Welcome to the concluding part of a two-part article on project procurement management. In the previous post, we started to examine project procurement management and we discussed the first two processes that make up the knowledge area (plan procurement and conduct procurement). You can view the article here. In this post we will conclude the knowledge area by examining the control procurement and close procurement processes. We will also examine the inputs, tools and techniques, and outputs of these processes. So let’s get right to it.
According to the PMBOK, this is the “process of managing procurement relationships, monitoring contract performance, and making changes and corrections to contracts as appropriate.” While the control procurement process is important for all project types, it is more complicated for large projects with multiple suppliers, as it involves managing the interfaces among various providers to ensure the overall success of the project. Since procurement management involves a legal agreement (contract) between the buyer and the seller, it is important for the project management team to be aware of the legal implications when controlling procurement.
The control procurement process reviews the performance of the seller with respect to the agreed contract and points the seller’s attention to variations, especially where corrective actions are required. It also ensures that agreed payment conditions are met as specified in the contract. It is important to note that the contract condition can be amended at any time before the end of the project, as long as there is a mutual consent between the buyer and the seller.
The most important inputs for the control procurement process are the procurement documents and agreements. The procurement documents hold details of records required for effective control of the procurement process; the agreement, as discussed in the previous post, is an understanding between the buyer and the seller that also provides detailed information on the duties of both parties. Other inputs include the procurement documents, approved change requests, work performance reports, and work performance data.
The tools and techniques for the plan procurement management are:
- Contract change control system—This defines the processes by which changes can be made to procurement. Important elements of this are conflict resolution and levels of approval necessary for change authorizations
- Procurement performance review—This is a structured review to ensure that the seller meets the contract requirement (scope) within the triple constrain (time, cost, and quality). This allows the project management team to quantify the work done by the seller, identify performance success and failure, and make further decisions based on the information gathered.
- Inspection and audits—These are conducted during the execution of the project to ensure that the contract deliverables are fulfilled
- Performance reporting
- Payment systems—These systems ensure that payment is made to the seller once work has been confirmed as satisfactory by authorized personnel.
- Claims administration—Claims are contested changes where the buyer and the seller cannot reach an agreement that the change occurred or on the cost of the change. Claims administration deals with resolving claims as agreed in the contract document.
- Record management system—This is used by the project manager in managing contract and procurement
The outputs of the control procurement process are:
- Work performance information—This helps in the identification of potential problems for new procurements. Documenting the performance of a vendor increases organizational knowledge about the seller, which can help in making better decisions and managing risk.
- Change request—For changes requested to the project management plan.
- Project management plan update—Elements of the project management plan that might be updated include the procurement management plan, schedule baseline, and cost baseline.
- Project documents updates—The procurement document is the key document that might be updated.
- Organizational process assets updates
Every beginning must have an end (hopefully). Close procurement is the process of completing all procurements. At this stage, agreements and related documents are documented for future references, all open claims are finalized, and relevant records are updated. In the case of a large project with multiple procurement agreements, different procurements are closed at different phases of the project lifecycle. A termination clause is usually included in the contract in case of an early termination. Early termination could be a result of the mutual agreement of both parties or a breach of contract from one of the parties. Contract termination should always be based upon the procurement terms and conditions.
There are two inputs for the close procurement process. These are the project management plan, which contains the procurement plan that details the necessary procedures for closing out procurements, and the procurement documents. The procurement documents contain all of the information gathered during the contract period, such as contract time, scope, quality, cost performance, payment records, etc.
There are three main tools and techniques used when closing procurements. First, the procurement audits constitute a structured review of the whole procurement process. This identifies the successes and weaknesses of the contract and helps in planning other procurement during the project or future procurements. Second is the procurement negotiation, which is used in resolving all outstanding negotiations and disputes. Only when settlements cannot be resolved through negotiation is the court involved. Finally, the record management system is used by the project manager in keeping records of all procurement.
There are two main outputs for the close procurement process:
- Close procurements—This is a formal way of closing the agreement with the seller. This involves a formal written notice given by the procurement team to the seller confirming the end of the contract. Details of formal procurement closure are always included in the procurement plan.
- Organizational process assets and updates—The procurement file, deliverable acceptance, and lessons learned are some of the organizational process that might be updated.
While exploring the knowledge area of procurement, we should realize that the words “contract” and “agreement” were used interchangeably and in the context of this article mean the same thing. We should also agree that procurement management can also be referred to as contract or agreement management.
In the light of the above, I think we should explore the word “contract” from a more detailed perspective. This would involve the definition of various types of contracts and who bears the risk in the contractual agreement.
A contract, as earlier defined, is a legal binding between two or more voluntary parties. There must be an offer and an acceptance before a contract can be defined as a legal entity. In procurement scenarios, the seller typically treats the contract as a project, especially when the acquisitions are not for shelf materials, goods, or common products.
When negotiating a contract, both the seller and the buyer often attempt to minimize their exposure to risk by shifting most of the risk onto the other party. The two extreme forms of contracts are the cost reimbursable and firm fixed price contract. The cost reimbursable contract involves the seller paying for all the legitimate costs incurred for the completion of the contract. In this type of contract the buyer bears most or all of the risk involved. On the other hand, for the fixed price contract the seller bears all risk incurred during the contract as the prices are not negotiable after an agreement has been reached. There are, however, various approaches to these forms of contracts and these approaches are discussed below
Some variations of cost reimbursable and fixed price contracts are shown below:
- Cost plus fixed fee contract—Here the seller is reimbursed for all allowable costs and a fixed fee, which is a percentage of the initial estimated cost is paid to the seller. Under no conditions does the percentage or the estimated cost change unless there is a change in the procurement scope.
- Cost plus incentive fee contract—The seller is reimbursed for all allowable costs and also receives pre-determined incentive fees upon achieving milestones as described in the contract.
- Fixed price incentive fee contract—Here a fixed priced is given for the contract, but financial incentives are tied to achieving good matrices as a form of performance motivation for the seller.
- Fixed price with economic price adjustment contract—This contract type is used when a contract spans a considerable period of years (long-term contracts). A predefined fixed price can then be adjusted, based on certain economic conditions that occurred over the years such as inflation or a change in the foreign exchange rate.
The figure below shows the two extremes on a spectrum of risk:
Understanding the various types of contracts and when to use them is very important for any project manager. While you might not have to make huge financial decisions like a CFO, you will have to make buying decisions as a project manager and you should be familiar with the various contract types and their implications on the project budget.
There you go! The project procurement management knowledge area. As usual, we have a summary of the processes in the diagram below. We are almost there now. In the next post in this series, we will explore the project stakeholder management knowledge area. Until then, have fun studying and managing projects!