project procurement and risk
TRANSCRIPT
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Chapter 12
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12.1 Plan Procurements
12.2 Conduct Procurements
12.3 Administer Procurements
12.4 Close Procurements
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Project Procurement Managementincludes the processes to purchase or
acquire the products, services, or resultsneeded from outside the project team toperform the work. This chapter presentstwo perspectives of procurement. The
organization can be either the buyer orseller of the product, service, or resultsunder a contract.
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Project Procurement Management includesthe contract management and change
control processes required to administercontracts or purchase orders issued byauthorized project team members.
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Project Procurement Management alsoincludes administering any contract issued byan outside organization (the buyer) that is
acquiring the project from the performingorganization (the seller), and administeringcontractual obligations placed on the project
team by the contract.
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Buyer The customer
Seller Contractor; vendor; supplier external
to the performing organization The terms and conditions of the contract
become key inputs to many of the sellers
processes
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Scope Baseline Requirements
Documentation TeamingAgreements
Risk Register Risk RelatedContractDecisions
ActivityResourceRequirements
ProjectSchedule
Activity Cost
Estimates Cost
Inputs1 Tools andTechniques2 Outputs3
Process 12.1
Reference: Figure 12.2.PMBOK Guide 4th Ed
Make-or-BuyAnalysis
ExpertJudgment
ContractTypes
___________
9Procurement 2Planning
ProcurementManagement
Plan
ProcurementStatementsof Work
Make-or-BuyDecisions
ProcurementDocuments
Source
SelectionCriteria
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Plan Procurements
The process of documenting projectpurchasing decisions, specifying theapproach and identifying the potential sellers.
It identifies those project needs which canbest be, or must be, met by acquiringproducts, services or results outside of the
project organization, versus those projectneeds which can be accomplished by theproject team.
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Plan Procurements: Inputs
1. Scope Baseline
Scope statement. The scope statement containsthe product scope description, service
description and result description and the list ofdeliverable and the acceptance criteria.
WBS
WBS Dictionary
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Plan Procurements: Inputs
2. Requirements Documentation
Requirements documentation may include:
Important information about projectrequirements that is considered during planningfor procurements.
Requirements with contractual and legalimplications that may include health, safety,security etc .
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Plan Procurements: Inputs
3. Teaming Agreements
Teaming agreements are legal contractualagreements between two or more entities to
form a partnership or joint venture, or someother arrangement as defined by the parties.
The agreement defines buyer-seller roles for
each party.
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Plan Procurements: Inputs
4. Risk Register
5. Risk Related Contract Decisions
6. Activity Resources Requirements
7. Project Schedule
8. Activity Cost Estimates
9.
Cost Performance Baseline10. Enterprise Environmental Factors
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Plan Procurements: Inputs
10. Organizational Process Assets
The organizational process includes
Formal procurement policies, procedures and
guidelines. Management systems that are considered in
developing the procurement management plan andselecting the contract types to be used.
An established multi-tier system of pre qualifiedsellers based on previous experience.
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Plan Procurements: Tools and
Techniques1. Make-or-Buy Decision
A make-or-buy decision is a generalmanagement technique used to determine
whether particular work can be bestaccomplished by the project team or mustbe purchased from outside sources.
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Plan Procurements: Tools and
Techniques2. Expert Judgment
Expert technical Judgment will often be usedto assess the inputs from this process.
Expert purchasing judgment can also beused to develop or modify the criteria thatwill be used to evaluate seller proposal.
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Plan Procurements: Tools and
Techniques3. Contract Types
The risk shared between the buyer and seller isdetermined by the contract type.
All legal contractual relationships generally fallinto one of two broad families, either Fixed-Priceor Cost-reimbursable.
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Plan Procurements: Tools and
Techniques Fixed Price Contracts
This category of contracts involves setting afixed total price for a defined product or
service to be provided. It further includesfollowing types based amount of risk involvedand amount of incentive included.
Firm Fixed Price Contracts (FFP) Firm Fixed Incentive Fee contracts (FPIP)
Fixed Price with Economic Price Adjustment Contracts(FP-EPA)
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Spectrum of risk (For contracts)
CPPC CPFF CPIF FPI FFP
Cost Plus FixedFee (CPFF)
Cost PlusIncentive Fee(CPIF)
Variable Sharing Ratio
Firm Fixed Price
0 100
Cost PlusPercentage ofCosts (CPPC)
100 0
Fixed PriceIncentive (FPI)
Seller RiskLOW HIGH
Buyer RiskHIGH LOW
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Plan Procurements: Tools and
Techniques Cost-reimbursable Contracts
This category of contracts involves payments(Cost reimbursements) to the seller for all
legitimate actual cost incurred for thecompleted work, plus a fee representingseller profit.
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Plan Procurements: Tools and
Techniques Three of more common types of cost
reimbursable in use are: Cost Plus Fixed Fee Contracts (CPFF)
Cost Plus Incentive Fee Contracts(CPIF) Cost Plus Award Fee Contracts (CPAF)
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Plan Procurements: Outputs
1. Procurement Management Plan
The procurement management plan describes
how the procurement will be managed fromdeveloping procurement document throughcontract closure.
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Plan Procurements: Outputs
The procurement management plan caninclude guidance for types of contracts to beused, risk management issues etc
A procurement management plan can formalor informal, can be highly detailed or broadlyfarmed, and is based on the needs of each
project.
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Plan Procurements: Outputs
2. Procurement Statement of Work
The statement of work describes theprocurement item in sufficient detail to allow
prospective sellers to determine if they arecapable of providing the products, services.
3. Make-or-Buy Decisions
4.
Procurement Documents Procurement document is used to solicit
proposals from prospective sellers.
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Plan Procurements: Outputs
Common terms are used for different types ofprocurement documents and may includerequest for information (RFI), invitation for bid
(IFB), request for proposal (RFP), request forquotation (RFQ) etc.
5. Change Request
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9 3
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ProjectManagement
PlanProcurementDocuments
SourceSelection
CriteriaQualifiedSeller List
SellerProposals
ProjectDocuments
Inputs1 Tools andTechniques2 Outputs3
Process 12.2
Reference: Figure 12.4.PMBOK Guide 4th Ed
BidderConferences
ProposalEvaluationTechniques
IndependentEstimates
ExpertJudgment
Advertising
Internet
Search
9Procurement
SelectedSellers
ProcurementContractAward
ResourceCalendars
ChangeRequests
ProjectManagement
Plan UpdatesPro ect
3Executing
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Conduct Procurement
Conduct procurement is the process ofobtaining seller responses, selecting a sellerand awarding a contract.
On major procurement items, the overallprocess of requesting responses from sellersand evaluating those responses can be
repeated.
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Conduct Procurement
A short list of qualified sellers can beestablished based on a preliminary proposal.
A more detailed evaluation can then be
conducted based on a more specific andcomprehensive requirements documentrequested from the sellers on the short list.
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Conduct Procurement: Inputs
1. Project Management Plan
2. Procurement Documents
3. Source Selection Criteria
4. Qualified Seller List
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Conduct Procurement: Inputs
5. Seller Proposals
6. Project Documents
7. Make-or-Buy Decisions
8. Teaming Agreements
9. Organizational Process Assets
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Conduct Procurement: Tools and
Techniques1. Bidder Conferences
Bidder Conferences (sometimes calledcontractor conferences, vendor conferences)
are meeting with all perspective sellers andbuyers prior to submittal of bid or proposal. Theyare used to ensure that all perspective sellershave a clear and common understanding of the
procurement.
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Conduct Procurement: Tools and
Techniques2. Proposal Evaluation Techniques
On complex procurement, when sourceselection will be made based on seller
responses to previously defined weightedcriteria, a formal evaluation review process willbe defined by the buyers procurement policies.
The evaluation committee will make their
selection for approval by management prior tothe award.
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Conduct Procurement: Tools and
Techniques3. Independent Estimates
For many procurement items, the procuringorganization may elect to either prepare its own
independent estimates, or have an estimate ofcosts prepared by an outside professionalestimator, to serve as a benchmark on proposedresponses.
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Conduct Procurement: Tools and
Techniques4. Expert Judgment
5. Advertising
Existing lists of potential sellers can often be
expanded by placing advertisements in generalcirculation publications such as newspapers orin specially trade publications.
6. Internet Search
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Conduct Procurement: Tools and
Techniques7. Procurement Negotiations
Negotiations clarify the structure, requirementsand other terms of the purchases so that mutual
agreement can be reached prior to signing thecontract.
Final contract language reflects all agreementsreached.
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Conduct Procurement: Outputs
1. Selected Sellers
The sellers selected are those sellers who havebeen judged to be in a competitive range based
upon the outcome of the proposal or bidevaluation, and who have negotiated a draftcontract that will become the actual contractwhen award is made.
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Conduct Procurement: Outputs
2. Procurement Contract Award
A procurement contract is awarded to eachselected seller.
The contract can be in the form of simplepurchase order or complex document.
A contract is a mutually binding legal documentthat obligates the seller to provide the specified
product or service and obligates the buyer tocompensate the seller.
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Conduct Procurement: Outputs
3. Resource Calendars
The quantity and availability of contractedresources and those dates on which each
specific resource can be active or idle isdocumented.
4. Change Requests
5. Project Management Plan Updates
6. Project Document Updates
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ProjectManagement
PlanProcurementDocuments
ContractsPerformance
ReportApprovedChangesReport
WorkPerformanceInformation
Inputs1 Tools andTechniques2 Outputs3
Process 12.2
Reference: Figure 12.4.PMBOK Guide 4th Ed
ContractChange
ControlSystem
ProcurementPerformanceReview
Inspection andAuditing
PerformanceReporting
PaymentsSystems
9Procurement
ProcurementDocumentation
Org: Processassets Updates
ChangeRequests
ProjectManagementPlan Updates
____________
3Executing
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Administer Procurement
Administer procurement is the process ofmanaging procurement relationships,monitoring contract performance, and making
changes and corrections as needed. Both the buyer and seller will administer the
procurement contract for similar purposes.
Each must sure that both parties meet theircontractual obligations and that their ownlegal rights are protected.
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Administer Procurement: Inputs
1. Procurement Documents
Procurement documents contain completesupporting records for administration of the
procurement processes. This includes procurement awards and the
statement of work.
2. Project Management Plan
3. Contracts
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Administer Procurement: Inputs
4. Performance Report
5. Approved Changes Requests
Approved changes request can include
modifications to the terms and conditions of thecontract including the procurement statement ofwork, pricing, and description of the products,services to be provided.
6. Work Performance Information
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Administer Procurement: Tools and
Techniques1. Contract Change Control System
A contract change control system defines theprocess by which the procurement can be
modified. It includes the paperwork, tracking systems,
disputes resolution procedures, and approvallevels necessary for authorizing changes.
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Administer Procurement: Tools and
Techniques2. Procurement Performance Review
A procurement performance review is astructured review of the sellers progress todeliver project scope and quality, within cost and
on schedule, as compared to the contract.
3. Inspections and Audits Inspections and audits required by the buyer
and supported by seller as specified in theprocurement contract can be conducted duringexecution of the project to verify compliance inthe sellers work process or deliverables.
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Administer Procurement: Tools and
Techniques4. Performance Reporting
5. Payment Systems
6. Claims Administration
7. Record Management System
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Administer Procurement: Outputs
1. Procurement Documentation
Procurement documentation includes, but notlimited to, the procurement contract with all
supporting schedule, requested unapprovedcontract changes and approved changesrequests.
Procurement documentation also includes any
seller-developed technical documentation andother work performance information such as,deliverables, seller performance report etc.
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Administer Procurement: Outputs
2. Organizational Process Assets Updates
Elements of organizational process assets thatmay be updated include:
Correspondence Payments Schedules and requests
Seller performance evaluation documentation
3. Change Requests
4. Project Management Plan Updates
9 3E i
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ProjectManagement
PlanProcurementDocuments
Inputs1 Tools andTechniques2 Outputs3
Process 12.2
Reference: Figure 12.4.PMBOK Guide 4th Ed
ProcurementAudits
NegotiationSettlement
RecordManagementSystem
9Procurement
Close
Procurements
Org: Processassets Updates
______
3Executing
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Close Procurement
Close procurement is the process ofcompleting each procurement.
It supports the close project or phase
process, since it involves verification that allwork and deliverables were acceptable.
The close procurement also involves
administrative activities.
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Close Procurement
Close procurements addresses each contractapplicable to the project or project phase.
Early termination of a contract is a special
case of procurement closure that result froma mutual agreement of both parties, from thedefault of one party, or for convenience of the
buyer if provided for in the contract.
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Close Procurement: Inputs
1. Project Management Plan
2. Procurement Documentation
To close the contract, all procurement
documentation is collected, indexed and filled. This information can be used for the lesson
learned information and as a basis forevaluating contractors for future contracts.
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Close Procurement: Tools and
Techniques1. Procurement Audits
The procurement audit is a structured review ofthe procurement process originating from the
Plan procurement process through AdministerProcurements
The purpose of a procurement audit is to identifysuccesses and failures that warrant recognition
in the preparation or administration of otherprocurement contracts on the project.
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Close Procurement: Tools and
Techniques2. Negotiated Settlement
In all procurement relationships, the finalequitable settlement of all outstanding issues,
claims, and disputes by negotiation is primarygoal.
Whenever settlement can not be achievedthrough direct negotiation, some form of
alternative dispute resolution (ADR) includingmediation or arbitration may be explored.
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Close Procurement: Outputs
1. Closed Procurements
2. Organizational Process Assets Updates
Procurement File
Deliverable Acceptance
Lessons Learned Documentation
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Warranty
Implied Warranty
Act of sale implies:
General fitness for use
Fitness for special uses
Express Warranty
Beyond the mere act of the sale
Seller makes specific representations
P l ( P)
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Request For Proposal (RFP)
The purpose of preparing a request forproposal is to state, comprehensively and indetail, what is required , from customer point
of view, to address the identified need.
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R F P l (RFP)
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Request For Proposal (RFP)
A good RFP allows contractors or projectteam to understand what the customerexpects so that they can prepare a thorough
proposal that will satisfy customers needsand requirements at a realistic price.
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R F P l (RFP)
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Request For Proposal (RFP)
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R F P l (RFP)
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Request For Proposal (RFP)
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R F P l (RFP)
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Request For Proposal (RFP)
Following are some guidelines for draftinga formal request for proposal to external
contractors: An RFP must provide a statement of
work. An SOW deals with the scope of theproject, outlining the tasks or workelements the customers wants thecontractor or project team to perform.
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R F P l (RFP)
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Request For Proposal (RFP)
The RFP must include the customerrequirements, which define specifications and
attributes. Requirements cover size, quantity,color, weight, speed, and other physical oroperational parameters the contractors
proposed solution must satisfy.
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R F P l (RFP)
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Request For Proposal (RFP)
The RFP should state that what deliverablesthe customer expects the contractors orproject team to provide. Deliverables are the
tangible items that the contractor is to supply.
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R F P l (RFP)
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Request For Proposal (RFP)
The RFP should list any customer-supplieditems. For example, the RFP might state thatthe customer will supply a copy of its logo for
use on the brochure.
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R F P l (RFP)
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Request For Proposal (RFP)
The RFP might stat that the approvalsrequired by the customer. For example, thehousing customer may want to review and
approve the plans before construction isstarted.
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R F P l (RFP)
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Request For Proposal (RFP)
Some RFPs mention the type of contractthe customer intends to use. It could be
fixed price, in which case the customer willpay the contractor a fixed amountregardless of how much the work actuallycosts the contractor.
See figure on next slide.
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Spectrum of risk (For contracts)
CPPC CPFF CPIF FPI FFP
Cost Plus FixedFee (CPFF)
Cost PlusIncentive Fee
(CPIF)
Variable Sharing Ratio
Firm Fixed Price
0 100
Cost PlusPercentage of
Costs (CPPC)
100 0
Fixed PriceIncentive (FPI)
Seller RiskLOW HIGH
Buyer RiskHIGH LOW
R t F P l (RFP)
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Request For Proposal (RFP)
The RFP should stat the required schedulefor the completion of the project. It mightsimply stat that the house will complete within
six months, or it may include more detailedschedule.
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R t F P l (RFP)
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Request For Proposal (RFP)
The RFP should provide instructions for theformat and contents of the contractorproposals.
The RFP should indicate thedue datebywhich the customer expects potentialcontractors to submit proposals.
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R t F r Pr p l (RFP)
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Request For Proposal (RFP)
An RFP may include theevaluation criteria.These are criteria that the customer will useto evaluate proposals from competing
contractors in order to select the one toperform the project.
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R q st F r Pr p s l (RFP)
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Request For Proposal (RFP)
In rare case an RFP will indicate the fundsthe customer has available to spend onproject.
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BID/NO BID DECISION
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BID/NO BID DECISION
Because the development and preparation ofa proposal takes time and can be costly,contractors interested in submitting a
proposal in the response to an RFP must berealistic about the probability of beingselected as the wining contractor.
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BID/NO BID DECISION
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BID/NO BID DECISION
Evaluating whether to go forward with thepreparation of a proposal is some timereferred to as the bid/no-bid decision.
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BID/NO BID DECISION
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BID/NO BID DECISION
Some factors that contractor might considerin making a bid/no-bid decision are thefollowing:
Competition. Which other contractors mightalso submit a proposal in response to theRFP?
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BID/NO BID DECISION
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BID/NO BID DECISION
Risk. Is there a risk that the project will beunsuccessful-technically and financially?
Mission. Is the proposed project consistent
with the contractors business mission?
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BID/NO BID DECISION
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BID/NO BID DECISION
Extension of capabilities. Would the proposedproject provide the contractor with anopportunity to extend and enhance its
capabilities? Reputation. Has the contractor successfully
completed projects for the same customer inthe past?
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BID/NO BID DECISION
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BID/NO BID DECISION
Customer funds. Does the customer reallyhave funds available to go forward with theproject?
Proposal resources. Are appropriateresources available to prepare qualityproposal?
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BID/NO BID DECISION
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BID/NO BID DECISION
Project resources. Are appropriate resourcesavailable to perform the project if thecontractor is selected as the winner?
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Developing A Wining Proposal
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Developing A Wining Proposal
A proposal is selling document; it is not atechnical report.
It is important to remember that the proposal
process is competitive. A customer uses a request for proposal to
solicit competing proposals from contractors.
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Developing A Wining Proposal
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Developing A Wining Proposal
In the proposal the contractor mustconvince the customer that the contractor
Understands what the customer is lookingfor.
Can carry out the proposed project.
Will provide the greatest value to thecustomer.
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Developing A Wining Proposal
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Developing A Wining Proposal
Is the best contractor to solve the problem.
Will capitalize on successful experience withprevious related projects.
Will do the work professionally. Will achieve the intended results.
Will satisfy the cutomer.
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Developing A Wining Proposal
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Developing A Wining Proposal
The preparation of proposal can be astraightforward task performed by a singleperson or it can be a resource intensive effort
requiring a team of organization andindividuals.
Developing a comprehensive proposal for alarge project should be treated as a projectitself.
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Proposal Contents
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Proposal Contents
Proposals are often organized into threesections:
o Technical
o Managemento Cost
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Proposal Contents
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Proposal Contents
Technical section
The technical section should contain thefollowing elements:
o Understanding the problem.o Proposed approach or solution.
o Benefits to the customer.
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Proposal Contents
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Proposal Contents
Management section
The objective of management section is toconvince the customer that the contractor can
do the proposed work.
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Proposal Contents
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Proposal Contents
The management section contains thefollowing elements:
o Description of work tasks.o Deliverables.
o Project Schedule.
o Project Organization.o Related Experience
o Equipment and Facilities
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Proposal Contents
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Proposal Contents
Cost Section
The objective of the cost section is toconvince the customer that contractors price
for the proposed project is realistic andreasonable.
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Proposal Contents
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Proposal Contents
The cost section contains the followingelements:
o Labor.
o Materials.o Subcontractors and Consultants.
o Equipments and Facilities.
o Travel.
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Proposal Contents
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Proposal Contents
o Documentation.
o Overhead.
o Escalation
o Contingency or Management Reserve.
o Fee or Profit.
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Proposal Submission And Follow Up
The customer RFPs will usually provideinstructions regarding
o Due date, by which proposal must be
submitted.o Name and address of the person to whom
the proposal should be submitted.
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Proposal Submission And Follow Up
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Proposal Submission And Follow Up
Contractors must continue to be proactiveeven after the proposal is submitted.
The contractor should call the customer to
confirm that the proposal was received.
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Customer Evaluation Of The
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Customer Evaluation Of The
Proposals Customers evaluate contractors proposal in
many different ways.
Some customers initially look at the prices of
the various proposals and select , forexample, only three lowest-priced proposalsfor further evaluation.
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Customer Evaluation Of The
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Customer Evaluation Of The
Proposals In large projects , customers create a
proposal review team that uses a scorecardto determine whether each proposal meets all
requirements in the RFP and to rank theproposal against predefined evaluationcriteria.
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Procurement Cycle
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Procurement Cycle
The procurement process can be effectivelypresented as a cycle outlining a series ofdesecrate steps .
In practice there may be some iterationbetween certain steps and indeed the stepsmay be carried out in a different order.
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Procurement Cycle
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Procurement Cycle
Procurement Planning
The procurement planning will be viewedfrom the buyers perspective, as the process
of identifying what products and services arebest procured out side the projectorganization.
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P ocu e e t Cyc e
Procurement Planning
This is the buy or make decision which is akey component of the execution strategy
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Procurement Cycle
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y
Procurement List The procurement list is developed from
projects scope of work.
From the procurement list the projectmanager must decide his execution strategyto buy or make.
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y
Procurement Schedule The procurement schedule is developed after
the CPM network diagramand schedule Bar
chartshave been produced but before theresource histogramsand cash flowstatementshave been considered.
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y
Procurement Schedule Order date = ES Lead Time JIT
Where:
ES (Start Date)
JIT (just-in-time)
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Procurement Cycle
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y
Supplier and Vendor List All potential suppliers and vendors need to be
identified and pre-qualified according to the
project quality plan
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Procurement Cycle
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y
Supplier and Vendor List The buyer need to be satisfied that the
supplier has the production and quality
management systems to deliver the productto the required specification, qualitystandards and schedule.
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y
Invite to Tender Compile a bid package (enquiry document)
for the suppliers to quote against.
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y
Invite to Tender The initial enquiry document is the basis for
the contract, it should be progressively
adjusted and marked up as more informationbecomes available.
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y
Tender Adjudication Scrutinize the quotations (Tenders), and
compile a technical and commercial bid
tabulation to ensure you are comparingApples with Apples
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y
Tender Adjudication Consider suppliers suggestions and negotiate
to achieve the best price and conditions,
while striving for a win-win arrangement .
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y
Tender Adjudication This process should take advantage of
market conditions, but should also be govern
by companys ethics policy.
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Procurement Cycle
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y
Raise the Order Comply with corporate standard terms and
conditions of contract.
The purchase order should be a stand alonedocument superseding all previousdocumentation and correspondence, andmust be formally accepted by the supplier.
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Procurement Cycle
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y
Raise the Order Where possible pass on any contractual
requirements from client with a back to back
agreement with suppliers.
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Procurement Cycle
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Transport
Always consider the different methods of
transport. Where possible the products quality
should be checked and confirmed beforeliving the factory.
This particularly applies to items beingexported.
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Insurance
Consider placing the order for the
transport and insuring yourself so that ifthere is a problem or claim you can dealwith the transport and insurancecompanies directly.
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Receiving
Checking the goods against delivery note,
check the delivery note against the orderand the check the quality of productsagainst the required condition.
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Receiving (Case)
A project I was working on received to
counter rotating gearboxes for an OffshoreSupply Vessel, but on inspection the werefound to both rotate the same way!Fortunately this was picked up by the
receiving inspection which gave the shipyardtime to have the correct type shipped over.
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Procurement Cycle
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Warehousing
Store the delivered (Received) items for safe
keeping and retrieval. Check if warehousing requires any special
handling equipment and storage facilities.
Issue the stock against the required internal
requisition order.
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Accounts (Last step of procurement cycle)
The accounts should check the budget ,
purchase order, invoice and delivery notefor variances before making payments.
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E di i
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Expediting
On a large project theexpeditor becomes the
project managers eyesand ears as he takeson a criminalinvestigating approach.
Monitoring & Control, Basic Concepts,
Lecture by Mumtaz Meer
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Consider asking the following questions: Have you received the order?
Is the order understood?
What is your job number? Who is your project manager?
Has the job been planned into your
production system?(Show me)
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Expediting
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Have the instructions been received byproject manager?
Are their suitably qualified resourcesavailable?(Name them and showqualification)
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Expediting
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Is the work progressing as planned?
Are there any problem?
Will you meet the contracted deliverydate?
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Expediting
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By asking all these questions the expeditorbecomes an invaluable source of progressinformation giving early warning of any supply
problems so that the project manager hastime to respond.
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B2B
P t
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Procurement
B2B (business to business)procurement platforms are anew type of business facilityoffered by the internet.
B2B market places are juston-line catalogues
Monitoring & Control, Basic Concepts,
Lecture by Mumtaz Meer
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Sellers list their products with prices,specifications and delivery terms.
Buyers scan the catalogues, place their
orders electronically, and can even makepayment online
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The potential benefit for buyers includedramatically reducing procurementadministration costs and time, lower material
prices, faster supply chains, and reducedinventory requirements.
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The benefit for the sellers include increasedsales volume, lower cost of making a sale,and reduced inventory requirements.
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The B2B procurement system are beingsuccessfully driven by large companies whoare collaborating on a market sector basis.
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For example, Boeing, Lockheed Martin, BAESystems, and Raytheon have combined toform a global B2B website for their
industry.
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B2B procurement offers project managerthe opportunity to:
Reduce transaction cost. Generate less paper work.
Provide an economy of scale through
consolidating purchasing. Reduce the level of unapproved Rough
purchases.
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The project managers also needs to beaware of the associated risks of accessingthese global market.
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B2B Procurement
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Although web browsing will identify a widerrange of products, if these are procuredfrom overseas there will be more links inthe supply chain and longer lead times.
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Just in Time
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Just in Time is a procurementmanagement system that provides theproduction line with components as theyneed them.
This will reduce stock levels and stockinvestment, but will also increase the risk
of production disruption.
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Toyota cars developed the KanbanSystem, Which is known in the West asJust-in-Time (JIT).
This was one of the most spectacularfeatures of the Toyota car productionsystem.
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The Toyota system created a greaterattention to both the customer who couldorder their special car with out extra cost,and the worker who was much moreinvolved in maintaining quality much moreaware and better educated than their
western contemporaries
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The down side of JIT as that it makescompanies far more sensitive tointerruption
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Project Risk Management includes theprocesses concerned with conducting riskmanagement planning, identification, analysis,responses, and monitoring and control on aproject; most of these processes are updatedthroughout the project.
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The objectives of Project Risk Managementare to increase the probability and impact ofpositive events, and decrease the probabilityand impact of events adverse to the project.
139
Risk Management
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Risk Management is the act or practice ofdealing with risk.
It includes planningfor risk, assessing
(identifying and analyzing) risk issues,developing risk handlingoptions, andmonitoringrisks to determine how risks havechanged
140
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Proper risk management is proactive ratherthan reactive.
Risk management is not a separate project
office activity assigned to a risk managementdepartment, but rather it is one aspect ofsound project management.
141
Risk Management Process
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Risk Management includes several relatedactions involving risk:
Risk Planning
Risk Assessment Risk Handling
Risk Monitoring
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Process 11.18Risk 2Planning
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ProjectScopeStatement
CostManagementPlan
ScheduleManagement
PlanCommunicationsManagementPlan
Enterprise
Inputs1 Tools andTechniques2 Outputs3RiskManagementPlan
____________
PlanningMeetings andAnalysis
___________
Reference: Figure 11.2.
PMBOK Guide 4th Ed
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Process 11.28Risk 2Planning
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RiskManagementPlan
Activity CostEstimates
ActivityDurationEstimates
Scope
Baseline StakeholderRegister
CostManagementPlan
Inputs1 Tools andTechniques2 Outputs3Risk Register
___________
_
Reference: Figure 11.6.
PMBOK Guide 4th Ed
Documentation Reviews
InformationGatheringTechniques
ChecklistAnalysis
AssumptionsAnalysis
DiagrammingTechniques
SWOT
Anal sis
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Risk is a measure of the probability andconsequences of not achieving a defined
project goal. Risk has two primary components for a given
event:
A probability of occurrence of that event. Impact of the event occurring (Amount at
stake)
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Conceptually, risk for each event can bedefined as a function of likelihood and impact:that is,
Risk= function of(Likelihood, Impact)
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Risk Events or consequences that have theprobability of occurring during a project and that aremeasured by their impacts on the project
Components Risk event Risk event probability Risk outcome or consequence
(Amount at stake) Risk event status
(Probability x amount at stake)
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Methodology defines approaches,tools, and data sources that might beused to perform risk management on theproject
Roles & Responsibilities defines thelead, support, and risk managementteam membership for each type of actionin the plan
Budget - $ Timing Describes how often the risk
management process will be performedthroughout the project life cycle.
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Reporting formats - defines how theresults of the risk managementprocesses will be documented, analyzed,and communicated to the project team
and stakeholders Tracking Documents all facets of risk
activities and how the risk process will
be audited
155
Risk Identification
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Risk identification includesdetermining which risk mayadversely affect the projectobjective and whatconsequences of each risk
might be if they occur
156
Risk Identification
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The most commonapproachidentifying thesource of risk isbrainstorming.
157
Brainstorming
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Risk Identification
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The project manager should involve the keyproject team members in identifying potentialsources of risk.
Identifying things that would negativelyimpact achieving the project objectives.
Historical information of past project alsohelpful in identifying possible risks.
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Types
Business (profit or loss) and insurable(loss)
Known known Total certainty Known unknown Degree of uncertainty
Unknown unknown Total uncertainty
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Categories External, unpredictable Regulatory,
etc.
External, predictable Market risks Internal, non-technical Management
Technical Design
Legal Contractual
161
Process 11.38Risk 2Planning
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Risk Register
Risk
ManagementPlan
ProjectScopeStatement
Organizational ProcessAssets
___________
Inputs1 Tools andTechniques2 Outputs3Risk RegisterUpdates
____________
Reference: Figure 11.8.
PMBOK Guide 4th Ed
RiskProbabilityand Impact
Assessment
Probabilityand ImpactMatrix
Risk DataQualityAssessment
RiskCategorization
Risk Assessment
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Assessing each risk involves determining thelikelihood that the risk event will occurand
the degree of impact the eventwill have onthe project objectives.
163
Risk Assessment
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Both of these factors can be assigned arating of High, Medium, or Low.
Project manager, in consultation with
appropriate team member who the mostknowledgeable about the potential risk,should determine a rating for each risk.
164
Risk Assessment
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A tool for assessingrisk is a riskassessment matrix.
165
Risk Response Planning
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Risk response planning involves developingan action plan to reduce the impact orlikelihood of each risk, establishing a triggerpoint for when to implement the actions toaddress each risk and assigningresponsibilities to specific individuals forimplementing each response plan.
166
Risk Response Planning
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A risk response plan can be to Avoidtherisk, Mitigatethe risk, or Acceptthe risk.
A Contingency plan is a predefined set of
actions that would be implemented, if riskevent occurs.
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Mitigation(Corrective action)
Avoidance
(Prevention)
Acceptance
(Accept consequences)
Transference
(Shift Responsibility)
Risk Monitoring
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Risk monitoring involves regular reviewing ofthe risk management matrix throughout theproject.
It is important to evaluate all the risk todetermine if there are any changes to thelikelihood of occurrence or the potentialimpact of any of the risks.
169
Risk Monitoring
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Process 11.48Risk 2
Planning
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Risk Register
Risk
ManagementPlan
CostManagementPlan
ScheduleManagementPlan
Organization
al Process
Inputs1 Tools andTechniques2 Outputs3Risk RegisterUpdates
____________
Reference: Figure 11.11.
PMBOK Guide 4th Ed
DataGatheringand
Representation Techniques
QuantitativeRisk Analysisand Modeling
TechniquesExpertJudgment
___________
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Strengths Weaknesses
Opportunities Threats
Internal
External
Build On Eliminate or Reduce
MitigateExploit
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Probability
Likelihood of occurrence. (Number of
occurrences of an event divided by thetotal number of all possible occurrences)
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Statistics Mean Average of the values of events
Mode Value which occurs most often
Median Value in middle of the range ofordered values
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Variance Average of the squared deviations from
the mean
Standard deviation Square Root ofthe Variance
Range Values between upper &
lower limits
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Interviewing project stakeholders andsubject-matter experts to quantify theprobability and consequences of risks on
project objectives The information needed depends upon the
type of probability distributions that will beused
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Probability distribution (Method ofmoments) Calculates project rangeestimates
Expected monetary value Probabilitytimes cost
Three values low (a) , most likely (m),and high (b) with probabilities for each;used to calculate expected value
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Sensitivity Analysis determines whichrisks have the most potential impact on
the project Decision Tree Analysis use of a
diagram that describes a decision
under consideration and theimplications of choosing one or anotherof the available alternatives
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Incorporates probabilities of risks andthe costs or rewards of each logical pathof events and future decisions
Solving the decision tree indicates whichdecision yields the greatest expectedvalue when all the uncertain implications,
costs, rewards, and subsequentdecisions are quantified
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Three values with probabilities; used tocalculate expected values
Optimistic Most likely Pessimistic
e.g. Optimistic 0.2 x $ 100 K = $ 20 K
Most Likely 0.6 x $ 130 K = $ 78 KPessimistic 0.2 x $ 180 K = $ 36 K
Expected Value = $ 134 K
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Project A
Project B
0.5
0.5
0.6
0.4
0.7
0.3
Success
Failure
Success
Failure
What is the probability that Project B willbe selected and will be successful?
Example
Answer: 0.35
High Demand
P b bili 0 3
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Decide not to pursue
$ 0
Production Successful
Probability = 0.7
Probability =0.3
$ 550,000
Production Unsuccessful
Probability = 0.3
Terminate = - $ 200,000
Decide to pursue
Low Demand
Probability = 0.7- $100,000
Expect Value of Pursuing Project A0.7 x 0.3 x $ 550,000 = $ 115,500
0.7 x 0.7 x $ 100,000 = $ 49,000
0.3 x $ 200,000 = $ 60,000
$ 6,500
The expected value of Project A is $6,500. The expected value of
not preceding is $0. Preceding is the lucrative option.
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Simulation Uses a model or copyof a system to analyze the behavior
or performance of the system
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Monte Carlo Perform project many times to provide a
statistical distribution of calculated results
Uses results to quantify the risk of various
schedule alternatives, different project strategies,different paths through the network, and individualactivities
Can be used to assess the range of possible cost
options
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Process 11.5
8Risk
2Planning
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Risk Register
RiskManagementPlan
____________
Inputs1Tools andTechniques2 Outputs3
Risk RegisterUpdates
Risk RelatedContractDecisions
ProjectManagement
Plan UpdatesProjectDocumentUpdates
___________Reference: Figure 11.17.
PMBOK Guide 4th
Ed
Strategies forNegativeRisks or
ThreatsStrategies forPositiveRisks orOpportunities
ContingentResponseStrategies
ExpertJudgment
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Process 11.6
8Risk
4Monitoring& Control
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Risk Register
RiskManagementPlan
WorkPerformanceInformation
PerformanceReports
____________
Inputs1Tools andTechniques2 Outputs3
Risk RegisterUpdates
Organizational ProcessAssetsUpdates
Change
RequestsProjectManagementPlan Updates
ProjectReference: Figure 11.19.
PMBOK Guide 4th
Ed
RiskReassessment
Risk Audits
Variance andTrendAnalysis
TechnicalPerformanceMeasurement
ReserveAnalysis
Stat s
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Hazard Prevention
Likelihood Reduction
Risk Avoidance Risk Transfer
Contingency Planning
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Risk Exposure
Confidence of the risk assessment
Compound Risks
The number of Risks
Cost of Action
Risk Reduction Leverage CostBenefit
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Spectrum of risk
CPPC CPFF CPIF FPI FFP
Cost Plus FixedFee (CPFF)
Cost PlusIncentive Fee(CPIF)
Variable Sharing Ratio
Firm Fixed Price
0 100
Cost PlusPercentage ofCosts (CPPC)
100 0
Fixed PriceIncentive (FPI)
Seller Risk LOW HIGH
Buyer RiskHIGH LOW
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Direct property damage Insurance ofprincipal assets, e.g., equipment, materials,
property, auto Indirect consequential loss Indirect loss
suffered by third party, resulting from actions
by the contractor
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Legal liability Design errors, public bodilyinjury, project-performance failure
Personnel Bodily injury
Wrap-up insurance All the aboveintegrated into one agreement usuallyprovided by the owner