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Flashcards in Procurement Management Deck (60):

Decentralized contacting

Procurement manager is assigned to your project full time and reports directly to this project manager

Pros: easier access to the procurement manager; loyalty to your project; better understanding of your project
Cons: "no home" for procurement manager after project; no level of high expertise; no standardization; no career path for procurement manager


Make or buy analysis

Company makes a decision about whether to do the project work themselves or outsource some or all of the work

Pros of buying - decrease the risk to the projects constraints
Pros of making - you want to retrain control; work involves proprietary information; you have an idle plant or workforce


Procurement statement of work

Must be clear, complete and concise as possible and it must describe all the work and activities the seller is required to complete including meetings, reports and communications and acceptance criteria


Types of statements of work

Performance - conveys what the final product should be able to accomplish; ex: I want a car that will go from zero to 100mph in 5 seconds.

Functional - conveys the end purpose or result rather than the specific procedures or approach; ex: I want a car with 23 cup holders

Design - conveys precisely what work is to be done and includes materials used and how work should be done; ex: build it exactly as shown on these drawings


Fixed price contract

Used for acquiring goods products or services with well defined specifications or requirements; buyer has least cost risk in this type of contract; less work for buyer to manage

If scope is not well defined this type on contract can create a higher risk

Used to buy a product
High amount of detailed procurement sow
Used in construction
No negotiation required


Fixed price incentive fee

Profits can be adjusted based on the seller meeting performance criteria such as getting the work done faster cheaper or better

Example; contract is 100,000 for every month early the project is completed an additional 10,000 is paid to the seller.


Fixed price award fee

The buyer pays a fixed price plus an award amount based on performance; total possible award amount it determined in advance and appropriated based on performance.

Example; contract is 100,000. For every month performance exceed the planned level by more than 15% an additional 5,000 is awarded to the seller with a maximum award of 50,000.


Fixed price economic price adjustment

If a contract will cover multi year period there may be uncertainties about future economic conditions and cost of supplies the seller is required to provide may change therefore a buyer may choose this type of contract.

Example; contract is 100,000 but a price increase will be allowed in year 2 based on the us consumer price index report for year 1.

Remember economy whenever you see this on the exam


Purchase order

Simplest type of fixed price contract; normally unilateral ( signed by one party ).

Example; contract is 30 meters of wood at $9 per meter.


Time and materials contract

Buyer pays on a per hour or per item bases and are frequently used for service efforts in which the level of effort cannot be defined when the contract is rewarded.

Sellers profit is built into the rate so they have no incentive to get the work done quickly or efficiently.
Used for services
Low detailed procurement sow
Low amount of negotiation
Medium level of management for buyer

lasting a short amount of time; Contract can be created quickly

Buyer has a medium amount of cost risk with these contracts

Example; $100 per hour plus expenses of materials at cost


Cost reimbursable contracts

Used when the exact scope of work is uncertain and costs cannot be estimated accurately; allows for the buyer to pay incurred costs to the extent prescribed in the contract;

used for services
Costs are variable
Profit is listed separately and known to buyer
Low level of detailed procurement sow
It and research and development

Buyer has the most cost risk
Seller has moderate incentive to control risk
Requires auditing of invoices high level of effort to manage seller
High level of negotiation

Simpler procurement statement of work
Requires less work to define the scope


Cost contract

The seller receives no fee (profit) and is used for work in a non profit.


Cost plus fee ( CPF )or cost plus percentage of costs (CPPC)

Requires the buyer to pay for all costs plus a percentage of costs as a fee.

Normally not allowed for us federal procurements and is bad for buyers

Sellers profit is based on a percentage of everything billed to the buyer for the project

Example; contract is cost plus 10% of costs as fee


Cost plus fixed fee (CPFF)

Provides payment to the seller of actual costs plus a negotiated fee that is fixed before the work begins

Example; cost plus a fee of $100,000


Cost plus incentive fee ( CPIF )

Provides for the seller to be paid for actual costs plus a fee that will be adjusted based on whether the specific performance objectives stated in the contract are met.

Example; $500,000 target cost plus $50,000 target fee. The buyer and seller share any cost savings or overruns at 80% to the buyer and 20% to the seller


Cost plus award fee (CPAF)

The buyer pays all costs and a base fee plus an award amount based on performance.

Example; cost plus a base fee plus award for meeting buyer-specified performance criteria. Maximum award available is $50,000



Used to bring the seller and buyers objectives inline; designed to motivate the sellers efforts

The buyer will provide an additional fee if the seller meets some cost performance or schedule objectives



The amount the seller charges the buyer


Profit (fee)

Planned into the price the seller provides the buyer



How much the item costs the seller to create develop or purchase


Target price

Measure of success; used to compare the end result (final price) with what was expected (target price)


Sharing ratio

Describes how the cost savings or cost overruns will be shared; example 80/20


Ceiling price

The highest price the buyer will pay and is a way for the buyer to encourage the seller to control costs


Point of total assumption (PTA)

PTA = (ceiling price - target price) / buyers share ratio + (target cost)

Relates to fixed price incentive fee contracts and refers to the a son t above which the seller bears all the loss of a cost overrun


Procurement document ( bid document)

After the contract type is selected this is put together and Describes the buyers needs to the seller; why they want the work done; what needs to be done to win the work

Request for proposal
Invitation for bid
Request for quotation

Well designed procurement documents can:
Easier comparison of sellers responses
More complete responses
More accurate pricing
Decreased number of changes to the project


Request for proposal (RFP)

Request a detailed proposal on now the work will be accomplished who will do it, experience, price etc


Invitation for bid (IFB)

Require a total price to do all the work


Request for quotation

Request a price quote per item, hour, meter or other unit of measure


Source selection criteria

Included in procurement documents to give the seller an understanding of the buyers needs

Lowest price
Number of years in business
Financial stability
Technical ability


Nondisclosure Agreement

Agreement between the buyer and seller identifying the information or document they will hold confidential and control and who in the organization will have access to the confidential information


Standard contract

Contract terms and conditions are created by the buyer who usually put their terms and conditions into a standard format that is used over and over


Special provisions

Additions to standard terms and conditions; PM must be able to read standard terms and conditions and decide what needs to be added changed or removed


Force majure

Situation that is an act of nature; fire, flood


Letter of intent

A letter without legal binding that says the buyer intends to hire the seller

Used when a seller may need to star hiring people or ordering equipment materials before the contract is signed



Contractual relationship


Noncompetitive forms of procurement

Single source - you contract directly with your preferred seller without going through the full procurement process

Sole source - there is only one seller



Ads may be placed in newspapers to attract sellers, magazines on the Internet or through company website, or media releases


Qualified seller list

Find investigate and check the credentials of prospective sellers in advance which will speed up the purchase and make sure the sellers qualifications are well researched before they are awarded procurements


Bidder conference

Buyer invites seller to attend a meeting in which they can tour the buyers facility and ask questions about the procurement

What to watch out for:
Sellers not asking questions in front of the competition
Making sure all questions and answers are put in writing and issued to all sellers by the buyer as addenda to the procurement documents


Seller proposal

Sellers response to the procurement documents and represents an official prefer from the seller


Proposal review

After receiving the proposal the buyer uses the source selection criteria to assess the potential sellers ability and willingness to provide the requested products or services


Weighting system

Select a seller by weighting the word source selection criteria according to the evaluation criteria


Independent estimates

Buyer may compare the sellers proposal cost with an estimate created in house or without assistance


Screening system

Eliminates sellers who do not meet the minimum requirements of the source selection criteria


Past performance history

Buyer may consider their past history with the prospective sellers in determining which seller to award the procurement to



Some sellers will be asked to make presentations of their proposals to the buyer so the buyer can select the most appropriate seller

Present proposals and approach to completing work



Not usually needed on fixed price negotiations but used with cost reimbursable and time and material contracts are used

Obtain a fair and reasonable price
Develop a good relationship with the seller

PMs must be involved because they are responsible for facilitating project management and resolution of technical issues on the project and must be involved in any issues that affect the key objectives of the project and not being involved in negotiation a contract may be signed that the pm later discovers cannot be completed


Main items to negotiate


Price is not usually the primary selection criteria or the major concern while negotiating



Entire agreement between both parties; boilerplate language business terms regarding payments reporting requirements marketing literature the proposal and procurement statement of work

Define roles and responsibilities
Make things legally binding
Mitigate or allocate risk


Needs of a legal contract

An offer
Legal capacity
Legal purpose


Centralized contracting

There is one procurement department and a procurement manager will handle multiple projects.

Pros: higher level of expertise; standardized company practices
Cons: hard to obtain contracting help for PM; less time spent on your individual project time is divided between many projects


Control procurements - fixed price contracts

Watch for seller cutting scope
Watch for the seller cutting quality
Watch for overpriced change orders
Check for scope misunderstandings
Make sure cost are real that have been incurred and not just future cost


Control procurements - time and management contract

Provide day to day direction to the seller
Attempt to get concrete deliverables
Make sure the project length is not extended
Make sure the number of hours spent is reasonable
Watch for situations when switching to a different form of contract makes sense


Control procurements - cost reimbursable contracts

Audit every invoice
Make sure all the costs are applicable and chargeable to your project
Make sure the sellers work is progressing efficiently
Reestimate the cost of the project
Watch for seller chargers that were not part of the original plan
Watch for the seller adding resources to your project that do not add value or perform real work
Watch for resources being shifted from what was said in the original proposal


Procurement performance review

Buyers project manager analyzes all data to verify that the seller is performing as they should; seller may be present for this meeting and talk about what they can do differently

Review is used to determine if changes are needed to improve the buyer seller relationship


Claims administration

An assert action that the buyer did something that hurt the seller and is asking for compensation


Records management system

Records relating to the contract; is critical if actions taken or situations that occurred during procurement are ever questioned after the work is completed

Sometimes every email payment and verbal communication must be kept


Contract interpretation

Based on an analysis of the intent of the parties to the contract and a few guidelines; one guideline is that the contact supersedes any memos conversations or discussions that may have occurred prior to contract signing


Contract change control system

Change procedures forms dispute resolution processes and tracking systems and is specified in the contract


Contract types

Fixed price
Time and material
Cost reimbursable