CompTIA Project+ PK0-004 – Managing the Project Procurement part 2
- Conducting procurements
Once you have a procurement management plan, you’re ready to execute the procurement management plan. So this means that you create a plan and then you execute the plan. You do the plan, you actually conduct procurements. So this means that you’ll be obtaining seller responses. You’ll choose a seller to provide the goods and services and then you’ll actually award the contract to the vendor that you choose to do business with. Now, this is a project management process. So we have several inputs, tools and techniques and outputs, inputs you’ll need the procurement management plan. The procurement documents. We’re talking about the statement of work, the request for, quote, request for proposal, invitation for bid. These are the procurement documents, source selection criteria.
How will you choose the vendor? You’ll get the responses from the vendor, so you have their seller proposals, project documents like the work breakdown structure and your schedule, things of that nature. Those make or by decisions are an input. The procurement statement of work and any organizational process, assets, tools and techniques. And we’ll talk about these in detail in one moment. For now, I’m just going to run through what these are bidder conference proposal evaluation techniques, independent estimates, expert judgment, advertising, analytical techniques, and procurement negotiations. Now these create the list of selected sellers, the agreements that’s your contract resource calendars. If you’re using the vendor to provide labor for your project change request.
And then you may have updates to your project management plan and your project documents, procurement details, the qualified seller list. This is the list of preferred vendors in your organization. Bidder conferences. A bidder conference is when you send out a statement of work to, let’s say, 20 potential vendors and then you invite them to all come to a meeting. That’s the bidder conference. And at this meeting, you’ll review the statement of work and give vendors an opportunity to ask questions for clarity. What this does is it allows all of the vendors to have the same information at one time, so you don’t have to take 20 phone calls and answer a bunch of email. Everyone has the same information. Everyone has the same updated statement of work.
Now, advertising is not you looking in the phone book or the web to find a vendor. It’s where you may have a public notice, like in a trade magazine or a newspaper, oftentimes in your Sunday newspaper, especially in the US. If you go to the classified section, you’ll see all of these public notices. Many government agencies have to advertise for public notices so people can bid on a project. So that’s what they’re talking about here with advertising from the buyer. So let’s say that you want me to build a piece of software for you, so you’re the buyer and I’ll be the seller. So from you to me, you would give me a statement of work and it defines all of the things that you want. That piece of software to do for your organization with that statement of work you could send a request for quote or an invitation for bid.
These two documents have the same request. Really. A quote in a bid means it’s the price of the project. So you often have an RFQ or an IFB when you’re buying a material or a laptop, something like that. So just give me a quote to do the work. I don’t need any ideas or extraneous information. Just how much for five tons of pea gravel, for example? So an RFQ or an IFB, it’s just give me a total amount to do the project. Now what you may also send if you didn’t do a request for quote or invitation for bid is a request for proposal. You might ask me to do a request for proposal because you want me to think about your statement of work and to come up with some ideas and some directions and maybe even a mock up of what I would do for you.
Oftentimes you see a request for proposal where you’re dealing with a lot more creative into the project so you can think about a landscaping project. Request for proposal would be give you some ideas of what you would do here or a website or if you’re going to design a brochure, a request for proposal would be a little bit more information provided than just a quote or a bid. Now in some instances you might send me just a request for information if you want just more information about what my company does. And RFI doesn’t mean we’re going to do business together. It just means that you’re interested. So I would send you some literature about our products and so on. So that’s from you to me. I’m going to build a piece of software.
Now I would look at your statement of work and I would give you a quote which is just a flat fee for the work or a bid, which is also a fee for the work. If you ask for information with an RFI, a request for information, I would give you information and then an RFP, a request for proposal, I would send you back a proposal. Now you would take those documents or whichever document you looked at and you would begin to do seller selection. So you would look at all of the different vendors and you would do that waiting system, recall the waiting system. Maybe you would do an independent estimate, a screening system and then you might narrow it down to two or three vendors and you would have contract negotiation.
You might look at a seller rating system and you might show my proposal to other people in your business to get some expert judgment in a proposal evaluation. So seller selection. Now you’re ready to give me the deal and we have a contract. Let’s look at the whole process of getting to the deal. Let’s snap it all together the buyer, that’s you will send me a statement of work with an invitation for bid, requests for quote or request for proposal. I didn’t include the request for information here because I want to get to a contract. So you would actually send that out? Yes, to me, but also to my competition. So all the sellers that you would like to perhaps do business with, you would send it to the sellers.
And then we would all come to a bidders conference where we can ask all sorts of questions about your statement of work and just seek some clarity. Based on that bidders conference, you would give us a statement of work update. So any questions or clarity, you would provide that to everyone who attended the bidders conference. So you give that back to the sellers. The sellers. Then you would have a response. So based on your Sow update, then we would give you a bid, a quote or a proposal. And then you’ll like mine the best, and you’ll award the contract to me and I’ll be the buyer. I’m sorry, that didn’t make sense, did it? Let me back up there. You’ll like mine the best, you are the buyer, and then you choose me source selection.
So I got ahead of myself there. I was so excited to get that deal, I got ahead of myself. So let’s back up, sell a response. I give you the proposal to you, the buyer, you do source selection, and then we may do a little negotiating. But ultimately you and I have a contract. So that’s the entire process to getting to the deal. Now, a contract, though, it’s a legally binding agreement between you and I that states exactly what I will do and what you will do. And there’s a lot of things that go into the contract. So the contract might include that statement of work, a schedule, baseline, how we’ll do performance reporting, what’s the period of performance, so a start and end date, roles and responsibilities for both parties.
Where exactly will this work happen? How much, what are you going to pay me, and what are the payment terms? You know, zero upfront, 50% halfway and 50% at the end. All of it upfront, all of it at the end. So all that has to be spelled out. How will you accept what I create? What’s your inspection and acceptance criteria? If I provide a warranty, then what is that warranty in writing? Will I offer product support? What’s my limitation of liability? At some point, we have to draw a line of demarcation where you own the product and I can’t be liable for it forever and ever. Are there any fees or retainage for me to continue to consult and support whatever it is I create for you? Are there penalties or incentives if I hit or miss a deadline? Do I have to provide some type of insurance? Almost always.
When I consult or train. I have to have some insurance, some liability insurance and errors and omissions insurance. So that’s pretty common. If I have subcontractors, generally in my contracts, I’m not allowed to have subcontractors. But some companies, of course, they can have subcontractors, but they retain the right to approve the contractors that the seller brings in. So you think about, in construction, a general contractor. How will change requests be handled between the client and the seller? So oftentimes with construction, you can have two or three change requests or whatever the case may be, but there’s a fee to even consider the change request. And then what about the termination and alternative dispute resolution? The termination means the client fires the vendor.
So the buyer tells the vendor, you’re not doing a good job, and we are done. Now, there could be a time, and this is the preferred method where we have alternative dispute resolution. Alternative dispute resolution means that there’s a disagreement between the seller and the buyer. And rather than have a lawsuit, we’ll go through mediation to try to find a good solution. So, for example, the seller may be doing a piece of software for a client, and then the client says, you know what? We don’t want this software anymore. Well, you’ve already put the guy on the hook to create the software, so something has to happen here. So some alternative dispute resolution.
- Choosing a contract type
One of the trickiest things about procurement is the contract that you, the project manager for your exam, must know the contract type that your organization allows you to use. And you need to know some details about these different contract types. So all of about contract types you already know. A contract is a formal agreement in the US. Contracts are backed up through the court system. Contracts state all requirements for product acceptance. Changes to the contract have to be formally approved, controlled, and documented.
And often that can be through an addendum or a new contract for the work that’s been added. Contracts can be used as a risk mitigation tool. Remember our risk response transference. So we can use a contract to hire someone else. Contracts can also be risk mitigation because we can’t have stipulations in the contract that if the vendor doesn’t meet the requirements, they don’t get paid. So that’s the risk mitigation. Now, some contract legalities. There are really two big flavors of contracts. Where you have it starts with a fixed price or it starts with a cost reimbursable. Sometimes just called a cost plus. Fixed price is just a flat fee. Now, there can be some variations we’ll look at in a second.
Cost reimbursable means that you pay the cost plus a fee or a percentage or a bonus. So those are the two big flavors of contracts. Now, contracts have an offer. They have been accepted, and there is a consideration. So there’s an offer. I will do the work. I will build a deck onto your house, and for that you will pay me $3,500. So we have an offer, you accept it, and there’s a consideration. The payment, they have to be for a legal purpose. You can’t have a contract for something that’s illegal. They have to be executed by someone with capacity and authority, sometimes the delegation of authority. So this is something that’s really important. The person signing the contract at the buyer must be someone who has the authority to sign that contract or it won’t be valid.
Or they can certainly introduce some litigation if someone tries to back out of the contract. Let’s look at these contract types. The first one is called a firm fixed price. Just called a fixed price. It’s the most common contract. I’ll build the deck for you for $3,500. I will build this software for $10,000. I’ll come teach a class on site for you for $22,000. So firm fixed price is a flat fee. The seller carries the risk of cost overruns. If I’m going to build that deck for you and your house, and I go out there and I start installing this wooden deck, and then I realize I’ve cut all these boards by six inches too short. Well, you don’t pay for that. That’s my mistake. I pay for that. The seller carries the risk of cost overrun. The buyer specifies exactly what’s to be purchased.
What am I getting for this money. Now changes to the scope may increase time and cost. So if I’m out there installing that deck and I’m done and then you say, oh well, I really want this deck to be stained as well. I don’t want it to be just sealed like this. Well in our contract we never said anything about staining it. So now we have a new contract or an addendum to our contract to cover the fee of staining that wood deck. Now a fixed price incentive fee is where you offer kind of a bonus or an incentive for getting done early. Or if I come under a certain cost or a technical performance. So you might say, especially in a large construction project, you might say for every day that you’re done early you get $100,000 bonus.
So the project may be lasting a year. But I’m going to sit down with my scheduler, with my project managers, with my experts on the team and I’m going to say how can we as a business what’s the fastest way we can get this project done? Because the sooner we get it done, the more money we’re going to make. So I might look at crashing the project or fast tracking, maybe working 24 hours a day. So how can I achieve that goal? Now, technical performance you could say, okay, if this server that you install has a 99% uptime for six months, you’ll get a bonus. And then you may also have some cost objectives where in a fixed price I give you a flat fee.
But the return of that has to be of so much value. So some cost savings in your company that I would get a portion of those cost savings based on the work that I’ve done. Generally there is a ceiling for a fixed price incentive fee like the $100,000 today, up to $5 million. So that would give me, I’d have an idea of a 50 day window there to realize my, my reward, the seller. Me, I carry the risk of overruns. So if I’m on that construction project and I say, well we’re going to add a bunch of labor and we’re going to work twenty four seven and it still takes me all the way to the deadline, then I don’t get any bonus. I just get my regular fee. But I may have a cost overrun because I added all that labor.
So seller carries the risk of overruns even with the incentive fee. Now on longer projects you may have a fixed price with an economic price adjustment. So what this does, it allows for inflation, it allows for interest rates, it allows for cost increase in the materials over time. So what this does is if I’m on a really long term project we would say, okay, your fee will be x amount of dollars plus or minus what the interest rate may be, how it fluctuates. So it could go down. It could go up or if inflation. Now this one is subject to external conditions. So neither one of us really know upfront what’s going to happen with this fee, but it just allows for fluctuations in the economy. Now, fixed price, all of these, the seller owns the risk.
There’s risk for the seller. Most of these are very low risk for you, the buyer. Now the other types of contracts, these cost reimbursable, you have the risk, you’re the buyer, you have the risk. So it’s the cost of the materials plus a fee. So these are kind of shady. They’re kind of well, you know, I mean, sometimes you have to use them, but generally we shy away from cost plus anything. So, for example, I want to build that deck on your house. Sure, you have to pay for the cost of the materials, plus you’re going to give me $1,500 to build it. So I would go out and buy the materials, and then you have to pay me $1,500 and however much the materials are, if I make a mistake and waste materials, you have to buy more materials, not me.
So see, there’s some risk there for you. Sometimes you have to use these where the scope of work can’t clearly be defined early because the vendor may say, I can’t give you a firm fixed price because I don’t know everything you want me to do and you don’t know everything you want me to do. Risk exists in this approach. Risk exists in the project. So cost reimbursable may be a choice. So you, the buyer, carry the risk of overruns. Now a cost plus a fixed fee, it’s all allowable cost. This is the example I was just giving with the wooden deck. It’s a fixed fee of the initial estimated cost, and then you give me a fee for the completed work. The fee is constant unless the scope changes. So let’s go back to I’m going to build that deck for you, that wooden deck on your house.
And I’m out there working on the deck, and you’re going to pay me $1,500 for the labor to build the deck. And then you have to purchase all of the nails and screws and the wood and so on. Now, if I make a mistake, then you have to buy more materials. My $1,500 fee does not change whether I make a mistake or not. Now, if you come out and you say, hey, we want to go ahead and stain this deck as well, well, my fee, the $1500 fee, that may increase because now you’re adding more labor, you’re adding more work to the scope. So you have to pay for the stain and the paint brushes and my fees going up to do that type of work. Now, a cost plus incentive fee allows for all allowable cost. The fee, though, is based on performance goals.
So you say, Joe, I want this deck done. We’re going to have a big party, and I’ll pay for all the materials, and I will pay you do the work. But if you can get done by a particular day, if you can get done within two weeks instead of three, I’ll give you $500 bonus. So it’s a performance goal. Now, on larger projects, we may have incentive sharing and this splits called 80 20. You don’t have to worry a whole lot about this for your exam. I really doubt if you see it on your exam. But here’s the idea. The project that you have is you’ve bought a big warehouse downtown, and you finance the purchase of this building, and you are having to pay an interest rate on this building, where you’re going to convert all of these lofts into apartments, into condos, rather that you’re going to sell.
So the longer it takes me to get done with the project, the longer it’s going to cost you because you have to pay an interest. And then you can’t sell any of the units until I’m done. And then you may actually lose business because people could go to your competition. So incentive sharing is where we set. You and I sit down together and we set goals for these different deadlines. And so if I’m able to achieve these deadlines, you’re going to realize the cost savings based on that interest rate and based on people can come in and start buying and so on. So what happens? Let’s say that I can hit my deadlines, and that means a savings to you of $100,000. Well, out of that $100,000 that you saved because I hit my deadlines, you would give me a $20,000 bonus. It’s an 80 20 split.
Instead of you getting 100% of the savings, you only get 80% of it. And I get a $20,000 bonus. It’s still good for you because I’m done ahead of schedule, and it’s good for me because I want the bonus. The contract has to define what the measurements are, the stipulations to get the bonus. But this is a cost plus incentive fee. Notice that you still carry some risk because if I’m rushing to hit those deadlines, I might have mistakes and waste material and so on. So you have to be like really eager and really willing to go into this type of a contract. Now, a cost plus award fee contract, it’s all allowable cost. You pay for all the materials, and then there’s performance criteria for the fee to the seller. What that means is you have deadlines set up. You have quality issues set up.
You have upfront defined how you’re going to measure success. Now, once I’m done, I say I’m done and the project is complete. So what’s my bonus? What’s my award fee? You review the work that I’ve done and then you determine what it’s worth. I don’t know upfront what that award is. It’s kind of a mysterious bonus. It might be $100 it might be $100,000. So this one kind of carries some risk for the seller if they’re expecting to make this bonus so upfront, I really have to understand what the costs are and what my profit margin is and how hard I want to work to get this mysterious award fee. Another really common contract is a time and materials contract.
And that’s where I’m going to come build this deck for you in your house, or I’m going to install these gutters or whatever the case may be, and you’re going to pay me $20 an hour. Plus you have to buy all the materials, and I’ll show you the receipts. So it’s time and materials. The seller, me, I get an hourly fee and you pay for the materials. Now, these have to include a not to exceed clause or a cap. So a not to exceed clause would be that you’ll pay for my time, $20 an hour, and you’ll pay for the materials. And the sum of that cannot exceed $10,000. And this project has to be done by August 31. So I just can’t keep going on and on and on on the contract. So time and materials, it’s kind of like a fixed fee.
You know what the cap is, but there’s a time limit, and there is an understanding that I won’t go beyond a certain amount of money. As a project manager, you have all those choices. For contracts, sometimes it’s good just to pause and say, should we build it or buy it? Now, we looked at a financial decision for buy versus build earlier. Now we want to think about other reasons to build it or buy it. And these points are good for buying or building. Is it less costly to do one or the other? Can I use my in house skills? Do I have people that are available and talented and can do that type of work? Can we control the work and the intellectual property? Is it an opportunity to learn new skills? Do we have available staff? Maybe these items we should outsource so then we can focus on core project work.