if a project is dissolved, in that the project closes or is shut down prematurely, the project itself is over, and the team members, including the project manager, exist as individuals once again, perhaps to be reconstituted in a different combination for another project.  Because a project is more than just the collection of the individuals working on it, it is important to capture the collective wisdom of the group so that it can be used by the organization again on future projects.  This is where documents that contain lessons learned come in.

Now the new project may be so new that none of the lessons learned apply, but many projects are similar to other previous projects done by the company or perhaps done by another company in the same industry, and so the lessons learned from a previous project become the distilled essence or wisdom of the group working on that project, which can save the newly-reconstituted group working on the new project a lot of time by not having to reinvent the wheel.  It’s kind of like the “project DNA” which gets passed from project to project.

3.  Conclusion

Knowing about the horizontal tendencies of self-preservation (agency) and self-adaptation (community) of holons can help a project manager both manage the team members on his or her own project, but also manage that project’s place within the larger organization.

Knowing that a project is more than the sum of its parts can help give a project manager the proper respect for the collective wisdom of the group, and thus give that project manager the incentive to record that perspective for use on future projects.

Next week, I will discuss tenet #3 of a holon.

Spiritual Economics: A Discipline Whose Time Has Come—a talk at Common Ground

1.  Introduction

Common Ground is an interfaith center for inquiry, study, and dialogue about the human quest for spiritual understanding.  Their primary focus is on the world’s cultural, philosophical, religious, and spiritual traditions and their implications for every dimension of human experience in this post-modern world.  The main center is in Deerfield, IL, but there are “satellites” of the center in various suburbs of Chicago, including Flossmoor, IL near where I live.

On Wednesday, August 14th, John Wasik gave a talk on Spiritual Economics.   Most of the world’s economic systems are based on material growth linked to expansion of the gross domestic products. What these gauges don’t tell us is how people are really faring, their well being and prosperity. The U.S. has the largest GDP on the planet, but still has dramatic income inequality, a declining middle class, fractured health-care system and environmental maladies. How do we get beyond growth-based economics? John Wasik, author of The Cul-de-Sac Syndrome and The Merchant of Power shared his latest research for an upcoming book and outlined a strategy for a dignity-based economics.  Is speaks widely and writes a weekly Bloomberg News column that reaches readers of five continents and which earned him the 2009 Peter Lisagor award for journalism.

These are my notes from his talk; the conclusion at the end is my own, based on the contents of Mr. Wasik’s talk.

2.  The American Dream

The American dream since World War II can be summed up in the phrase “economic mobility”.  This can be stated as a) the likelihood that you will end up better off economically at retirement that you were when you entered the work force, and b) the likelihood that your children will be even better off economically than you are.

In the 1950s and 1960s, the belief was that “a rising tide will lift all boats.”  Prosperity in the economy as a whole, measured by GDP growth, would spread to all socioeconomic classes in society.  There was a virtuous cycle:

The people who work pay taxes, and these taxes go to pay for services.  The services would provide the societal infrastructure within which jobs could be readily created.  These jobs would pay wages to people, who would buy goods that wanted.  The sales of these goods would create the demand that would lead to more people working, and the cycle would start all over again.

There was a paternalistic work culture that favored a pension, which was a defined benefit that would be received upon retirement, above and beyond the social security payments those in the private sector would receive.

3.  The Great Unraveling

This is the title of a book by Paul Krugman on how the American Dream unraveled in the 1980s onward.  What were the forces that contributed to this great unraveling of the American Dream?

a.  The growth of the anti-government movement

Starting in the Reagan era, the political culture started to shift to reflect anti-government sentiments.  It was sold as a way to keep Americans from developing a dependency culture on the government, but it was in reality a way for the private sector not only to have its growth unrestricted by governmental regulations, but also for the private sector to start replacing the government sector as a source of spending in the economy.  Unfortunately, the reality is that the private sector has started to cannibalize public sector investment, as can be seen by the growth of the charter school movement, which takes public funds and funnels them away from public education and into the hands of for-profit corporations who run the charter schools.

b.  Disappearance of the manufacturing base

When capital investment controls were loosened, much of the manufacturing base was moved overseas to take advantage of cheaper labor costs.

c.  Globalism

The acceleration of capital investment abroad meant that not just the manufacturing base, but essentially the tax base oversea or, more accurately, offshore due to tax havens in the Caribbean, among others.

d.  Pensions changed to 401Ks

401Ks were originally designed as supplemental income streams like annuities for those with high-income anyway; they were never designed to replace pensions, but Wall Street encouraged Main Street companies to do so anyway.  As a result, defined benefit pensions were replaced by defined contribution 401Ks.  When the dot-com bubble burst in the 1990s, for many people, their so-called nest-egg was not sufficient for them to retire.

e.  Housing Bubble

For most of the 20th century, people thought of houses like bonds, a slow, steady investment that followed roughly the inflation curve.  However, the idea came after 2001 with the housing bubble that suddenly houses were like stocks that you could cash in like stock options or dividends.

f.  Wages flattened

Technology in the 1970s through the 2000s continued apace, and this increased the productivity of each worker.  However, as opposed to the productivity gains until the 1960s, the gains from that productivity were siphoned off by the corporations and not shared with the workers, so that wages have essentially remained on average flat since the 1970s.

4.  What will NOT work?

Before discussing the solution to our problems of income inequality, chronic unemployment and a stagnant wage structure for those who have jobs, let’s first discuss some of the suggested solutions which John Wasik believes will NOT work.

a.  Technology

Will technology bring about an improvement of wages for the average worker?  No, because although technology increases productivity, as we have already seen, any productivity gains will be retained by the corporations and not shared with its workers.

b.  More Growth!

Because of the mechanisms of economic inequality that are essentially ”baked into” our system at this point, more growth in the economy as a whole, measured say in GDP, will accumulate at the top and will NOT trickle down to the rest of the economy.  If you look at the stock market, it seems to be doing well.  That is because it is based on the “herd instinct” that future corporate earnings will increase.  Yes, but as we have seen, the structure of today’s economy is such that those increased corporate earnings will not translate into more jobs or more wages for those who already have jobs.

c.  Austerity

The idea of cutting government budgets in the case of a budget deficit probably has deeper roots in theology, particularly Old Testament theology, than it does in sound macroeconomic policy.  If the government and the private sector are the two sources of investment, the idea is that if you cut down the spending in the government sector, the private sector will “pick up the slack.”  In reality, it has done no such thing.  Banks have taken the TARP handouts from the US government sector and used them to shore up their balance sheets, but have NOT turned around and used that capital to lend to homeowners and businesses.

As Paul Krugman has mentioned before, we are in a parallel situation to 1937, where at the first sign of even moderate growth, the Republicans put on the brakes and demanded cuts in spending, and sent the economy back into a recession.  You don’t have to relearn the lessons of the Great Depression; just look at what has already occurred in Britain, as they adopted austerity measures only to have it start hurting economic growth (they are now in a so-called “double-dip recession”).

5.  What WILL work?

So if technology, more growth, or austerity will not get us greater prosperity and return us to, if not the same income mobility we had after World War II, to at least a situation where we are not LOSING ground?

According to the Keynesian school of macroeconomics, the only way to stimulate demand at a time when interest rates are nearly flat, and monetary policy is therefore totally ineffective, is to have the stimulus come from the fiscal side, i.e., from  government spending.  This can be used in combination with the following, to create true prosperity for all Americans:

a.  Innovation

If those 1.6 million people in the retail industry were to have their wages lifted to a living wage, it would end up through multiplier effects to improve the lives of 1/3 of Americans!  What happened when the pent-up demand of Americans was unleashed after World War II?  The goods and services demanded unleashed a stream of innovations from other Americans to meet those needs.

b.  Infrastructure

The American Society of Civil Engineers puts out an annual report card on the state of America’s infrastructure.  The 2013 version of this report card gives America a D+ on infrastructure, and the money needed by 2020 to address the crumbling infrastructure of America would be $3.6 trillion.  This sounds like a fantastic sum, except when you compare it to the true cost of the Iraq War, which according to Joseph Stiglitz and Linda Bilmes was close to $3 trillion.

c.  Electricity Grid

A subset of the infrastructure needed to be modernized is the electricity grid.  Just to modernized it and digitize it would require $1 trillion out of that $3.6 trillion.  This does not even take into account the infrastructure spending on renewable energy which would end up paying for itself in the long run.

d.  Lwarps

What is “lwarps”?  It is the reversal of the word “sprawl”.  This means we need to rebuild our inner suburbs and abandon the outer suburbs, and reverse the process of suburban sprawl that started in the 1950s and is now unsustainable from an energy standpoint.  The latter has already taken place in places in the Southwest after the bursting of the housing bubble.  An interesting phenomenon is taking place and that is the growth of family farms in the rural areas around metropolitan areas which is being fueled in turn by the growth of farmers markets in these inner suburbs.  A case in point:  I buy jams and jellies at a farmers market near Flossmoor, IL.  In talking to the person from the local bakery who has the booth there, she gets all of those jams and jellies from the Amish who make them on farms that are just on the border between the southern Chicago suburbs and rural areas that surround them.

e.  Health Care

Part of the rising costs for individuals and businesses is that of health care, which represents 17% of all economic activity in the US.  It has to be restructured, and in this context, the Affordable Care Act is only a band aid, and not a permanent solution.  Only government administering of the payments to health providers (NOT the same thing as socialized medicine, which is where the government IS the main health provider) will reduce the disincentives in the system, as it exists now, to rein in costs.

f.  Education

This needs to be a growth industry, but not in the sense of taking public funds and using them to enrich politically well-connected for-profit corporations, but in the sense of investing at the community college level to make sure that education is once again a viable option for all Americans, regardless of socioeconomic status and/or age.

g.  Civic Institutions

One of the things that held the fabric of American society together after World War II was the growth of civic institutions like the Kiwanis Club, the Rotary Club, and other similar entities which bridged the gap between the business community and the overall needs of the communities in which they existed.  This is not only a question of various philanthropic or charitable projects that they undertook but also the sense of well-being that they provided its members which came from a sense of being connected with others in the community.

Since government spending on social needs has dropped precipitously, there is a need now for more and more people to join these kinds of institutions which help the communities they are in by helping them help themselves.

It’s amazing what one can do when one gets together with others in the community.  As the final example of his talk, Mr. Wasik said that in Lake County (north of Chicago), there were many people that complained when property taxes went up that they didn’t understand the very complicated and opaque property assessments that would be done every year.  They created a movement to make the process more opaque and to allow people a process by which they could appeal the assessment if they disagreed with the factual basis for it.

The movement was so successful in Lake County that it was taken by their Illinois representative to the State Legislature where it was enshrined in law.  Now everybody throughout the state is privy to this more transparent assessment procedure AND has the ability to exercise their right to appeal that assessment.  This concrete step towards the preservation of homeowner’s rights all started because of a small civic group in one town of one county in the state of Illinois!

6.   Spiritual Economics:  A Discipline Whose Time has Come

Rather than a person’s wealth being measured by the amount of money that it has his or her disposal, one way to measure a person’s prosperity is the number of connections they have to others in the society, with the priority being local connections.   I’m not talking about Facebook or digital-only relationships, but honest-to-goodness face-to-face relationships with others.

The model here is that of a geodesic dome, the one designed by Buckminster Fuller.  He created a structure made of numerous nodes which have numerous links from node to node.  Each link in and of itself is not particularly strong, but when they link together, the geodesic dome can withstand up to gale force winds.

And at a time when the stagnant economy is sending gale force headwinds blowing all across America, linking together at the local level as with the links of a geodesic dome, will help us all weather the storm!

5th Edition PMBOK® Guide—Chapter 12: Fixed Price Procurement Contracts

In the process 12.1 Plan Procurement Management, the organization looks to the company policies, procedures, and guidelines regarding the types of procurement contract that would be available and decides which type of contract would be best for the particular project at hand.  More than one type may be used, depending on the procurement involved.

In the last post, I described the three basic types of procurement contract:  a) the fixed price, b) the cost-reimbursable, and c) time & material.  The purpose of this post is to describe the various sub-types of this first type of contract, the fixed price procurement contract.

Fig. 1   Fixed-Price Procurement Contract Subtypes

  Fixed-Price Contract Subtype Description Cost increase is responsibility of …
1. Firm fixed-price (FFP) Most common type of contract Seller
2. Firm fixed-price incentive fee (FPIF) Financial incentive awarded to seller if performance target reached Seller (above price ceiling)
3. Fixed price with Economic Price Adjustment (FP-EPA) Pre-defined final adjustments to the contract price due to changed conditions Buyer (but based on external conditions)

Let’s take each of these contract types in turn.

1.  Firm fixed-price (FFP)

This is the most common type of fixed-price contract, and this is a pure fixed-price contract, in that the price of the procurement received from the seller does not change unless the scope of work changes.  Any cost increase on the part of the seller producing the procurement above the amount of the fixed-price contract is the responsibility of the seller, who is nonetheless obligated to complete the effort even at a loss.

2.  Firm fixed-price incentive fee (FPIF)

This type of fixed-price contract awards a fixed-price for the procurement, but then adds an incentive which is a fixed amount IF the seller achieves a performance target, which could be related to the cost, schedule, or technical performance of the seller.  In this type of contract, there is a ceiling price established so that if the cost of the procurement turns out to be greater than the ceiling price, the costs above the ceiling price are the responsibility of the seller.  This aligns the incentives of each side more closely, because the seller has an incentive to get the work done faster, better, or cheaper, but the buyer also is protected because the cost of the procurement is limited to a fixed amount (the ceiling price plus the incentive fee).

3.  Fixed price with Economic Price Adjustment (FP-EPA)

This type of fixed-price is usually used when the project spans a number of years.  The procurement costs a fixed-price, but adjustments are allowed to the cost IF there are changes in economic conditions that would affect the cost of commodities such as increases in inflation.  The Economic Price Adjustment or EPA is tied to some reliable financial index, which is used to adjust the final price.  This aligns the incentives of each side in that the seller is compensated for increases to the seller’s own costs that are out of its control due to the economy, but the buyer is protected because the cost of the procurement is limited to the fixed amount plus the EPA.

4.  Conclusion

All three of these fixed-price contracts tend to be more favorable to the buyer because the risk of any increases cost of production are born by the seller, but the seller is compensated somewhat if the seller is able to make performance targets (in the case of the firm fixed-price incentive fee or FPIF contract) or if there are economic conditions outside of its control (in the case of a fixed-price with Economic Price Adjustment or FP-EPA contract).

In any case, the fixed-price may be amended by mutual agreement of the buyer and seller if the scope of the procurement increases.

Next week, I will discuss the three subtypes of the next category of contract, the cost-reimbursable contract.

5th Edition PMBOK® Guide—Chapter 12: Procurement Contract Types

In the process 12.1 Plan Procurement Management, the organization looks to the company policies, procedures, and guidelines regarding the types of procurement contract that would be available and decides which type of contract would be best for the particular project at hand.  More than one type may be used, depending on the procurement involved.

The purpose of this post is to outline the three basic types of procurement contract by indicating what kind of projects they are normally used for, and whether they are advantageous to the buyer or seller.

Fig. 1   Procurement Contract Type

  Contract Type Type of Project Favors
1. Fixed-price Scope well-defined, risks relatively low Buyer
2. Cost-reimbursable Scope not well-defined, risks relatively high Seller
3. Time and Material (T&M) Often used for staff augmentation Neutral

Let’s take discuss each of these contract types in turn.

1.  Fixed-price

If the scope is relatively well-defined, and the risks on the project are relatively low, then the fixed-price contract specifies, as the name implies, a fixed price for the product, service, or result obtained by the seller.  If you consider this from the seller’s standpoint, you can see why it is advantageous to the buyer.  Even if the cost to the seller exceeds the amount of money that the seller is going to get from the buyer, that amount of money is going to stay the same, so the seller is going to have to produce that product at a loss.

One of the next posts in this series will discuss the various sub-types of fixed-price contract that add various incentives in order to align more closely the interests of the buyer and the seller so that it becomes a win-win situation.

If the scope is well-defined, then the seller has a chance to make a good estimate as to how much it will take to produce the product, and that is why this type of more predictable project is also more suitable for this type of contract.

2.  Cost-reimbursable

On the other hand, if the project scope is NOT as well-defined, or has higher risks involved, then the best type of contract may be the cost-reimbursable contract.  The contract specifies that all legitimate contract costs incurred by the seller for completed work, plus an agreed-upon fee for the seller’s profit, will be paid by the buyer.  It is pretty obvious why this is advantageous to the seller, because the profit is guaranteed.

Since the buyer is therefore at a cost disadvantage, there are various sub-types of cost-reimbursable contract that add various incentives in order to align more closely the interests of the buyer and the seller so that it becomes a win-win situation.  These will be discussed in later post in this series.

An example of a cost-reimbursable project is the contract awarded to Northrop Grumman by NASA to create the Lunar Module or LM for the Apollo Program.  The project being one for a vehicle that had never, ever been produced before, the scope was very uncertain and the risk was extremely high.  A fixed-price contract would have been impossible to accept from a business standpoint.  I forget what the cost of the program turned out to be, but it was more than double than what the original budget was, if I remember right from watching From The Earth to the Moon series on HBO on the history of the Apollo Program.

3.  Time & Material

Time & Material contract takes characteristics from both types of contracts, in that the price per hour of the resource provided or the price per quantity provided is fixed, but the number of hours or the number of units, is open-ended.  It is used for outside support of the project, typically in the form of temporary staff augmentation or sometimes for expert judgment (such as legal advice from attorneys).


Time & Material contracts can be freely used with either the fixed-price or cost-reimbursable contract.  The next post will discuss some of the sub-types of the fixed-price contract.

5th Edition PMBOK® Guide—Chapter 12: Process 12.1 Plan Procurement

1.  Introduction

The first out of four procurement-related project management processes is in the Planning Process group, and is the process which creates the guidelines for all of the procurement activities on the project.  It helps document the project procurement decisions, specifies the approach taken to identify potential sellers and carry out the procurements.

2.  Inputs

The inputs to this process are numerous, but that’s because from the standpoint of the seller, the producing the procurement is going to be an entire project in and of itself, and thus requires the same knowledge areas that are going to be used in the buyer’s project, of which the procurement is just a part.

Inputs are therefore coming from scope, time, cost, human resources, risk, and stakeholder knowledge areas.  Important information from the industry at large (EEFs) and internal procedural guidelines (OPAs) are also crucial to the process.

1. Project Management Plan The input for procurement management is the scope baseline, which includes the following three documents:

  1. Project scope statement
  • description of the product, service, or result
  • list of deliverables
  • acceptance criteria
  • technical issues or concerns
  • constraints such as delivery dates, available skilled resources
  1. WBS—indicates which components of work may be resourced externally
  2. WBS dictionary—provides identification of deliverables and description of work needed to produce them
2. Requirements Documentation
  • Project requirements
  • Contractual and legal requirements
3. Risk Register Contains the following information with regards to risks that is relevant to procurements:

  • List of risks
  • Analysis of risks
  • Risk response planning
4. Activity Resource Requirements Contains information on specific needs such as people, equipment, or locations.
5. Project Schedule Contains information on required timelines or mandated deliverable dates.
6. Activity Cost Estimates Cost estimates are used to evaluate reasonableness of bids or proposals from potential sellers.
7. Stakeholder Register Details of project participants and their interest in the project.
8. EEFs
  • Marketplace conditions, and products, services, and results available in the marketplace
  • Suppliers’ past performance or reputation
  • Typical terms and conditions for the specific industry
  • Unique local requirements
9. OPAs
  • Formal procurement policies, procedures, guidelines
  • Management systems which may affect contractual relationships
  • Multi-tier supplier system or prequalified sellers based on prior experience
1. Make-or-buy analysis Determines whether particular work can be best accomplished by the project team or purchased from outside sources.
2. Expert Judgment Used to assess the inputs and outputs of this process, including

  • expert purchasing judgment
  • expert legal judgment
  • expert technical judgment
  • expert business judgment
3. Market Research Examines industry-wide and vendor-specific capabilities.
4. Meetings Information exchange with potential bidders.
1. Procurement Management Plan Describes how a project team will acquire goods and services from outside the performing organization.  Also describes how the procurement processes will be managed throughout the project, from developing procurement documents through contract closure.
2. Procurement Statement of Work Defines the portion of the project scope that is to be included within the related contract.
3. Procurement Documents Used in soliciting proposals from prospective sellers.
4. Source selection criteria Used to rate or score seller proposals.
5. Make-or-buy decisions The results of the make-or-buy analysis, which tells whether particular work can be best accomplished by the project team or needs to be purchased from outside sources.
6. Change Requests If the result of the make-or-buy decision is to procure the goods, services, or results, this typically requires a change request.
7. Project Documents Updates
  • Requirements documentation
  • Requirements traceability matrix
  • Risk register

3.  Tools & Techniques

The main tool is the make-or-buy analysis, which is the basis on deciding whether or not a procurement is even desirable.  The market research based on the information from EEFs is utilized by the various types of experts, and information on the potential seller companies is either obtained from industry sources or from meetings with the companies themselves.

4.  Outputs

The main output of this process is the Procurement Management Plan, which gives guidelines on how to conduct all of the procurement activities on the project.  Of course, whether or not there will even be a procurement is the result of the make-or-buy decision.  If the decision is to “make” rather than “buy”, then you will need to make a change request stating this, and then you will need the Procurement Statement of Work or SOW, basically the portion of the scope that the seller will be responsible for producing, and the procurement documents and source selection criteria to be used when selecting the seller in the next process, 12.2 Conduct Procurements.

5.  Conclusion

This Procurement Management Plan, the output of this process, is the blueprint for all of the other procurement activities that may be conducted during the course of the project.   I say “may” be conducted because it is entirely possible that some projects may be done ENTIRELY within the organization, in which case Procurement Management may be unnecessary on those projects.

Before going on to discuss the next process 12.2 Conduct Procurements, it will be necessary to go into some more detail this week and next week on some of the inputs, tools & techniques, and outputs of this process, including

a)      the types of procurement contracts used by the organization (part of the OPAs input)

b)      make-or-buy analysis (the main tool & technique of this process)

c)      elements of the Procurement Management Plan (the key output of this process)

d)     the Procurement Statement of Work (output)

e)      Source Selection Criteria (output)

The next posts will be on the first of these categories, the types of procurement contracts.  Just this topic will take several posts, because I need to discuss a) the three basic types of procurement contracts, b) the sub-types within each of these three types, and c) questions on the PMP examination regarding these types of contracts, which can be very difficult.

5th Edition PMBOK® Guide—Chapter 12: Project Procurement Management Knowledge Area

1.  Introduction

Procurement Management is the knowledge area involved in purchasing or acquiring products, services, or results from outside the project team, including developing and administering the contract or purchase order needed to obtain them.

2.  Procurement Management Processes

There are four project management processes in the Procurement Management Knowledge Area.  One is the in Planning Process Group, one is in the Executing Process Group, one is in the Monitoring & Controlling Group, and one is in the Closing Process Group.

The first process, that of Plan Procurement Management, creates the Procurement Management Plan which is the framework for all of the other processes.  The second process, that of Conduct Procurements, is where the bidding process for a contract is conducted.  The responses or bids of the sellers are evaluated according to criteria set up in the Procurements Management Plan, and the seller is selected and the contracted awarded.  During the course of the project, the Control Procurements process manages the relationship, evaluates the performance of the seller on the contract, and any changes or corrections that are required to be implemented by the seller are monitored.  As the only process in the Closing process group other than Close Project or Phase, the Close Procurements process is where the deliverable from the seller is accepted and the project procurements are formally closed.





Process Name Process Description
Planning 12.1 Plan Procurement Management Documents project procurement decisions, specifies the approach, and identifies potential sellers.
Executing 12.2 Conduct Procurements Obtains seller responses, selects seller, and awards contract.
Monitoring & Controlling 12.3 Control Procurements Manages procurement relationships, monitors contract performance, makes changes and corrections as needed.
Closing 12.4 Close Procurements Completes project procurements.

The next post will discuss the inputs, tools & techniques, and outputs of the first process, 12.1 Plan Procurement Management.

5th Edition PMBOK® Guide—Chapter 11: Process 11.6 Control Risks

1.  Introduction

The five risk-related project management processes in the Planning Process Group deal with setting up the Risk Management Plan (process 11.1), identifying (process 11.2), analyzing (processes 11.3 and 11.4), and then developing responses for risks to the project (process 11.5).  The last process 11.6 Control Risks is in the Monitoring and Controlling Process Group and is done periodically throughout the course of the project.

This post is devoted to the Inputs, Tools & Techniques, and the Outputs of this process 11.6 Control Risks.

2.  Inputs

The main inputs comes from the risk management plan and the risk register, with work performance data on how the project is going, along with analysis of that data.

1. Project Management Plan The components of the risk management plan that are inputs to the process are:

  • Guidelines for risk monitoring and controlling
2. Risk Register The pieces of information in the risk register that are used as inputs to the process are:

  • Identified risks and risk owners
  • Agreed-upon risk responses
  • Control actions for assessing effectiveness of response plans
  • Risk symptoms and warning signs
  • Residual and secondary risks
  • Time and schedule contingency reserves
  • Watch list (low priority risks)
3. Work Performance Data Performance results that may be impacted by risks include:

  • Deliverable status
  • Schedule progress
  • Costs incurred
4. Work Performance Reports Information from performance measurements is analyzed using variance analysis, earned value data, and forecasting data.
1. Risk reassessment Risk reassessments should be regularly scheduled in order to:

  • Identify new risks
  • Reassess current risks
  • Close risks that are outdated
2. Risk audits Examines and documents

  • Effectiveness of risk responses in dealing with identified risks and their root causes
  • Effectiveness or risk management process
3. Variance and trend analysis Variance analysis compares planned results to actual results, and trend analysis monitors overall project performance.  Together these forecast potential deviation of the project at completion from cost and schedule targets.
4. Technical performance measurement Compares technical accomplishments during project execution to schedule of technical achievement.
5. Reserve analysis Risks may occur with positive or negative impacts on time or schedule contingency reserves.
6. Meetings Project risk management should be agenda item at periodic status meetings.
1. Work performance information Provides mechanism to communicate and support project decision making.
2. Change Requests Implementing contingency plans or workarounds sometimes results in a change request which may recommend either a corrective or preventive action.
3. Project Management Plan  Updates If approved change requests have an effect on risk management process, the relevant components of the project management plan are revised to reflect the approved changes.
4. Project Documents Updates Risk register is updated to include:

  • Outcomes of risk reassessments, risk audits, and periodic risk reviews
  • Actual outcomes of the project’s risks and of the risk responses
5. OPAs updates Documents that may be updated may include:

  • Templates for the risk management plan
  • Risk breakdown structure
  • Lessons learned from project risk management activities

3.  Tools & Techniques

Risk are periodically reassessed during the course of the project, and the risk management processes themselves are assessed through risk audits.  Variance and trend analysis show how the project will turn out by the time of completion if the current performance continues.  Reserve analysis may impact the contingency reserves, which provide funding for risk responses.   If certain risks do not occur, the contingency reserves may be reduced because the risk responses are no longer needed.   PMI strongly recommends that periodic status meetings focus on risk management activities.

4.  Outputs

Risk responses may required change requests in order to be approved and implemented.  If they are implemented, the risk management plan may be updated.  Risk register can be updated to include results of risk reassessments, risk audits, and risk reviews.  OPAs may be updated for use on future projects.

he next post will go on to the next chapter, Chapter 12, on Project Procurement Management.