UNIT VI STUDY GUIDE

Project Procurement

Course Learning Outcomes for Unit VI

Upon completion of this unit, students should be able to:

6. Plan project procurements.

6.1 Determine how to manage project procurements.
6.2 Utilize methods to monitor contract performance for a project procurements plan.

Required Unit Resources

In order to access the following resources, click the links below.

Alhazmi, T., & McCaffer, R. (2000, May/June). Project procurement system selection model. Journal of
Construction Engineering and Management, 126(3), 176–184.
[Link]
ct=true&db=bsu&AN=3292311&site=ehost-live&scope=site

Rane, S. B., Narvel, Y. A. M., & Bhandarkar, B. M. (2020). Developing strategies to improve agility in the
project procurement management (PPM) process: Perspective of business intelligence (BI). Business
Process Management Journal, 26(1), 257–286. [Link]
[Link]/docview/2534576289?accountid=33337

Unit Lesson
Plan Procurement Management

In the course of producing project deliverables, a few project teams will do all the work and create all
subsystems and components in-house. In fact, it is not uncommon for a project team to do little more than
integrate hardware and software components sourced elsewhere. The substantial activity associated with
dealing with third parties requires significant planning and process support. In the same way that the project
scope, schedule, budget, and communications begin with a strategy for managing these project elements
throughout the project lifecycle, project procurement also benefits from such forethought. It could be argued
that project procurement requires the attention to detail that goes beyond other knowledge areas. This is
because interaction with third parties necessitates a level of formality that is often not present when
collaborating internally with the company. For example, it is a safe choice to request an internal department or
division to contribute work, components, or subsystems to a project. Internal processes, authority, and
decision-making channels are a known entity and well understood. However, this is often not the case when
the project team goes outside of the confines of the company and seeks third-party support. Many questions
must be thought through as part of the preparation associated with the planning of procurement management.
These include the following.

Make Versus Buy

What process and decision-making criteria are used to decide whether an element of the project is acquired
internally or externally? This will vary from company to company, but it depends upon the resources available
in the company, the skillsets, the opportunity costs, and finally, the economic concerns. A common mistake is
to evaluate third party costs for a particular component or system and conclude that it would be more
affordable to develop internally after carrying out an internal cost analysis. The mistake lies in thinking that
attempting the development internally for the first time will be as efficient as a third party who has completed
the work many times over a period of years. Manufacturing practice uses the concept of the learning curve to
illustrate how cost and efficiency of manufactured products improve over time. While the learning curve is not

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directly applicable to project management, a clear principle does exist, and that is, the
UNIT first time
x STUDY something is
GUIDE
attempted will likely take longer and end up being more expensive than [Link]
Vendor Selection

Many third parties likely exist who could complete specific work for the project team. The challenge is in
selecting the supplier who is the best fit and is likely to perform the best. Several methods exist for identifying
and vetting vendors. One approach is to issue a request for proposal (RFP). This is a document with
specifications, a target budget, and a timeframe for the desired project work to be outsourced. In some cases,
the project team may not fully understand possible solutions and may require input from suppliers prior to
issuing an RFP. This is handled using a formal request for information (RFI). In an RFI, suppliers are afforded
the opportunity to explain their solutions and proposed technologies.

In the context of planning procurement management, decisions will need to be made regarding the approach
employed to identify potential suppliers. Further, and just as importantly, it will need to be determined what
criteria will be applied when making the supplier decision. Such criteria typically include cost of the
component or system, the financial stability of the company, the track record of the company with other
clients, and the technical ability to deliver. Additional criteria will likely include an evaluation of the quality
management systems of the supplier. The procurement management plan will provide guidance on this
including any required quality standards.

Contract

Unlike internal sourcing efforts, the decision to employ third parties in the project will require issuing contracts.
Contracts spell out the detailed requirements for the third-party deliverables and associated supplier
responsibilities. Additionally, contracts will include the statement of work, as well as acceptance criteria for the
supplier deliverables. A contract without acceptance criteria inevitably leads to a mismatch of expectations, as
well as substandard deliverables. The contract also plays a role in balancing risks between the project team
and the supplier.

It is naturally desirable to minimize the risk of the project and to place the risk burden on the supplier. The
contractual approach that supports this is the fixed-price contract. In the fixed price contract scenario, the
supplier quotes a price and must live within the bounds of the quoted price. In a homebuilding project, it is
common for a contractor to agree on a fixed price for implementing electrical, plumbing, or other deliverables
such as the roof or foundation. While fixed-price on the face of it seems the least risky for the project, it is not
always the option with the least risk. It is essential that the supplier be able to deliver within the confines of the
contractual price agreement. If the contract is sent out to bid and multiple suppliers seek to outbid each
other—it is possible that the winning bid may have a price so low that the supplier is not able to fully carry out
the contractual obligations. The danger of this risk is something that the plan procurement management
document should take into account. This relates to how bidding is carried out and how the winning bid is
selected. One approach to prevent awarding a contract to a supplier with a bid that was too low is to employ a
creative process for selecting the winning bid. One example of this is to avoid accepting the lowest bid but
instead select the second lowest bid. This constraint can often prompt bidders to be more thoughtful about
their bid amounts.

The cost-plus contract avoids the problem of a supplier running out of funding and failing to deliver. This type
of contract pays the cost associated with the work, as well as a specified profit percentage. While this form of
supplier contract protects the supplier, it places all of the budget risk on the project. There is little incentive for
the supplier to rein in costs, and this may create the likelihood of budget overruns.

The fixed-price and the cost-plus are but two forms of a contract with many variations in between including
various schedule and performance incentives. The procurement management plan will capture the project
strategy for managing contract risks. It should be noted, however, that the type of contract is but one concern
addressed in the plan. Other important legal concerns must be addressed including factors such as the legal
review of the contract, recourse, and consequences for failure to meet performance requirements, and finally,
the legal jurisdiction in which disputes will be adjudicated. Jurisdiction is of particular concern in global
projects. For example, a company operating a project in the United States will naturally prefer a U.S.
jurisdiction. However, if the supplier is outside of the United States—for example, China—the supplier will
also seek local jurisdiction. Often a compromise results and a neutral third country is adopted. A homebuilding

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project may not appear to be a concern with respect to contractual [Link]
However, it is possible
x STUDY GUIDE that a
multinational company may be a part of the team used to carry out the build. This
Titleis especially true in the
case of elements of the home project such as appliances, solar panels, and other materials or components.

Conduct Procurement

Conducting the procurement involves all activities identified in the procurement management plan including a
make or buy analysis, vendor identification and selection, and contractual matters. Conducting procurement
will also include engagement activities with the suppliers including site visits, progress meetings, and
negotiation sessions. In essence, the conducting of procurements is the execution of the procurement plan.
However, this activity will involve significant communication and people skills to coordinate and steer the work
of outside parties. It bears noting that the Guide to the Project Management Body of Knowledge (PMBOK
Guide) includes significant process support for project procurement within the executing process group,
thereby reflecting the significant interaction required in managing outside vendors.

Control Procurement

It is of interest to the project team, sponsor, and client to keep a close eye on the progress of the supplier to
determine whether the vendor is achieving the schedule, budget, and performance milestones. This can be
challenging because a third party is likely to employ different processes, procedures, and policies than if the
work was done in house. In globally distributed projects, the project team will also likely encounter language
and cultural barriers. The bulk of the work of controlling procurement is on accurately assessing progress and
performance. One approach to this that is usually included in the procurement management plan is the audit
of supplier processes. The emphasis in an audit is to fully understand how the supplier manages the work.
Further, the quality of such management processes itself is evaluated. What is important is answering the
question: Can the supplier really do what they claim to be able to do in the given contract and schedule? This
is an important question as it is common for suppliers to make a schedule and budget claims without the
underlying process discipline to effectively carry it out.

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