Chapter 12: Project Procurement Management

Information Technology Project Management, Fifth Edition

Learning Objectives
Understand the importance of project procurement

management and the increasing use of outsourcing for information technology projects
Describe the work involved in planning purchases

and acquisitions for projects, the contents of a procurement management plan and contract statement of work, and calculations involved in a make-or-buy analysis
Discuss what is involved in planning contracting,

including the creation of various procurement documents and evaluation criteria for sellers
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Learning Objectives (continued)

Understand the process of requesting seller

responses and the difference between proposals and bids Describe the seller selection process and recognize different approaches for evaluating proposals or selecting suppliers Discuss the importance of good contract administration Describe the contract closure process Discuss types of software available to assist in project procurement management 3
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Importance of Project Procurement Management

Procurement means acquiring goods and/or

services from an outside source

Other terms include purchasing and outsourcing Experts predict that global spending on computer

software and services will continue to grow

People continue to debate whether offshore

outsourcing helps their own country or not

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Debates on Outsourcing
Some companies, such as Wal-Mart, prefer to do

no outsourcing at all, while others do a lot of outsourcing

Most organizations do some form of outsourcing to

meet their IT needs and spend most money within their own country
The U.S. temporary workforce continues to grow

as people work for temporary job agencies so they can more easily move from company to company
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Why Outsource?
To reduce both fixed and recurrent costs To allow the client organization to focus on its

core business
To access skills and technologies To provide flexibility

To increase accountability
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Contracts
A contract is a mutually binding agreement that

obligates the seller to provide the specified products or services and obligates the buyer to pay for them
Contracts can clarify responsibilities and sharpen

focus on key deliverables of a project

Because contracts are legally binding, there is more

accountability for delivering the work as stated in the contract

A recent trend in outsourcing is the increasing size of

contracts
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What Went Wrong?

Companies often change their minds about procurement;

for example, JPMorgan Chase announced a seven-year, $5 billion deal to outsource much of its data processing to IBM, but they revoked the contract less than two years into its existence because the procurement plan no longer fit their business strategy The Australian Computer Society says sending work offshore may lower the number of students entering IT courses, deplete the number of skilled IT professionals, and diminish the nations strategic technology capability Procurement can also cause security problems, including the protection of intellectual property, integrity of data, and the reliability of infrastructure in offshore locations
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Project Procurement Management Processes

Project procurement management: acquiring

goods and services for a project from outside the performing organization Processes include:

Planning purchases and acquisitions: determining what to procure, when, and how Planning contracting: describing requirements for the products or services desired from the procurement and identifying potential sources or sellers (contractors, suppliers, or providers who provide goods and services to other organizations)
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Project Procurement Management Processes (continued)

Requesting seller responses: obtaining

information, quotes, bids, offers, or proposals from sellers, as appropriate Selecting sellers: choosing from among potential suppliers through a process of evaluating potential sellers and negotiating the contract Administering the contract: managing the relationship with the selected seller Closing the contract: completing and settling each contract, including resolving any open items
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Figure 12-1: Project Procurement Management Summary

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Planning Purchases and Acquisitions

Identifying which project needs can best be met

by using products or services outside the organization

If there is no need to buy any products or

services from outside the organization, then there is no need to perform any of the other procurement management processes

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What Went Right?

Several organizations, such as The Boots

Company PLC in England, outsource their IT services to save money compared with the cost of running the systems themselves
Carefully planning procurement can also save

millions of dollars, as the U.S. Air Force did by using a unit pricing strategy for a large office automation project

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Tools and Techniques for Planning Purchases and Acquisitions

Make-or-buy analysis: general management

technique used to determine whether an organization should make or perform a particular product or service inside the organization or buy from someone else
Often involves financial analysis

Experts, both internal and external, can provide

valuable inputs in procurement decisions

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Make-or-Buy Example
Assume you can lease an item you need for a

project for $800/day; to purchase the item, the cost is $12,000 plus a daily operational cost of $400/day
How long will it take for the purchase cost to be

the same as the lease cost?

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Make-or Buy Solution

Set up an equation so both options, purchase and

lease, are equal In this example, use the following equation; let d be the number of days to use the item:
$12,000 + $400d = $800d Subtracting $400d from both sides, you get: $12,000 = $400d Dividing both sides by $400, you get: d = 30
If you need the item for more than 30 days, it is more

economical to purchase it
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Types of Contracts

Different types of contracts can be used in different situations

Fixed price or lump sum contracts: involve a fixed total price for a well-defined product or service Cost reimbursable contracts: involve payment to the seller for direct and indirect costs Time and material contracts: hybrid of both fixed price and cost reimbursable contracts, often used by consultants Unit price contracts: require the buyer to pay the seller a predetermined amount per unit of service

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A single contract can actually include all four of these categories, if it makes sense for that particular procurement
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Point of Total Assumption

The Point of Total Assumption (PTA) is the cost

at which the contractor assumes total responsibility for each additional dollar of contract cost Contractors do not want to reach the point of total assumption because it hurts them financially, so they have an incentive to prevent cost overruns The PTA is calculated with the following formula:
PTA = (ceiling price target price)/government share + target cost

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Cost Reimbursable Contracts

Cost plus incentive fee (CPIF): the buyer pays

the supplier for allowable performance costs plus a predetermined fee and an incentive bonus Cost plus fixed fee (CPFF): the buyer pays the supplier for allowable performance costs plus a fixed fee payment usually based on a percentage of estimated costs Cost plus percentage of costs (CPPC): the buyer pays the supplier for allowable performance costs plus a predetermined percentage based on total costs
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Figure 12-2: Contract Types Versus Risk

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Contract Clauses
Contracts should include specific clauses to take

into account issues unique to the project

Can require various educational or work

experience for different pay rights

A termination clause is a contract clause that

allows the buyer or supplier to end the contract

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Procurement Management Plan

Describes how the procurement processes will be

managed, from developing documentation for making outside purchases or acquisitions to contract closure
Content varies based on project needs

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Contract Statement of Work (SOW)

A statement of work is a description of the work

required for the procurement

If a SOW is used as part of a contract to describe

only the work required for that particular contract, it is called a contract statement of work
A SOW is a type of scope statement A good SOW gives bidders a better understanding

of the buyers expectations

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Figure 12-3: Statement of Work (SOW) Template

I. II. III. Scope of Work: Describe the work to be done to detail. Specify the hardware and software involved and the exact nature of the work. Location of Work: Describe where the work must be performed. Specify the location of hardware and software and where the people must perform the work Period of Performance: Specify when the work is expected to start and end, working hours, number of hours that can be billed per week, where the work must be performed, and related schedule information. Deliverables Schedule: List specific deliverables, describe them in detail, and specify when they are due. Applicable Standards: Specify any company or industry-specific standards that are relevant to performing the work. Acceptance Criteria: Describe how the buyer organization will determine if the work is acceptable. Special Requirements: Specify any special requirements such as hardware or software certifications, minimum degree or experience level of personnel, travel requirements, and so on.
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IV. V. VI. VII.

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Planning Contracting

Involves preparing several documents needed for potential sellers to prepare their responses and determining the evaluation criteria for the contract award

Request for Proposals: used to solicit proposals from prospective sellers

A proposal is a document prepared by a seller when there

are different approaches for meeting buyer needs

Requests for Quotes: used to solicit quotes or bids from prospective suppliers
A bid, also called a tender or quote (short for quotation), is

a document prepared by sellers providing pricing for standard items that have been clearly defined by the buyer
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Figure 12-4: Request for Proposal (RFP) Template

I. II. III. IV. V. VI. VII. Purpose of RFP Organizations Background Basic Requirements Hardware and Software Environment Description of RFP Process Statement of Work and Schedule Information Possible Appendices A. Current System Overview B. System Requirements C. Volume and Size Data D. Required Contents of Vendors Response to RFP E. Sample Contract
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Evaluation Criteria
Its important to prepare some form of evaluation

criteria, preferably before issuing a formal RFP or RFQ

Beware of proposals that look good on paper; be

sure to evaluate factors, such as past performance and management approach

Can require a technical presentation as part of a

proposal
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Requesting Seller Responses

Deciding whom to ask to do the work, sending appropriate documentation to potential sellers, and obtaining proposals or bids Organizations can advertise to procure goods and services in several ways

Approaching the preferred vendor Approaching several potential vendors Advertising to anyone interested

A bidders conference can help clarify the buyers expectations

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Selecting Sellers
Also called source selection

Involves:
Evaluating proposals or bids from sellers

Choosing the best one

Negotiating the contract Awarding the contract
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Figure 12-5: Sample Proposal Evaluation Sheet

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Seller Selection Process

Organizations often do an initial evaluation of all

proposals and bids and then develop a short list of potential sellers for further evaluation
Sellers on the short list often prepare a best and

final offer (BAFO)

Final output is a contract signed by the buyer and

the selected seller

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Media Snapshot
Information technology has made a tremendous

impact on how organizations and individuals select sellers The Interactive Advertising Bureau and PricewaterhouseCoopers reported that U.S. Internet advertising revenues for the first half of 2006 were almost $8 billion, a new record and a 37 percent increase over the first half of 2005 Google and Yahoo! charge advertisers each time a user clicks on that advertisers site Other companies, like DoubleClick, Inc., provide digital marketing technology services
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Administering the Contract

Ensures that the sellers performance meets contractual requirements Contracts are legal relationships, so it is important that legal and contracting professionals be involved in writing and administering contracts It is critical that project managers and team members watch for constructive change orders, which are oral or written acts or omissions by someone with actual or apparent authority that can be construed to have the same effect as a written change order
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Suggestions for Change Control in Contracts

Changes to any part of the project need to be reviewed, approved, and documented by the same people in the same way that the original part of the plan was approved Evaluation of any change should include an impact analysis; how will the change affect the scope, time, cost, and quality of the goods or services being provided?

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Changes must be documented in writing; project team members should also document all important meetings and telephone phone calls
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Suggestions for Change Control in Contracts (continued)

Project managers and teams should stay closely

involved to make sure the new system will meet business needs and work in an operational environment
Have backup plans Use tools and techniques, such as a contract

change control system, buyer-conducted performance reviews, inspections and audits, and so on
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Best Practice
Accenture developed a list of best practices from

experienced outsourcers throughout the world:

1. Build in Broad Business Outcomes Early and Often 2. Hire a Partner, Not Just a Provider 3. Its More Than a Contract, Its a Business Relationship

4. Leverage Gain-Sharing
5. Use Active Governance 6. Assign a Dedicated Executive 7. Focus Relentlessly on Primary Objectives

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Closing the Contract

Involves completing and settling contracts and

resolving any open items

The project team should:
Determine if all work was completed correctly and

satisfactorily
Update records to reflect final results Archive information for future use

The contract itself should include requirements for

formal acceptance and closure

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Tools to Assist in Contract Closure

Procurement audits identify lessons learned in

the procurement process

A records management system provides the

ability to easily organize, find, and archive procurement-related documents

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Using Software to Assist in Project Procurement Management

Word-processing software helps write proposals

and contracts, spreadsheets help evaluate suppliers, databases help track suppliers, and presentation software helps present procurement-related information E-procurement software does many procurement functions electronically Organizations also use other Internet tools to find information on suppliers or auction goods and services
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Chapter Summary
Project procurement management involves

acquiring goods and services for a project from outside the performing organization Processes include:
Planning purchases and acquisitions Planning contracting Requesting seller responses Selecting sellers

Administering contracts
Closing contracts
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