Chapter 11,
Project Procurement
Management
2013-3-1 2
Learning Objectives
? Understand the importance of good procurement
management and the increasing use of outsourcing for
IT projects
? Describe the main processes and deliverables of
procurement management
? Perform a simple make-or-buy analysis
? Explain the various types of contracts,the risks
involved in using each
? Describe the basic contents of a Request for Proposal
? Create and use a proposal evaluation worksheet
? Understand the importance of having good contracts
and managing them well
2013-3-1 3
Chapter Outline
? Importance of Project Procurement
Management
? Procurement Planning
? Solicitation Planning
? Solicitation
? Source Selection
? Contract Administration
? Contract Close-out
11.1 Importance of Project
Procurement Management
2013-3-1 5
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 by the year 2003 the
worldwide information technology
outsourcing market will grow to over
$110 billion
2013-3-1 6
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
2013-3-1 7
Project Procurement
Management Processes
? Procurement planning,determining what to procure and
when
? Solicitation planning,documenting product requirements and
identifying potential sources
? Solicitation,obtaining quotations,bids,offers,or proposals as
appropriate
? Source selection,choosing from among potential vendors
? Contract administration,managing the relationship with the
vendor
? Contract close-out,completion and settlement of the contract
2013-3-1 8
Project Procurement Management
Processes and Key Outputs
11.2 Procurement Planning
2013-3-1 10
Procurement Planning
? Procurement planning involves identifying
which project needs can be best met by using
products or services outside the organization,It
includes deciding
? whether to procure
? how to procure
? what to procure
? how much to procure
? when to procure
2013-3-1 11
Collaborative Procurement
? Several organizations,even competitors,
have found that it makes sense to
collaborate on procurement for some
projects
2013-3-1 12
1.Procurement Planning Tools
and Techniques
? Make-or-buy analysis,determining
whether a particular product or service
should be made or performed inside the
organization or purchased from someone
else,Often involves financial analysis
? Experts,both internal and external,can
provide valuable inputs in procurement
decisions
2013-3-1 13
Make-or Buy Example
? Assume you can lease an item you need for
a project for $150/day,To purchase the
item,the investment cost is $1,000,and the
daily cost would be another $50/day,
? How long will it take for the lease cost to
be the same as the purchase cost?
? If you need the item for 12 days,should
you lease it or purchase it?
2013-3-1 14
Make-or Buy Solution
? Set up an equation so the,make” is equal to the,buy”
? In this example,use the following equation,Let d be the number
of days to use the item,
$150d = $1,000 + $50d
? Solve for d as follows,
? Subtract $50d from the right side of the equation to get
$100d = $1,000
? Divide both sides of the equation by $100
d = 10 days
? The lease cost is the same as the purchase cost at 10 days
? If you need the item for 12 days,it would be more economical to
purchase it
2013-3-1 15
2.Types of Contracts
? Fixed price or lump sum,involve a fixed total
price for a well-defined product or service
? Cost reimbursable,involve payment to the seller
for direct and indirect costs
? Time and material contracts,hybrid of both fixed
price and cost reimbursable,often used by
consultants
? Unit price contracts,require the buyer to pay the
seller a predetermined amount per unit of service
2013-3-1 16
Cost Reimbursable Contracts
? Cost plus percentage of costs (CPPC),the buyer
pays the seller for allowable performance costs plus
a predetermined percentage based on total costs
? Cost plus fixed fee (CPFF),the buyer pays the seller
for allowable performance costs plus a fixed fee
payment usually based on a percentage of estimated
costs
? Cost plus incentive fee (CPIF),the buyer pays the
seller for allowable performance costs plus a
predetermined fee and an incentive bonus
2013-3-1 17
Contract Types Versus Risk
2013-3-1 18
3.Statement of Work (SOW)
? A statement of work is a description of the
work required for the procurement
? Many contracts,mutually binding
agreements,include SOWs
? A good SOW gives bidders a better
understanding of the buyer’s expectations
2013-3-1 19
Statement of Work (SOW) Template
I,S c op e of Wo r k, De s c r i b e t h e wo r k to b e do n e to de t a i l, S pec if y t h e h a r dwar e a n d
s o f t wa r e i n v o l ved a n d t h e e xac t n a t ur e o f t h e w o r k.
II,L ocat io n of Wo r k, De s c r i b e w h e r e t h e wo r k m u s t b e per f o r m e d,S pec i f y t h e
l o c a t i o n o f h a r dwar e a n d s o f t wa r e a n d wh e r e t h e peo pl e m us t per f o r m t h e wo r k
III,P e r io d of P e r f o r m an c e, S pec i f y w h e n t h e wo r k i s e x pec t e d to s t a r t a n d e n d,
wo r ki n g h o ur s,n u m b e r o f h o ur s t h a t c a n b e bi ll e d per we e k,wh e r e t h e wor k m us t
b e per f o r m e d,a n d r e l a t e d s c h e du l e i nf o r m a t i o n,
I V,De l iv e r ab l e s S c h e d u l e, L i s t s pec i f i c de l i ver a bl e s,des c r i b e t h e m i n det a i l,a n d
s pec i f y w h e n t h e y a r e du e,
V,Ap p l icab le S t an d ar d s, S pec i f y a ny c o m pa ny o r i nd u s t r y - s p e c i f i c s t a n d a r ds t h a t
a r e r e l e va n t to per f o r m i ng t h e wo r k.
VI, Ac c e p t an c e Cr it e r ia, De s c r i be h o w t h e b u y e r or gani z a t i o n w i ll det e r m i ne i f t h e
wo r k i s a c c e pt a bl e,
VI I, S p e c ia l Re q u ir e m e n t s, S pec i f y a ny s pec i a l r e qu i r e m e n t s s uc h a s h a r dwar e o r
s o f t wa r e c e r t i f i c a t i o ns,m i n im u m d e gr e e o r e x per i e nce l e ve l o f per s o n ne l,t r a v e l
r e qu i r e m e n t s,a n d s o o n,
11.3 Solicitation Planning
2013-3-1 21
Solicitation Planning
? Solicitation planning involves preparing several
documents,
? Request for Proposals(RFP),used to solicit
proposals from prospective sellers where there are
several ways to meet the sellers’ needs
? Requests for Quotes(RFQ),used to solicit quotes
for well-defined procurements
? Invitations for bid(IFB) or negotiation(IFN) and
initial contractor responses are also part of
solicitation planning
2013-3-1 22
Outline for a RFP
I,P ur pose of R F P
II,Or g a niz a ti on’ s B a c kg r ound
III,B a si c R e quire ments
I V,Ha r dwa r e a nd S of twa r e Environment
V,De sc r ipt ion of RF P P r oc e ss
VI, S tatement of W or k a nd S c he dule I nf or mati on
VI I, P ossi ble A ppe ndice s
A,C ur r e nt S y st e m Ove r view
B,S y st e m R e qui r e ments
C,Volume a nd S iz e Da ta
D,R e quire d C ontents of V e ndor ’ s R e sponse to R F P
E,S a mpl e C ontra c t
11.4 Solicitation
2013-3-1 24
Solicitation
? Solicitation involves obtaining proposals or
bids from prospective sellers
? 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
buyer’s expectations
11.5 Source Selection
2013-3-1 26
Source Selection
? Source selection involves
? evaluating bidders’ proposals
? choosing the best one
? negotiating the contract
? awarding the contract
? It is helpful to prepare formal evaluation
procedures for selecting vendors
? Buyers often create a,short list”
2013-3-1 27
Sample Proposal Evaluation Sheet
2013-3-1 28
Detailed Criteria for Selecting Suppliers
2013-3-1 29
Be Careful in Selecting Suppliers
and Writing Their Contracts
? Many dot-com companies were created to meet
potential market needs,but many went out of
business,mainly due to poor business planning,
lack of senior management operations experience,
lack of leadership,and lack of visions,Check the
stability of suppliers
? Even well-known suppliers can impede project
success,Be sure to write and manage contracts
well with all suppliers
11.6 Contract Administration
2013-3-1 31
Contract Administration
? Contract administration ensures that the
seller’s performance meets contractual
requirements
? Contracts are legal relationships,so it is
important that legal and contracting
professionals be involved in writing and
administering contracts
? Many project managers ignore contractual
issues,which can result in serious problems
2013-3-1 32
Suggestions on Change Control for
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?
? Changes must be documented in writing,Project team
members should also document all important
meetings and telephone phone calls
11.7 Contract Close-out
2013-3-1 34
Contract Close-out
? Contract close-out includes
? product verification to determine if all work was
completed correctly and satisfactorily
? administrative activities to update records to
reflect final results
? archiving information for future use
? Procurement audits identify lessons learned in
the procurement process
2013-3-1 35
Using Software to Assist in Project
Procurement Management
? Word processing software helps in writing proposals and
contracts,spreadsheets help in evaluating suppliers,
databases help track suppliers,and presentation software
aids in presenting procurement-related information
? In the late 1990s and early 2000s,many companies started
using e-procurement software to do many procurement
functions electronically
? Companies such as Commerce One,Ariba,Concur
Technologies,SAS,and Baan provide corporate
procurement services over the Internet
? Organizations also use other Internet tools to help find
information on suppliers or auction goods and services
Project Procurement
Management
2013-3-1 2
Learning Objectives
? Understand the importance of good procurement
management and the increasing use of outsourcing for
IT projects
? Describe the main processes and deliverables of
procurement management
? Perform a simple make-or-buy analysis
? Explain the various types of contracts,the risks
involved in using each
? Describe the basic contents of a Request for Proposal
? Create and use a proposal evaluation worksheet
? Understand the importance of having good contracts
and managing them well
2013-3-1 3
Chapter Outline
? Importance of Project Procurement
Management
? Procurement Planning
? Solicitation Planning
? Solicitation
? Source Selection
? Contract Administration
? Contract Close-out
11.1 Importance of Project
Procurement Management
2013-3-1 5
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 by the year 2003 the
worldwide information technology
outsourcing market will grow to over
$110 billion
2013-3-1 6
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
2013-3-1 7
Project Procurement
Management Processes
? Procurement planning,determining what to procure and
when
? Solicitation planning,documenting product requirements and
identifying potential sources
? Solicitation,obtaining quotations,bids,offers,or proposals as
appropriate
? Source selection,choosing from among potential vendors
? Contract administration,managing the relationship with the
vendor
? Contract close-out,completion and settlement of the contract
2013-3-1 8
Project Procurement Management
Processes and Key Outputs
11.2 Procurement Planning
2013-3-1 10
Procurement Planning
? Procurement planning involves identifying
which project needs can be best met by using
products or services outside the organization,It
includes deciding
? whether to procure
? how to procure
? what to procure
? how much to procure
? when to procure
2013-3-1 11
Collaborative Procurement
? Several organizations,even competitors,
have found that it makes sense to
collaborate on procurement for some
projects
2013-3-1 12
1.Procurement Planning Tools
and Techniques
? Make-or-buy analysis,determining
whether a particular product or service
should be made or performed inside the
organization or purchased from someone
else,Often involves financial analysis
? Experts,both internal and external,can
provide valuable inputs in procurement
decisions
2013-3-1 13
Make-or Buy Example
? Assume you can lease an item you need for
a project for $150/day,To purchase the
item,the investment cost is $1,000,and the
daily cost would be another $50/day,
? How long will it take for the lease cost to
be the same as the purchase cost?
? If you need the item for 12 days,should
you lease it or purchase it?
2013-3-1 14
Make-or Buy Solution
? Set up an equation so the,make” is equal to the,buy”
? In this example,use the following equation,Let d be the number
of days to use the item,
$150d = $1,000 + $50d
? Solve for d as follows,
? Subtract $50d from the right side of the equation to get
$100d = $1,000
? Divide both sides of the equation by $100
d = 10 days
? The lease cost is the same as the purchase cost at 10 days
? If you need the item for 12 days,it would be more economical to
purchase it
2013-3-1 15
2.Types of Contracts
? Fixed price or lump sum,involve a fixed total
price for a well-defined product or service
? Cost reimbursable,involve payment to the seller
for direct and indirect costs
? Time and material contracts,hybrid of both fixed
price and cost reimbursable,often used by
consultants
? Unit price contracts,require the buyer to pay the
seller a predetermined amount per unit of service
2013-3-1 16
Cost Reimbursable Contracts
? Cost plus percentage of costs (CPPC),the buyer
pays the seller for allowable performance costs plus
a predetermined percentage based on total costs
? Cost plus fixed fee (CPFF),the buyer pays the seller
for allowable performance costs plus a fixed fee
payment usually based on a percentage of estimated
costs
? Cost plus incentive fee (CPIF),the buyer pays the
seller for allowable performance costs plus a
predetermined fee and an incentive bonus
2013-3-1 17
Contract Types Versus Risk
2013-3-1 18
3.Statement of Work (SOW)
? A statement of work is a description of the
work required for the procurement
? Many contracts,mutually binding
agreements,include SOWs
? A good SOW gives bidders a better
understanding of the buyer’s expectations
2013-3-1 19
Statement of Work (SOW) Template
I,S c op e of Wo r k, De s c r i b e t h e wo r k to b e do n e to de t a i l, S pec if y t h e h a r dwar e a n d
s o f t wa r e i n v o l ved a n d t h e e xac t n a t ur e o f t h e w o r k.
II,L ocat io n of Wo r k, De s c r i b e w h e r e t h e wo r k m u s t b e per f o r m e d,S pec i f y t h e
l o c a t i o n o f h a r dwar e a n d s o f t wa r e a n d wh e r e t h e peo pl e m us t per f o r m t h e wo r k
III,P e r io d of P e r f o r m an c e, S pec i f y w h e n t h e wo r k i s e x pec t e d to s t a r t a n d e n d,
wo r ki n g h o ur s,n u m b e r o f h o ur s t h a t c a n b e bi ll e d per we e k,wh e r e t h e wor k m us t
b e per f o r m e d,a n d r e l a t e d s c h e du l e i nf o r m a t i o n,
I V,De l iv e r ab l e s S c h e d u l e, L i s t s pec i f i c de l i ver a bl e s,des c r i b e t h e m i n det a i l,a n d
s pec i f y w h e n t h e y a r e du e,
V,Ap p l icab le S t an d ar d s, S pec i f y a ny c o m pa ny o r i nd u s t r y - s p e c i f i c s t a n d a r ds t h a t
a r e r e l e va n t to per f o r m i ng t h e wo r k.
VI, Ac c e p t an c e Cr it e r ia, De s c r i be h o w t h e b u y e r or gani z a t i o n w i ll det e r m i ne i f t h e
wo r k i s a c c e pt a bl e,
VI I, S p e c ia l Re q u ir e m e n t s, S pec i f y a ny s pec i a l r e qu i r e m e n t s s uc h a s h a r dwar e o r
s o f t wa r e c e r t i f i c a t i o ns,m i n im u m d e gr e e o r e x per i e nce l e ve l o f per s o n ne l,t r a v e l
r e qu i r e m e n t s,a n d s o o n,
11.3 Solicitation Planning
2013-3-1 21
Solicitation Planning
? Solicitation planning involves preparing several
documents,
? Request for Proposals(RFP),used to solicit
proposals from prospective sellers where there are
several ways to meet the sellers’ needs
? Requests for Quotes(RFQ),used to solicit quotes
for well-defined procurements
? Invitations for bid(IFB) or negotiation(IFN) and
initial contractor responses are also part of
solicitation planning
2013-3-1 22
Outline for a RFP
I,P ur pose of R F P
II,Or g a niz a ti on’ s B a c kg r ound
III,B a si c R e quire ments
I V,Ha r dwa r e a nd S of twa r e Environment
V,De sc r ipt ion of RF P P r oc e ss
VI, S tatement of W or k a nd S c he dule I nf or mati on
VI I, P ossi ble A ppe ndice s
A,C ur r e nt S y st e m Ove r view
B,S y st e m R e qui r e ments
C,Volume a nd S iz e Da ta
D,R e quire d C ontents of V e ndor ’ s R e sponse to R F P
E,S a mpl e C ontra c t
11.4 Solicitation
2013-3-1 24
Solicitation
? Solicitation involves obtaining proposals or
bids from prospective sellers
? 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
buyer’s expectations
11.5 Source Selection
2013-3-1 26
Source Selection
? Source selection involves
? evaluating bidders’ proposals
? choosing the best one
? negotiating the contract
? awarding the contract
? It is helpful to prepare formal evaluation
procedures for selecting vendors
? Buyers often create a,short list”
2013-3-1 27
Sample Proposal Evaluation Sheet
2013-3-1 28
Detailed Criteria for Selecting Suppliers
2013-3-1 29
Be Careful in Selecting Suppliers
and Writing Their Contracts
? Many dot-com companies were created to meet
potential market needs,but many went out of
business,mainly due to poor business planning,
lack of senior management operations experience,
lack of leadership,and lack of visions,Check the
stability of suppliers
? Even well-known suppliers can impede project
success,Be sure to write and manage contracts
well with all suppliers
11.6 Contract Administration
2013-3-1 31
Contract Administration
? Contract administration ensures that the
seller’s performance meets contractual
requirements
? Contracts are legal relationships,so it is
important that legal and contracting
professionals be involved in writing and
administering contracts
? Many project managers ignore contractual
issues,which can result in serious problems
2013-3-1 32
Suggestions on Change Control for
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?
? Changes must be documented in writing,Project team
members should also document all important
meetings and telephone phone calls
11.7 Contract Close-out
2013-3-1 34
Contract Close-out
? Contract close-out includes
? product verification to determine if all work was
completed correctly and satisfactorily
? administrative activities to update records to
reflect final results
? archiving information for future use
? Procurement audits identify lessons learned in
the procurement process
2013-3-1 35
Using Software to Assist in Project
Procurement Management
? Word processing software helps in writing proposals and
contracts,spreadsheets help in evaluating suppliers,
databases help track suppliers,and presentation software
aids in presenting procurement-related information
? In the late 1990s and early 2000s,many companies started
using e-procurement software to do many procurement
functions electronically
? Companies such as Commerce One,Ariba,Concur
Technologies,SAS,and Baan provide corporate
procurement services over the Internet
? Organizations also use other Internet tools to help find
information on suppliers or auction goods and services
