PMI RMP – PROJECT PROCUREMENT MANAGEMENT part 1

1. INTRODUCTION

Hi and welcome back again to a new knowledge area, one of the most critical and important ones. Knowledge. A number nine. The project. Procurement? Management. So it includes all the processes necessary to purchase or acquire products, services or results needed externally from from outside the project team. It includes the management and control processes required to develop agreements such as contracts, purchase orders, memorandum agreements, or even SLA or service level agreements. So whenever you want to purchase or acquire a good or service from outside your project into your project, you will use the procurement management processes.

Either you are performing a small purchase order for goods or services of $1,000, or you are performing a long lead item procurement of ten or $15 million. Both will use the same processes. The processes of the project procurement Management the basic procurement management skill the Project Manager must have is being able to negotiate and help create, trade and manage contracts and supporting documentation. The person is authorized to procure goods and or services required for the project, might be members of the project team, or might be from the senior management or part of the organization procurement or purchasing Department that depends on your organization.

Sometimes the Procurement Manager will be within the project team and they will report or she will report to the Project Manager. Sometimes you will have a centralized procurement department within your organization. Three processes only for the project procurement management the plan procurement management as a part of the planning process group conduct procurement as a part of the executing processing group control procurements as a part of the monitoring and controlling processing group. As shown here, the procurement management knowledge area is extended in between the planning, executing, monitoring and controlling processing groups as taken from the project management body of knowledge.

We have 12. 1 Plan Procurement Management with a lot of new tools and techniques 12. 2 Conduct Procurements 12. 3 Control Procurements this is all for the introduction. This knowledge area is very important for your practical experience and your practical application of the project management series. We will talk about the types of the contracts you can create while managing project, how to manage these contracts, how to perform the procurement audits, how to manage the bidder conference during the conduct procurements, and a lot of new tools and techniques. Thank you so much. I will see you at the next lecture.

2. KEY CONCEPTS IN PROCUREMENT MANAGEMENT

Hi and welcome back again a few key concepts of the project procurement management. The key difference between the procurement management knowledge area and the other nine knowledge areas that there can be significant legal obligations and penalties tied to the procurement management processes. This is the primary difference between the procurement management knowledge area and other knowledge areas. It’s the only one that contains significant legal obligations and penalties as we are dealing with agreements and conference, the project procurement management processes involve agreements that describe relationship between two parties the buyer and the seller.

The company or the person or the organization or the team who provides services and goods can be called contractor, subcontractor, supplier, designer or vendor. This is called the seller. The company or person who purchases the services is called the buyer. For example, if you are working on a construction project and you are representing the client or the owner, you will be the buyer. In this case, if you are providing a service working with a subcontractor with a sublime, then you are the seller in the procurement process. The procurement is the formal process of obtaining goods or services for the product and the procurement manager is the ultimate responsible to determine what type of contract and procurement documents should be used.

The types of contracts and the types of procurement documents will be explained in the plan procurement management process. For now, we should know that it’s the ultimate responsibility of the procurement manager. The project manager will just support this process and the key roles of the project manager within the procurement management knowledge area will be first of all to identify the risks and incorporate mitigation and the location of these risks into the contract to decrease the project risk. As explained in the Risk Management knowledge area section, you can use the transfer risk response strategy in order to transfer critical risks on your project to other vendors or suppliers.

Managing the seller delivery to the contract and making sure all contract work is done. It’s the key role of the project manager. Tailoring standard Contracts Standard contracts are usually available within the organizational process assets. As a project manager, you need to tailor these standard contracts of the organization into your project needs, making sure contract includes all the scope need to be done in the project. Contracts require formality any correspondences, clarifications and notifications related to contracts should be in the formal written communication. It’s the strongest type of communication.

As explained in the Communication management knowledge area, contracts are legally binding. The seller must perform as agreed in the contract or face the consequences for breaching the contract. The last key concept of the procurement management will be the centralized procurement versus the decentralized procurement. Decentralized Procurement in a centralized contracting environment, there is one procurement department and the procurement manager may handle procurements on many projects as the case in the company or the organization I’m working for.

As a project manager, I will send a request for the procurement department asking them for the specifications and because of the products I need for my project and they will manage the whole procurement process. This is the centralized procurement. The procurement managers in this case will result with a higher level of expertise and individuals in this department will have a clearly defined career path in procurement. In the case of the decentralized procurement, usually it’s available within the projectised organizations or the contracting companies or the construction companies.

In a decentralized contracting environment, a procurement manager is assigned to one project full time and reports directly to the project manager. So in the centralized procurement, the procurement manager will not report to the project manager. In the decentralized procurement, the procurement manager will be part of the project team members and he will report directly or she will report directly to the project manager. The procurement manager has more loyalty to the project and has a better understanding of the project as this is the only project he or she is managing. These are the key concepts of the procurement management knowledge area. Looking forward to see you at the next stage.

3. TRENDS AND EMERGING PRACTICES IN PROCUREMENT MANAGEMENT

Hi and welcome back again trends and emerging practices when it comes to the project procurement management. First of all, advances in tools. Significant improvements in the development of tools to manage the procurement and the implementation phase of the project. More advanced risk Management to write contracts that accurately allocate specific risks to these entities more capable to manage than as explained in the Risk Management Knowledge area and the Risk Transparent Response Strategy. Changing contracting processes where large projects involve international contracts with multiple contractors, logistics and Supply Chain Management the management of flow for materials become critical to successful completion of the project.

The supply chain management department and the Logistics department are usually available within large organizations. Technology and stakeholder relations. These are the trends and emerging practices and the procurement management in addition to the trial engagements where some projects will engage several candidate sellers for initial deliverables. Now, when it comes to the tailoring considerations for the project procurement management, first of all, you have the complexity of the procurement process. You are managing. You are managing. I’m managing.

Now, the procurement process of the elevators and Escalators for one of our largest projects and the expected or the independent estimate of the bidding process will be more than $6 million. So the complexity in such procurement with the technical specifications of the elevators will be much more than a normal procurement process with a few thousand US. Dollars. The physical location between the project and the procurement department, the governance and the regulatory environment, the availability of the contractors within your company. These are the primary tailoring considerations. And this is all for this lecture. Thank you so much. I’ll see you at the next ledge.

4. AGILE CONSIDERATIONS FOR PROCUREMENT MANAGEMENT

Hi and welcome back again. The last topic before we start the first process is the considerations for the agile environment when it comes to procurement management. How will this or the agile environment affect the application of the procurement processes? Specific sellers may be used to extend the team. This collaborative working relationship can lead to a shared risk procurement model where both the buyer and the seller can share the risk or the threats with the rewards when working on larger projects. This may use adaptive approach for some deliverables, predictive approach for other deliverables and a more stable approach for other parts on the project. This is all for the considerations for agile I will see you in the next lecture to start the plan procurement process.

5. PROCESS 1: PLAN PROCUREMENT MANAGEMENT

Hi and welcome back to the first process of the Procurement Management Knowledge Area Plan. Procurement management as a part of the planning process group. So in this process we are going to document the product procurement decisions, specifying the approach and identifying the potential sellers on the product. So as all the other planning processes, we are not going to perform anything here or execute on ground anything. We are just planning, thinking in advance what we are going to do regarding the project procurement management.

The key benefit of this process is that it determines whether to acquire goods and services from outside the project and if so, what to acquire, when and how. This process is usually performed once at predefined or at predefined points throughout the project fly and this process will simply answer the question how will make or buy analysis be performed? This is the primary technique used in this process as a part of the data analysis technique, the make or buy analysis for some scope of your project, you will think either to make it in house by your own team or to buy it or outsource it from outside the project.

For this purpose, we are going to do some math under the category of the make or Buy Data Analysis technique. Now, the planned Procurement management process includes activities of performing, make or buy analysis, defining the roles and responsibilities of the procurement management activities, procurement Management Plan creation, creating the procurement Strategy and the procurement statement for each item you are procuring on your project, selecting the bid contract type and the bid documents. What are the contract types? What are the bid documents, the types of the bid documents. All this will be discussed in this lecture and the next lecture.

Now, plan Procurement Management we have six inputs, five tools and techniques and ten outputs. It is one of the 49 processes with the highest number of outputs and the majority of these outputs are important and they are unique for the planned procurement management process. So let’s start with the inputs for this process. First of all, you need the project charter as it contains the project description, summary milestones and pre approved financial resources for the project. The project business documents, the business case to ensure that there is an alignment between the business value of the project and the procurement strategy you are creating in the plan.

Procurement Management Process the Benefits Management Plan which will drive procurement days and contracts language by providing when benefits shall be expected. An important section of the Benefits Management Plan is when the benefits will be gained or obtained for the project. So when the benefits shall be expected will affect the procurement activities on the project. You will need also the Project Management Plan with the Scope Management plan as a subsidiary plan as it describes how the scope of work by the contractors will be managed. The Quality Management Plan that contains the applicable industry standards that the project will follow.

This information is used in the bidding documents. The resources management plan has information on which resources will be purchased or leased. The Scope Baseline elements of the scope are used to develop the statement of work for the contractors, the statement of fork and the bidding documents for the product. For the items we are going to procure are made of the scope based line. We will need also the project documents. First of all, the milestone list key dates will show the seller when they are required to deliver the results. The project team Assignments contains information about the project team skills and their availability to support procurement activities.

Requirements Documentation includes requirements that the sellers require to satisfy requirements. Traceability matrix to link the product requirements to the problems that satisfy them. You will need also an important input the resources requirements. It will include information on specific needs such as team and physical resources for the product. Physical resources you might acquire from outside the product. The risk Register as some identified risks will be transferred by procurement contracts and agreements. Risk response strategy transference or sharing, as explained in the Risk Management Knowledge area section.

You will need also the stakeholder register that includes information about contracting, personal enterprise, environmental factors and organizational process assets. These are the six inputs for the plant procurement management process when it comes to the tools and techniques for this process, first of all, we will have the expert judgment expert judgment regarding the procurement management and the procurement strategy creation. Data gathering Techniques Mainly, you will use the market research to gather data for the project. Includes examination of the industry and specific seller capability.

Sometimes, before awarding a bid for a specific seller, you will go to the market, ask about the seller, check the repetition, the capability. All this is done as a part of the market research technique. Data Analysis Techniques make or buy analysis used to determine whether work or the problems can best be accomplished by the project team or should be purchased from outside sources. It can be used also for buying these analysis. Make or Buy analysis shall I make this scope of work by myself, by my own team, or shall I outsource it or buy it from outside the team? Buy or Lease for some, especially the physical equipment, sometimes you will do analysis to check which is better to buy the equipment or to lease it for the time you are using it.

Make or buy analysis may use payback period return on investment and generate return discounted cash flow net, present value and benefit cost Analysis an example of the make or buy analysis application you are deciding whether or not to contract out a construction job. To do it within your company, you will have to hire an engineer for $35,000 and pay a construction team $15,000 per week. A contractor quotes you a price of $19,000 per week and your expert agrees that you won’t find a lower price than that, the job will take 16 weeks.

What’s the best way to proceed? So we have two choices here. Either we do it in house by hiring an engineer for $35,000 and a construction team for $15,000 per week, or to outsource it through a contractor for $19,000 per week. Which one is better to make or to buy? It’s a very simple question. The buying cost will be 16 weeks, the project duration by $19,000. The coated price, so it’s $304,000. If you are doing it in house, it’s $35,000 what you are going to pay for the engineer plus 16 weeks by $15,000 per week for the construction team. Overall, it will cost $275,000. So it’s cheaper to do it in house. This is the application of the make or buy analysis.

Source selection Analysis based on what you are going to select your vendor, this is what we are going to do in the source selection analysis, it’s necessary to review the prioritization of the competing demands for the project before deciding on the selection method. Commonly used selection methods includes the following now the most used one is the least cost. It’s suitable for procurements with standard or routine nature where well established practices and standards exist. So you will just select the vendor with the least cost. Qualifications only applies when the time and cost of a selection of a process does not make sense because the value of the procurement is relatively small.

The value of the goods you are procuring is relatively small. So you will defend or rely only on the qualifications. Quality Based highest technical proposal Score the selected firm is asked to submit a proposal with technical and cost details and then invited to negotiate the contract if the technical proposal proves acceptable. This is the third selection criteria. The fourth one is the quality and cost based. It allows costs to be considered as a factor in the seller selection purposes. The Sole Source the buyer asks specific seller to submit technical and financial proposals which are then negotiated. There is no competition in this type.

Sole source sometimes used when you are procuring some goods which is available with only one supplier, there will be no competition. You have to take it from this supplier. This is an example of the sole source we have the fixed budget. This method requires disclosing the available budget to invited sellers in the RFP and selecting the highest ranking technical proposal. This is the fixed budget. You need to disclose your budget or your price for this procurement for all the vendors. All will work on this budget and you will select the highest ranking technical proposal. The last tool we are using in this process will be the meetings that can be used to determine the strategy for managing and monitoring the procurement.

Now, what we will have as an output for the plan procurement Management Process first of all you will have the Procurement Management Plan which will be a component of the Project Management Plan. It contains the activities to be undertaken during the procurement process. Procurement Management Plan can be formal or informal. We will have also the procurement strategy. Once the make or buy announcement is completed and the decision is made to acquire from outside the project, a Procurement strategy should be identified. Some of the primary sections you need to identify in the Procurement Strategy are first of all the delivery methods. Delivery methods are different for professional services versus construction projects.

Contract payment Types they shall be coordinated with the biased Financial Department. They include contract types, procurement phases, information about the procurement phases such as the sequencing of the phases, monitoring and Procurement Performance Indicators. All these are sections of the Procurement Strategy as shown in front of you. Now, here is the project title, here is the date, the delivery method, the contract type. All these contract types will be explained in the next lecture, the incentive for the contract, the criteria and the procurement lifecycle with all the phases. The third output will be the bid documents that are used to solicit proposals from prospective sellers depending on the goods or services needed.

Bidding documents can be any of the three types. We have three types bidding documents are whatever documents you are sending to the potential sellers in order to quote for your project. These are the bidding documents. Bidding documents can be an RFI request for information used when more information on the goods or services to be acquired is needed from the sellers. It will typically be followed by an RfQ or Request for quotation or Request for proposal, the RfQ or the Request for quotation used when more information is needed on how the sellers vendors would satisfy the requirements and how much it will cost. It requests a price quote per item, our meter or other unit of measure.

It’s commonly used in the construction project the request for completion. Bidding Documents because we will have the bill of quantities, we will have the quantities all what we need on the project. So the contractors or the vendors will need only to put the tree on this bill of quantity. This is a request for quotation. The other type is the request for proposal commonly used with the It projects, research and development projects or projects with one of kind used when there is a problem in the project and the solution is not easy to determine. This is the most formal predicament and contains track procurement rules for content, timeline and seller proposals. These are the three types.

Remember that usually for predictive projects for construction projects you will use the Request for completion for the one of kind. For the research and development, the It projects you will use the Request for proposal. The fourth output will be the Procurement Statement of Hope that’s ow it’s developed for each procurement from the project scope baseline and defines only proportion of the project scope that to be included within the related contract. The following are the three types of the procurement statement of work. First of all, we have the performance statement of work. This type conveys what the final product should accomplish rather than how it should be built or what are the design characteristics.

An example of the performance statement of work will be that I need a car. This is the deliverable for the final product of the project that will go from zero to 100. This is the performance you mentioned. What should the final product of the project accomplish? I need a car from zero to 103 seconds the functional statement of work. This type conveys the end purpose or result rather than the specific procedures. It may include a statement of the minimum essential characteristics of the product. For example, I want a car with four cup holders. For the functional statement of four, you will just describe the final product and purpose or result. The third one is the most commonly used one especially for the construction project.

This type conveys in precision what work is to be done. It includes materials to be used and an explanation how the work should be completed. Commonly used in construction projects and equipment purchases. So the performance and the function and statement of works will be used for the research and development project. For example, you will just describe the end result of the project for a web development complicated web development project. While if you have all the details of what needs to be done procedures, materials, quantities you will use the design statement of work. It can be also the terms of reference to if you are procuring services, not products or goods for the project.

The statement of work may be referred to as terms of reference. It includes the work the seller will perform, standards expected to achieve data and services will be provided for the buyer. The fifth output will be the source selection criteria. In choosing evaluation criteria, the buyer seeks to ensure that the proposal selected will offer the best quality for the services required. Examples of source selection criteria will be the capability, capacity and product cost. Make or buy decisions as we perform make or buy analysis as a technique in this process, you will have them make or buy decisions as an output. The decision whether particular work can best be accomplished by the project team or needs to be purchased from outside source.

Independent cost Estimates the procuring organization may elevate to either prepare its own dependent estimate or have a cost estimate prepared by an outside proficient estimator to serve as a benchmark on the proposed responses. Before you start a procurement on your project, you must have a reference an expected budget for this procurement. This is the independent post estimate. You can do it in house or you can hire a third party to do it for you. One of the few planning processes that might result with change requests is the plan Procurement Management. We will have few project documents updated like the Minestone list, the listen zone register, the requirements documentation and traceability matrix, the risk register and the stakeholder register.

The last output will be the organizational process assets updated as a result of this process. Due to the new information on the qualified sellers, it might be updated in the organizational process assets, so other projects within the organization might benefit of this qualifications or qualified sales. Here is an example of the source selection criteria. Here is the project title. Here is criteria 1234 and five. Here is the weight given for each criteria and each candidate rating and so on. This is called the scoring model for the source selection purpose. This is all for the first process. Thank you so much. I’ll see you in the next lecture to talk in detail about the contract taxed.