Procurement Management Principles and the PMI Philosophy

The Overall Procurement Management Process

Although this process depends largely on the industry you work in, many project managers lack considerable exposure to procurement management. Often, this is due to organizational structures and the common use of procurement specialists due to the legal and contractual nature of this activity. Given the limited experience with formal procurement procedures, this subject area can be more difficult for many professionals. In many industries, it is standard practice to use a "selection" methodology when a significant investment will be made to procure products or services. Our guess is that you've had some exposure to organized, planned selection activities. We'll use that experience in our review of the overall procurement management process to help you better understand how procurement planning and solicitation planning fit together. Table 5.15 provides this summary.

Table 5.15. Summary of Procurement Management Process

After procurement planning, the other steps are only performed if a "buy" decision is made.

Solicitation planning does not actually produce a project management planning output.

Key PMI Procurement Management Principles

Now that you have a better understanding of the overall procurement management process, let's review the key PMI procurement management principles you need to know to be better prepared for procurement-focused exam questions.

Here are the key principles to remember about the PMI procurement management approach:

• The procurement management process is based on the buyer's perspective.

• The procurement management process is based on a formal contractual process that's most common in the United States.

• A contract is a formal agreement.

• All requirements should be specifically stated in the contract.

• All contract requirements must be met.

• Changes must be in writing and formally controlled.

• Project communications dealing with procurement management should always be formal and written.

• Incentives should be used to align the seller's objectives with the buyer's.

The PMI perspective of project procurement management is from the buyer's perspective.

The Project Management Skills Used in Procurement Management

To help you prepare for the procurement management-based questions on the exam, we'll review the type of skills and knowledge a project manager should possess to be effective at procurement management. The key project management skills needed for procurement management include the following:

• Proficient negotiating

• Effective verbal and written communications

• The ability to identify risks and develop appropriate responses

• Contract knowledge

• The ability to manage to a contract

• Understanding when and how to use legal assistance

The Key Elements of the Procurement Management Plan

To further improve your understanding of the scope and context of procurement management, let's review the key components of the procurement management plan, which include the following:

• The types of contracts to be used on the project

• The need for independent estimates in evaluation criteria

• The criteria for evaluating estimates

• The roles and responsibilities for the procurement department versus the project team

• The plans to manage the sellers

• The use of standard procurement forms

• The coordination of procurement with performance reporting and scheduling

The procurement management plan is considered part of the project plan.

Key Contract Facts

We mentioned earlier that contract knowledge is a key project management skill for procurement management. So, what exactly do we mean by contract knowledge ? The following list details what you need to understand concerning contract knowledge:

• The purpose of a contract

• Common contract components

• Contract classifications

• Common contract types

• The common contract clauses and conditions that have the most impact on the project

• The common source of contract conflict for a project manager

• The benefit of using incentives in a contract

• When a contract is legally enforceable

Although there is no substitution for actual experience, in-depth study, and formal training, here is a quick synopsis of key contract facts. These will improve your contract knowledge and assist your PMP exam preparations :

• A contract is a legally binding agreement.

• The common contract components include the following:

  • Responsibilities of each party

  • Identification of the person authorized to make changes

  • The change/configuration management process

  • Penalties for ending the contract

  • Financial arrangements

• The two contract classifications are as follows :

  • Completion

  • Term

• The three common contract types are as follows:

  • Cost reimbursable (CR)

  • Fixed price (FP)

  • Time and materials (T&M)

• The three variations of cost-reimbursable contracts are as follows:

  • Cost Plus Fixed Fee (CPFF)

  • Cost Plus Percent of Cost (CPPC)

  • Cost Plus Incentive Fee

• The four conditions that make a contract legal are as follows:

  • It must be voluntarily entered into.

  • It must contain mutual considerations.

  • It must be created for legal purposes.

  • It must be signed by authorized parties.

• Generally, a natural conflict exists between the contract administrator and the project manager. There are three reasons for this:

  • The contract administrator is the only one authorized to change the contract.

  • The contract includes the statement of work (SOW).

  • The project manager manages the SOW.

• The motivation to use incentives in a contract is to align the objectives of both parties.

The motivation behind incentives is to align the seller's objectives with the buyer's.

The Purpose, Risks, Advantages, and Disadvantages of Each Contract Type

In the previous section, we mentioned the three key contract types. For the exam, you will need to understand the following about each type:

• Its advantages and disadvantages

• What situation is best for its use

• Who owns the risk

• The required project management tasks

Table 5.16 summarizes these key facts about each contract type.

You should understand the contract types, as well as the purpose, advantages, disadvantages, and risk elements of each.

Table 5.16. Summary of Contract Types

Key Factors in a "Build Versus Buy" Decision

Because the "build versus buy" decision is a key component of procurement planning, let's review a few points about this process:

• There are three possible outcomes :

  • Buy/procure all of the solution.

  • Buy/procure none of the solution.

  • Buy/procure a part of the solution.

• When evaluating a "buy" decision, make sure to factor the indirect costs of procurement management.

• Understand the key factors that influence this decision.

Table 5.17 summarizes the key reasons why an organization would "build" the solution itself or "buy" solution elements from outside the organization.

Table 5.17. Key "Build Versus Buy" Decision Factors