Practice Exams:

PMI PMP Project Management Professional – Introducing Project Procurement Management

  1. Section Overview: Project Procurement Management

Welcome to this section on project procurement management. Do you buy stuff as a project manager? If you do, you probably are dealing with your procurement office or a contracting office, or maybe you’re doing maybe you’re the one that’s doing the procurement activity. Well, a lot of project managers that I meet, they don’t do any of that business that’s handled by other parts of their organization.

So I think that sets up a lot of project managers to get frustrated with this chapter on procurement, because they don’t do it. Another thing that I see that happens is we’re nearing the end of the course, and this is kind of a boring frankly, it’s kind of a boring section. So people don’t pay attention, and then they go take their exam notice. I did take their exam, and they don’t pass because procurement beefs them up. Don’t let that be you.

If you’re feeling tired right now, get up and do a stretch. Get yourself some coffee or whatever it takes. But you want to really pay attention to this section on procurement management. Chapter twelve in the Pinbach Guide on Procurement. A lot of information you must know for your PMP. So I know you’ve put a lot of time in you’ve invested time. Continue to invest. You need to know procurement management. So let’s hop in here. We’re going to talk about procurement management in an adaptive environment, creating a procurement management plan.

We have to know the contract types and how those contract types, the different nuances, creating those procurement documents. We’ll talk about some terms that you may not have heard before with procurement documents, then controlling the procurement and doing contract administration. Really important for you as a project manager. And then we’ll do a case study about procurement. So some important things to talk about. Keep positive. You can do this. You’re almost there. Keep pressing forward.

  1. Key Concepts for Procurement Management

Welcome back. Let’s talk about project procurement. We know that all projects don’t need to purchase, but for your exam you’ll need to be familiar with the procurement management processes. So let’s first talk about some key concepts here. For procurement management, purchasing the product and services for your project requires some planning and some insight and understanding of how your organization allows you to procure. Or do you deal with a procurement office or a centralized contracting? So you have to plan for the enterprise environmental factors, the processes, the workflow of how you get to procure. So when you think about acquiring products and services, that affects the contract, that affects the process of your internal process, and your project is constrained by that. So we’ll talk about that in this section about planning and acquiring.

We’re also going to talk about choosing a source. So again, your enterprise environmental factors may have a system of how you choose a source, or they have to be an approved vendor or license in your state or whatever the case may be. Once you have a contract, you administer the contract that both parties live up to the terms of the contract. You have an agreement and a contract and you adhere to it. And then we will eventually close out the contract. So both parties have met their obligations and we can close out the contract. On your exam, you may be put in a position where sometimes you’re the buyer and other times you are the seller. So when you’re a seller, you are a stakeholder to the buyer. And so you think about that. You are completing a project or delivering a product or a service for the buyer. So you have to think about it from both points of view. A purchase order means we have an agreement to purchase from.

It’s not a check, but it means that we agree to purchase and we agree to the terms. A memorandum of agreements, an SLA, those are two terms that also describe our agreements and the understanding of what we will both do in this contractual relationship. And then just the idea of contracting, it’s just the generic way to describe the business relationship in exchange for funds. We could barter or something, but typically we’re talking about money here, exchanging hands. So in consideration, I pay X amount of dollars in consideration of the work that you’ll do.

So an offer and a consideration. Project managers need to think about the legal obligations that are tied to the procurement process. This is really the only knowledge area where there could be a legal obligation between two parties. So we think about the legalities there. Now you could say, well, what about like laws and regulations with scope? That’s true, but this is a little different. This is more special that I’m hiring someone to do a service or someone is hiring me to do a service. And so very clearly in the contract, it’ll have what legal obligations, if it escalates to that point, where will the court case be held? What’s the jurisdiction of our contractual relationship?

Usually it’s the county and state. Probably different in Europe or some Asian country. So you will need to be aware of the laws, the practices, what’s the norms, and if you don’t know, you either educate yourself or you go to expert. So expert judgment. PMS are typically not the individual that signs the contract. You need a delegation of authority. That’s an individual in your company who can sign the contract for the project, for your organization to enter that relationship with the vendor. The big picture of contracting here, the contracts will clearly state what you’re going to get. They spell out the deal and what the payment is and when the payment is going to happen. Net 30, net ten upon receipt, whatever the case may be that’s in the contract and both parties have to live up to that agreement. Anything not in the contract, you can’t really enforce it.

So even if we have a handshake deal or we both have a verbal agreement, if it’s not in the contract, we can’t agree to it. International contracts and local law. Just what I was talking about there, about the jurisdiction. If you think about a project that may span the globe and you’re dealing with a lot of different vendors, the contract may define where, if it gets escalated to this, where the lawsuit or the legalities that you have to follow in that country, in that jurisdiction. The terms and conditions of the contract define what the seller is to perform and provide. And then it also defines in consideration of what’s the monies, the offer and the acceptance here that’s happening. And then you must confirm that the procurement really satisfies the project need.

You don’t want to enter into a contractual relationship if it’s not really satisfying the needs of the project. So we have to confirm that the seller also participates in this. Obviously the buyer becomes the customer and then they are a key stakeholder. So if I’m buying from you, I’m the customer, I’m a key stakeholder in your project to build that house, or whatever our contract is for the seller’s project management team. They are now concerned with all of the project management processes in performing the work. So if you’re building a house for me and I’m the customer, you then are responsible for the project to build that house. The terms and conditions are inputs to the seller’s management processes. So if I have in the contract, I have dates for payment, I have dates for inspection or milestones and what those conditions may be that affects your project as the seller because I’m the buyer. In this scenario, the contract can limit your options. So it may have constraints like a deadline, a budget, but it may also address any type of a subcontractor. So we may say that you can’t hire subcontractors without our approval, or it has to be an employee. So that’s all part of the contract that can affect your project management approach as the seller in that instance. All right, so that’s the big picture here of procurement. Keep moving forward.

  1. Emerging Trends in Procurement

Let’s talk about some emerging trends and procurement you should be aware of. First off, there’s all sorts of new tools, so online tools. So one of the things we’ll see will be advertising. You have to advertise in some government projects, like it’s open for bid or an invitation for bid. That’s public knowledge. Well now a lot of that can be done online, not in the classifieds, in the newspaper. There are some advances in risk management that are tied to procurement. So you may have some specific risks that you assign to entities that will just handle that part of the project for you. So for example, you have dangerous work. You would say anything related to the electrical work is going to be handled by the ABC Electric Company.

So it’s kind of a blanket for your project, a way of saying all of those risks, we do transference and then we have a contract with that ABC Electrical Company to manage that portion of the project. It’s possible that you want to change your contracting projects depending on the type of work or the size of the project. Really big projects, like billion dollar international projects, they kind of have this new term tied in called a mega project. And I like to say that a mega project. You might have terms tied to infrastructure development. So you may have some laws, regulations, accountability to the public where you have to have a communications office to explain what’s happening and road closures in progress, maybe a website. So that could all be in the contract as well.

Engineering projects, you may have specifications for the type of engineers, the PES, the architects, the structural engineers, even mechanical engineers. You think about all those different qualified individuals that participate in engineering projects and what the requirements may be there. And you may have some special terms for multibillion dollar projects. So you may describe like financing, interest rate we’ll see coming up in the scores, economic adjustments. So if the cost of steel were real high, that could be accounted for in the project in our contract. Like the cost of steel could fluctuate, so we would give some allowances for that up or down.

Some other trends. You should be familiar with logistics and supply chain management. You don’t have to be an expert at this for your exam, just be topically familiar with this idea. So you think about large projects getting a lot of materials from all over or shipping materials all over the world. A lot of logistics that have to happen there. So that flow of material is critical to project success. Also think about the lead time. So a lot of forecasting and coordination will happen on a large project with lots of moving parts and lots of materials and such. Technology and stakeholder relations are also something we have to take into consideration. So you think about public funded projects. The public is a stakeholder.

The media may be investigating your project and want to see where the money is being spent, things like that. Same with infrastructure and big commercial construction projects. And one thing that’s becoming pretty popular and I think it’s really cool are webcams. So maybe you’ve seen like these big construction projects and there’s a webcam there so you can go and log in any time and look at what’s happening in that construction project. And then it’s always fun at the end where they speed it up and everybody’s working so rapidly and that you see it all come together. But that’s just a way of communicating. But that could be part of procurement, that you have to have some visibility here, many different webcam angles, and always showing what’s happening on the job site.

You might also do a trial engagement where we have a very big contract that we want to do with a vendor, but we’re going to try it out on a small scale. So we’ll do a small engagement first, and if that goes well, then we’ll go on and let you have the rest of the contract. So it’s a full commitment based on this initial performance. So that’s a pretty neat idea in procurement. Of course we can tailor procurement processes if we don’t need to procure. Well, there’s a quick tailor that we don’t mess with those processes. The complexity of procurement is something that you may tailor to what depth, depending on what you’re buying, how big your project is, if it’s a long term project or short term, are you buying goods or services or a combination of both.

So you can tailor and you can put anything in a contract that you want as long as it’s legal, the physical location, so access to the site, you think about environmental concerns and disrupting the neighbors there. Those are things you would tailor and add to your contracting. Of course, you would have an adherence to government and regulatory environment, and you may have some business there about who is responsible to adhere to the law.

So if I hire someone to build something for me, I don’t know anything about the building codes or the laws or so on. So our contract would spell that out as the who is adhering to codes, who’s responsible for that? And I would probably get an attorney or an expert to help make certain the terms of that contract cover me, the buyer, and that the seller is responsible for meeting these governance or regulatory concerns. And of course, the ability and availability of the contracts.

Ability. We know you got to be qualified to do this or you’re out. But the availability so you think about building a house. When do people come from that builder to work on the home? So, okay, we sign a contract to build a house, but my team is committed for the next three or four months, so what’s the availability? And that affects our contract and tailoring as well. All right, good job. Keep moving forward.

  1. Planning for Procurement

As with all of our knowledge areas, we need a plan for procurement. So we’ll be creating a procurement management plan. There are four things that we have to consider when it comes to procurement whether procurement is even needed, what to procure, how much to procure, and when to procure. Let’s look at our for procurement, our inputs. You’ll have the charter, the business documents like the business case and the benefits management plan, the project management plan like the scope quality resource, all of those plans, the scope baseline, the project documents can help you plan procurement. The milestone list, your team assignment, what are the requirements, your RTM resource requirements, the risk register, and the Stakeholder register.

And of course, you’re going to have rules, policies, templates, so you need EEF and OPA. Now let’s talk about the tools and techniques for procurement. Expert judgment, data gathering like market research, data analysis, make or buy analysis, source selection analysis and meetings. The outputs of planning procurement. We have a procurement management plan, a procurement strategy, the bid documents, the procurement statement of work, your source selection criteria, make or buy independent cost estimates change request. You could also have updates to many different project documents, lessons learned, your milestone list, your requirements, your RTM, the risk register, the stakeholder register, and even OPA. Some typical procurement actions that you’ll have to move through if you’re procuring statement of Work and a Tor. These are very similar. Basically, these define what are we buying and we’ll look at both of these coming up in this section.

So a statement of work or a terms of reference. Generally you have a high level cost estimate to determine the budget. And then as we get into procurement, we can get much more precise. We want to advertise the opportunity. So this may be required to put it in the newspaper. Although more and more can be online. Government agencies are doing this online bidding or announcing projects. You’ll identify qualified sellers. So this may be your organization has an approved vendors list or a qualified vendors list. Or when you go out to look for people that you can purchase from, you might look for certain credentials.

So that would be some criteria there to qualify to bid on your project. Then you’ll create these bid documents and give them to the appropriate sellers so that they can respond. And we’ll look at these bid documents coming up. There’s a couple of different ones you need to know. So a typical procurement action or the different actions you’ll do, you create the seller. Rather you are buying. Let’s start over there. I’m buying a house from you, so you’re the seller. The seller creates a proposal to me. So I didn’t review the proposal and I do a cost evaluation.

I may have three or four proposals, so I’ll evaluate those. The buyer will also examine the combination of the quality in relation to the cost. So I think about what am I getting for a few dollars more? Or what am I not getting for a few dollars less? And how does that affect the goals of the project? And then we’ll negotiate and sign the contract. So basically I want to buy from you. I say, hey, here’s my project. Do you want to bid on it? Yes. You give me a bid or a proposal, I review it. I might have two or three to review and then I’m going to choose one that I want to work with and try to negotiate the best deal for both of us in light of what I think the work is.

And then we’ll sign off when we have a deal. Some enterprise environmental factors that affect how you procure the marketplace conditions. So there may not be a lot of vendors available or there may be a whole bunch. So supply and demand affects the price. The seller’s reputation and past performance can affect your procurement process. What are the terms and conditions? Are there any laws, local or regulatory requirements that have to be accounted for in the project? Go get an attorney. Do you need legal advice because this is a complex project or a complex contract?

Do you have a contract management system? A way of how the vendor enters their price and how we follow and do an audit of that and confirm everything was done properly and then we close it out? Do you have a multi tier supplier system? So you have multiple suppliers or you’re dealing with a general contractor, for example, and then they have subcontractors. So how does that payment process happen? And then you need an accounting and payment system. It may be such a big project and it’s such a big contract that you do give it to accounting to manage some terms about the marketplace conditions. Okay, there are three different terms you need to know sole source, single source, and oligopoly. A sole source means there’s only one seller who could meet the needs. So a sole source is like there’s just one person, like this artist. This artist has a great talent, they’re really good at murals, and that’s the guy that you want. And they have a very unique skill set that nobody else can copy. So there might be lots of artists, but there’s only one artist who has the style and this approach that you want. So it’s a sole source. So it’s a very skilled type of relationship. Here you’re after a single source is where there are lots of different sellers, but you prefer to work with just this one. So for example, there’s lots of different attorneys, but you want to work with this one attorney.

That’s the one that you want. That’s a single source. And then an oligopoly is where the market conditions are so tight that the actions of one of those sellers affects the price and the availability of the others. So if you think about airfare is a good example of an oligopoly. So one particular airline, they go on sale, or they start charging a certain fee for whatever it is, then the others generally follow suit. Or oil, it kind of looks like oil. So an oligopoly is when one raises the price, the others do the same, or one takes on a big project. So now the supply and demand happens for the others. So that’s oligopoly. All right, a really cheesy way to remember these three.

The first one a soul source. All right. You’ve heard of James Brown, the Godfather of Soul? If you don’t know who that is, just Google them or go to YouTube and look up James Brown. He’ll be your new favorite. But there’s only one James Brown, and he is a soul singer. So he’s the sole source. There’s only one, a single source. There are lots of singles out there, but you prefer your sweetheart, so it’s a single source. And then oligopoly kind of looks like oil. So you know that that is when the guy in the corner raises his gas prices up a nickel. Everybody around there will do the same. That’s an oligopoly. Kind of a weak example of an oligopoly. But there you go. The market conditions are so tight that what one person does affects the other entities. So there you go, keep moving forward.