Project Procurement Management

Knowledge Area Executive Summary

Procurement ManagementProcurement Management is about the processes necessary to purchase or acquire products, services, or results needed from outside the project team.  This Knowledge Area centers on the different contracts that are appropriate for different types of purchases. You can find the detail of all other PMBOK Knowledge areas in The Best PMP Study Guide.

  • What process groups are involved
    • Planning
    • Executing
    • Monitoring and Controlling
  • What processes make up this KA
    • Plan Procurement Management
    • Conduct Procurements
    • Control Procurements
  • Major or important ITTOs
    • Project Charter
    • Business Documents
    • PM Plan
    • Project Documents
    • Procurement Documents
    • Seller Proposals
    • Agreements
    • Approved Change Requests
    • Work Performance Data
    • Data Gathering
    • Data Analysis
    • Source Selection Analysis
    • Interpersonal and Team Skills
    • Claims Administration
    • Inspections
    • Audits
    • Procurement Management Plan
    • Procurement Strategy
    • Procurement Statement of Work
    • Make-or-Buy Decisions
    • Source Selection Criteria
    • Independent Cost Estimates
    • Change Requests
    • Selected Sellers
    • Closed Procurements
    • Work Performance Information
  • Critical concepts

There are several terms in this Knowledge Area that may not be common to Project Managers that don’t deal with contracts on a consistent basis.  If you are currently not an integral part of the procurement process in your organization, you will need to make sure that you refresh your knowledge in these areas and have them as a part of your “Brain Dump” for test day.

The first process in Procurement Management is Plan Procurement Management.  This process is where the project procurement decisions are documented and the approach to procurements is outlined.  This process determines whether to acquire goods and services from outside the project and if so, what to acquire as well as how and when to acquire it.  This process uses a tool and technique called Source Selection Analysis.  There are many aspects to determining who will be awarded a contract, or what criteria are most important in selecting a vendor.  Common items that are taken into consideration are cost, vendor qualifications, the best technical solution, or the time estimated to complete the work.  This will generate outputs that are used in our next process, Conduct Procurements.

The Conduct Procurements process allows us to obtain seller/vendor responses, select the seller/vendor, and award a contract.  It is an Executing Process Group process, however the work involved is centered on determining who it will be outside the project team that will perform the actual work described by the Procurement Statement of Work (SOW).  In this process, the Project Manager’s work is to use their (or other parties) expert judgment to Advertise the needed work, hold Bidder Conferences, analyze proposals, and then award the seller/vendor that aligns best with the Source Selection Criteria.  The Project Manager will also need to align the Selected Seller’s work with the project by updating all of the generated portions of the PM Plan, including the Schedule Baseline.  This will then be evaluated for variance in the next process, Control Procurements.

In the Control Procurements process, we will manage the procurement relationship, the contract performance, and make changes or corrections when needed.  Additionally, this process will allow us to close out contracts after the work has been inspected and found accurate/complete in accordance with the terms and conditions of the Agreement.  This process uses tools and techniques like Data Analysis, Inspections, Audits, and Claims Administration.  In Claims Administration, it is important to remember the preferred order to resolve issues between the seller and the buyer.

Knowledge Area Frequently Asked Questions

FAQQ: What is the difference between Single Source Contracts and Sole-Source Contracts?

A: Single-Source contracts are awarded without any competition.  This is often due to a prior business relationship with a vendor.  Sole-Source contracts are awarded to a seller because they are the ONLY source of the required product.  To show an example of the difference in plain terms, a Single-Source was awarded to a coffee-maker vendor because their makers are in three of your other stores and you are well aware of their quality and the organization’s customer service.  A Sole-Source contract was awarded to the maker of a ruggedized storage container for a 60-inch TV with an internal lift motor.

Q: Are there different levels of risk with the different types of contracts?

A: Absolutely.  Often, companies will use different contract types to shift the risk from one party to the other in an Agreement based upon the level of risk that is acceptable (often called risk appetite).  The image below shows the level of risk to each party in contracts.

Contract Risk

What to Memorize in this Knowledge Area

This Knowledge Area can be intimidating if you don’t work in or very involved in the procurement process for your organization.  Don’t worry, though.  PMI® doesn’t expect you to be an expert in the full procurement process.  They will be testing you on the levels of risk in contracts, contract terminology, and in various scenario-based terms to determine your understanding of the Procurement Management processes.  Below is a list of items to memorize or include in your Brain Dump.

  • Contract Terminology – Fee, Target Price/Cost/Fee, Sharing Ratio, Ceiling Price, PTA, etc…
  • Contract Types
  • The risk associated with each type of contract
  • Point of Total Assumption (PTA) formula
  • Target Price/Cost formula
  • The purpose of contracts/Agreements
  • Source Selection Criteria
  • Bidder Conference (ethical rules)
  • Make-or-Buy Decisions

Memorize - Study

Knowledge Area Critical Reasoning & Testing Skills

ContractsQ: You are a Project Manager working on a project to create the prototype for a new electric autonomous vehicle.  You complete a Make-or-Buy analysis for the power source and you realize that it will be more cost-effective for your organization to procure the power source from a third party.  You work with the selected vendor and establish a Fixed Price-Incentive Fee contract with an 80:20 Buyer-Seller Share Ratio.  The Target Cost for this contract is $1M with a $100 Target Profit for the seller.  Your Procurement Department sets a Ceiling Price of $1.3M.  Your Sponsor asks what the Point of Total Assumption (PTA) will be.  What do you tell him?

  1. You can’t determine the PTA because you do not have the ability to calculate the Target Cost
  2. $1.25M
  3. $2M
  4. The PTA does not apply here because this is an FPIF contract, not a CPIF contract

EXPLANATION: This question is drawing on a number of recall items regarding contracts.  It is asking you to remember the unique aspects of an FPIF contract (is there a PTA with FPIF contracts..?), the formula to determine the Point of Total Assumption (if it applies to FPIF contracts), and the formula to calculate the Target Price.  There’s a lot going on here, but it can be done.  For instance, answer A states that we can’t determine the Target Price, but we can.  We have enough of the other variables to get what we need.  The formula for Target Price is TP = TC + Seller Profit.  The Target Cost and Seller Profit are in the question.  Therefore A, cannot be correct.  Answers B and C are the results of either a correct or incorrect PTA calculation.  We’ll come back to them in a second.  Answer D states that CPIF contracts are the contracts that have a Point of Total Assumption rather than FPIF contracts.  This is inaccurate.  FPIF contracts do in fact have a PTA.  In fact, the PTA is defined as “the cost determined in a Fixed Price Incentive Fee contract above which the seller bears all the loss of a cost overrun…”  So D can’t be correct either.  So let’s go back to answers B and C and do some math, shall we?  The formula to calculate the PTA is:

PTA = ((CP – TP)/BSR) + TC

CP is the Ceiling Price, which was set by the Procurement Department at $1.3M

TP is the Target Price, which we know from above is Target Cost + Seller Profit, which we can gain from the question and know the TP = $1.1M.

BSR is the Buyer’s Share Ratio, which is 80% according to our question.

TC is the Target Cost, which we know is $1M.

So let’s “sub-in” all of those variables and see what we come up with:

PTA = ((CP – TP)/BSR) + TC

PTA = (($1.3M – $1.1M)/.80) + $1M

$1.25M – This is correct

So in this question, Answer B is correct.  Using the incorrect ratio for the BSR (accidentally using the seller’s percentage), we would come to the conclusion that Answer C is correct…

PTA = ((CP – TP)/BSR) + TC

PTA = (($1.3M – $1.1M)/.20) + $1M

$2M – This is incorrect because it uses the wrong sharing ratio

Knowledge Area Closing Summary

I stated earlier that PMI® does not expect you to be an expert in contracts.  Instead, they are looking to evaluate your ability to incorporate the processes associated with Project Procurement Management.  This means you need to have a basic, but firm understanding of the various contract types, the risk associated with them (as well as who owns the risk), contract terms, how to calculate the overall costs of contracts (including the PTA), and the ability to utilize the various tools and techniques of the Procurement Management processes.  You must include these things in your Study Plan.  Don’t be afraid of this Knowledge Area!  The instructors and staff at PM-ProLearn specialize in helping people reach their PMP® goals, which means we know Procurement Management!  Let us help you on your way to understanding all the items surrounding procurements and their processes so that you can pass your PMP exam and be successful as a Project Manager!

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