Procurement Planning CPMGT302 Kerzner (2009) defines procurement and contracting as the “process that involves two parties with different objectives who interact on a given market segment. ” (p. 840) As with every phase of project management, proper planning is key to the success of any project by ensuring the project gets the most out of any supplier relationships. This paper will define the project procurement planning process and how risk management affects that process. Procurement Planning
There are several pieces to the procurement planning process that include documenting the procurement requirements, identifying goods and services to procure, approach specification, and seller identification. The process is also used to identify if acquiring goods or services outside the organization or producing them within will better meet the needs of the project. This is referred to as a make-or-buy decision. If a decision is made to step outside the organization to acquire goods or services, this process will determine the how, how much, and when to acquire it.
The project schedule can significantly influence the when and should be carefully considered during the planning. Contract Types Risk shared between the buyer and the seller determine contract types. The most common, and often demanded, type of contract is a firm-fixed-price but there are situations which another contract type may be better suited to the requirements of the project. There are generally two families of legal contractual relationships; fixed-price or cost reimbursable. A third , hybrid type of contract used commonly is the time and materials contract. In fixed-price contacts, price for the products or services rovided are fixed at the onset. These contracts can often integrate financial incentives when the project objectives such as, delivery dates, cost, and technical performance are achieved or exceeded. Basically, anything that can be quantified and measured could be included in these incentives. On the other side of this there can be risks of financial damages involved with not meeting the contractual obligations of the contract for the sellers. Any change to the scope of the contract, although it may be accommodated will most likely increase the contract price. Fixed-priced contracts present the highest risk to the seller.
There are three types of fixed-price contracts; firm fixed price (FFP), fixed price incentive fee (FPIF), and fixed price with economic price adjustment (FP-EPA). FFP contracts are the most common and prime choice of buying organizations because the price of goods or services is set from the beginning and will not change unless there is a scope change. FPIF contracts allow deviation from performance with incentives tied to metrics based on cost, schedule, or technical performance of the seller. FP-EPA contracts are used when the period of performance covers a considerable number of years.
These are fixed -priced contracts with provisions for inflation changes or cost changes of specific commodities. This PMBOK (2008), states that this type of fixed-price contract protects both buyer and seller from external conditions beyond their control. (p. 323) In Cost-reimbursable, or cost-plus contracts the supplier is paid for all their allowed expenses plus an additional fee to allow for profit. Cost-reimbursable contracts can also include incentives or penalties for exceeded or falling short on costs, schedule, or technical performance targets. These contracts present the highest risk to the buyer.
There are three types of cost-reimbursable contracts; cost plus fixed fee (CPFF), cost plus incentive fee (CPIF), and cost plus award fee (CPAF). In CPFF contracts sellers are reimbursed for all allowable costs plus a pre-set fee. The fee is paid on completed work regardless of performance and do not change unless the project scope changes. In CPIF contracts the seller is reimbursed for all allowable expenses and receives a fee based upon achievement of performance objectives. In CPAF contracts the seller is reimbursed for legitimate costs, but most of the fee is base upon the subjective satisfaction of the buyer.
Time and material contracts are a hybrid as they contain aspects of both fixed-price and cost-reimbursable contracts. This contract type is used when it is impossible to estimate accurately the extent or duration of the contracted work. Time and material contract represents the highest risk to the buyer. Outputs Outputs of the procurement planning process include the procurement management plan, procurement statements of work, make-or-buy decisions, procurement documents, source selection criteria, and change requests to the project management plan.
Procurement statements of work (SOW) are the most valuable output of the plan procurement process. These documents directly correlate to the project scope baseline and specify the portion of the project scope to be included in any related contract. The SOW allows perspective sellers to determine if they are capable of provided for the needs of the contract before they bid, thus eliminating time and effort wasted for both the buyer and seller. This ultimately leads to the greatest efficiency in identifying the right source for the project.
Source Selection Criteria Source selection criteria are used to rate or score seller proposals and is often included as part of the procurement documents. Purchase price is the one criterion that is applicable to any project. Regardless of the project or contract type, cost will always be the main factor in consideration. Additionally, understanding of need, warranty, and references are criterion that would apply to most contracts. Ethical Concerns Procurement managers have an obligation to demonstrate the highest standards of ethical behavior.
There is an expectation that source selection will be executed with honesty, integrity, diligence, fairness, and consistency. In the procurement process, ethics implies the following: * The relationship between the buyer and seller is based on mutual trust * Procurement managers do not use their positions to influence for personal gain * Procurement is conducted fairly with integrity * All laws and government policies are upheld without fail and impartiality * Resources are not wasted, abused or used improperly
Risk Management Risk management encompasses every aspect of the project planning process, including procurement planning. The risk management plan for the project should include processes for risk identification, risk assessment, risk mitigation, risk allocation, and monitoring and control. This applies to the risks involved in purchasing products or services such as, schedule slip because of failure to meet contract deliverables, production delays, and cost misrepresentation.
Conclusion The procurement planning process leads directly to the remaining procurement management activities. Failure to plan thoroughly will most likely lead to failure or significant deficits to the remaining phases of procurement and probably the project as well. For the health of the company all procurement activities must be encompassed by ethical behavior that will ensure improprieties will not hurt the outcome of the project.
Finally, a continued tight management of risks and opportunities must be executed throughout the procurement planning process to avoid risk realization without a mitigation plan. References Kerzner, H. (2009). Project management: A systems approach to planning, scheduling, and controlling (10th ed. ). Hoboken, NJ: John Wiley & Sons. Project Management Institute. (2008). A Guide to the Project Management Body of Knowledge (4th ed. ). Newton Square, Pennsylvania: Project Management Institute.