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Introducing Project Procurement Management

Projects routinely require procurements. They need materials, equipment, consultants, training, and many other goods and services. Project procurement management is the process of purchasing the products necessary for meeting the needs of the project scope. It involves planning, acquiring the products or services from sources, choosing a source, administering the contract, and closing out the contract. Procurement management, as far as your PMP exam is considered, focuses on the practices from the point of view of the buyer, not the seller (for example, contractor, subcontractor, vendor, or supplier).

When buying anything from a vendor, the buyer needs a contract, which becomes a key input to many of the processes within the project. The contract, more than anything else, specifies the rules and agreements for the project.

Here’s a neat twist: When the seller is completing its obligations to supply a product, PMI treats those obligations as a project itself. In other words, if ABC Electricians were wiring a building for your company, ABC Electricians would be the performing organization completing its own project. Your company becomes the customer of their project—and is, of course, a stakeholder in their project. When the vendor is completing work for a portion of your project, the close contract activities don’t wait until the end of the project—they happen as needed.

In the scenarios described in this chapter, the seller will be outside of the performing organization. The buyer will be managing a project and procuring resources from a vendor. However, all of the details in this chapter can be applied to internal work orders, formal agreements, and contracts between organizational units within a single entity.

Planning for Purchases

Procurement planning is the process of identifying which part of the project should be procured from resources outside of the organization. Generally, procurement decisions are made early on in the planning processes. Procurement planning centers on four elements:

Whether procurement is needed

What to procure

How much to procure

When to procure

When the project manager begins the procurement process, she’ll rely on the usual enterprise environmental factors and organizational process assets. For example, the project manager has to consider the marketplace conditions, the availability of the needed items or services in the marketplace, and how the procurement process works within the performing organization. If the project manager’s organization has forms, policies, and management guidelines that direct the procurement process, she must follow those established processes.

Often, an organization will have resources for managing the procurement process, including contracting and negotiating on behalf of the project. If, however, the performing organization has no such resources for the project manager to rely upon, it is up to the project manager to supply the procurement management resources, including capabilities for negotiating and for obtaining in a fiscally responsible way the right products or services for a fair price on behalf of the performing organization.

Evaluating the Market Conditions

Part of procurement management is to determine what sources are available to provide the needed products or services for the project. An evaluation of the marketplace is needed to determine what products and services are available and from whom and on what terms and conditions they are available.

While in most free market enterprise societies multiple vendors are offering comparable products, there may be times when choices of vendors are limited. The following are three specific terms to know for the PMP exam that you may encounter:

Sole source     Only one qualified seller exists in the marketplace.

Single source     The performing organization prefers to contract with a specific seller.

Oligopoly     There are very few sellers and the actions of one seller will have a direct effect on the other sellers’ prices and the overall market condition.

Referring to the Scope Baseline

The project’s scope statement, WBS, and WBS dictionary all serve as input to making procurement decisions. Because the project scope baseline defines the project work, and only the required work, to complete the project, it also defines the limitations of the project. Knowing the limits of what the project includes can help the project manager, the contract specialists, and other procurement professionals determine what needs to be purchased and what does not.

The WBS and the WBS dictionary define the details and requirements for acceptance of the project. This information also serves as valuable input regarding what needs to be procured and what does not. The WBS defines what the end result of the project will be. When dealing with vendors to procure a portion of the project, the work to be procured must support the requirements of the project customer.

A statement of work (SOW) may define the work to be accomplished within the project, but it generally does not define the product description as a whole. However, when an entire project is to be procured from a vendor, the SOW and the product description become one and the same. Along with SOW you may need to reference the requirements documentation to ensure the procurement planning process defines exactly what’s needed and adheres to any relevant laws, regulations, and standards.

Relying on the Project Management Plan

The project management plan is also needed during the procurement planning processes because it will guide how the project should progress, and each subsidiary plan may need to be referenced for procurement guidelines. For example, the cost management plan, the scope management plan, the quality management plan, and the staffing management plan may all be needed for effective procurement planning.

One of the biggest things to consider during procurement management is the reliance on the risk response transference. Recall that transference is the assignment of a risk to a third party—typically with a fee involved. Insurance and contractors for dangerous work are two common examples of transference. The risk register will help identify the costs associated with the identified risks, and the contractual agreements for transference will be referenced as part of the project costs.

The project management plan also includes the project schedule—something the project manager needs to consider procurement leads, fulfillment time for vendors, and when resources are needed to keep the project moving along. Couple the project schedule with the activity cost estimate and the cost performance baseline, and the project manager can do cash flow forecasting, communicate with management about upcoming expenses, and ensure that vendors are paid on time.

Teaming with Other Organizations

If your organization and another organization partner on an opportunity, it’s called a teaming agreement. It’s a legally binding venture between two or more organizations to complete a defined set of work or to seize an opportunity, or some other venture that the parties involved couldn’t complete necessarily on their own. Teaming agreements end when the venture ends. You might have heard these agreements loosely defined as “coop-etition”—a fun way to describe cooperating with the competition, although teaming doesn’t have to be just a partnership with the competition.

Teaming agreements should define in a contract the roles, buyer-and-seller relationships, and how the teaming agreement ends. The parties must all be in agreement with one another as to who does what, communication channels, and how decisions in the partnership will be made.

Completing Procurement Planning

Procurement planning should be done early in the planning processes, with certain exceptions. As needs arise, as project conditions change, or as other circumstances demand, procurement planning may be required throughout the project. Whenever procurement planning happens early in the project, as preferred, or later in the project, as needed, a logical approach to securing the proper resources is necessitated.

Determining to Make or Buy

The decision to make or buy a product is a fundamental aspect of management. Under some conditions, it is more cost-effective to buy—while in others it makes more sense to create an in-house solution. The make-or-buy analysis should be made in the initial scope definition to determine if the entire project should be completed in-house or procured. As the project evolves, additional make-or-buy decisions are needed.

The initial costs of the solution for the in-house or procured product must be considered, but so, too, must the ongoing expenses of the solutions. For example, a company may elect to lease a piece of equipment. The ongoing expenses of leasing the piece of equipment should be weighed against the expected ongoing expenses of purchasing the equipment and the monthly costs to maintain, insure, and manage the equipment.

For example, Figure 12-1 shows the mathematical approach for determining whether it is better to create a software program in-house or buy one from a software company. The in-house solution will cost your company $25,000 to create your own software package and (based on historical information) another $2,500 per month to maintain the software.

FIGURE 12-1    Make-or-buy formulas are common exam questions.

The development company has a solution that will cost your company $17,000 to purchase, but the development company requires a maintenance plan for each software program installed, which will cost your company $2,700 per month. The difference between making the software and buying the software is $8,000. The difference between supporting the software the organization has made and allowing the external company to support their software is only $200 per month.

The $200 per month is divided into the difference between creating the software internally and buying the software—which is $8,000 divided by $200—or 40 months. If the software is to be replaced within 40 months, the company should buy the software. If the software will not be replaced within 40 months, it should build the software.

There are multiple reasons why an organization may choose to make or buy. The following are some common examples or reasons for making and buying:

Using Expert Judgment

Procurement planning can rely on expert judgment. It may be beneficial to rely on the wisdom of others—those in the performing organization or subject matter experts—to determine the need for procurement. Expert judgment for procurement management planning can come from the following:

Units or individuals within the performing organization

Consultants and subject matter experts

Professional, trade, or technical associations

Industry groups

You’re at the final knowledge area. Congrats! In my experience teaching PMP Boot Camps, most candidates are worn out by this topic. And they rationalize that since they personally don’t handle much of the procurement, they can ease off in this chapter. Wrong! You can expect plenty of questions on procurement on your PMP exam—don’t take it easy. You’re almost there, but you’re not there yet. Keep going—think of how good you’ll feel when you’re done with this exam.

Determining the Contract Type

There are multiple types of contracts when it comes to procurement. The project work, the market, and the nature of the purchase determine the contract type.

The following are some general rules that PMP exam candidates, and project managers, should know:

A contract is a formal agreement between the buyer and the seller. Contracts can be oral or written—though written is preferred.

The United States and most developed countries back all contracts through the court system.

Contracts should clearly state all requirements for product acceptance.

Any changes to the contract must be formally approved, controlled, and documented.

A contract is not fulfilled until all of the requirements of the contract are met.

Contracts can be used as a risk mitigation tool, as in transferring the risk. All contracts have some level of risk; depending on the contract type, the risk can be transferred to the seller. If a risk response strategy is to transfer, risks associated with procurement are considered secondary risks and must go through the risk management process.

There are legal requirements governing contracts. In order for a contract to be valid, it must:

Contain an offer

Have been accepted

Provide for a consideration (payment)

Be for a legal purpose

Be executed by someone with capacity and authority

The terms and conditions of the contract should define breaches, copyrights, intellectual rights, and force majeure. Force majeure is French for superior force—sometimes called “acts of God.” You might know these as tornados, earthquakes, and hurricanes.

Fixed-Price Contracts

Fixed-price contracts (also known as firm fixed-price and lump-sum contracts) are agreements that define a total price for the product the seller is to provide. These contracts must clearly define the requirements the vendor is to provide. These contracts may also provide incentives for meeting or exceeding contract requirements—such as meeting deadlines—and require the seller to assume the risk of cost overruns, as Figure 12-2 demonstrates. There are three fixed-priced contracts you should know.

FIGURE 12-2    Fixed-price contracts transfer the risk to the seller.

Firm fixed-price contract     This contract type defines the exact amount for the goods or services provided by the vendor. It’s the most common and most preferred contract type for organizations, as the risk for the buyer is relatively low. For the seller, however, the risk is that if their cost of materials, doing business, or completing the work defined in the contract increases, they cannot pass the cost on to the customer. A firm fixed-price contract is also known as a lump-sum contract.

Fixed-price incentive fee contract     This contract type is similar to the firm-fixed-price contract in that a lump-sum amount is agreed upon between the buyer and the seller for the work to be performed. However, this contract type allows the contract to include incentives for the project, such as a bonus for completing the project work early, saving costs in the project, or other performance objectives. This contract can also have penalties for the vendor if they’re late on the project work or their performance suffers.

Fixed price with economic price adjustment contract     This contract type is for long-term projects that may span years to complete the project work. The contract does define a fixed price, with caveats for special categories of price fluctuation over the life of the project, including inflation, electricity, shipping, labor costs, cost of materials, or other resources that could affect the feasibility of the vendor completing the work. The contract must define the financial indexes that will be used to determine the fluctuation in the identified cost categories.

Cost-Reimbursable Contracts

These contract types pay the seller for the product. In the payment to the seller there is a profit margin—the difference between the actual costs of the product and the sales amount. Cost-reimbursable contracts require the buyer to assume the risk of cost overruns. There are four types of cost-reimbursable contracts.

Cost plus fixed fee     The buyer is responsible for all costs the contracted work incurs plus a predetermined fee for the vendor to manage and complete the contracted work. The fee for the work is usually tied to a percentage of the estimated project costs, but not always. For example, I’ll remodel your condo, but you have to pay for all the materials and labor I’ll need, which should be close to $80,000. In addition, you’ll have to pay me 15 percent of the costs, which will be $12,000. You’ll pay the costs as the project progresses and pay my fee based on milestones completed in the project. If I don’t finish the project, you don’t finish paying me. You do have some risks, though—if I waste materials, you have to buy more and you’ll still have to pay my fee for the work.

Cost plus incentive fee     This contract type requires that the buyer pays for all the preapproved costs for materials and labor in the project plus an incentive fee for completing the project early, saving on project costs, managing certain risks, or meeting other performance objectives. The contract will define how the incentives are determined. One popular method attaches dollar amounts to completed milestones and dates. If the vendor delivers the milestones ahead of the promised dates on a consistent basis, the value of the work increases and so will the incentive fee for the vendor. If the contract is based on cost savings for the project and early completions are cost savings, the contract must define how the cost savings are split between the buyer and the seller. Usually, the seller receives 20 percent of the cost savings in what’s called an “80/20 split.”

Cost plus award fee     This contract requires the buyer to pay for all the project costs and gives the seller an award fee based on the project performance, certain project criteria, or other goals established by the buyer. The award fee can be tied to any factor the buyer determines, and the factor doesn’t have to be exact. For example, the buyer can set an award fee of up to $100,000 for a $1,000,000 project based on the technical ingenuity of the project solution, the quality of the work, or the actual cost savings the solution creates for the organization.

Cost plus percentage of costs     This contract type is the absolute pits, and most organizations won’t participate with these contracts. In this instance, the buyer has to pay for all of the costs of the materials plus a predetermined percentage for the cost of the materials. The obvious risk is that the vendor can waste materials and the buyer will have to buy new materials and pay the percentage of costs for the materials again. It’s easy for the vendor to run up the total project costs just by wasting materials.

The only time it might be appropriate, and I stress the word might, to use a cost plus percentage of costs contract is when the vendor is working with a highly specialized material and type of work. For example, imagine an artist who’s sculpting a marble statue for the lobby of a building or a scientist who’s working with a highly complex chemical. The nature of this type of work is so specialized that the artist and the scientist are unlikely to waste materials on purpose just to crank up their project costs. Having said that, I doubt you will see this on the PMP exam. As a general rule, avoid the cost plus percentage of costs contract.

Time and Materials Contracts

Time and materials (T&M) contracts are sometimes called unit price contracts. They are ideal for instances when an organization contracts out a small project for instances when smaller amounts of work within a larger project are to be completed by a vendor. T&M contracts, however, can grow dangerously out of control as more work is assigned to the seller. T&M contracts should have a not-to-exceed clause (NTE clause) to put a ceiling on the procured work. Figure 12-3 is an example of how T&M contracts can pose a risk for the buyer.

FIGURE 12-3    Time and materials contracts must be kept in check, or costs can skyrocket.

Summary of Contract Types

On the PMP examination, you can expect a few questions on contract types. Familiarize yourself with the following table:

The Procurement Management Plan

Procurement planning is a process that should happen early in the planning processes. The outputs of procurement planning allow the project manager and the project team to proceed with confidence in the procuring of products and services needed to successfully complete the project. If it is determined early in the project that there isn’t a need for procurements, then obviously the balance of the procurement processes is not necessary for the project.

This subsidiary project plan documents the decisions made in the procurement planning processes. It specifies how the remaining procurement activities will be managed. The plan details the following:

How vendors will be selected

The types of contracts to be used

The process of independent estimating (also known as should-cost estimates)

The relationship between the project team and the procurement office within the performing organization (if one exists)

Planning for the lead time requirements between the vendor and the organizational purchasing processes

Requirements for performance bonds and insurance requirements for the vendors

The procurement forms, such as contracts, that the project team is required to use

How multiple vendors will be managed to supply their contracted product

The coordination between sellers and the project team and among project activities, project reporting, scheduling, business operations, and other project concerns

Metrics to be used to determine which vendors qualify for project work and to complete vendor selection

Using the Statement of Work

In the contract statement of work (SOW), the seller fully describes the work to be completed and/or the product to be supplied. The contract SOW becomes part of the contract between the buyer and the seller. The contract SOW is typically created as part of the procurement planning process, and it allows the seller to determine if it can meet the written requirements of the SOW.

Particular industries have different assumptions about what constitutes an SOW. What one industry calls an SOW may be a statement of objectives (SOO) in another. A SOO is a document describing a problem to be solved by the seller. The SOW, what you’ll see on the PMP exam, defines the project specifications; requirements for vendor qualification; and details about the project work, location, expected time frame, and similar conditions.

Preparing for Contracting

Contracting planning is the process of preparing to acquire sellers to provide products that the project needs. It’s a pretty straightforward business. Three inputs are used for contracting planning.

The procurement management plan     This subsidiary plan sets out the methodologies and expectations of procurement within the performing organization.

The statement of work     The contract SOW provides detailed information on what the seller will be providing for the performing organization. Recall that this document allows the seller to determine if it can provide the product and meet the requirements of the project team.

Other planning outputs     Other details within the project plan, such as the schedules, estimates, constraints, and assumptions, are referenced, since their values may have a direct influence on the contracting process.

Organizing Contracting Materials

Contracting planning relies on the outputs of procurement planning. The procurement management plan will guide the process as the project team has planned, as the performing organization requires, or under the guidance of a procurement office within the performing organization.

Two primary tools are used for contracting planning.

Standard forms     Within the performing organization, there may be many different standardized forms for contracts, descriptions of procurement items, bid documents, and other procurement-related documents.

Expert judgment     Expert judgment may be needed to review and help the project manager select the best source for the procured product.

Creating the Procurement Documents

The primary outputs of contracting planning are the procurement documents. These documents guide the relationship between the buyer and the seller. Communication between the buyer and the seller should always be specific as to the requirements and expectations of the seller. In initial communications, especially when requesting a price or proposal, the buyer should include the SOW, relevant specifications, and, if necessary, any nondisclosure agreements (NDAs). Requests from buyers to sellers should be specific enough to give the seller a clear idea of what the buyer is requesting, but general enough to allow the seller to provide viable alternatives.

The following are some specific terms the project manager—and the PMP candidate—should be familiar with:

Determining the Source Selection Criteria

Another output of contracting planning is the evaluation criteria to determine which source the organization will purchase from. The evaluation criteria is used to rate and score proposals from the sellers. In some instances, such as a bid or quote, the evaluation criterion is focused just on the price the seller offers. In other instances, such as a proposal, the evaluation criteria can be multiple values: experience, references, certifications, and more.

It’s essential for the project manager and the project team to create selection criteria that will guide their decision making later in the project. Common questions that should be considered prior to vendor selection include the following:

Does the vendor understand the project need?

What is the overall project and/or life-cycle cost?

What is the vendor’s technical capability?

What is the vendor’s management and technical approach to the project work?

What is their financial capacity to complete the project work?

Does the vendor qualify in areas that may help in rewarding the contract (such as they’re a small business, female-owned, or a disadvantaged small business)?

What are the proprietary rights and intellectual property rights associated with the project work?

Will the vendor provide a warranty for the work they complete?

Updating the Contract Statement of Work

The final outputs of contracting planning are updates to the contract statement of work. As the project team creates the requirements from the sellers during invitations for bids, requests for quotes, or requests for proposals, they may discover other needed elements in the SOW. In addition, it is possible the bids, quotes, and proposals may offer alternatives the project team has not considered—and a new SOW is then created.

Changes to the SOW should be updated, documented, and recorded to reflect the logic and reason behind the change.

Completing Procurement Purchasing

Once the contracting planning has been completed, the actual process of contracting can begin. Fortunately, the sellers, not the buyers, perform most of the activity in solicitations—usually at no additional cost to the project. The sellers are busy trying to win the business. There are two inputs to solicitations.

Procurement documents are created in contracting planning. These are the invitations for bid, requests for proposal, and requests for quote documents.

Qualified seller lists are often maintained by performing organizations. These lists of qualified sellers (also preferred sellers or approved sellers) generally have contact information, a history of past experience with the seller, and other pertinent information. In addition to the internal qualified seller list, there are many other resources to determine which sellers may qualify for the proposed work: Internet resources, industry directories, trade associations, and so on.

Procuring Goods and Services

Requesting seller responses is the process of inviting sellers to acquire the business of the performing organization. Three primary tools are needed to complete this process.

Bidder conferences     A bidder conference, also called a contractor conference or vendor conference, is a meeting with prospective sellers to ensure that all sellers have a clear understanding of the product or service to be procured and are on equal footing. Bidder conferences allow sellers to query the buyer on the details of the product to help ensure that the seller’s proposal is adequate and appropriate for the proposed agreement. At this point of the process, all sellers are considered equal.

Advertising     In most circumstances, advertisements inviting bidders are expected. These advertisements can run in newspapers or trade journals specific to the industry of the organization. Some government agencies require advertisements inviting sellers to acquire the project work, attend a bidder conference, or present a proposal for the described work.

Developing a qualified sellers list     Many organizations use a qualified sellers list to guide their procurement decisions. The project team may elect to create their own qualified sellers list, use the organization’s list, or rely on a third-party qualified sellers list through the Internet or other third-party resources.

A standard of procurement is that bids and quotes are looking for sellers to provide a price. Proposals are asking the sellers to provide solutions.

Examining the Results of Contracting

The end result of contracting, as expected, is a collection of proposals, bids, and quotations. These documents indicate the sellers’ ability and preparedness to complete the project work. The proposals should be in alignment with the stated expectations of the buyer, and they may be presented orally, electronically, or in hard copy format. Of course, the relationship between the buyer and the seller—and the type of information being shared—will determine which modality is the best choice of communication.

Selecting the Seller

Once the sellers have presented their proposals, bids, or quotes (depending on what the buyer requested of them), their documents are examined so that the project manager can select which sellers are the best choice for the project work. In many instances, price may be the predominant factor for choosing a particular seller—but not always. Other factors besides price may also be taken into consideration.

The cost of an item may not reflect the true cost to the performing organization if the item cannot be delivered in a timely manner. If a seller promises to have a product on site by a specific date and fails to do so, the project can be delayed, costing the organization thousands—or more—in losses.

Proposals can be separated into two categories: technical and commercial. The technical category describes the approach and methodology to complete the project work, while the commercial category delves into the price to complete the project work. An evaluation takes into consideration both categories in order to determine the best choice for the project.

Critical, high-priority projects may rely on multiple sellers to complete the project work. This redundancy can balance risk, cost, and opportunity among multiple vendors.

Preparing for Source Selection

Source selection weighs and evaluates the proposals, bids, and quotes for the procured portions of the project and then makes a determination as to which seller is the best for the project work. Source selection has three inputs to the decision-making process.

Proposals     The proposals, bids, and quotations provided by the sellers are key inputs. These are the documents the performing organization will evaluate to determine which seller is the best provider for the project.

Evaluation criteria     The evaluation criteria, such as referrals, samples of previous work, and references, are considered. The evaluation criteria are evidence of the quality, depth, and experience of work the seller has performed in the past and, hopefully, is capable of performing on the current project. Evaluation criteria are developed in contracting planning and are applied in source selection.

Organizational policies     The performing organization likely has procurement policies and procedures that the project manager is expected to follow in regard to source selection. The organizational policies should be known before starting the source selection process to avoid any discrepancies, conflicts of interest, or other breaches of policies. For example, some organizations’ procurement policies do not allow project managers to accept any gifts beyond $25 in value.

Completing the Seller Selection Process

For the performing organization to finalize the process of seller selection, there must first be eligible sellers. Assuming there is more than one seller that can satisfy the demands of the project, the project manager can rely on several tools and techniques when making a selection.

Weighting system     A weighting system takes out the personal preferences of the decision-maker in the organization to ensure that the best seller is awarded the contract. A weighting system creates a matrix, as seen in Figure 12-4. Weights are assigned to the values of the proposals, and each proposal is scored. Because the weights are determined before reviewing the proposals, the process is guaranteed to be free of personal preferences and bias. The seller with the highest score is awarded the contract.

FIGURE 12-4    Weighting systems remove personal preference from the selection process.

Independent estimates     These estimates are often referred to as “should-cost” estimates. They are created by the performing organization or outside experts to predict what the cost of the procured product should be. If there is a significant difference between what the organization has predicted and what the sellers have proposed, the statement of work was inadequate or the sellers misunderstood the requirements or the price provided by the seller is too high.

Screening system     A screening system is a method to remove sellers from consideration if they do not meet given conditions. For example, screening could require that sellers must be certified by a specific organization, have prior experience with the project technology, or meet other values. Sellers that don’t meet the requirements are removed from the selection process and their proposals are not considered.

Contract negotiation     The performing organization creates an offer, and the seller considers it. The contract negotiation process is an activity to create a fair price for the work the seller is to complete. The performing organization and the seller must be in agreement on the expectations, requirements, authorities, terms, technical and business management approaches, price—and any other pertinent factors covered within, and by, the contract—prior to signing it.

Seller rating systems     How the vendor has performed in the past may guide current and future project procurement decisions. Consider a vendor that has offered poor performance in quality, delivery, and contractual compliance versus a vendor that has scored high marks in quality, delivery, and contract compliance—which should the project manager choose? That’s the goal of the seller rating system: to collect and disseminate information on the performance of sellers in order to guide project decisions.

Expert judgment     Often, the project manager and the project team may not be qualified in the discipline the vendor is offering, which the project requires. In these instances, the project manager can rely on expert judgment to help make the best decisions regarding the project’s welfare.

Proposal evaluation techniques     There are many different approaches to evaluating vendors’ proposals—from weighting systems to screening systems—but all will rely on expert judgment and some sort of evaluation criteria.

Examining the Results of Seller Selection

The one output of seller selection is a contract between the buyer and the seller. A contract is a legally binding agreement between the buyer and the seller in which the seller provides the described product and the seller pays for the product. Contracts are known by many names.

Agreement

Subcontract

Purchase order

Memorandum of understanding

Contracts have to be signed by a person with the power to authorize the requirements and payment specified in the contract. This role is called the delegation of procurement authority. Whether this person is the project manager depends on the procurement policies of the performing organization.

In some organizations, all contracts flow through centralized contracting. Centralized contracting requires all contracts for all projects to be approved through a central unit within the performing organization. Other organizations use a decentralized contracting approach, which assigns a contract administrator or contract officer to the project.

Performing Contract Administration

Contract administration is the process of ensuring that the seller lives up to the agreements in the contract. The project manager and the contract administrator must work together to make certain the seller meets its obligations. If the seller does not fulfill its contractual requirements, legal remedies may ultimately be pursued.

Another aspect of contract administration, especially on larger projects with multiple sellers providing various products, is the coordination between the contractors. The project manager or contract officer schedules and confirms the performance of the sellers so that the deliverables, schedule, and performance of a contractor do not infringe or adversely affect the performance of another contractor.

The contract must also include the terms of payment. Typically, the performance and progress of the contractor is directly linked to payments it receives. The project manager must track performance and quality to approve or decline payment as needed. The contract should define the metrics for acceptance to avoid disagreements on performance and to ensure that vendors get paid on time.

Preparing for Contract Administration

The contract and the contract management plan are needed as a guide for effective contract administration. The contract dictates the requirements and expectations of the seller and the buyer. The obligations of both parties should be in alignment with the contract—if not, disagreements, delays, and even work stoppage can ensue. In addition to the contract, there are three other inputs to contract administration.

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Performance reports     Within the contract, the terms for acceptance are defined. Reports on the seller’s performance are needed to compare with the requirements of the contracted work.

Work results     The seller’s work results must be completed according to the requirements of the contract. As part of project plan execution, the seller must meet the quality standards of the performing organization and expected schedule of completion, and stay within the anticipated costs and the specified range of variance.

Change requests     Change requests can complicate contract administration. The performing organization’s change control system must somehow mesh with the seller’s change control system. Changes to the project that affect the contracted work require changes to the contract, addendums to the contract, or a new contract for the additional or changed work. In some instances, the seller and the buyer may disagree about the cost of the changes. These differences may be labeled as claims, disputes, or appeals—and may ultimately slow the project’s progress if not remedied.

If the seller’s performance is unacceptable and a resolution to the problem cannot be found, the performing organization may elect to cancel the contract. This termination of the contract is also handled as a change request within the change control system.

Completing Contract Administration

The actual process of completing contract administration relies heavily on communication between the project manager, the contract officer, and the seller. The communications plan may have considerations for how and when the communication between the buyer and the seller should take place and what the purpose of the communication should be. There are six primary concerns, in addition to communication, within contract administration.

Contract change control system     The contract change control system defines the procedures for how the contract may be changed. The process for changing the contract includes the forms; documented communications; tracking; conditions within the project, business, or marketplace that justify the needed changes; dispute resolution procedures; and the procedures for getting the changes approved within the performing organization. The system is part of integrated change control.

Buyer-conducted performance reviews and audits     As the vendor completes the contracted work, the seller will need to inspect the work for progress; compliance with contract requirements; and adherence to agreed-to time, cost, and quality constraints.

Performance reporting     Performance reporting is the communication between the project manager and management on how the seller is performing under the guidelines in the contract. This is part of communications and should be documented within the communications management plan.

Payment system     Sellers like to be paid when they have completed their obligations. How the sellers are paid is controlled by the payment system, which includes interactions between the project manager and the accounts payable department. The performing organization may have strict guidelines for how payment requests are submitted and approved, and how payments are completed. On larger projects, the project management team may have specific procedures for submitting the payment requests.

Claims administration     This is not fun. Claims result from contested changes, such as disagreements about a change that has occurred and who should pay for that change. Though these go by various names—claims, disputes, and appeals—they all mean the same thing: The buyer and the seller are in disagreement over who should pay for the changes to the project work. Resolution may come through negotiation, mediation, or arbitration, as defined by the contract.

Records management system     This is part of the project management information system and is designed to track all contracting documentation. This is essential, since it assists the project manager in managing procurement documents and records, and serves as a point of reference regarding communications and procurement paperwork.

Reviewing the Results of Contract Administration

Contract administration calls for communication between the seller and the buyer, between the project manager and the vendor, and among the stakeholders. There must be significant documentation of the agreement that both the buyer and the seller agree to before the procured work begins. Once the procured work, service, or product has been delivered from the seller to the buyer, there must be agreement that the delivery is in alignment with the original agreement.

Correspondence

The performance of the contracted work, the contract obligations, and the procedures of the performing organization generate correspondence between the buyer and the seller. The correspondence often takes the form of warnings, letters of discontent, and project performance reviews from the buyer to the seller. This correspondence can serve as documentation for legal action if disputes arise between the buyer and the seller.

Contract Changes

Both approved and declined changes are documented as to their cost, time, and effect on the project and the procured work. Changes that are approved require updates to the project plan, subsidiary plans, and possibly to other project documentation.

Payment Requests

Within the contract, the terms for payment are specified. The terms for payment may stipulate under what conditions the seller will provide an invoice for the work completed. In addition, the buyer may specify when and how the invoices are paid (for example, “Net 30 days from receipt of the invoice”). If the project is using an external payment system, there will be communication between the buyer and the seller, and between the buyer and the external payment system. If the performing organization is handling its own payment processing, this output would simply be payments.

Performing Contract Closure

Contract closeout is analogous to administrative closure. Its purpose is to confirm that the obligations of the contract were met as expected. The project manager, the customer, key stakeholders, and, in some instances, the seller may finalize product verification together to confirm the contract has been completed.

Contract closeout can also be linked to administrative closure, because it is the process of confirming that the work was finished. In instances where the contract was terminated, contract closeout is reviewed and is considered closed because of the termination. The project records should be updated to reflect the contract closeout and the acceptance of the work or product.

Reviewing Contract Documentation

To successfully close out a contract, the details of the contract need to be reviewed. This review ensures that the product verification is complete and is in accordance with the language and agreement in the contract. The review actually considers more than just the contract; the project manager should review and consider the following:

Schedules of the procured work

Contract change requests—approved and declined

Documentation that the seller has created and provided, if any

Financial documents, invoices, and payment records

Results of contractual inspections

Auditing the Procurement Process

The successes and failures within the procurement process of the project are reviewed from the procurement planning stage through contract administration. The intent of the audit is to learn what worked and what didn’t during the procurement processes. This knowledge can then be applied to other areas within the current project and to other projects within the performing organization.

Negotiated Settlements

Termination of the contract may not always be because of something the vendor did wrong. The buyer may no longer need the good or service being provided, but the buyer may still be contractually obligated to pay the vendor. The contract overrides everything. When there is a dispute, technically a claim, the contract even directs the claims administration process.

Should the buyer and the seller not be able to work out their differences between themselves, things are escalated. This means the buyer and the seller will participate in alternative dispute resolution—a nice way of saying, “Here come the attorneys!” Alternative dispute resolution includes mediation, arbitration, and even litigation.

Completing Contract Closeout

Once the deliverables have been accepted and the contract has been closed, it’s essential to collect all of the contract information and record it in the contract file. A contract file is a complete indexed set of records of the procurement process and is incorporated into the administrative closure process. These records include financial information as well as information on the performance and acceptance of the procured work.

Assuming the procured work is acceptable and meets the requirements of the contract, the contract can be closed. The formal closure of a project comes in a written notice from the contract officer to the seller. The notice informs the seller that its work is acceptable and that the contract is considered closed. The formal closure process may vary according to the size of the project. The requirements for contract closeout should be documented within the contract.

CERTIFICATION SUMMARY

Project procurement management allows a project to ascertain resources, materials, equipment, services, and other components needed to successfully complete the project. It is the process of finding sellers that can supply the needed products or services at a fair rate and that meet the quality, time, and cost expectations of the project. The product description will help the project manager and the vendor determine what the best solution is for the procurement need.

One of the first activities the project manager and the project team complete together before procuring products is to determine the need to buy versus the ability to make the product. A decision tree can help the project manager determine which decision is most cost-effective, reliable, and best for the project. A buy-versus-build analysis can compare the benefits of buying versus selling—including attributes other than just price and time.

Bidder conferences allow the bidders to meet with the project managers and other officials representing the seller to confirm the details of the contract statement of work. Recall that the statement of work is provided to all those vendors that may be creating bids or proposals for the seller. The bidders’ conference allows the bidders to obtain any additional information they may need to create a full and complete bid, quote, or proposal. It is part of the contracting process and proceeds to source selection.

PMP candidates—and project managers—must be familiar with the different contract types and when to use each one. Here’s a recap of the most common contract types:

Cost plus fixed fee     Details the fixed cost of the contract, which includes a profit margin for the seller.

Cost plus percentage of cost     Has a price for the contracted product or service, but cost overruns are assigned to the buyer.

Cost plus award fee     Requires the buyer to pay for all the project costs and give the seller an award fee based on the project performance, meeting certain project criteria, or meeting other goals established by the buyer. The award fee can be tied to any factor the buyer determines, and the factor doesn’t have to be exact.

Cost plus incentive fee     The seller determines a price for the product or service, but includes an incentive reward for completing the procured work on time or ahead of schedule.

Fixed-price     A simple fixed price for the contract. This can also include incentives for the seller to complete the project early or ahead of schedule, or for other savings shared between the buyer and the seller.

Fixed price with economic price adjustment contracts     Ideal for long-term projects that may span years to complete the project work. The contract does define a fixed price, with caveats for special categories of price fluctuation.

Time and materials     A price is assigned for the time and materials provided by the seller.

KEY TERMS

To pass the PMP exam, you will need to memorize the following terms and their definitions. For maximum value, create flashcards based on these definitions and review them daily. The definitions can be found within this chapter and in the glossary.

bid A document from the seller to the buyer. Used when price is the determining factor in the decision-making process.

bidder conference A meeting with prospective sellers to ensure that all sellers have a clear understanding of the product or service to be procured. Bidder conferences allow sellers to query the buyer on the details of the product to help ensure that the proposal the seller creates is adequate and appropriate for the proposed agreement.

centralized contracting All contracts for all projects need to be approved through a central contracting unit within the performing organization.

contract A legal, binding agreement, preferably written, between a buyer and the seller detailing the requirements and obligations of both parties. Must include an offer, an acceptance, and a consideration.

contract administration The process of ensuring that the buyer and the seller both perform to the specifications within the contract.

contract change control system Defines the procedures for how contracts may be changed. Includes the paperwork, tracking, conditions, dispute resolution procedures, and procedures for getting the changes approved within the performing organization.

contract closeout A process for confirming that the obligations of the contract were met as expected. The project manager, the customer, the key stakeholder, and, in some instances, the seller complete the product verification together to confirm the contract has been completed.

contract file A complete indexed set of records of the procurement process incorporated into the administrative closure process. These records include financial information as well as information on the performance and acceptance of the procured work.

cost plus award fee This contract requires the buyer to pay for all the project costs and give the seller an award fee based on the project performance, meeting certain project criteria, or meeting other goals established by the buyer. The award fee can be tied to any factor the buyer determines, and the factor doesn’t have to be exact.

cost-reimbursable contracts A contract that pays the seller for the product. In the payment to the seller, there is a profit margin of the difference between the actual costs of the product and the sales amount.

direct costs Costs incurred by the project in order for it to exist. Examples include equipment needed to complete the project work, salaries of the project team, and other expenses tied directly to the project’s existence.

evaluation criteria Used to rate and score proposals from sellers. In some instances, such as a bid or quote, the evaluation criterion is focused just on the price the seller offers. In other instances, such as a proposal, the evaluation criteria can be multiple values: experience, references, certifications, and more.

fixed price with economic price adjustment contract A contract for long-term projects that may span years to complete the project work. The contract does define a fixed price, with caveats for special categories of price fluctuation.

fixed-price contracts Fixed-price contracts are also known as firm-fixed-price and lump-sum contracts. These contracts have a preset price that the vendor is obligated to perform the work for or to provide materials for the agreed-upon price.

force majeure A powerful and unexpected event, such as a hurricane or other disaster.

invitation for bid A document from the buyer to the seller. Requests the seller to provide a price for the procured product or service.

letter of intent Expresses the intent of the buyer to procure products or services from the seller. Not equivalent to a contract.

make-or-buy analysis Used in determining what part of the project scope to make and what part to purchase.

oligopoly A market condition where the actions of one competitor affect the actions of all the other competitors.

procurement The process of a seller soliciting, selecting, and paying for products or services from a buyer.

procurement audits The successes and failures within the procurement process are reviewed from procurement planning through contract administration. The intent of the audit is to learn from what worked and what did not work during the procurement processes.

procurement management plan This subsidiary project plan documents the decisions made in the procurement planning processes. It specifies how the remaining procurement activities will be managed.

proposal A document from the seller to the buyer, responding to a request for proposal or other procurement document.

qualified sellers list The performing organization may have lists of qualified sellers, preferred sellers, or approved sellers. The qualified sellers list generally has contact information, history of past experience with the seller, and other pertinent information.

quote A document from the seller to the buyer; used when price is the determining factor in the decision-making process.

request for proposal A document from the buyer to the seller that asks the seller to provide a proposal for completing the procured work or for providing the procured product.

request for quote A document from the buyer to the seller asking the seller to provide a price for the procured product or service.

should-cost estimates These estimates are created by the performing organization to predict what the cost of the procured product should be. If there is a significant difference between what the organization has predicted and what the sellers have proposed, the statement of work was inadequate or the sellers have misunderstood the requirements or the price is too high.

single source A specific seller that the performing organization prefers to contract with.

sole source The only qualified seller that exists in the marketplace.

statement of work This fully describes the work to be completed, the product to be supplied, or both. The SOW becomes part of the contract between the buyer and the seller. It is typically created as part of the procurement planning process and is used by the seller to determine whether it can meet the project’s requirements.

time and materials A contract type where the seller charges the buyer for the time and materials for the work completed. T&M contracts should have a not-to-exceed clause (NTE) to contain costs.

TWO-MINUTE DRILL

Planning for Purchases

Procurement planning is determining which aspects of the project can best be fulfilled by procuring the specified products or services.

The project scope serves as a key input, as this describes the work, and only the required work, needed to complete the project.

A clearly defined product description is needed in order to successfully procure the product.

Make-or-buy analysis calculates and predicts which is better: for the performing organization to make the product or to hire an entity outside of the organization to make the product.

Some contracts can transfer the risk to the seller, while other contract types require the buyer to retain the risk of cost overruns.

Completing Procurement Planning

The procurement management plan describes the procedures for procuring work or products.

Bids and quotes are needed when the decision is made on price. Proposals are needed when decisions are based on other factors, such as experience, qualifications, and approaches to the project work.

The buyer should provide the seller with an SOW, details on the type of response needed—such as a proposal, quote, or bid, and any information on contractual provisions, such as nondisclosure agreements or a copy of the model contract that the buyer intends to use.

Preparing for Contracting

Contracting is requesting the potential sellers to provide bids, proposals, or quotes to complete the project work or supply the described product.

An organization may retain a qualified sellers list from which the project team is forced to select a vendor. In other instances, the project team can rely on trade associations, industry directories, and other resources to locate qualified sellers.

Advertisements for the procurement needs in newspaper and trade publications can increase the list of sellers the buyer can choose from. Many government entities must publish procurement opportunities.

Bidder conferences allow sellers to meet with the buyer to query the buyer on details of the procurement process. The goal of the bidder conference is to ensure that all prospective sellers have the same information and all of the needed information to complete an accurate bid or proposal.

Completing Procurement Purchasing

Samples of the sellers’ previous, related products or services can serve as evaluation criteria.

Contract negotiation focuses on finding a fair and reasonable price for both the buyer and the seller.

Weighting systems are unbiased approaches to determine which seller has the best offer to complete the procured product or service.

Screening systems allow an organization to screen out sellers that do not qualify for the procured product or service.

“Should-cost” estimates are completed by the performing organization to determine if sellers completely understand the requirements of the project work.

Performing Contract Administration

Contract administration ensures the sellers are meeting their contractual obligations.

Change requests may require updates to the contract between the buyer and the seller. Contract change requests are part of the integrated change control system.

The project manager must document and report to the seller and management on how the seller is meeting its contract obligations.

Performing Contract Closure

Contract closeout is similar to administrative closure.

Contract documentation—such as the contract, schedules, relevant documentation, approved contract changes, performance reports, and other pertinent information—is needed to complete contract closeout.

Procurement audits are intended to review, document, and share the successes and failures of the current project’s procurement process. The information can be applied to other projects within the organization.

A contract file is created and is included with the project records as part of the historical information of the current project.

SELF TEST

1. Which of the following may be used as a risk mitigation tool?

A. A vendor proposal

B. A contract

C. A quotation

D. Project requirements

2. A contract cannot have provisions for which one of the following?

A. A deadline for the completion of the work

B. Illegal activities

C. Subcontracting the work

D. Penalties and fines for disclosure of intellectual rights

3. You are the project manager for the 89A Project. You have created a contract for your customer. The contract must have what two things?

A. An offer and consideration

B. Signatures and the stamp of a notary public

C. The value and worth of the procured item

D. A start date and an acceptance of the start date

4. The WBS and the WBS dictionary can help a project manager plan for purchases and acquisitions. Which one of the following best describes this process?

A. The WBS defines the specific contracted work.

B. The WBS defines the requirements for the specific contracted work.

C. The WBS defines the specific contracted work, which must support the requirements of the project customer.

D. Both parties must have and retain their own copy of the WBS.

5. Yolanda has outsourced a portion of the project to a vendor. The vendor has discovered some issues that will influence the cost and schedule of its portion of the project. How must the vendor and Yolanda update the agreement?

A. As a new contract signed by Yolanda and the vendor

B. By submitting the change request to the contract change control system

C. As a memo and SOW signed by Yolanda and the vendor

D. By submitting the change request to the cost change control system

6. The United States backs all contracts through which of the following?

A. Federal law

B. State law

C. Court system

D. Lawyers

7. Terry is the project manager of the MVB Project. She needs to purchase a piece of equipment for her project. The accounting department has informed Terry she needs a unilateral form of contract. Accounting is referring to which of the following?

A. The SOW

B. A legally binding contract

C. A purchase order

D. An invoice from the vendor

8. Bonnie is the project manager for the HGH Construction Project. She has contracted a portion of the project to the ABC Construction Company and has offered a bonus to ABC if they complete their portion of the work by August 30. This is an example of which one of the following?

A. A project requirement

B. A project incentive

C. A project goal

D. A fixed-price contract

9. You are a project manager for your organization and are progressing through the procurement management processes. Who should receive the procurement document package?

A. Your client

B. Your project sponsor

C. Your accounting/finance department

D. Each seller that will participate in the bidding

10. Privity is what?

A. The relationship between the project manager and a known vendor

B. The relationship between the project manager and an unknown vendor

C. The contractual, confidential information between the customer and vendor

D. The professional information regarding the sale between the customer and vendor

11. Sammy is the project manager of the DSA Project. He is considering proposals and contracts presented by vendors for a portion of the project work. Of the following, which contract is least dangerous to the DSA Project?

A. Cost plus fixed fee

B. Cost plus percentage of cost

C. Cost plus incentive fee

D. Fixed-price

12. Of the following contract types, which one requires the seller to assume the risk of cost overruns?

A. Cost plus fixed fee

B. Cost plus incentive fee

C. Lump-sum

D. Time and materials

13. Benji is the project manager of the PLP Project. He has hired an independent contractor for a portion of the project work. The contractor is billing the project $120 per hour, plus materials. This is an example of which one of the following?

A. Cost plus fixed fee

B. Time and materials

C. Unit price

D. Lump-sum

14. Mary is the project manager of the JHG Project. She has created a contract statement of work (SOW) for a vendor. All of the following should be included in the contract SOW except for which one?

A. The items being purchased

B. The signatures of both parties agreeing to the SOW

C. The expected quality levels

D. A description of the collateral services required

15. You are the project manager for a software development project for an accounting system that will operate over the Internet. Based on your research, you have discovered it will cost you $25,000 to write your own code. Once the code is written, you estimate you’ll spend $3,000 per month updating the software with client information, government regulations, and maintenance. A vendor has proposed to write the code for your company and charge a fee based on the number of clients using the program every month. The vendor will charge you $5 per month per user of the web-based accounting system. You will have roughly 1,200 clients using the system each month. However, you’ll need an in-house accountant to manage the time and billing of the system, so this will cost you an extra $1,200 per month. How many months can you use the system before it’s better to write your own code rather than hire the vendor?

A. 3 months

B. 4 months

C. 6 months

D. 15 months

16. You are the project manager of a project that will span six years in Columbus, Ohio. You are negotiating with your project customer for considerations for inflation, cost of utilities, and other cost factors that will likely fluctuate over the course of the project. What type of project should your project have?

A. Cost plus award fee

B. Fixed price with economic price adjustments

C. Lump-sum

D. Fixed-price incentive fee

17. A contract between an organization and a vendor may include a clause that penalizes the vendor if the project is late. The lateness of a project has a monetary penalty. Thus, the penalty should be enforced or waived based on which one of the following?

A. Whether the project manager could have anticipated the delay

B. Whether the project manager knew the delay was likely

C. Whether the delay was because of an unseen risk

D. Who caused the delay and the reason why

18. A single-source seller means what?

A. There is only one qualified seller.

B. There is only one seller the company wants to do business with.

C. There is a seller that can provide all aspects of the project procurement needs.

D. There is only one seller in the market.

19. Which one of the following is not a valid evaluation criterion for source selection?

A. The age of the contact person at the seller

B. The technical capability of the seller

C. Financial capacity

D. Price

20. Henry has sent the ABN Contracting Company a letter of intent. This means which one of the following?

A. Henry intends to sue the ABN Contracting Company.

B. Henry intends to buy from the ABN Contracting Company.

C. Henry intends to bid on a job from the ABN Contracting Company.

D. Henry intends to fire the ABN Contracting Company.

21. Martha is the project manager of the MNB Project. She wants a vendor to offer her one price to do all of the detailed work. Martha is looking for which type of document?

A. A request for proposal

B. A request for information

C. A proposal

D. An invitation for bid

22. Which one of the following is true about procurement document packages?

A. They offer no room for bidders to suggest changes.

B. They ensure the receipt of complete proposals.

C. They inform the performing organization why the bid is being created.

D. The project manager creates and selects the bid.

23. In what process group does source selection happen?

A. Initiating

B. Planning

C. Executing

D. Closing

24. Within your organization, all project managers are required to document the performance quality ratings, delivery performance, and contractual compliance of each vendor they interact with. This is known as what?

A. A requirement

B. A seller rating system

C. Procurement selection

D. An incentive contract

25. You are the project manager for a seller, but are managing another company’s project as well. Things have gone well on the project, and the work is nearly complete. There is still a significant amount of funds in the project budget. The buyer’s representative approaches you and asks that you complete some optional requirements to use up the remaining budget. You should do which one of the following?

A. Negotiate a change in the contract to take on the additional work.

B. Complete a contract change for the additional work.

C. Submit the proposed change through the contract change control system.

D. Deny the change because it was not in the original contract.

SELF TEST ANSWERS

1. Which of the following may be used as a risk mitigation tool?

A. A vendor proposal

B. A contract

C. A quotation

D. Project requirements

2. A contract cannot have provisions for which one of the following?

A. A deadline for the completion of the work

B. Illegal activities

C. Subcontracting the work

D. Penalties and fines for disclosure of intellectual rights

3. You are the project manager for the 89A Project. You have created a contract for your customer. The contract must have what two things?

A. An offer and consideration

B. Signatures and the stamp of a notary public

C. The value and worth of the procured item

D. A start date and an acceptance of the start date

4. The WBS and the WBS dictionary can help a project manager plan for purchases and acquisitions. Which one of the following best describes this process?

A. The WBS defines the specific contracted work.

B. The WBS defines the requirements for the specific contracted work.

C. The WBS defines the specific contracted work, which must support the requirements of the project customer.

D. Both parties must have and retain their own copy of the WBS.

5. Yolanda has outsourced a portion of the project to a vendor. The vendor has discovered some issues that will influence the cost and schedule of its portion of the project. How must the vendor and Yolanda update the agreement?

A. As a new contract signed by Yolanda and the vendor

B. By submitting the change request to the contract change control system

C. As a memo and SOW signed by Yolanda and the vendor

D. By submitting the change request to the cost change control system

6. The United States backs all contracts through which of the following?

A. Federal law

B. State law

C. Court system

D. Lawyers

7. Terry is the project manager of the MVB Project. She needs to purchase a piece of equipment for her project. The accounting department has informed Terry she needs a unilateral form of contract. Accounting is referring to which of the following?

A. The SOW

B. A legally binding contract

C. A purchase order

D. An invoice from the vendor

8. Bonnie is the project manager for the HGH Construction Project. She has contracted a portion of the project to the ABC Construction Company and has offered a bonus to ABC if they complete their portion of the work by August 30. This is an example of which one of the following?

A. A project requirement

B. A project incentive

C. A project goal

D. A fixed-price contract

9. You are a project manager for your organization and are progressing through the procurement management processes. Who should receive the procurement document package?

A. Your client

B. Your project sponsor

C. Your accounting/finance department

D. Each seller that will participate in the bidding

10. Privity is what?

A. The relationship between the project manager and a known vendor

B. The relationship between the project manager and an unknown vendor

C. The contractual, confidential information between the customer and the vendor

D. The professional information regarding the sale between the customer and the vendor

11. Sammy is the project manager of the DSA Project. He is considering proposals and contracts presented by vendors for a portion of the project work. Of the following, which contract is least dangerous to the DSA Project?

A. Cost plus fixed fee

B. Cost plus percentage of cost

C. Cost plus incentive fee

D. Fixed-price

12. Of the following contract types, which one requires the seller to assume the risk of cost overruns?

A. Cost plus fixed fee

B. Cost plus incentive fee

C. Lump-sum

D. Time and materials

13. Benji is the project manager of the PLP Project. He has hired an independent contractor for a portion of the project work. The contractor is billing the project $120 per hour, plus materials. This is an example of which one of the following?

A. Cost plus fixed fee

B. Time and materials

C. Unit price

D. Lump-sum

14. Mary is the project manager of the JHG Project. She has created a contract statement of work (SOW) for a vendor. All of the following should be included in the contract SOW except for which one?

A. The items being purchased

B. The signatures of both parties agreeing to the SOW

C. The expected quality levels

D. A description of the collateral services required

15. You are the project manager for a software development project for an accounting system that will operate over the Internet. Based on your research, you have discovered it will cost you $25,000 to write your own code. Once the code is written, you estimate you’ll spend $3,000 per month updating the software with client information, government regulations, and maintenance.

A vendor has proposed to write the code for your company and charge a fee based on the number of clients using the program every month. The vendor will charge you $5 per month per user of the web-based accounting system. You will have roughly 1,200 clients using the system each month. However, you’ll need an in-house accountant to manage the time and billing of the system, so this will cost you an extra $1,200 per month. How many months can you use the system before it’s better to write your own code rather than hire the vendor?

A. 3 months

B. 4 months

C. 6 months

D. 15 months

16. You are the project manager of a project that will span six years in Columbus, Ohio. You are negotiating with your project customer for considerations for inflation, cost of utilities, and other cost factors that will likely fluctuate over the course of the project. What type of project should your project have?

A. Cost plus award fee

B. Fixed price with economic price adjustments

C. Lump-sum

D. Fixed-price incentive fee

17. A contract between an organization and a vendor may include a clause that penalizes the vendor if the project is late. The lateness of a project has a monetary penalty. Thus, the penalty should be enforced or waived based on which one of the following?

A. Whether the project manager could have anticipated the delay

B. Whether the project manager knew the delay was likely

C. Whether the delay was because of an unseen risk

D. Who caused the delay and the reason why

18. A single-source seller means what?

A. There is only one qualified seller.

B. There is only one seller the company wants to do business with.

C. There is a seller that can provide all aspects of the project procurement needs.

D. There is only one seller in the market.

19. Which one of the following is not a valid evaluation criterion for source selection?

A. The age of the contact person at the seller

B. The technical capability of the seller

C. Financial capacity

D. Price

20. Henry has sent the ABN Contracting Company a letter of intent. This means which one of the following?

A. Henry intends to sue the ABN Contracting Company.

B. Henry intends to buy from the ABN Contracting Company.

C. Henry intends to bid on a job from the ABN Contracting Company.

D. Henry intends to fire the ABN Contracting Company.

21. Martha is the project manager of the MNB Project. She wants a vendor to offer her one price to do all of the detailed work. Martha is looking for which type of document?

A. A request for proposal

B. A request for information

C. A proposal

D. An invitation for bid

22. Which one of the following is true about procurement document packages?

A. They offer no room for bidders to suggest changes.

B. They ensure the receipt of complete proposals.

C. They inform the performing organization why the bid is being created.

D. The project manager creates and selects the bid.

23. In what process group does source selection happen?

A. Initiating

B. Planning

C. Executing

D. Closing

24. Within your organization, all project managers are required to document the performance quality ratings, delivery performance, and contractual compliance of each vendor they interact with. This is known as what?

A. A requirement

B. A seller rating system

C. Procurement selection

D. An incentive contract

25. You are the project manager for a seller, but are managing another company’s project as well. Things have gone well on the project, and the work is nearly complete. There is still a significant amount of funds in the project budget. The buyer’s representative approaches you and asks that you complete some optional requirements to use up the remaining budget. You should do which one of the following?

A. Negotiate a change in the contract to take on the additional work.

B. Complete a contract change for the additional work.

C. Submit the proposed change through the contract change control system.

D. Deny the change because it was not in the original contract.