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August 2017
Project Procurement Management
Includes:
the processes necessary to purchase products, services, or
results from outside the project team;
the contract management and change control processes
required to develop and administer contracts or purchase
orders issued by project team;
controlling any contract issued by an outside organization
(the buyer) that is acquiring deliverables from the project
performing organization (the seller), and administering
contractual obligations placed on the project team by the
contract.
Project Procurement Management
Client Contractor
Customer Subcontractor
Prime contractor Vendor
Contractor Service provider
Acquiring organization Supplier
Service requestor
Purchaser
Project Procurement Management
Contract Types
Purchase Order
Purchase order is the simplest type of fixed price
contract. It is normally unilateral (signed by one
party).
Cost-Reimbursable Contracts
This contract is also known as a Cost Disbursable Contract. In
this type of contract, the seller is reimbursed for completed work
plus a fee representing his profit. Sometimes this fee will be paid
if the seller meets or exceeds the selected project objectives; for
example, completing the task before time or completing the task
with less cost, etc.
A Cost Reimbursable Contract is used when there is uncertainty
in the scope, or the risk is higher. In this contract, since the buyer
pays for all cost, he bears the risk.
Scope Creep is an inherent drawback of a Cost Reimbursement
Contract, especially when there is no clarity in the requirements.
The seller will always try to elevate the cost because it will be tied
to some sort of fee. However, this difficulty can be minimized with
proper management of the contract and capping the sellers
profit; e.g. 10% of the total cost.
Project Procurement Management
Cost-Reimbursable Contracts
CPFF vs CPPC
CPFF CPPC
Actual $80 $100 $120 Actual $80 $100 $120
Cost Cost
Fee $10 $10 $10 Fee $8 $10 $12
Actual $90 $110 $130 Actual $88 $110 $132
Price Price
Project Procurement Management
Buyer risk
High Low
Low High
Seller risk
Project Procurement Management
Procurement Documents
Procurement manager has to determine what type of
contract and procurement document should be used.
The most common procurement documents are:
Request for Proposal (RFP)
- Asks for the price and how/who will do the work
Initiation for Bid (IFB)
- One simple price to do the work
Request for Quotes (RFQ)
- Price per unit quote
Project Procurement Management
Conduct Procurements
Inputs Tools & Techniques Outputs
Control Procurements
Inputs Tools & Techniques Outputs
Procurement Terms
Procurement Terms
Procurement Terms
Negotiating Tactics
PTA is amount above which the seller bears all the loss of
a cost overrun.
+ Target cost
Exercise 1
Reimbursement amount=
Actual cost + % profit of actual cost =
$130,000 + (10% of $130,000) = $143,000
Exercise 2
Profit to Seller is =
Predetermined fee + (Share ratio of Seller * Savings) =
$15,000 + (20% * $20,000) = $19,000
Final Fee = [(Target cost - Actual Cost) * Seller ratio] + Target fee =
= (($130,000 - $150,000)*20% + $15,000 = (- $20,000*20%) + $15,000 =
= - $4,000 + $15,000 = $11,000;
Final Price = Actual cost + Final Fee = $150,000 + $11,000 = $161,000.
But this is more than the ceiling price which is $160,000. So the final price
which the seller gets is $160,000.
So the profit that seller gets is $160,000 - $150,000= $10,000
Exercise 4