Hello and welcome back to our PMP Series. In the previous posts, we discussed project scope management, project time management, project cost management, project quality management, project human resource management, project communication management, Project Risk Management, and Project Selection Criteria.
In a continuation of our series, this article will explore another project management knowledge area that is important for the PMP exam: project procurement management.
Project procurement management deals with the processes involved in acquiring a product, work, or service from a third party external to the project team. Organizations can be described as a part of chain or a link in a web and often have to rely on other organizations such for supplies. Products or services rendered by one organization can be the raw material for another organization or a finished product for the final consumer. Since it is largely impossible for an organization to be self-sufficient and produce all the materials or services it requires, it requires external parties, thus necessitating the need for procurement management. Procurement management also ensures that goods or services meet the organization’s specification of quality, quantity, and deadline at the best possible cost.
The project procurement management knowledge area has four processes and, in this article, we will explore the inputs, tools, and techniques and outputs of these processes. The processes are:
Plan procurement management
Conduct procurement management
The plan procurement management process is a planning process; conduct procurement management process is an executing process; the control procurement process, just as the name implies, is a monitoring and control process; and similarly, the close procurement process belongs to the closing process group.
Plan Procurement Management
According to the PMBOK, the plan procurement management focuses on “documenting project procurement decisions, specifying the approach, and identifying potential sellers.” This analyzes the organization project by identifying products and services that can be developed internally and those that require external contributions. Upon the identification of what products and services require external parties, the plan procurement further details how to acquire it, when to acquire it, and the required quantity.
The most important inputs into the procurement management processes are the project management plan, the requirement documentation, and the activity cost estimates. The project management plan, as discussed in earlier articles, defines the requirement, need, justification, and boundary for the project. The requirement documentation, on the other hand, shows how individual requirements dovetail into the overall project need. For a project manager, a clear understanding of the requirements vis-à-vis the organization’s strength and resources will help in deciding what items or services require procurement. Finally, the activity cost estimates are used in evaluating the reasonableness of bids and proposals by prospective sellers. Other inputs into the plan procurement management process include the risk register, activity resource requirement, project schedule, stakeholders register, enterprise environmental factors, and organizational process assets.
As project manager, we deal with a lot of contractual relationships when planning procurement. The most popular contract types are the fixed-price contract, which defines a fixed total price for a project; the cost reimbursable contract, which reimburses the seller with legitimate cost incurred during the cost of the project (this is largely used when the scope of a project cannot be determined at the start of the project);. and the time and material contract (T&M), which is a combination of the fixed-price contract and the cost reimbursable contract. It is often used for special arrangements in a fixed-cost project such as hiring expatriates, staff augmentation, or part of the contract for which the quantity cannot be defined as of the time of award.
The main tools and techniques for the plan procurement management are as follows:
Make or buy analysis—As far as procurement management is concerned, this is the most important tool for the project manager. It analyzes whether a product or service should be produced in-house or sourced from a supplier by analyzing the various costs and risks involved.
Meetings—As a project manager, arranging meetings with potential sellers or bidders allows the organization to make better choices and strike better deals. It also gives room for the sellers to clarify details of the procurement with the procurement team.
Other important tools and techniques used for the plan procurement process are expert judgment and market research for industry and seller analysis.
The outputs of the plan procurement management process are:
Procurement management plan—This is the major output of the plan procurement management process; it describes how procurement will be managed throughout the whole project and it contains information such as the type of contract to be used, how to manage suppliers, handling risk, etc.
Procurement statement of work—This describes the product or service in great detail to allow contractors to determine if they are able to deliver.
Source selection criteria—These are criteria developed to be used in evaluating and selecting buyers.
Make or buy decision—This is the result of the make or buy analysis, detailing which activity would be accomplished by the project team or sourced from outside source.
The change request, procurement documents, and the project documents update are other key outputs of the plan procurement management process.
After planning procurement, the next process a project manager has to undertake is to conduct procurement. This is defined as the process of obtaining seller bids and proposals, selecting the seller and awarding the contract to the chosen seller.
The most important inputs in the conduct procurement processes are the procurement management plan, source selection criteria, and the seller proposal. The procurement management plan, as discussed earlier, is the key output of the plan procurement management process and details how the whole procurement management process would be managed. The source selection criteria detail information required for selection of sellers, while the seller proposals are bids submitted by sellers that will be used in selecting the successful bidders. Other inputs for the conduct procurement processes include the procurement document, project documents, make or buy decisions, procurement statement of work, and organizational processes assets.
As a project manager, it is important to note that, depending on the nature of the project, the seller might be involved in the preparation of the procurement statement of work, as this would provide a broader perspective from which ideas can be drawn to satisfy the project requirement. A detailed contract would then be negotiated with the seller afterwards.
The tools and techniques for the conduct procurement processes are:
Bidder conference—As the name suggests, this is a meeting at which the prospective bidders or sellers meet with the buyer before submitting a proposal. This is to ensure that all prospective sellers have a clear idea of the procurement requirements. This also eliminates or reduces preferential treatment among bidders.
Proposal evaluation techniques—After proposals have been made, these are the criteria used in selecting the successful bidders.
Independent estimates—When carrying out procurement, it is important for the buyer to carry out independent estimates of product or services. This is used as a benchmark for comparison of the prospective sellers’ bids. Large variations among independent estimates should be noted and possible reasons for the variations identified.
Expert judgment—The use of expert opinion in evaluating proposals
Advertising—Although this might sound very general, advertisement is the only way to increase the list of potential suppliers. This is sometimes neglected during procurement. thus limiting the number of prospective sellers. Niche advertisement, such as advertising in specific trade publications, is more effective.
Analytical techniques—While sellers generally try to add value to product and services rendered to increase chances of winning the bid, analytical techniques are used to identify areas of risk in a project such that they might be monitored closely to ensure a successful project and avoid cost overruns.
Procurement negotiations—This is used for final clarification of the requirements and structure of the contract before signing the contract. It covers areas such as authority to make changes, technical and management approaches, propriety rights, payment, project schedule, price, and contract financing.
The major outputs of the conduct procurement process are the selected sellers and the agreements. The selected sellers are those whose bids have been judged competitive after the proposal evaluation. The agreement describes the terms and condition of the contract. It can be called a contract, an understanding, a subcontract, or a purchase order. The main components of the agreement include the deliverables, schedule baseline, performance reporting, period of performance, roles and responsibilities, pricing, payment terms, place of delivery, acceptance criteria, product support, limitation of liability, fees and retention, penalties, incentives, insurance and performance bonds, change request, and termination clause.
Other outputs of the conduct procurement process are resource calendars, change requests, and updates to the project management plan.
At this juncture, I believe we need a break to digest the processes we have just covered. However, there are two more processes in the project procurement management knowledge area, which are the control procurement and close procurement. We will explore these processes in the next post. As usual, if you have any questions or thoughts, please feel free to use the comments section. Thank you for reading and I’ll see you tomorrow for part 2!