The last two remaining facilitating planning processes to review come from project procurement management. Those processes are procurement planning and solicitation planning. In order for you to best understand these processes, we need to review how they fit into the overall procurement management structure. In addition, to best prepare for exam questions on these steps, you need to understand some key procurement management principles and the PMI procurement management philosophy. Specifically, you should know the following:
The overall procurement management process
The key PMI procurement management principles
The project management skills used in procurement management
The key elements of the procurement management plan
Key contract facts
The purpose, risk, and advantages of each contract type
Key factors in the "build versus buy" decision
Advantages of centralized versus decentralized contracting organizations
If you only read two chapters in the PMBOK, read the "Project Risk Management" and the "Project Procurement Management" chapters.
Both subject areas often represent experience gaps for many professionals, and the exam questions concerning both risk and procurement management are generally based on the PMBOK material.
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
Common Selection Phase(s)
12.1: Procurement Planning
Build or buy.
Build or buy decision, contract types, draft scope of work(s), and procurement management plan.
12.2: Solicitation Planning
Requirements document, RFI, and RFP.
Seller proposals and RFP response ratings.
12.4: Source Selection
Pick a winner.
12.5: Contract Administration
Not part of the "selection" phase
Reviews, reports, change requests, and payments. (See Chapter 7, "Project Control.")
12.6: Contract Closeout
Not part of the "selection" phase
(See Chapter 8, "Project Closing.")
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:
Effective verbal and written communications
The ability to identify risks and develop appropriate responses
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
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
The two contract classifications are as follows:
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:
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
Quick to create.
Good choice when hiring "people" to augment your staff.
Less work for buyer to manage.
Seller has strong incentive to control costs.
Buyer knows total project price.
Companies are familiar with this type.
Simpler scope of work.
SOW is easier than an FP one.
Lower cost than FP because the seller does not need to add as much for the risk.
Profit in every hour billed.
Seller has no incentive to control costs.
Good only for small projects.
Requires most day-to-day oversight by the buyer.
Seller may underquote and make up profits with change orders.
Seller may reduce work scope if it is losing money.
More work for the buyer to write the SOW.
Can be more costly than CR if the SOW is incomplete.
Seller will increase the price to cover risk.
Must audit seller's invoices.
More work for buyer to manage.
Seller has only moderate incentive to control costs.
Total project price is unknown.
Best to use when…
You need work to begin right away.
You need to augment staff.
You know exactly what needs to be done.
You don't have time to audit invoices.
You want to buy expertise in determining what needs to be done.
Who has the risk?
The seller (cost), or both the buyer and seller if not well defined.
Scope of work detail
Limited functional, performance, or design requirements.
Seller needs to know all the work.
Describes only performance or requirements.
"How to do it."
Project management tasks
Providing daily direction to seller.
Striving for concrete deliverables.
Close monitoring of project schedule.
Looking for a situation to switch the contract type.
Establishing clear acceptance criteria of deliverables.
Managing change requests.
Monitoring project task dependencies.
Monitoring project assumptions.
Auditing seller's costs.
Monitoring seller work progress.
Ensuring added resources add value to the project.
Watching for shifting resources.
Watching for unplanned seller charges.
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
Existing resources are idle (plant, workforce, and so on).
More control is needed.
Proprietary information or procedures are involved.
A need to decrease risk (cost, time, performance, scope).
The required resources, skills, or expertise are not available.
"In-house" processes are not efficient.
Advantages of Centralized Versus Decentralized Contracting Organizations
A frequent procurement-related question that has appeared on the exam involves how organizations structure their contracting or procurement functions. Overall, the general advantages of centralized versus distributed or decentralized functions of any type apply to contracting, too. A quick summary of the advantages is provided in Table 5.18.
Table 5.18. Advantages of Organizational Contracting Structures
Better use of expertise and resources
Standard company practices
Career path for contracting/procurement staff
Easier access to resources
Increased project commitment and loyalty