Project procurement management focuses on the purchasing and outsourcing of services. It includes the processes required to acquire good and services for a project from outside the performing organization. As a project manager you will have to outsource for certain supplies and materials that your company may not have. When dealing with procurement, it is important to create a plan as to how you will manage the outsourcing of materials and services.
According to Kathy Schwalbe “planning procurement management involves determining what to procure, when and how to do it. In procurement planning, one must decide what to outsource, determine the type of contract, and describe the work for potential sellers… Outputs of this process include a procurement management plan, procurement strategy, bid documents, procurement statement of work, source selection criteria, make-or-buy decisions, independent cost estimates, change request, project documents updates, and organization process assets updates.” (510)
Planning procurement management involves many different facets. In this post we will focus on a few of these things to give you a little more information of what to look for when doing procurement. We will look at determining types of contracts, make- or- buy analysis, procurement management plan, and a statement of work.
Procurement Management Plan
Just like any other aspect of project management, project procurement needs to have a plan. A procurement management plan describes how procurement processes will be managed. As you could assume these plans will always very based on the needs of the project. According to Peter Landau of ProjectManager.com a procurement plan can be broken down into 8 steps:
Define the Terms- the process of listing what is needed in detail (quantity, size, duration, etc.) along with knowing what services will be provided to the project.
Outline the Agreement Type- creating a contract between you and whoever you are outsourcing to. Both sides must agree on a contract and how it will be maintained
Identify and Mitigate Risks- acknowledge and document potential risk. Once the risks are acknowledged it is important to find a way to resolve each risk
Define Costs- What are the cost of the projects’ procurement? Make a thorough list of what is required and offer a proposal requestion bids from suppliers. Suppliers will then provide you with the cost of the services.
Identify Constraints- by identifying constraints if helps to avoid getting hit with unforeseen constraints during execution. Constraints can be cost, scope, limited resources, and technical specifications
Get Contract Approved- Review bids from potential suppliers by doing a service and cost analysis. Review that with decision makers in the project as you all decide which bid is the best option.
Make a Decision Criteria- created criteria in which you and your team decide on which bid to begin a contract with
Create a Vendor Management Plan- After a contract is picked, create a plan the guarantees that services are being delivered correctly and on time.
Statement of Work
When going through the procurement planning process, creating a statement of work can help to determine what services may be need. A statement of work is a description of the work required for the procurement (Schwalbe 519). A statement of work can be contract specific to focus solely on what services are needed within the contract. A contract SOW should be clear-cut, brief and as complete as possible. These SOWs describe the require work in adequate detail which allows potential suppliers to determine if they can provide desired services and determine a suitable price. For many organizations SOWs are created using samples and templates similar to the one below.
Make- or- buy Analysis
A common management technique, make-or-buy analysis is used to decide if an organization should make a product or perform a service inside the organization or buy it from someone else (Schwalbe 517). Make-or-buy analysis should be done at the beginning of the project procurement planning process as it allows you to decide on if outsourcing a service within the project is needed. This analysis consists of internal cost estimations of the service compared to the cost of outsourcing. Potential cost constraints should be considered when doing this analysis along with available contract types.
Types of contracts
Contracts are necessary when outsourcing for a service or product. As a project manager the question that you should be asking yourself is which, depending on the project which type of contract would be the most beneficial for my company and team? When looking at there are three main types: Fixed-price or lump-sum contracts, cost-reimbursable contracts, and time and material (T&M) contracts.
1. Fixed price/ lump sum contracts- these contracts involve a fixed total price for a well-defined service. These types of contracts favor you the buyer since the price is prearranged. That being said the product seller often does increase the estimate while still being competitive in order to reduce risk on their end.
2. Cost reimbursable contracts- these contracts involve payment to the supplier for direct and indirect actual cost. There are four different versions of cost reimbursable contracts: cost plus incentive fee (CPIF) contracts, cost plus fixed fee (CPFF) contract, cost plus award fee (CPAF) contract, and cost plus percentage of costs (CPPC) contracts.
-Cost plus incentive fee (CPIF) contracts- consists of the buyer paying the supplier for contract defined allowable cost along with a predetermined fee and an incentive bonus.
-Cost plus fixed fee (CPFF) contract- consists of the buyer paying the supplier for contract defined allowable cost plus a fixed fee payment that is often based on an estimated cost percentage.
-Cost plus award fee (CPAF) contract- consist of the buyer paying the supplier a contract defined allowable cost plus an award fee based on the satisfaction of subjective performance criteria
-Cost plus percentage of costs (CPPC) contracts- consist of the buyer paying the supplier a contract defined allowable cost along with a predetermined percentage base on total costs
3. Time and material contracts- these contracts are a hybrid of fixed price and cost reimbursable contracts. These contracts reimburse the supplier for the materials need to finish a job along with a prearranged hourly wage and fee related to the provided services.
Procurement and Agile
When using agile procurement, it is important to know that it is less orthodox and strict and more collaborative and open. Agile procurement has more of a focus on time and speed this tends to be favored because it’s a leaner approach due to steps being incorporated together allowing for quicker decision to be made. Agile procurement also provides metrics that can be measured in real time allowing for better information when determining outsourcing decisions.
Procurement management planning is a very broad but impactful aspect on project management. Outsourcing services to others can help to reduce the risks accompanied with certain parts of the project. That being said, creating a procurement plan should be well thought out and concise process for you and your project management team.
Works Cited
Agile Procurement: What It Is and How to Implement. ProcurePort.com, February 02, 2021, https://blog.procureport.com/agile-procurement-definition/. Accessed 21 Nov 2021
Landau, Peter. How to Make a Procurement Management Plan.ProjectManager.com, July 30, 2021, https://www.projectmanager.com/blog/procurement-management-plan. Accessed 21 Nov 2021
Schwalbe, Kathy. Information Technology Project Management. Boston, MA: Course Technology, 2019. Print
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