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Introducing Project Procurement Management - Completing Procurement Planning

15 important questions on Introducing Project Procurement Management - Completing Procurement Planning

In which phase should the make or buy decision for procurement take place?

It should occur in the initial scope definition to determine whether the entire project should be completed in-house or procured. (although additional make or buy decisions might be made as the project evolves).

What are the two factors that influence a make or buy decision?

  • The initial costs of the solutions
  • The ongoing expenses of the solutions

What might be other reasons to make in-house?

Less costly, use in-house skills, control of work, control of intellectual property, learn new skills, available staff, focus on core project work.
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What might be other reasons to buy?

Less costly, lack of in-house skills, small volume, more efficient, transfer risks available vendor, allows project team to focus on other work items.

Why is expert judgment relevant for procurement?

It may be beneficial to rely on the wisdom of others to determine the need for procurement.

What are general rules regarding contracts you should know?

  • Contracts are formal agreements
  • Contracts will mostly be backed through court systems
  • They should clearly state all requirements for acceptance
  • Any changes must be formally approved, controlled and documented
  • It is not fulfilled until all requirements are met
  • Can be used as a risk mitigation tool
  • Legal requirements govern contracts
  • The terms and definitions should define breaches, copyrights, intellectual rights and force majeure

What is the characteristic of a fixed price contract?

Agreements for a total price for the product the seller needs to provide. They must provide incentives for meeting or exceeding contract requirements and require the seller to assume the cost of overruns.

What fixed contracts types do we recognize? Who owns the risk

  • Firm-fixed price contract - agreed upon price for contracted product; can include incentives for the seller - risk issues for seller
  • Fixed price incentive fee - `agreed upon price for contracted product; can include incentives for the seller - risk issues for seller
  • Fixed price with economic price adjustment contract -  agreed upon price for contracted product; can include cost adjustments based on predefined categories of cost - risk issues for seller

What is the characteristic of a cost-reimbursable contract? Who owns the risk?

The seller is paid for the product with the payment including a profit margin, the difference between the actual costs of the product and the sales amount. These contracts require the buyer to assume the risk of cost overruns.

What 4 types of cost reimbursable contracts do we recognize? Where are the risk issues?

  • Cost plus fixed fee - Actual costs plus profit margin for seller - cost overrun represents risk to buyer
  • Cost plus incentive fee - Actual cost plus a profit margin for seller - cost overrun represent risk to the buyer
  • Cost plus award fee - Actual costs plus an award based on seller-defined objectives for the project -  Buyer carries the risk, as the seller is the judge of the contract work and performance.
  • Cost plus percentage of costs - Actual costs plus profit for seller - cost overrun represent risk to the buyer. This is the most dangerous contract type for the buyer.

When would Time and Material Contract generally be useful?

These contracts, often also called unit price contracts are ideal when an organization contracts out a small project when smaller amounts of work within a larger project are to be completed by a vendor.

What is the risk of a T&M contract? How can we mitigate?

The risk (for the buyer) is that the expenses grow out of control as more work is assigned to the seller. Therefore they should put a ceiling on the procured work via a NTE clause (not to exceed clause).

What do we mean with a 'third party' or 'should cost' estimate?

You either hire a third party to create an estimate for how much the procured work will cost, or you create an estimate for the work internally as part of the procurement process.

Which document contains the decisions that have been made in the procurement planning processes?

The subsidiary project plan. It specifies how the remaining procurement activities will be managed.

How is the contract SOW used?

The contract SOW the seller fully describes the work to be completed and/or the product to be supplied. It is part of the contract between the buyer and the seller.
The SOW defines the project specifications, requirements for vendor qualification, and details about the project work, location, expected time frame, and similar conditions.

The question on the page originate from the summary of the following study material:

PMP - project management professional study guide | 9780071775915 | Joseph Phillips

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