Ch8. Procurement Management and Contracts — Managing External Resources

What Is Procurement Management?

Procurement management covers the entire process of purchasing or contracting for products, services, or results that the project cannot provide internally.

Make vs. Buy Decision:
Build internally: core competency, confidentiality, long-term cost savings
Procure externally: lack of expertise, short-term need, short-term cost savings

→ Weigh cost, time, quality, and risk together

Contract Types — The Most Important Concept

1. Fixed-Price Contracts (FP)

Firm Fixed Price (FFP):
→ The most common type
→ Vendor bears cost overrun risk; price does not change
→ Best when scope is clearly defined

Fixed Price Incentive Fee (FPIF):
→ Bonus for meeting targets; penalty for exceeding them
→ Motivates vendor performance

Fixed Price with Economic Price Adjustment (FPEPA):
→ For long-term contracts; allows adjustment for inflation

2. Cost-Reimbursable Contracts (CR)

Cost Plus Fixed Fee (CPFF):
→ Actual costs reimbursed + a pre-agreed fixed profit
→ Used when scope is unclear
→ Buyer bears cost overrun risk

Cost Plus Incentive Fee (CPIF):
→ Savings are shared if costs come in below target

Cost Plus Award Fee (CPAF):
→ Fee determined by performance criteria

3. Time and Materials Contracts (T&M)

→ Pre-agreed unit rates (per hour or per unit)
→ Total quantity is not fixed at signing
→ Moderate risk shared between buyer and seller
→ Best for small tasks or when duration is uncertain

Contract Types by Risk Distribution

Buyer risk LOW ←——————————————→ Buyer risk HIGH
         FP           T&M              CR
Seller risk HIGH ←——————————————→ Seller risk LOW

The Procurement Process

1. Plan Procurement Management
   → Make/Buy decision
   → Select contract type
   → Prepare procurement documents (RFP, RFI, IFB)

2. Conduct Procurements (Bidding and Proposal Evaluation)
   → Develop qualified sellers list
   → Evaluate proposals (technical + cost + company capability)
   → Negotiate → Award contract

3. Control Procurements
   → Monitor vendor performance
   → Inspect and accept deliverables
   → Process payments
   → Manage contract changes

4. Close Procurements
   → Final inspection and acceptance
   → Issue formal contract closure document

Types of Procurement Documents

RFI (Request for Information):
→ Market research — find out who is available and capable

RFP (Request for Proposal):
→ Request technical approach, methodology, and price
→ Used for complex projects

RFQ (Request for Quotation):
→ Price inquiry only — for standardized goods or services

IFB (Invitation for Bid):
→ Formal public procurement solicitation

Vendor Performance Management

SLA (Service Level Agreement):
→ Specifies required service quality standards
→ Example: 99.9% system uptime, response time < 4 hours

KPIs (Key Performance Indicators):
→ On-time delivery rate
→ Defect rate
→ Cost variance rate

Vendor evaluation:
→ Regular performance reviews (monthly or quarterly)
→ Corrective action plans when needed
→ Decision on contract renewal

FP: low buyer risk, best when scope is clear / CR: high buyer risk, best when scope is unclear T&M: moderate risk, unit rates fixed but total quantity open RFP vs. RFQ: RFP requests full methodology + price; RFQ requests price only Procurement has four stages: Plan → Conduct (bid) → Control (monitor) → Close