Product Management•Chapter 8•3 min read

Procurement Management and Contracts — Managing External Resources

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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)
  1. Conduct Procurements (Bidding and Proposal Evaluation)
  • Develop qualified sellers list
  • Evaluate proposals (technical + cost + company capability)
  • Negotiate → Award contract
  1. Control Procurements
  • Monitor vendor performance
  • Inspect and accept deliverables
  • Process payments
  • Manage contract changes
  1. 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

Key Takeaways

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

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