CEESP Project Management. Unit Eight

7/29/2019 CEESP Project Management. Unit Eight

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Project Management

Purchasing Management

Lecturer: Javier Daz lvarez

Electrical EnergyConversion andPower Systems

Universidadde Oviedo


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Purchasing Management Plan Procurements

Conduct Procurements

Administer Procurements

Close Procurements


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Purpose

Determine what to procure, when, how and from whom

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Plan Procurements


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We need to use:

Baselines

Scope Cost

Schedule

Requirements documentation

Teaming agreements

Risk Register

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Plan Procurements


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Types of Contracts. Fixed Price

Firm fixed price (FFP). A lump-sum contract under which the

seller furnishes goods or services at a fixed price. The sellerbears all risk, but is compensated with the greatest profitpotential. FFP is the most common contract type, because it isbest suited for situations with reasonably definite

specifications and relatively certain costs

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Plan Procurements


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Fixed price incentive (FPI). A contract in which the buyer pays

the contractor for the actual allowable cost incurred, not toexceed a ceiling price defined in the contract, and thecontractor can earn more or less profit depending on its abilityto meet defined cost or performance criteria. Some sharing of

risk with this contract type exists, but in general, the seller istaking more risk than the buyer. This type of contract is usedprimarily for high-value projects involving long performanceperiods (for example, shipbuilding and major systems

development projects)

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Plan Procurements


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Fixed price with economic price adjustment (FP-EPA). A

contract used when a long-term (multiyear) agreement existswith accommodation to account for the fluctuations ininflation, commodity prices, or other external price increases.This contract type is designed to protect both the buyer and

the seller from external influences outside their control.

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Plan Procurements


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Plan Procurements

Contract Type Actual Costs Profilt Incentive

FPF. Firm

Fixed Price

No, lump-sum

payment

Defined by the ability to meet

defined cost and performance

criteria

No

FPI. FixedPrice Incentive

Yes, actual cost noto exceed a

ceiling price

Defined by the ability to meetdefined cost and performance

criteria

Yes, given forsuperior

performance

FP-EPA. Fixed

Price withEconomic Price

Adjustment

No, lump-sum

payment adjustedfor inflation rates

or other exteral

monetary factors

Dictated by the ability to meet

defined cost and performancecriteria and the adjustments

made per the external factors

No


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Types of Contracts. Cost Reimbursement

Cost plus incentive fee (CPIF). A CPIF contract allows overrun

or underrun sharing of cost through a predetermined formulafor fee adjustment. The maximun and minimum fees limit thefee in this contract type. If the actual cost is less than theexpected cost, the buyer and seller share the savings. If the

actual cost exceeds the expected cost, the buyer and sellershare the overrun. This contract type is used predoinantly forprojects with long performance periods and substantialhardware development and test requirements

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Plan Procurements


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Cost plus fixed fee (CPFF): A CPFF contract provides for the

reimbursement of allowable costs plus a fixed fee paidproportionately as the contract progresses. Because thesellers fee is fixed, there is no motivation to control costs.Therefor, most risk remains with the buyer. This contract type

is used predominantly for reserch and development projects inwhich the effort required remains uncertain until the project iswell under way.

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Plan Procurements


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Cost plus award fee (CPAF). A CPAF contrct reimburses for

actual costs, but the fee is largely based on the sellersperformance against subjective criteria built into the contract.The buyer determines how well the seller has met thosecriteria.

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Plan Procurements


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Cost plus percentage of cost (CPPC): A CPPC contract provides

for the reimbursement of allowable costs of servicesperformed plus an agreed-upon percentage of the actual costas profit. The seller is only obligated to make its best effort tofulfill the contract within the estimated amount; the buyer

funds all overruns. It is not allowed in the USA.

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Plan Procurements


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Plan Procurements

Contract Type Actual

Costs

Profit Incentive

CPIF. Cost plus

incentive fee

Yes Allows overrrun or underrun sharing of

expenses through a predetermined

formula.

Maximun and minimum fee limits the

fee in the contract

Yes

CPFF. Cost plus fixed

fee

Yes Fixed fee paid as the contrct progresses No

CPAF. Cost plus award

fee

Yes Dictated by the sellers ability to serve

the subjective criteria dictated withinthe contract and awarded accordint to

the buyers determination that the

criteria have been satisfied

Yes

CPPC. Cost plus

percentage of cost

Yes Calculated from percentage of actual

cost

No


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BuyersRisk

Sellers

Risk

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Plan ProcurementsType of Contrat

CPPC

CPFF

CPIF

CPAF

FPI

FP-EPA

FFP


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Purchasing Management Plan Procurements


Administer Procurements Close Procurements


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Purpose

Obtain quotes or bids, select a seller, and award a contract

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Statement of work

It describes the procurement item in sufficient detail so that

prospective sellers can determine whether they are capable ofproviding the item. It is a narrative description of the productsor services to be supplied under contract.

It is important that the SOW be as clear, complete, and concise

as possible.

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Some tools (I):

Bidder conferences and advertising: Conferences with

prospective sellers are often held to ensure that sellers have aclear, common understanding of the procurement product.Responses to questions must be incorporated into theprocurement documents as amendments so all prospective

sellers remain on equal standing. Advertising also is used toexpand existing lists of potential sellers where appropriate

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Some tools (II-a):

Proposal evaluation techniques:

Wighting system: method of quantifying qualitative data to minimizethe effect of personal prejudice. Most systems involve:

Assigning a numerical weight to each of the evaluation criteria

Rating the proposed sellers on each criterion

Multiplying the weight by the rating Totaling the resultant products to compute an overall score

Screening system: establishment of minimum performancerequirements for one or more of the evaluation criteria. This methodmeans that a prospective seller may be required to propose a projectmanager with specific qualifications befor the remainder of theproposal would be considered

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Some tools (II-b): Seller rating system: tied to evaluation criteria, the seller rating

system is an organizational tool that evaluates considerations likeseller past performance, quality ratings, and compliance.

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Some tools (III):

Independent estimates: preparation of the procuring

organizations own estimate as a reference point against whichcontractor proposals are ompared. Significant differences mayindicate that the Statement of Work (SOW) was not adequateor that the prospetive seller either misunderstood or failed to

respond to the SOW. These estimates are often referred to asshould cost estimates.

Expert judgment: the expertise to review proposals can comefrom many differente parts in the organization

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Some tools (IV):

Contract negotiations: clarification and mutual agreement on

the contract structure and requirements. Subjects ofteninclude responsibilities and authorities, applicable terms andlaw, technical and business management approaches, contractfinancing, and price. Contract negotiation may be a separate

process with inputs and outputs for complex procurementitems.

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Negotiation stages:

Protocol: Introductions are made and the atmosphere is set.

Probing: Negotiators identify issues of concern, as well as thestrengths and weaknesses of the other party.

Scratch bargaining: The actual bargaining occurs andconcessions are made.

Closure: Positions are summed up and final concessions aremade.

Agreement: The final agreement is documented.

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Negotiation tactics (I):

Deadline: imposing a deadline for reaching an agreement.

Surprise: taking the other party by surprise with newinformation.

Limited authority: claiming an inability to finalize theagreement just reached (a stalling tactic).

Missing man: claiming that the person with final authority isabsent.

Fair and reasonable: Offering comparisions to other situations,

for example, to show that the price offered is reasonable Strategic delay: Requesting a recess to divert attention from

the present discussion or to regroup.

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Negotiation tactics (II):

Reasoning together: Collaborating to resolve problems for

everyones benefit. Withdrawal: Making a false attack on an issue and the retrating

(to diver attention from a weakness).

Unreasonable: Making the other partys request appear

unreasonable. Suggesting arbitration: Attempting to scare the other party

into agreement.

Fait accompli (hecho consumado): Claiming that a topic ofdispute has already been decided or accomplished and cannotbe changed

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Contract document (I):

SOW

Schedule basline Performance reporting

Period of performance

Place of performance

Pricing

Roles and responsibilities

Payment terms

Place of delivery

Inflation adjustments

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Contract document (II):

Handling changes

Warranties Limitations of liability

Insurance

Inspections

Delays

Terminations

Subontracts

Peformance bonds

Fees and retainage

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Contract document (III):

Penalties

Incentives Support

Acceptance criteria

Subcontractor approvals

Disputes resolution

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Plan Procurements




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Purpose

Manage the contract and the relationship with the seller.

Ensuring that the sellers performance meets contractualrequirements

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Some tools (I):

Changes and change control. All contracts should define theprocess by which any changes to the contract (project) can beaccommodated and should include the paperwork, trackingsystmes and approvals necessary for authorizing changes.

Reviews, audits, inspections, and reporting. Processes

designed to assess progress in terms of both process anddeliverables.

Claims administration. It deals with those changes wheredisagreements exist and there is a lack of resolution. Claims

can be generated when cost of a change, existence of achange, or the nature of the change is at issue. They should bedetailed in a disputes clause within the contract.

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Some tools (II):

Records management system. It refers to the specificprocesses for maintaining contractually requireddocumentation within the project management informationsystem.

Undefined work. It becomes an issue when time is of the

essence. The parties would like to proceed with the project,but the price and other important terms and conditions of thecontract have not been specified or agreed to.

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Standard Clauses of Contracts (I)

Changes

Control who initiates a change request Determine how change is funded

Identify final approval authority

Require configuration control

Warranties Establish a level of quality

Express warranty: explicitly stated

Implied warranty: stated as usable

Doctrine of waiver

Relinquishing of one partys rights because of a lack of enforcementof those rights

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Standard Clauses of Contracts (II)

Delays

Identify who caused it and the impact Bonds

Performance bond

Payment bond

Breach Failure to perform a contractua obligation

Material breach is more serious than a contract breach

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Standard Clauses of Contracts (III)

Damages

Punitive damage Damages awarded over and above what will compensate for cost

Activities that punish (or make example) of defendant

Not normally awarded under contract law

Compensatory Damages awarded to cover the loss and nothing more

Force majeure

The Act of God clause

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Elements of a Legally Enforceable Contract

Agreement must be voluntary

People who sign must have legal capacity to do so Cause must be sufficient to contract

Purpose must be legal and must not violate public policy

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Plan Procurements




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Purpose

Complete the contract and all open issues

Settle the contract

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Close Procurements


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Topics

Organizing for contract management:

Centralized contracting

Decentralized contracting

Privity of contract

Dealing with foreign currencies and their exchanges

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Close Procurements


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Centralized contracting

A single function within the company is responsible for theentire contracting process for all projects.

Advantages

More economical

Easier to control overall contracting efforts

Higher degree of contracting specialization Orders can be consolidated across several projects

Disadvantages:

The contracting office can become a bottleneck if several projectshave heavy needs at once

Less attention is given to the especial needs of individual projects

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Close Procurements


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Decentralized contracting (more used in projectizedorganization)

Each project manager controls the contracting process for hisor her project.

Advantages

Project Manager has more control

Contracting personnel are more familiar with project needs More flexible and adaptable to project needs

Disadvantages:

Duplicationn of contracting efforts across projects Higher costs

No standard contracting policies

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Close Procurements

Documents

CEESP Project Management. Unit Eight