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1
Procurement Management
Sharif Project Management
Session 11 – Fall 1390
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Procurement
Purchasing, Acquisition, Supply (Materials, Services, Results, Consultants)
Outsourcing, Sub-contractors Contracts, Supplier Relationships
Impossible to produce everything internally!
Inputs to company must be procured/managed
Contracts and relationships must be managed!
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Procurement Management
Includes the processes to purchase or inquire the products, services, or results needed from outside the project team to perform the work.
Includes the contract management & change management processes needed to administer contracts or purchase orders issued.
Plan Purchases/Acquisitions o Plan Contracting Request Seller Responses o Contract Closure Select Sellers o Contract Administration
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The Make Decision
Less costly (but not always!!) Easy integration of operations Utilize existing capacity that is idle Maintain direct control Maintain design/production secrecy Avoid unreliable supplier base Stabilize existing workforce
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The Buy Decision
Less costly (but not always!!) Utilize skills of suppliers Small volume requirement (not cost
effective to produce) Having limited capacity or capability Augment existing labor force Maintain multiple sources (qualified
vendor list) Indirect control
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Procurement Strategies
Corporate procurement strategy: the relationship of specific procurement actions to the corporate strategy
Project procurement strategy: the relationship of specific procurement actions to the operating environment of the project
Procure all goods/services from a single source. Procure all goods/services from multiple sources. Procure only a small portion of the goods/ services. Procure none of the goods/services.
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Procurement Management
1. Requirement cycle: definition of the boundaries of the project
2. Requisition cycle: analysis of sources
3. Solicitation cycle: the bidding process
4. Award cycle: contractor selection and contract award
5. Contract administration cycle: managing the subcontractor until completion of the contract
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1. Requirement Cycle
Defining the need for the projectDevelopment of the statement of work,
specifications & work breakdown structurePerforming a make or buy analysisLaying out the major milestones and the
timing/scheduleCost estimating, including life-cycle costingObtaining authorization/approval to proceed
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Specifications are written, pictorial, or graphic information that describe, define, or specify the services or items to be procured. There are three types of specifications:
• Design• Performance• Functional
Specifications
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Types of Specifications
Design specifications: These detail what is to be done in terms of physical characteristics. The risk of performance is on the buyer.
Performance specifications: These specify measurable capabilities the end product must achieve in terms of operational characteristics. The risk of performance is on the contractor.
Functional specifications: This is when the seller describes the end use of the item to stimulate competition among commercial items, at a lower overall cost. This is a subset of the performance specification. The risk of performance is on the contractor.
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2. Requisition Cycle
Evaluating/confirming specifications (are they current?)
Confirming sources Reviewing past performance of
sources Producing solicitation package
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3. Solicitation Cycle
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
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Solicitation CycleAdvertisingNegotiationSmall purchases (i.e., office supplies)
Negotiation ProcessesRequest for information (RFI)Request for quotation (RFQ)Request for proposal (RFP)
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Negotiation Planning
Develop objectives (i.e., min-max positions)
Evaluate your opponent
Define your strategy and tactics
Gather the facts
Perform price/cost analysis
Arrange “hygiene” factors
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Negotiation Objective-Setting
Buyer
Seller
Min
Min Objective
Objective Max
Max
Price
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Contract Negotiations Requires Knowing When to Speak and When to Be Quiet.
Negotiation Factors
Compromise-ability Adaptability Good faith
Research Your Supplier/ Customer Before Entering Into Contract Negotiations
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4. Award Cycle
The objective of the award cycle is to
negotiate a contract type and price that
will result in reasonable contractor risk
and provide the contractor with the
greatest incentive for efficient and
economic performance.
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Contract ElementsMutual agreementConsiderationContract capabilityLegal purposeForm provided by law
Contract FormsContract CompletionContract Terms
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Contract Selection Criteria
Overall degree of cost and schedule risk Type and complexity of requirement (technical risk) Extent of price competition Cost/price analysis Urgency of the requirements Performance period Contractor’s responsibility (and risk) Contractor’s accounting system (is it capable of
earned value reporting?) Concurrent contracts (will my contract take a back
seat to existing work?) Extent of subcontracting (how much work will the
contractor outsource?)
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Contracting Type
Fixed price contract
Cost plus contract
Unit rates contract
EPC-Turnkey contract
BOOT contract
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Contract’s Risk and Reward Go Hand-in-Hand
Negotiating wrong type of contract can be devastating!
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Contractor’s Risks
FFP CPFF
Risk On Contractor
HIGH LOW
LEGEND
FFP FIRM FIXED PRICECPFF COST PLUS FIXED FEE
Risk On Client
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Cost Plus Contracts
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Cost-Plus-Fixed-Fee Contract (CPFF)
0 %
0 %
100 %
100 %
CO
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OR
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CU
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RIS
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RIS
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RISK SHARING METER
RISKLOCATION
• All costs are reimbursed (cost run-ups)• Fee is fixed (in $$$ not %) irrespective of costs• Contractor is motivated for early completion
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Cost-Plus-Award-Fee Contract (CPAF)
0 %
0 %
100 %
100 %
CO
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’S
RIS
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RIS
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RISK SHARING METER
RISKLOCATION
• All costs are reimbursed (cost run-ups)• Negotiated range of possible profits• Award may be percentage of cost
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Cost-Plus-Incentive-Fee Contract (CPIF)
0 %
0 %
100 %
100 %
CO
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OR
’S
CU
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’S
RIS
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RIS
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RISK SHARING METER
RISKLOCATION
• Contractor can earn additional profits• All costs are reimbursed (cost run-ups)• A “floor” and “ceiling” exists on profits
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Firm-Fixed-Price Contract (FFP)
0 %
0 %
100 %
100 %
CO
NT
RA
CT
OR
’S
CU
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RIS
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RIS
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RISK SHARING METER
RISKLOCATION
• Maximum risk with contractor• Higher negotiated profit margins• High likelihood of scope changes
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Firm-Fixed-Price with Economic Price Adjustments (FPE)
0 %
0 %
100 %
100 %
CO
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CT
OR
’S
CU
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RIS
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RIS
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RISK SHARING METER
RISKLOCATION
• Adjustments for escalation factors• Adjustments for inflation• Negotiated adjustment cycle
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Incentive Contracts• Additional profits are possible by lowering cost
• Customer and contractor share cost savings
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Principles of Incentive Contracts
TARGET COST: $20,000TARGET FEE: $1500SHARING RATIO: 80/20 %
• Customer pays 80 % of overrun
• Contractor pay 20 % of overrun
• Profit is $1500 lessCONTRACTOR’S 20 %
• Customer keeps 80 % of underrun
• Contractor keeps 20 % of underrun
• Profit is $1500 plusCONTRACTOR’S 20 %
Note: limitations may be imposed on price or profit
EXAMPLE
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Fixed-Price-Incentive-Fee Contract (FPIF)
0 %
0 %
100 %
100 %
CO
NT
RA
CT
OR
’S
CU
ST
OM
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’S
RIS
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RIS
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RISK SHARING METER
RISKLOCATION
• Contractor can earn additional profits• Contract has a ceiling on price (or cost) paid• Incentive may be on time, quality, other factors
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Cost-Sharing Contract (CS)
0 %
0 %
100 %
100 %
CO
NT
RA
CT
OR
’S
CU
ST
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RIS
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RIS
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RISK SHARING METER
RISKLOCATION
• No profits allowed• Customer and contractor share costs• Contractor may retain control ofProprietary knowledge after completion
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Cost Contract (C)
0 %
0 %
100 %
100 %
CO
NT
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OR
’S
CU
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RIS
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RISK SHARING METER
RISKLOCATION
• No profits allowed• Contractor is usually a non-profit organization• Limitations on costs allowed may be imposed
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Cost-Plus-Percentage-of-Cost Contract (CPPC)
0 %
0 %
100 %
100 %
CO
NT
RA
CT
OR
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CU
ST
OM
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RIS
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RIS
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RISK SHARING METER
RISKLOCATION
• COSTS INCURRED MAY BE UNLIMITED
• CONTRACTORS CAN MAXIMIZE PROFITS
• SCOPE CHANGES MAY BE FREQUENT AND UNLIMITED
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Relative Contract Risk
RISKLOCATION
FFP
FFE
FPIF
CPIF
CPAF
CPFF
CSC
CPPC
0 %
100 %
CO
NT
RA
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OR
’SR
ISK
0 %
100 %
CU
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OM
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’SR
ISK
RISK SHARING METER
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There are several other types of contracts available. They may be derivatives of these contracts, combinations, or simply special contracts for special circumstances.
Other Types of Contracts
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5. Contract Administration Cycle Change management Specification interpretation Adherence to quality Warranties Subcontractor management Production surveillance Waivers Contract breach Resolution of disputes Project termination Payment schedules Project closeout
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Order of Precedence
A. Specifications (first priority)
B. Other instructions (second priority)
C. Other documents, such as exhibits, attachments, appendices, SOW, contract date requirements list [CDRL], etc. (third priority)
D. Contract clauses (fourth priority)
E. The schedule (fifth priority)
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Type of Changes
Administrative changeChange orderContract modificationUndefinitized contractual actionSupplemental agreementConstructive change
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Causes of Constructive ChangesDefective specification with
impossibility of performanceErroneous interpretation of contractOver-inspection of workFailure to disclose superior knowledgeAcceleration of performanceLate or unsuitable owner or customer
furnished propertyFailure to cooperate Improperly exercised optionsMisusing proprietary data
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Reasons for Termination For Convenience of the Customer
Elimination of the requirementTechnological advances in the state-of-
the-artBudgetary changesRelated requirements and/or
procurementsAnticipating profits not allowed
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Reasons for Termination -For Default Due to Contractor’s Actions
Contractor fails to make delivery on scheduled date.
Contractor fails to make progress so as to endanger performance of the contract and its terms.
Contractor fails to perform any other provisions of the contract.
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Contract Administration Rights
Reject the entire shipmentAccept the entire shipment (barring
latent defects)Accept part of the shipment
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