Administer Procurements -What is a Procurement

Performance Review and why isit important to understand it?

461

Centralized ContractingDepartment (Disadvantages)

Administer Procurements -What is CLAIMS

Administration and why is itimportant?

Close Procurements -Procurements are closed

when..... 463

Administer Procurements -What is the purpose of a

contract? 456

Close Procurements - What isthe difference between

Administrative Closure andProcurement Closure? 465

Centralized ContractingDepartment (Advantages)

Decentralized ContractingDepartment (Advantages)

1a

One PM to many projects(divide attention among manyprojects), more difficult for PM

to obtain project help.

During the Administer Procurement process, the PMshould analyze all available data to verify that theSELLER is performing as they should. This is called aprocurement performance review. Often the SELLER ispresent to review the data and, most importantly, to talkabout what the BUYER can do differently to helpprogress the work. The purpose of this review is todetermine if changes are needed to improve theBUYER/SELLER relationship and the processes beingused, in addition to determining how the work isprogressing. Formal changes to the contract may berequested as a result of the meeting.

Procurements are closed when *A contract is completed*A contract is terminated

before the work is completed

A claim is an assertion that theBUYER did something that hashurt the SELLER and theSELLER is asking forcompensation. They are a formof SELLER change requests.

*Procurements must be closed before the project isclosed.*The PM performs a procurement audit and closesout the procurement.*When the project as a whole is completed later,the PM closes out the project.*Procurement closure needs to happen beforeproject closure.*PROJECT CLOSURE CAN OCCUR AT THE ENDOF EACH PROJECT PHASE AND AT THE ENDOF THE PROJECT AS A WHOLE.

*to define roles andresponsibilities

*to make things legally binding*to mitigate or allocate RISK

PM has easier access tocontracting expertise(procurement manager part ofPM's team), procurementmanager tends to have moreloyalty to the project and willunderstand the project better.

Procurement Managers with higherlevels of expertise. Procurement deptwill provide employees withcontinuous improvement, trainingand shared lessons learned, standardcompany practices, employees haveclearly defined career paths.

1b

Decentralized ContractingDepartment (Disadvantages)

Plan Procurements - FunctionalSOW - Describe 428

List the seller evaluationcriteria that relate to the seller's

business.

Plan Procurements - Make-or-Buy Analysis calculations 427

Plan Procurements - Describethe Make-or-Buy Analysis

process including anycalculations 427

Plan Procurements -Performance SOW - Describe

428

Plan Procurements - DesignSOW - Describe 428

Plan Procurements - TeamingAgreement or Joint Venture is

also referred to as...445

2a

The functional SOW conveys the endpurpose or result, rather than specificprocedures, etc., It is to be used inthe performance of the work and mayalso include a statement of theminimum essential characteristics ofthe product (ie I want a car with 23cupholders.)

Duplication of expertise, littlestandardization, no employee career path,inefficient use of resources for projects, no"home" dept for procurement manager onceproject is complete, more difficult tomaintain a high level of contractingexpertise, no focus on improving expertise(no dept)

You are trying to decide whether to lease or buy an item for yourproject. The daily lease cost is $120. To purchase the item, theinvestment is $1,000 and the daily cost is $20. How long will ittake for the lease cost to be the same as the purchase cost?

d = number of days when purchase and lease costs are equal

$120d = $1,000 +$20d$120d - $20d = $1,000$100d = $1,000d = 10

10 days - if you plan on utilizing for more than 10 days buy theitem. Include costs in the project cost estimate.

The seller's business dynamics may influence the projectmanager's selection of a seller. The business needs to be the rightsize to handle the project. The project may need a big company tohandle the large requests or a small company to focus on qualityand service. The company must have the financial ability tocomplete the job. The company should be interested in the bid. Theproject manager may choose only sellers that will be willing toaccept future projects in addition to the current one. The companyneeds the ability to handle the specifics of the project, not justprojects in general. To investigate the company's ability tocomplete a project, the project manager could ask for referencesfrom former customers.

The performance SOW conveys whatthe final product should accomplish,rather than how it should be built orwhat its design characteristics shouldbe (ie., I want a car than will go zeroto 100 mph per hour in 4.2 seconds)

Better to MAKE if1) you have an idle workforce2) you want to retain control3) the work involves proprietary info

Better to BUY if you want to decreaserisk to project constraints

Often 2 SELLERS believes that their chance ofwinning work from a BUYER will be enhanced ifthey join forces for one procurement. In this case,they will sign a teaming agreement with each otherto address the legal and business aspects of thearrangement. The agreement must clearly definewhat role each SELLER will take. The BUYER'sproject manager and procurement manager mightwant to review the teaming agreement to see ifthere are any legal ramifications or risks to theproject.

Conveys precisely what needsto be done (ie build exactly as

shown on these drawings).

2b

Plan Procurements - What aresome considerations that a PMmust ask when selecting one ofthe 3 (primary) contractingtypes? 429

Plan Procurements - What arethe "disadvantages" to a costreimbursable contract? 436

Plan Procurements - What arethe "advantages" to a cost

reimbursable contract? 436

Plan Procurements - What arethe "disadvantages" to a fixed

price contract? 435

Plan Procurements - What arethe "advantages" to a fixed

price contract? 434

Plan Procurements - What arethe "disadvantages" to a T&M

contract? 435

Plan Procurements - What arethe "advantages" to a T&M

contract?" 435

Plan Procurements - What arethe types of SOW?

3a

Requires auditing of theSELLER invoices.More work for the BUYER tomanage.SELLER only moderateincentive to control costs.Total price is unknown.

1) What is being purchased?2) The completeness of scope of work3) Level of expertise the buyer can devote tomanaging the Seller4) Whether the buyer wants to offer the sellerincentives5) The marketplace or economy6) Industry standards for the type of contractused.

If SELLER underprices the work, they maytry to make up profits on change orders.SELLER may try to not complete some ofSOW if they begin to lose money. Requiresmore work for the BUYER to write SOW.more expensive if SOW is incomplete andSELLER needs to add to the price forincreased risk.

Simpler procurement SOW.Usually less work to definescope for CR than FP contract.Generally lower cost than FPbecause SELLER does not haveto add as much for risk.

Profit for SELLER in every hourbilled.SELLER has no incentive to controlcosts.Appropriate only for small projects.T&M contracts require a great deal ofday-to-day oversight from theBUYER.

Less work for BUYER to manage.SELLER has strong incentive tocontrol costs. Companies haveexperience with this type of contract.BUYER knows the total price beforethe work begins.

1) Performance2) Functional

3) DesignProcurement SOW becomes

part of the contract.

Quick to create.Contract duration is brief.Good choice when hiring

"bodies" or people to augmentyour stuff.

3b

Plan Procurements - Whatcontract type and procurementSOW aligns with a Request for

Proposal? 445

Plan Procurements - What is acost contract? 432

Plan Procurements - What doesNoncompetitive forms ofprocurement mean? 449

Plan Procurements - What is acost plus award fee (CPAF)

contract? 432

Plan Procurements - What doesPrivity mean? 449

Plan Procurements - What is acost plus award fee (CPAF)

example?

Plan Procurements - What is aceiling price? 438

Plan Procurements - What is acost plus fee contract (CPF)

contract? cost plus percentageof costs (CPPS)?

4a

Cost contract - SELLERreceives no fee, non profit

organizations.

PROCUREMENT DOCUMENT, CONTRACTTYPE, PROCUREMENT SOW - Request forProposal (RFP), CR, Performance or Functional

PROCUREMENT DOCUMENT, CONTRACTTYPE, PROCUREMENT SOW - Invitation for Bid(IFB), FP, Design

PROCUREMENT DOCUMENT, CONTRACTTYPE, PROCUREMENT SOW - Request forQuotation (RFQ), T&M, Any

BUYER pays all costs and a base feeplus an award amount (bonus) basedon performance. Similar to CPIF.Award amount is determined inadvanced and apportioned outdepending on performance. Incentivecontract.

When would you award work to a company w/ocompetition?*The project is under extreme schedule pressure.*A seller has unique qualifications.*There is only one seller who can provide the goodsor service.*A seller holds a patent for the item you need.*Other mechanisms exist to ensure that the seller'sprices are reasonable.

Contract = Cost plus $5,000 forevery month productionexceeds 100,000 units.Maximum award is $50,000.Contract = cost plus an awardfee (TBD) for each deliverablecompleted at least 7 days early.

Privity is a contractual relationship.QUESTION - Company A hires company B todo some work for them. Company Bsubcontracts to Company C. The proectmanager for company A is at the job site andtells Company C to stop work. Generally doescompany C have to listen? Answer: No.Companies C and A have no contractualrelationship. A needs to talk to B, who needsto talk to C.

BUYER to pay for all costs plusa percentage of costs as a fee.Not allowed for U.S. federalacquisitions under federalacquisition regulations.

CEILING PRICE - This is thehisgest price the BUYER willpay. Note how the answers tocalculations on the exam canchange when a ceiling price ismentioned.

4b

Plan Procurements - What is acost plus fixed fee (CPFF)

contract? 432

Plan Procurements - What is aFixed Price Award Fee (FPAF)

430

Plan Procurements - What is acost plus incentive fee (CPIF)

contract?

Plan Procurements - What is aFixed Price Economic Price

Adjustment (FPEPA) contact?430

Plan Procurements - What is acost reimubursable (CR)

contract?

Plan Procurements - What is aFixed Price Incentive Fee

(FPIF) contract?

Plan Procurements - What is aFixed Price (FP, Lump Sum,Firm Fixed Price) contract?

Plan Procurements - What is aLetter of Intent? 449

5a

The BUYER pays a fixed price(includes a fee) plus an award

amount (a bonus) based onperformance.

CPFF = for payment to theSELLER of actual costs plus anegotiated fee that is fixedbefore the work begins. Feedoes not vary. Some incentivefor SELLER to control costs.

If there are questions about future economicconditions (future prices) for contracts thatexist for a multi-year period, a BUYER mightchoose a fixed price contract with aneconomic price adjustment. Future costs ofsupplies and equipment that SELLER mightbe required might not be predictable.

CPIF = provides for SELLER tobe paid for actual costs plus afee that will be adjusted basedon whether the specificperformance objectives statedin the contract are met (seepage 438 for exercise).

Profits (or financial incentives) canbe adjusted based on SELLERmeeting specified performancecriteria such as getting work donefaster, cheaper or better. Final priceis calculated by a formula based onthe relationship of final negotiatedcosts to the total target cost.

A CR contract is used when the exact scopeof work is uncertain and costs cannot beestimated accurately to use a fixed pricecontract. BUYER to pay SELLER allowableincurred costs to the extend prescribed inthe contract. BUYER has most risk becausetotal costs are unknown. (R&D or IT projectswere scope is generally unknown).

If a contract is not signed in time, the SELLERmay ask the BUYER to provide a letter of intent. Aletter of intent is NOT a contract, but simply aletter, without legal binding, that says the BUYERintends to hire the SELLER. It is intended to givethe SELLER confidence that the contract will besigned soon and to make them comfortable withtaking the risk of ordering the reuqipment orhiring the staff that will eventually be needed.

FP is the most common type ofcontract. BUYER has the leastcost risk provided BUYER has acompletely defined scope.SELLER is most concernedwith the procurement SOW inthis type of contract.

5b

Plan Procurements - What is aPurchase Order? 431

Plan Procurements - What is anexample of a Fixed Price

Economic Price Adjustment(FPEPA)? 431

Plan Procurements - What is asharing ratio? 438

Plan Procurements - What is anexample of a FPIFE? 430

Plan Procurements - What is aTime and Materials contract?

431

Plan Procurements - What is anexample of T&M? 431

Plan Procurements - What is anexample of a Fixed Price Award

Fee (FPAF)? 430

Plan Procurements - What ispoint of total assumption

(PTA)? 438

6a

Contract = $1,100,000 but a price increasewill be allowed in year two based on the U.S.Price Index Report for year one.

Contract = the contract price is $1,100,000but a price increase in year two to accountfor increases in material costs.

A P.O. is the simplest fixed price type ofcontract. Normally unilateral (signed by oneparty) instead of bilateral (signed by bothparties) used for simple commodityprocurements. P.O.'s become contracts whenthey are accepted by performance (i.e.,equipment is shipped by the SELLER). Somecompanies will require a signature thatforms the acceptance needed to make acontract.

Contract = $1,100,000.For every month early that the

project is finished, anadditional $10,000 is paid to

the SELLER.

SHARING RATIO - incentives take the formof a formula, usually expressed as a ratio, ie90/10. This sharing ratio describes how thecost savings or cost overrun will be sharedwith the BUYER, the first number being theamount the BUYER will keep and the secondnumber being the amount the SELLER willkeep (BUYER/SELLER).

Contract = $100/hour plusexpenses or materials at cost

Directed to small dollar amounts and shortterm with a not to exceed clause. The BUYERpays on a per-hour or per-item basis. It isfrequently used for service efforts in whichthe level of effort cannot be defined at thetime the contract is awarded. Has elementsof fixed price (price per hour/unit) and a CRcontract (in material costs and total costbeing unknown).

POINT OF TOTAL ASSUMPTION - this onlyapplies to fixed price incentive fees contracts andrefers to the amount above which the SELLERbears all the loss of a cost overrun. Costs that goabove the PTA are assumed to be due tomismanagement. SELLERS will sometimesmonitor their actual costs against the PTA to makesure they are still receiving a profit for completingthe project. FORMULA: PTA = [(Ceiling price -Target Price)/Buyer's share ratio] + Target Cost

Contract $1,100,000For every month performanceexceeds the planned levels bymore than 15%, an additional$5,000 is awarded to theSELLER, with a maximumaward of $70,000.

6b

Plan Procurements - What istarget price? 437

Plan Procurements - Whattypes of contracts are there?

429

Plan Procurements - What isthe difference between profit

and cost? 437

Plan Procurements - Whichparty has the most and least

risk in a Fixed Price (FP) typecontract? 429

Plan Procurements - What isthe name of the party that

provides services and goods?421

PM - how would "not definedscope" indicate the type of

contract you would choose?433

Plan Procurements - What isthe name of the party that

purchases services? 421

PM - You do not have acomplete scope of work andhave a fixed price contract.What problems can you expectto run into? 433

7a

1) Fixed Price (FP)2) Time and Material (T&M)3) Cost Reimbursable (CR)

TARGET PRICE - compare endresult with what was expected.

Target Cost + Target Fee =Target Price

SELLER sometimes accepts a high level ofrisk as SELLER needs to add huge reserves inprice to cover their risks. BUYER pays morein a FP. SELLER can try to increase profitsby cutting scope or claim that what theBUYER wants is outside of the contractrequiring a change to the contract. SELLERcan try to take their best people off of thecontract.

PROFIT - amount of money theSELLER has left over aftercosts are paid.

COST - how much an item coststhe SELLER to create, developor purchase.

...

ContractorSubcontractor

DesignerSELLER

... BUYER

7b

Procurement Process(Activities) - 427

Procurement Process (Identifythem) 426

Procurement Process (Inputs)426

8a

1) Performing a make-or-buy analysis, 2)Creating a procurement mgmt plan, 3)Creating a procurement SOW for eachprocurement, 4) Selecting a contract type foreach procurement, 5) Creating theprocurement documents, 6) Determining thesource selection criteria

1) Plan procurements, 2)Conduct procurements, 3)

Administer procurements, 4)Close procurements

1) enterprise environment factors, 2)organizational process assets, 3)procurement manager assignment, 4) scopebaseline, 5) risk register, 6) review of anyexisting procurements, 7) identification ofany resources not in the performingorganization, 8) project schedule, 9) initialcost estimates for wrok to be procured, 10)cost baselines

8b