PMI CAPM – Procure Goods and Services in a Project

1. Section Overview

I’ve been teaching the PMP exam prep course now for many, many years, and I’ve met thousands of PMP candidates. The one knowledge area that gives these folks the most trouble is procurement management. And I think that’s because most of these people don’t do the actual procurement. They work with contracting or procurement, procurement office or a purchasing office where they are. So they aren’t necessarily involved in the day to day procurements. Well, I’ve structured this course to focus in, especially the section to focus in what you will be tested on for the exam. So even if you don’t have procurement experience, you need to understand these processes, these activities, in order to pass the test in this knowledge area.

So in this section, we’re going to begin by talking about planning, procurement management. That documents your procurement approach. It defines your procurement decisions, it identifies potential sellers, and it gives us the approach for getting resources and services on our project. You will be creating a procurement management plan as a result of this project. So this planning we do, procurement management planning. You’re going to create this plan. This plan will define what contracts can you use? What about risk management? Should we use third party estimates, what documents we’ll be using?

The one if you’re working with lots of different suppliers or vendors, the plan also defines coordinating the different activities, constraints and assumptions. And an important topic in this section will be the buy versus build. So should you make it or should you go buy it from a vendor? So we’ll look at that process. In fact, that’s an activity that you’ll do in this section we need to think about too. On the exam, sometimes you are the vendor, so you’re selling to the customer. So if you are the seller, you provide the work breakdown structure.

So it’s important to know that we can’t expect the customer to give us the WBS the seller does if I am the seller. So on your exam, pay attention to what role are you in. We’re going to look at three terms and I’m going to give you some tricks here and how to remember these three terms. For market conditions, we have sole source, single source, and oligopoly. I’m not going to tell you what those means. You’re going to see it in this section. We’re going to look at all the details for a contract type, all the different contracts you need to know and what you’re allowed to use. So we’re going to see the firm fixed price. It’s most common.

But we’re also going to look at what about a cost reimbursable, where it’s a cost plus contract. And that’s a little bit dangerous for most projects. So we’ll look at the contract types. As I mentioned, we’re going to do a build versus buy. That’s something you’ll probably see on your exam. So you’ll want to take the time to complete that activity. Determining to build or buy so we’ll spend a little bit of time there and little worksheet that I have for you that you’ll want to complete. We’re going to talk about the different forms that you send out and how you actually conduct procurement.

So the statement of work, request for request for, quote, invitation for bid and request for proposal. You might also see requests from information and then we’ll see how sellers respond to that with bids and quotes and so on. That will lead us to we’re going to walk through the whole procurement process and that will lead us to the agreement, to the contract details. So we’re going to really nail down everything. There’s a lot of business that can go into a contract.

Once we have a contract, we have to control that. We have to make certain both parties are living up to the terms of the contract. So we’ll take some time to talk about controlling procurement. It’s possible, hopefully not, but it’s possible that you could have a claim in a contractual relationship where a claim means that it’s a dispute or an appeal, where the parties don’t agree on the change or on the outcome or on the work that’s been performed. So a claim is a disagreement. Then at some point we get a close out procurement. So this is one of our closing processes, one of the two, and we closed the project or phase. Well, now we close procurement.

So this will be all about completing procurement, updating records to show results, getting rid of claims and litigation if they are hanging around. But also, what about early termination? That if we want to cancel the contract, what are the procedures for doing that? So it could be a good thing, could be a bad thing. If you have to cancel, if it’s a bad thing, you might have a lawsuit, some litigation. If it’s a good thing, like my mum, it’s a good thing. The technology has leapfrogged your project where this vendor is. So you might do some type of an equitable settlement and we’ll talk about that in this section. All right, let’s hop in here and knock this out. Don’t be afraid of this. You can do it. And talk about procurement management.

2. Plan Project Procurement Management

In this lecture, we’re going to look at the plan procurement management process. So we’re talking all about planning for procurement and we’ll get into actually working with contracts and controlling procurement activities and then eventually closing out procurement. All of those activities though, depend on a solid and reliable procurement management plan. So let’s look at this process now, right under the Pinbox, from Pinbox section twelve one to Plan Procurement. So plan Procurement Management, that it documents the procurement approach, defines the procurement decisions, identifies potential sellers, and it’s the approach for acquiring resources and services on your project. So really it’s all about our intent.

How will we make procurement decisions? Like every plan that we’ve seen, it lays the groundwork for, how will we do the other processes in this knowledge area? Let’s look at the Edo for plan procurement management. A lot of inputs. So you think about, as we look at these, think about things that you could buy that would affect these different inputs. So the project management plan, remember, it’s full of all those subsidiary plans, in particular the resource management plan, the requirements documentation, what requirements will cause you to procure, do you have to buy flooring and paint and countertops and so on. So all of the things that you have to buy in order to satisfy the requirements, the risk registered because there may be some contractual agreements with transference activity resource requirements.

Do you have a gap in your HR resources or your HR? Of course. But do you also have a gap in any of the resources like materials, facilities or equipment which could cause procurement? The project schedule, when do you need to procure in order to have materials and resources and whatnot available for when you need them in the project activity cost estimates, the stakeholder register and EEF and OPA, because there may be some forms that you use or some guidelines or processes on how you procure to plan procurement management.

We’ll do a make or buy analysis. We’ll look at expert judgment, market research and meetings. We get several outputs here as a result of planning procurement. The procurement Management plan, the procurement statement of work, procurement documents, source selection criteria, make or buy decisions, and change request. Finally, you might have project document updates depending on what happens here in procurement. Let’s look at the main output, which is the procurement management plan. This plan will define what types of contracts are you allowed to use in your organization? What about risk management issues? Will you use an independent estimate? Let’s talk about independent estimates for a minute.

An independent estimate is a should cost estimate or a third party estimate. If you remember way back in our chapter five in the Pinbox, in our discussion about cost estimating, we did a should cost estimate. It’s where we get someone to tell us like a vendor will come in and do an analysis of the project and they’ll say this is what this should cost, and that becomes the mean for when we get bids of what we measure against. So an independent estimate or a should cost estimate. Organizational procurement procedures. How are you allowed to procure? Do you do it? Does it go through a centralized contracting or procurement office? So how do you procure? What documents will you use? And we’re going to look at all the different documents coming up, but there’s a lot of different documents that are standard for procurement. And then if you’re working with multiple sellers, like you’re in construction and a general contractor, you probably have multiple sellers that have to work together, so they have to schedule with one another to coordinate the work.

So managing multiple sellers could become part of our procurement management plan. Also in our plan, we will coordinate our procurement activities. So this is talking about internal, but also with our vendors. And how do we move through the whole process. We have to look at our constraints and assumptions. A constraint is anything that limits your options, and an assumption is anything that you believe to be true, but you haven’t yet proven it to be true. So when it comes to procurement, a constraint could be you’re only allowed to purchase from your company’s preferred vendors list. So you are constrained by those people that are already on the list. An assumption might be just the opposite, where you assume you can buy from anyone.

Well, that would prove to be a false assumption. An assumption could also be that when you deal with a vendor they’re going to do construction, you might have the assumption they’re also going to do the painting. Well, some vendors do and some don’t when it comes to construction. So you need to nail down and ask lots of questions. Because if an assumption proves to be false, that could be a risk or even an issue in your project. Of course we want to look at our lead time for procurement. That’s always an issue or something to be concerned with that if I need materials 30 days from now and our procurement takes 45 days to actually move through that process, now we have an issue because we can tell the lead time is not going to fit, make, or buy decisions.

We’re going to walk through that coming up. Scheduling deliverables in the contract. So when you deal with the vendor milestones for deliverables, in some instances on the exam, you will be the vendor doing a project for someone else. So you’ll be on the other side of that equation. Performance bonds or insurance, those could be requirements for the vendor that when you hire them to come in and do work that they can show they have a performance bond or they have errors and omissions or general liabilities insurance pretty standard stuff in the procurement management plan.

If you are the seller, so you’re doing a project for the customer, then you are responsible for the work breakdown structure for your portion of that project, what you are going to do. You also need to define the Procurement Management Plan, the form and the format for the statement of work documents. So we’re going to look at these documents coming up, but I’m talking about things like requests for proposal and bids and whichever. If you’re a vendor or if you’re a buyer, what forms will you use? Your company may have a preferred vendor’s list or a pre qualified seller’s list. And then you also in this Procurement Management Plan will define what are your metrics for evaluations.

How do you know that procurement is working? How do you know that vendors are living up to the terms of the contract and that they’re doing a good job on what they’re creating for you? In the Procurement Management Plan, we’ll also define our source selection criteria. So this defines all of these different attributes, will help us determine which vendor should we purchase from. So does the vendor understand our need? That’s always important. What’s the lifecycle cost of the solution that the vendor is selling us now? Life cycle costing is like when you go buy a water heater or a stove or just about any appliance, there’s a big yellow sticker on the side of it that will tell you what the average cost per year to maintain that thing is to maintain that water heater.

So lifecycle costing is the vendor will tell you, here’s our solution and this is what you can anticipate to pay over the next year to maintain this solution. So that may be an issue, it may not for you. When you’re choosing a vendor, what’s the technical capability of the vendor? What risk is associated with this vendor? Like if they’re new or a oneman shop, sometimes it’s good, sometimes it’s not. What’s the management approach of the vendor, the technical approach? What’s their methodology for building the solution? Do they provide a warranty? Do they have the financial capacity to sustain the project? So this is sometimes an issue with smaller companies is cash flow.

Where are they going to start a project for you, but they don’t have enough cash to pay their employees and buy the materials and so on. So that could leave your project in the lurch. What about the production capacity and interest? Is it a really large company and they don’t want to mess with your little project? The business size and type? What about the past performance? Have you worked with them before or have other people in your company worked with that vendor before? Do they have references that you can call on? Who maintains the intellectual property rights? Like if you’re hiring someone to develop a piece of software for you who retains the right to that code, you don’t want that developer to give you a deliverable and then they hold your code hostage.

Or worse, they take your code and sell it, then proprietary rights. So kind of that goes right with intellectual property rights, who owns the rights to the thing that you’re creating? So again, like with software, is a good example of proprietary rights. Some things about procurement we need to know for the exam, the buyer is a stakeholder for the seller. So if I’m selling something to you, you’re my stakeholder. The seller is the project management team. We’re building a house for you. Our companies will manage this project. You’re going to be our customer.

You’re the stakeholder, the seller. My company will build the house and we’ll do the project management work. The terms and the conditions of the contract for the seller have to be honored. If I’m going to build a house for you, we’re going to have these intermittent reviews, and tied to those reviews will be you’re going to have to give me a payment to continue on in the project. So we need to both be in agreement what you are going to pay for me. So we have an offer and a consideration, and we both live up to those terms. Your company may have external and internal contracts.

So external is pretty obvious, right? You have a contract with your customer or with a vendor, but internal contracts could just be agreements between departments as to what they’ll pay for. Inner organizational billing, where they’re just moving blue dollars around from company to organization to organization within one company. Evaluating the market conditions. All right, so there are three market conditions you need to know sole source, single source, and oligopoly. And I’m going to tell you a little way to remember these, and they’re really corny, but you’re never going to forget these or get these mixed up. The first one is a sole source. A sole source means that only one person in the marketplace can satisfy the needs of the project. And here’s the goofy way to remember this. You’ve heard of James Brown. If you haven’t, go google James Brown.

But James Brown is the godfather of soul. He’s a fantastic singer, rock and roll artist. There’s only one James Brown, so he’s a sole source. So a sole source. There’s only one person, one company that can satisfy the needs of your project. Now, a single source means there are lots of companies to choose from, but you prefer one specific company. So that’s a single source. And how you remember this, there are lots of singles available on the dating scene, but you prefer your sweetheart. So it’s a single source. That’s the one that you want. So a single source, lots available.

You have a specific one that you repur. And then we have an oligopoly. An oligopoly describes the market conditions are so tight that the actions of one organization in that marketplace will affect the actions of the others. Airfare is a great example of an oligopoly. If Delta goes on sale, United and JetBlue. And so on will follow. Sue so what one does affects the actions of another. So oil is a good example of that. The guy across the street raises his gas prices a nickel, then other gas stations start doing the same thing. So the market conditions are so tight that everybody’s pretty closely priced and has the same features and the same product that they’re giving.

So Oligopoly and how you remember this, it kind of looks like oil, but oil is gasoline and the price of gas. All right, so know those for your exam. This is all about procurement management planning. In the next lecture, we’re going to look at those procurement contracts that we’ve been talking a little bit about. So I’ll see you in just a few minutes.