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CONTRACT MANAGEMENT

PRINCIPLES AND PRACTICES

Introductions

Instructor

Name
Background

Students/Course Participants

Name
Company
PM and procurement experience
Motivations for taking course

What do you want out of the class?

Formalities
Introductions
Logistics

Timing and breaks


Student kits
Training center facilities

Distractions

Cell phones and pagers on vibrate

Special needs?
Rules of classroom engagement
Lets get started

Course Objectives
1.
2.
3.

4.

This course will teach you how to effectively manage all


aspects of project procurement.
Youll discover the terms, techniques, and tools of how to
convert project needs into outsourced goods and services.
In this skills-building course, you will spend up to 70% of
class time working on contracting activities from
requirements documentation to contract closure.
Exercises include the development of a procurement
strategy, contract selection, revising and updating SOWs
(Statement of Work), risk management, negotiated claims
settlement, and collection of lessons learned.

After taking this course, you will be able


to:

Describe steps and stages of contract management from needs analysis


to closure
Define terms and terminology of contracting and procurement
Explain legal requirements of contracts and their implications
Perform stakeholder mapping and expectations analysis
Convert project objectives to contract requirements
Describe applications and weaknesses of contract types
Explain risk transfer through contracting terms and conditions
Describe procurement planning, from needs analysis to creation of bid
packages
Explain the importance of the SOW (Statement Of Work)
Conduct procurements and bid on packages through source selection
and awarded contracts
Describe negotiation principles

Course Outline

Section 3

Section 4

Section 5

Section 6

Introduction to Project Analysis


Plan
Procurement
Procurements
Management

Section 1

Conduct
Procurements

Administer
Procurements

Close
Procurements

Advertise
Choose vendor

Manage
contract

Lessons
learned

Terminology
Contracts
Stakeholders
Success

Section 2

Determine
project needs

Day One

Documentation

Day Two

Day Three

Contract Management Principles and Practices

Section 1: Introduction to Procurement


Management
Terminology
Contracts
Contracting Success
Stakeholders
Procurement Process Success

Introduction to Procurement Management

Section 3

Section 4

Section 5

Section 6

Introduction to Project Analysis


Plan
Procurement
Procurements
Management

Section 1

Conduct
Procurements

Administer
Procurements

Close
Procurements

Advertise
Choose vendor

Manage
contract

Lessons
learned

Terminology
Contracts
Stakeholders
Success

Section 2

Determine
project needs

Day One

Documentation

Day Two

Day Three

Section 1 Objectives
After completing this section, you will be able to:

Estimate the time required for procurement


processes
Define the terminology used in procurement
management and contract management
Describe what contracts are and when they are used
Outline the spectrum of stakeholders involved in
procurements
Apply contract management success criteria

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Exercise 1-1: Estimating Procurement


Schedules

1-3

Instructions
Work in groups to complete the following tasks. Be
prepared to share your results with the class.
1. Estimate durations for activities in the Contract
Schedule Network Diagram. Provide estimates in
terms of both minimum and maximum amounts
for each step.
2. Total the durations to calculate how much time
procurement can add to project schedules.
Estimate both the upper and lower limits.

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Exercise 1-1: Contract Schedule Network


Diagram

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Exercise 1-1: Schedule Network Diagram

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Exercise 1-1: Schedule Network Diagram


(cont.)

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Exercise 1-1: Schedule Network Diagram


(cont.)
Evaluate
proposals

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Exercise 1-1: Schedule Network Diagram


(cont.)

1-4

Exercise 1-1: Debrief


Which procurement steps are unnecessary?
How can the process be shortened?
Who should decide how to shorten the process?

Terminology
Procure
Procurement
Procurement management
Contracts
Contract management
Procurement management vs. contract
management

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Procure

To procure is to acquire

Typically refers to sources outside of organizations

www.YourDictionary.com

To get or bring about by some effort; obtain; secure


to procure supplies, work, a settlement, etc.
To obtain

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Procurement/Procurement Management

All the processes relating to the acquisition of


goods and services

From preparation of documents and processing of


requisitions through to receipt of goods and services
Includes approval of invoices and related payments

Also known as:

Sourcing
Outsourcing
Purchasing
Contracting

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Procurement Steps

Plan
Prepare bid documents and distribute
Receive responses from bidders
Evaluate proposals
Interview bidders
Conduct negotiations
Award contracts
Determine work start date
Manage contracts
Review performance (extend or terminate)
End contracts
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Contract Management
The management of contracts made with
customers, vendors, partners, or employees
Creation,
execution, and performance with
the objective of optimizing outcomes while
minimizing risk
Responsibilities include:

Negotiating terms and conditions


Ensuring compliance with terms and conditions
Documenting and agreeing to changes that arise
during contract implementation or execution

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Contract Management Scope

Plan
Prepare and distribute bid
Obtain bidder responses
Evaluate proposals
Interview bidders
Conduct negotiations
Award contracts
Determine work start date
Manage contracts
Review performance
End contract

Contract
management
responsibilities
vary

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Contracts
A mutually binding agreement that obligates the
seller to provide the specified products, services,
or results, and obligates the buyer to provide
monetary or other valuable consideration.
PMBOK Guide, Fourth Edition
Synonyms
A contract represents a mutually binding

Agreement (MoA)
Understanding (MoU)
Purchase order (PO)

agreement that obligates the seller to provide


something of value (e.g., specified products,
services, or results) and obligates the buyer to
provide
monetary
or
other
valuable
compensation. An agreement can be simple or
complex, and may reflect the simplicity or
complexity of the deliverables or required effort
(PMBOK Guide, Fifth Ed., 2013)

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Legal Definition of Contract


An agreement between two or more persons that
creates an obligation to do or not to do a particular
thing
A binding, legal agreement that is enforceable in a
court of law

An exchange of promises or commitments


If promises or commitments are not satisfied, the law
will provide a remedy

More than mere promises because the courts can


be used to enforce these promises

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Contract Elements

Legal capacity
Consideration
Offer
Legal purpose
Acceptance

Agreement has been reached when an offer capable of


immediate acceptance is responded to with an unqualified
acceptance.
The parties reaching agreement must have the necessary
capacity to commit to the contract and the contract must not
be either trivial, ambiguous, impossible, or illegal.
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Contract Matters (Terms)


Duress
Minor
Estoppel
Privity

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Discussion Activity

When should contracts be used?

When are contracts pointless or unnecessary?

When there is room for misunderstanding about what


will be done by whom, and when the parties want the
courts to serve as the final arbitrator in the event of
conflict
When there is no recourse or no assets worth seizing

How effective are contracts at keeping people


honest?

They are not effective at all. Contracts do not force


people to be honest.

Purpose of Contracts

Document obligations and allocate risks.

Define relationships between parties through terms and


conditions.
Define objectives, responsibilities, and requirements
through a SOW.

Clarify roles and responsibilities.


Define performance criteria.
Document penalties and actions in the event of
noncompliance (breach of contract).

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Contracts in Procurement

Procurement is the process of acquiring goods and


services from outside an organization.
Contracts are used in procurement to document
commitments that transfer risk (in exchange for
benefits).
Example: Company A will pay Company B a specified
amount of money to complete a job. Then it becomes
Company Bs responsibility to finish all work by a
certain date or be penalized.

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Example of Risk Transfer


A company has a project with objectives that include the
expansion of a data network to a new building. The choices
of how to proceed are:
1. Attempt to complete the required work with the
companys existing workforce and skill sets.
2. Contract
the work out to another company
(procurement).
Choosing to contract out the work transfers the problems
(risks) associated with the expansion to the contractor in
exchange for a financial reward.

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Contract Risk Equals Responsibility

What kind of risks can be transferred through


contracting?
Is it possible for a company to pay for risk transfer but
still retain responsibility for the risk?

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Definitions of Success

Neutral definition

The right work done at the right time with a minimum of


conflict and confusion. Both parties are satisfied.

Organizations definition of success

Lowest price, least grief (unfortunate outcome; trouble).


If the other party is satisfied then we probably overpaid
them.

PMs definition of success

Vendors who deliver what is needed, on time, on


schedule, and on cost, with the least amount of confusion,
conflict, and management supervision.
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Contract Failure vs. Contracting Failure

Contract failure

Interests of both parties are not protected by the contract.


Contract does not account for events that occur.
Wording is vague and subject to interpretation.

Contracting or procurement failure

Relationship between buyer and seller does not work.


Sides forced to resort to courts for conflict resolution.

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Criteria for Success

What are the ingredients of contracting success?

Clear definitions:
Expectations: Scope, schedule, cost
Methodology: Procedures, processes, and practices
Consequences: Rewards and penalties

Fair compensation
Experience: Buyers, sellers, and contract managers
(on both sides)
Honest and open communication

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Student Guide Structure


Guide

Course notes and


exercise instructions
Instructor Case Study
Student Case Study
Section Review Answers
Glossary
Recommended Reading

Do not read case study material out of order or


before being instructed to do so.

Case Study Instructions for Exercises


1.

Quickly read case study and exercise instructions


for the instructor case study.

2.
3.

Instructor walks through exercises and uses the


instructor case study as an example.
Students work in teams on the same exercise
using the student case study.

4.

Painting Project

PC Upgrade Project

Teams present their analysis to the class.

Exercise 1-2: Analyzing Procurement


Strategy

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Instructions
Complete the following tasks:
1. Read the student case study in Case Study Section: 1 (CS1).
2. Identify risks (good or bad) that have been created by or are
poorly managed by the procurement strategy developed to
date. Use the SWOT Outline and the SWOT worksheet to
analyze the procurement strategy and to define the pros and
cons of individual risks or opportunities. SWOT stands for
Strengths, Weaknesses, Opportunities, and Threats.
3. Rank the procurement strategy on a scale of 1 to 10, with 1
as terrible (no chance of success) and 10 as brilliant
(guaranteed to succeed).
4. Be prepared to present and justify your risk analysis and
rankings to the class.
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SWOT Analysis
SWOT Analysis
SWOT is the analysis of Strengths, Weaknesses, Opportunities, and
Threats of an organization, project, or option (PMI PMBOK, 5-th Ed).
This technique examines the project from each of the strengths,
weaknesses, opportunities, and threats (SWOT) perspectives to increase
the breadth of identified risks by including internally generated risks.
The technique starts with identification of strengths and weaknesses of
the organization, focusing on either the project, organization, or the
business area in general. SWOT analysis then identifies any
opportunities for the project that arise from organizational strengths, and
any threats arising from organizational weaknesses.
The analysis also examines the degree to which organizational strengths
offset threats, as well as identifying opportunities that may serve to
overcome weaknesses.

SWOT Outline and SWOT Worksheet


SWOT Outline
Use this table to highlight what you believe to be true about
strengths, weaknesses, opportunities, and threats with regard
to each of the headings in the SWOT Outline. For example,
indicate the SWOT with regard to skills or experience.

SWOT Worksheet
Use the grid to analyze individual risks, both good and bad.

Worksheets: SWOT Outline


Painting Project
S

Skills

Easy to inspect

W
Tricky quality
control

Project manager
lacks experience

Experience

Vendors know
how to cheat
Lot of expertise
available

Knowledge
Marketing

Easy to find
contractors

Not sure if best


contacted

Not enough
response

Costs

No fixed price
expectation

Dont know what is


fair

Price fixing by
contractors

Savings

Innovative bids

Operations

Everyone is
aware

Ethics

Good
intentions

Disruption
inevitable

Keep staff
informed

Painters
irresponsible
Management
demanding
1-24

SWOT Worksheet Example


Painting Project
Security risk: Theft or damage

STRENGTHS

WEAKNESSES

Can request guarantees


No screening being done for
Problems easy to detect
criminals
Common problem that must Huge exposure to theft
have a simple solution

OPPORTUNITIES

THREATS

Bids from bonded


companies only
Pre-screen all contractor
staff

Crimes may be committed


after end of contract
Promises are not guaranteed
Late detection could be
disastrous
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SWOT Worksheet Example (cont.)


Painting Project
Quality control

STRENGTHS

WEAKNESSES

Should be easy to determine Not clear what action to take


what has been done
if quality is inadequate
No clearly stated quality
standards

OPPORTUNITIES

THREATS

Discuss and agree to quality Manipulation by contractor


standards before signing
Shortcuts that are not easy
contract
to recognize

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SWOT Worksheet Example (cont.)


Painting Project
Nights-only schedule

STRENGTHS

WEAKNESSES

Least potential for


interruption of operations
Lots of time available

No plans for supervision by


IYFM
Potential for surprises in
morning

OPPORTUNITIES

THREATS

Work on weekends under


supervision

Work may not proceed as


fast as possible
Problems may be hidden
rather than discussed

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Exercise 1-2: Discussion Points:


PC Upgrade Project

Weaknesses in procurement strategy

Not clarifying minimum standards prevents lowest bids


from being received.
Not specifying how bids are to be structured provides too
much room for creative results and makes it difficult to
compare responses.

Should have a response form (template)

Lack of specifics with regard to peripherals means you


may not receive even the minimum standard.
Schedule information is vague.
Nonprofit organization is not committed legally to
disposal.

What is plan B?

Exercise 1-2: Discussion Points:


PC Upgrade Project (cont.)

What should be in an RFQ?

Every line of SOW has implications.

Minimum performance and quality requirements


Overall objectives (if minimums are to be exceeded)
Instructions for how to respond in a way that
simplifies comparisons between offers
SOW is meant to avoid confusion.

Details at the beginning avoids conflicts later.


Failing to plan is planning to fail.
Alan Lakein

Definition of Stakeholders
Person or organization (e.g., customer, sponsor,
performing organization, or the public) that is
actively involved in the project, or whose interests
may be positively or negatively affected by
execution or completion of the project
A stakeholder may also exert influence over the
project and its deliverables
PMBOK Guide, Fourth Edition

Stakeholder. An individual, group, or organization


who may affect, be affected by, or perceive itself to
be affected by a decision, activity, or outcome of a
project - PMBOK Guide, Fifth Edition
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Stakeholder Mapping: Internal Projects


Corporation
Project
Customer

Regulators

Sponsor

PM

Users

Team

Competitors

Sen. Mngmt

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Stakeholders in the Procurement Process

Who has a stake in the procurement process?

Whose interests must be considered?

How does the need for procurements (purchases from


outside of an organization) change the PMs
responsibilities in a project?

Stakeholder Map with Procurements


Corporation
Procurement
Dept.

Legal
Dept.

Finance
Dept.

Procurement Team

Project

Vendor 1

Vendor 2

Sales Team

Sales Team

Vendor 3
Sales Team

Delivery Team

Delivery Team

Delivery Team

Sponsor

Sponsor

Sponsor

Sen. Mgmt

Sen. Mgmt

Sen. Mgmt

Shareholders

Shareholders

Shareholders

Customer
Sponsor
Users

PM

Sen. Mgmt

Team
Regulators
Competitors

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Stakeholder Map with Subcontractors


Vendor 1

Corporation
Procurement
Dept.

Legal
Dept.

Finance
Dept.

Procurement Team

Subcontractor

Vendor 2

Vendor 3
Subcontractor

Subcontractor

Project
Customer
Sponsor
Users

PM

Sen. Mgmt

Team
Regulators
Competitors

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Procurement Players
Project needs analysis
Procurement planning
Prepare requirements doc.

Project team

Prep. and distribute bid doc.


Receive responses from bidders
Evaluate proposals
Interview bidders
Negotiate
Award contract

Procurement team
With help

Start date of work


Contract management
Review performance

Project team

With help

End contracts
Lessons learned

Project team
With input from others
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Contract Schedule vs. Stakeholders

Who are the stakeholders in each step?

Buyer-Seller Stakeholder Map

Our team

Their team

Project

Spokesperson

Procurement dept.

Sales team

Finance dept.

Delivery team

Legal dept.

Subcontractors

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Stakeholder Roles for the Buyers Side

Project team

Procurement department

Contact point between project, procurement department, and


seller

Legal department

Analyzes procurement needs


Ensures process meets needs of organization

Contract manager or procurement administrator

Analyzes project needs


Ensures procurement process meets needs of project

Ensures that the commitments being exchanged meet needs of


organization and can be legally enforced

Finance department

Involved in all matters relating to credit, payments, and


financing
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Stakeholder Roles for the Sellers Side

Sponsor/spokesperson/sales manager

Vendor sales team

Evaluates customer needs from sales perspective


Prepares proposals or bids

Vendor delivery team

Communicates and negotiates with purchasing organization

Evaluates customer needs from operational perspective


Develops strategy and delivers the product or service

Subcontractors

Are responsive to needs of vendor first and buyer second


Are employed by vendor, not buyer

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Buyer Stakeholder Expectations

Project team

Procurement team will deliver required products and services


as promised.
Process will be time-consuming and complex.
Project team has little or no control over process.

Procurement department will:

Follow rules.
Define requirements with no room for ambiguity.
Bring in other departments as necessary.

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Buyer Stakeholder Expectations (cont.)

Contract manager or procurement administrator

Legal department

Formal processes will be followed, with all exceptions escalated


for a legal opinion.

Finance department

Project team understands the formal processes and will


cooperate.
Vendor team understands the formal processes and will act
accordingly.

Spending and debt decisions will be made with input from


finance department.

Other stakeholders

They will be involved if decisions directly affect them.


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Buyer Stakeholder Expectations


(Combined for PSD Only)

Project team

Procurement department will:

Formal processes will be followed, with all exceptions escalated for a legal
opinion.

Finance department

Project team understands the formal processes and will cooperate.


Vendor team understands the formal processes and will act accordingly.

Legal department

Follow rules.
Define requirements with no room for ambiguity.
Bring in other departments as necessary.

Contract manager or procurement administrator

Procurement team will deliver required products and services as promised.


Process will be time-consuming and complex.
Project team has little or no control over process.

Spending and debt decisions will be made with input from finance
department.

Other stakeholders

They will be involved if decisions directly affect them.

Seller Stakeholder Expectations

Vendor sponsor/salesperson/sales manager

Buyer requirements are clear and concise.


Contract manager understands and can explain buyer needs.
Process will be fair, open, and honest.
All communications (negotiations) will go through sales
manager.

Vendor sales team

The main focus is closing the sale.


Sell it first and then figure out how to build it.

The devil is in the details.

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Seller Stakeholder Expectations (cont.)

Vendor delivery team

Sales team will overpromise.


Nothing is as easy as it sounds at first.
Problems will arise during execution.

Subcontractors

Everyone understands each others role.


Subcontractors role has been clearly articulated to buyer.
Everyones legal responsibility is clearly understood.

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Seller Stakeholder Expectations


(Combined for book)

Vendor sponsor/salesperson/sales manager

Vendor sales team

The main focus is closing the sale.


Sell it first and then figure out how to build it.
The devil is in the details.

Vendor delivery team

Buyer requirements are clear and concise.


Contract manager understands and can explain buyer needs.
Process will be fair, open, and honest.
All communications (negotiations) will go through sales manager.

Sales team will overpromise.


Nothing is as easy as it sounds at first.
Problems will arise during execution.

Subcontractors

Everyone understands each others role.


Subcontractors role has been clearly articulated to buyer.
Everyones legal responsibility is clearly understood.

Communication Chain

Customer

Project

Translation #1

Contract
Manager

Translation #2

Sales
Manager

Translation #3

Vendor
Delivery
Team

Translation #4

Subcontractor

Translation #5

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How Can PMs Streamline the Process?

Serve the interests of all stakeholders in the chain.

Help with due diligence.


Make it easy for them to do what you want.

Define requirements in ways others can understand.

Make it as easy as possible for the procurement process


to serve the projects needs.

The procurement process is a


safeguard; it should not be
circumvented, just streamlined.

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Basis of Procurement Success

Planning:

Requirements that are clear and coherent to all members


of the procurement chain
Procurement process that is understood by all

Clear roles and responsibilities


Steps, stages, and players

Processes that fulfill the information and due diligence


needs of important stakeholders
Proactive management of risks
Plan ahead to avoid problems

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Summary

Contract schedule network diagram

Terminology

It takes longer than you want it to


Procure, procurement, procurement management,
contract management, contract

Contracts

Elements and related terms


Purpose
Risk transfer

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Summary (cont.)

Contracting success and failure

Stakeholders

Definitions
Who does what
Who expects what
Communications chain

Ingredients for success

Streamline
Plan

1-43

Section Review
1.

2.

A contract requires a signature in order to be


enforceable in a court of law.
a. True
b. False
The term capacity in the context of a contract
refers to _____.
a. A selling organizations ability to do the work
b. The dollar value of the commitment
c. The authority level of the personnel committing
an organization to the contract
d. The volume of transactions in the contract
Knowledge Check
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Section Review
3.

4.

Why are procurement protocols necessary and


desirable?
Procurement protocols are in place to protect the
organization from misunderstanding, unscrupulous
vendors, and incompetent employees. They embody
lessons learned so as to avoid repeating errors of
the past.
Planning
_____________
is the key to contracting success,
lessons ________
learned is key
and the application of _________
to effective planning.
Knowledge Check
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