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In this post, I continue going through the various outputs for the Plan Procurement Management process.   The most important output is the Procurement Management Plan, from which the process gets its name.   Here are some additional outputs.

12.1.3.1  Plan Procurement Management

12.1.3.2 Procurement Strategy

Once the make-or-buy decision is complete (output 12.1.3.6) and the decision is made to acquire products or services from outside the project, a procurement strategy should be identified which includes the following three major elements.

• Delivery methods
  • For professional services, delivery methods include:  no subcontracting, subcontracting, joint venture, and representative.
  • For industrial and commercial construction, delivery methods include:  turnkey, design build (DB), design bid build (DBB), design build operate (DBO), and build own operate transfer (BOOT).
• Contract payment types
  • Fixed-price contracts:   suitable for predictable work with well-defined requirements
  • Cost-plus contracts:   suitable when work is evolving with not well-defined requirements
  • Incentive fees and awards may be used to align the objectives of buyer and seller
• Procurement phases
  • Sequencing or phasing of the procurement, with criteria for moving from phase to phase
  • Performance indicators and milestones to be used in monitoring, including monitoring and evaluation plan for tracking progress
  • Process for knowledge transfer to use in subsequent phases

12.1.3.3 Bid Documents

Bid documents are used to solicit proposals from prospective sellers.  Terms such as “bid”, “tender”, or “quotation” are used when the seller selection is based on price, and is usually used when purchasing standard items.   On the other hand, a term such as “proposal” is used when the seller selection is based on other considerations such as technical capability or technical approach, and is usually used when purchasing custom items.   Here are the types of bid documents typically used in procurements:

• Request for Information (RFI)–used when collecting information about the capabilities of various suppliers.   This is followed by one of the two following documents:
• Request for Quotation (RFQ)–when the seller selection is based on price
• Request for Proposal (RFP)–when the seller selection is based on technical capability or technical approach in addition to price

The RFP is obviously the most formal of the “request for” documents, and it includes the following:

• Description of the desired form of the response
• Relevant procurement Statement of Work (SOW) (see paragraph 12.1.3.4 below)
• Required contractual provisions

12.1.3.4  Procurement Statement of Work

In the same way that a seed contains the genetic blueprint for a plant, the SOW contains a blueprint of the procurement in the form of the definition of the project scope to be included within that procurement.   The SOW can include the following:

• Technical specifications
• Quantity desired
• Quality levels
• Performance data
• Period of performance
• Work location

Enough detail is included so that prospective sellers can determine if they are capable of providing the products, services, or results to be included in the procurement.

When contracting for services, sometimes Terms of Reference (TOR) are used in place of a Statement of Work.    A TOR can include the following:

• Tasks the contractor is required to perform
• Specified coordination requirements (delivery dates, communication methods, etc.)
• Standards the contractor will fulfill that are applicable to the project
• Data that needs to be submitted for approval
• Detailed list of all data and services that will be provided to the contractor by the buyer for use in performing the contract
• Definition of the schedule for initial submission and the review/approval time required

12.1.3.5  Source Selection Criteria

The buyer seeks to ensure that the proposals selected in response to the RFP will offer the best quality for the services required.   The PMBOK® Guide lists these in somewhat random order on p. 478.   I’m listing them below organized by the knowledge area they are most relevant to.

Integration Management

• Suitability of the knowledge transfer program, including training

Scope Management

• Adequacy of the proposed approach and work plan in responding to the SOW

Schedule Management

• Delivery dates

Cost Management

• Product cost and life cycle cost
• Financial stability of the firm

Quality Management

• Technical expertise and approach

Resource Management

• Capability and capacity
• Specific relevant experience
• Key staff’s qualifications, availability, and competence
• Management experience

Communications Management

• Local content requirements (for international projects)

The specific criteria may be a numerical score, color-code, or a written description on how well the seller satisfies the buyer’s selection criteria listed above.  The criteria form part of a weighting system that can be used to rank all the proposals by the weighted evaluation scores assigned to each proposal, and finally to select a single seller with whom the buyer will sign a contract.

12.1.3.6  Make-or-Buy Decisions

This is the result of the make-or-buy analysis (described in the post on “tools and techniques” for this process).

12.1.3.7  Independent Cost Estimates

For large procurements, the procuring organization may either prepare its own independent estimate or have a cost estimate prepared by an outside professional estimator to serve as a benchmark on proposed responses.

12.1.3.8 Change Requests

If the decision is made to procure goods, services, or resources as a result of the make-or-buy decision (see paragraph 12.1.3.6 above), then this may require a change request to the project management plan, which are then evaluated through the Perform Integrated Change Control process 4.6.

12.1.3.9  Project Document Updates

• Lessons learned register–updated with any relevant lessons regarding:
  • regulations and compliance
  • data gathering (market research)
  • data analysis (make-or-buy analysis)
  • source selection analysis
• Milestone list–shows when the sellers are expected to deliver their results
• Requirements documentation
  • Technical requirements that the seller is required to satisfy
  • Contractual and legal requirements related to the agreements, including:
    • Health
    • Safety
    • Security
    • Performance
    • Environmental
    • Insurance
    • Intellectual Property Rights
    • Equal Employment Opportunity requirements
    • License, permits
• Requirements traceability matrix–links product requirements from their origin to the deliverables that satisfy them, and indicate the owners of the requirements (who is responsible and/or accountable for them, as well as who to consult and inform when making decisions regarding them)
• Risk register–each approved seller will comes with its own unique set of risks related to one of the following:
  • Seller’s organization
  • Duration of the contract
  • External environment
  • Project delivery method
  • Type of contracting agreement chosen
  • Final agreed-upon price
• Stakeholder register–updated with any additional information on stakeholders that may have an impact on procurements, including contracting and/or legal personnel within the organization.

12.1.3.10  Organization Process Assets Updates

Information on qualified sellers is updated to the organization based on the experience gained in this process.

The documentation within the company that relates to procurements includes the following (see previous output paragraphs for details)

• Procurement Management Plan (paragraph 12.1.3.1)
• Procurement Management Strategy (paragraph 12.1.3.2)
• Statement of Work (paragraph 12.1.3.4)
• Bid Documents (paragraph 12.1.3.3)

There is a summary table 12-1 of all the contents of these documents on p. 461 of the PMBOK® Guide.

And that covers the remaining outputs for the process 12.1 Plan Procurement Management.   The next process, 12.2 Conduct Procurements, is in the Executing process group, and the inputs to this process are covered in the next post.

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In this post, I will review what the outputs are to the Plan Procurement Management process, the most important of which is, of course, the Procurement Management Plan.  Also, there will be a Procurement Strategy, Bid Documents (used in the next process), the Procurement Statement of Work, Source Selection Criteria (used in the next process), Make-Or-Buy Decisions, Independent Cost Estimates, Change Requests, and finally Project Documents Updates and Organizational Process Assets Updates.

Because there are so many outputs, I’m going to split up my discussion into a couple of posts.

Let’s go over the first output in this post.

12.1.3  Plan Procurement Management:  Outputs

12.1.3.1  Procurement Management Plan

The procurement management plan contains the activities to be undertaken in the procurement process, which will take place in the next two processes, Conduct Procurements and Control Procurements.

I will list the ones given on p. 475 of the PMBOK® Guide, but will organize them according to what other knowledge area they intersect (if any).   For all others, I’ll list them under the main knowledge area under consideration, namely Procurement Management.

Integration Management

• Constraints and assumptions that could affect planned procurements.

Schedule Management

• How procurement will be coordinated with project schedule development.
• Timetable of key procurement activities.

Cost Management

• The legal jurisdiction and currency in which payments will be made.
• Determination of whether independent estimates will be used and whether they are needed as evaluation criteria.

Risk Management

• Identifying requirements for performance bonds or insurance contracts to mitigate some forms of project risk (for example, cost risk).

Procurement Management

• Metrics used to manage procurement contracts.
• If the performing organization has a procurement department, the authority levels and other constraints of the project team.
• Prequalified sellers, if any, to be used.

Stakeholder Management

• Stakeholder roles and responsibilities related to procurement.

The level of detail of the plan–whether it is highly detailed or broadly framed, whether it it is written in a formal or informal manner–is based upon the needs of the project and the organization.

The next important output is the Procurement Strategy, which is the subject of the next post.

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Plan Procurement Management contains some tools and techniques which are generic, that is, common to other similar planning processes for other knowledge areas, and those specific to this particular process.   The generic tools and techniques are Expert Judgment and Meetings.   You talk to the experts who know about this particular knowledge area, and you discuss their findings at meetings with the project team.

You gather data about procurements, you analyze it, and then you use source selection analysis to help you evaluate the proposals for procurements that will come in the next procedure.

12.1.2 Plan Procurement Management:  Tools & Techniques

12.1.2.1 Expert Judgment

As a project manager, you will help from experts who have expertise in the following areas in order to draft your Procurement Management Plan.

• Procurement and purchasing
• Contract types and contract documents
• Regulations and compliance issues

If your company is large enough, it is possible that all procurements will be managed by a procurement manager.   If not, you will need to seek out experts who will assist you in managing them as the project manager.

12.1.2.2  Data Gathering

Market research is a data-gathering technique often used to help create the Project Management Plan.   Market research includes the following examination of industry and specific seller capabilities.   The objectives of market research are to:

• Leverage maturing technologies
• Balance risks associated with the sellers who can provide the desired materials or services, particularly with risks to various project constraints such as cost, schedule, and quality.

12.1.2.3  Data Analysis

Make-or-buy analysis is used to determine whether the deliverables of a project (which are found in the project scope statement) can best be accomplished by the project team or should be purchased from outside sources.   The factors to be considered are:

• the organization’s current resource allocation, as well as their skills and abilities
• the need for specialized expertise
• the desire not to expand permanent employment obligations
• the need for independent expertise
• the risks involved with the make-or-buy decision

The make-or-buy analysis make use financial tools and techniques, including the same ones used to analyze the viability of the project itself, such as

• Return on investment (ROI)
• Internal rate of return (IRR)
• Discounted cash flow
• Net present value (NPV)
• Benefit/cost analysis (BCA)

12.1.2.4  Source Selection Analysis

You need to look into the organization’s method for selecting the source of procurements.   Bidders need to know how they will be evaluated, because some of the selection methods require them to invest a large amount of time and resources upfront.

Commonly used selection methods include the following:

• Least cost–appropriate for procurements of a standard or routine nature which have well-established practices and standards and from which a specific and well-defined outcome is expected.
• Qualifications only–if the value of the procurement is relatively small, a full selection process may not make sense.   The buyer establishes a short list and selects the bidder with the best credibility and qualifications.
• Quality-based/highest technical proposal score.   For products and/or services that involve technology, the sellers are encouraged to submit a proposal with both technical and cost details.  The seller who submitted the highest-ranked technical proposal is selected if their financial proposal can be negotiated and accepted.
• Quality and cost-based.   If the risk and/or uncertainty are greater for the project, quality should be a key element when compared to cost.   The previous method of “quality-based and highest technical proposal score” is similar, but for products and services that involve technology.
• Sole source–if there is no competition, this method is acceptable ONLY when properly justified and viewed as an exception.   It is either for sole providers of a product or service, but for trusted providers with a history of past projects with the company.
• Fixed budget–when the statement of work (SOW) is well-defined, no changes are anticipated, and the budget is fixed and cannot be exceeded, this method may be appropriate.   The available budget is disclosed to invited sellers in the Request for Proposal (RFP) and the highest-ranking technical proposal given in response to that RFP is then selected.

12.1.2.5  Meetings

Meetings are used to determine the strategy for managing and monitoring the procurement, which is essentially the next two processes of procurement management.

The next post reviews the outputs of the Plan Procurement Management process.

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In the last post on the inputs to the Procurement Management Plan, I listed some of the categories of contracts you can have with a vendor who is producing something you need for your project.

For a person who is new to procurement management, the list of categories (Fixed Cost, Cost Reimbursable, Time and Materials) and the subcategories underneath each of these can be hard to keep straight in your mind.   However, it becomes very simple to understand the difference between the main categories of Fixed Cost contracts and Cost Reimbursable contracts if you understand the concept of cost risk.

Now, risk as you is an event or condition which has an impact on the project, either a positive impact (an opportunity) or a negative impact (what people most commonly think of as a “risk”).    If you look at which particular constraint the risk has an impact on, you can get several categories of risk, such as scope risk, schedule risk, and cost risk.  What it means is that the risk in question may have a positive or negative impact on the costs of the project.   In other words, at least for a negative risk, it might cause the project to go over budget.

In the case of a procurement, it means that the cost to the seller of producing the procurement may exceed the cost that the buyer had originally agreed to pay.   Who pays for the overage?   THAT is the key question which determines whether a contract is a Fixed Cost contract or a Cost Reimbursable contract.    In a Fixed-Cost Contract, the buyer agrees to pay a certain cost for the procurement, and if the costs are above that agreed-upon amount, the seller has to pay the additional costs.   That means that the seller has a cost risk.

Now, in a Cost-Reimbursable contract, the buyer agrees to pay the additional costs, which means it is the buyer who has the cost risk.   So in either type of contract, there is a cost risk either on one side of the transaction or the other.   The whole purpose of the subcategories under each type is to create incentives to balance the cost risk between the parties, so that no party feels that it is taking on the burden of the majority of the cost risk.  The type of incentive will determine the type of sub-category of each contract type.

So that is the relationship of the cost risk to the type of procurement contract you choose.   In a future post, I will discuss the different types of incentive.  In the next post, I will return to discussing the first procurement management process, 12.1 Plan Procurement Management.

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