Understanding Key Procurement Management Principles and PMI s Procurement Management Philosophy

Understanding Key Procurement Management Principles and PMI's Procurement Management Philosophy

Procurement management involves the relationship between the buyer and the seller when products, services, or other results are being purchased by the project team in order to complete the project. Key PMI principles for procurement management include

• The contract statement of work (SOW) is a key document that defines the work in order to allow buyers the ability to evaluate and bid on the work.

• There are three primary contract types:

  • Fixed price

  • Time and material

  • Cost reimbursement

• The risk to both the buyer and seller depends on the type of contract chosen.

• The contract is a formal, written document and any changes are submitted in writing.

The Make/Buy Decision

The first step in procurement is resolving the make/buy decision. This decision is made during the plan purchases and acquisition process. An analysis is done to determine if the product or service can be produced by the project team or if it should be purchased. This analysis might also include buying versus renting/leasing a product.

The Contract Statement of Work

In addition to making the make/buy decision during the plan purchases and acquisition process, it is during this step that the contract statement of work (SOW) is developed and the type of contract to be used is determined. The SOW is a document that defines the work to be performed. A contract SOW is work performed under contract. The contract SOW is developed from the scope statement and WBS and should be sufficiently detailed to allow the potential sellers to determine their ability to perform the work. A project can have multiple SOWs.

Contract Types

A number of contract types are used in the procurement process. In order to be prepared for the exam, understand the benefit of each type, as summarize in Table 4.11

Table 4.11. Contract Types

Name	Description	Pro/Con
Firm fixed price (FFP) (or lump sum)	The work is completed for a predetermined price.	Benefits the buyer. Seller at risk if item isn't clearly defined. Seller must manage changes closely.
Fixed price incentive (FPI)	Similar to fixed price but an incentive is offered for early completion.	More administrative effort for buyer and seller.
Purchase order	A form of fixed price, usually for off-the-shelf items.	Optimal for both parties when item is a commodity (such as computers).
Cost reimbursement, includes CPF, CPPC, CPFF, and CPIF (see the following exam alert)	The seller is reimbursed for his costs, plus an additional fee.	Benefits the seller because his cost is covered. Risk to buyer if costs are higher than anticipated; the budget is affected.
Time and material (T&M)	Hybrid arrangement between fixed price and cost reimbursement where elements of both are used; a fixed unit rate can be set for certain elements of work while other components are completely reimbursable. For example, a programmer might be acquired at $125 per hour without defining how long they will be used.	Seller benefits if amount of work can be extended, which affects the buyer's budget.

PMI identifies four types of cost-reimbursement contracts that only vary in how the fee is calculated: cost plus fee (CPF), cost plus percentage of cost (CPPC), cost plus fixed fee (CPFF), and cost plus incentive fee (CPIF). Be familiar with all four variations of cost-reimbursement contracts, found on page 278 of the PMBOK.

Figure 4.3 illustrates the risk to buyer and seller for the contract types.

Figure 4.3. The buyer and seller risk for contract types.

The Procurement Management Plan

The procurement management plan is developed to plan out how procurement activities will be carried out. Evaluation criteria are a key output of plan contracting. Criteria can include

• Costs

• Quality

• Capabilities of the sellers, including technical, financial, capacity, and so on

• Technical approach

• References

The steps of the procurement process are only necessary if the decision is made to buy outside resources.