Chapter 12:

Project Procurement
Management

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 Learning Objectives
• Understand the importance of project procurement
management and the increasing use of outsourcing for
information technology projects
• Describe the procurement planning process, procurement
planning tools and techniques, types of contracts, and
statements of work
• Discuss what is involved in solicitation planning and the
difference between a request for proposal and a request
for quote
• Explain what occurs during the solicitation process

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 Learning Objectives
• Describe the source selection process and different
approaches for evaluating proposals or selecting
suppliers
• Discuss the importance of good contract administration
• Describe the contract close-out process
• Discuss types of software available to assist in project
procurement management

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 Importance of Project
Procurement Management
• Procurement means acquiring goods and/or services
from an outside source
• Other terms include purchasing and outsourcing
• Experts predicted that by the year 2003 the worldwide
information technology outsourcing market would
grow to over $110 billion
• U.S. federal spending on IT outsourcing is projected
to increase from $6.6 billion in 2002 to nearly $15
billion by 2007 due to an emphasis on e-government,
homeland security, and the shortage of IT workers in
government

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 Why Outsource?

• To reduce both fixed and recurrent costs

• To allow the client organization to focus on its
core business
• To access skills and technologies
• To provide flexibility
• To increase accountability

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 Project Procurement Management
Processes
• Procurement planning: determining what to procure and
when
• Solicitation planning: documenting product requirements
and identifying potential sources
• Solicitation: obtaining quotations, bids, offers, or
proposals as appropriate
• Source selection: choosing from among potential vendors
• Contract administration: managing the relationship with
the vendor
• Contract close-out: completion and settlement of the
contract

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 Figure 12-1. Project Procurement
Management Processes and Key Outputs

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 Procurement Planning
• Procurement planning involves identifying
which project needs can be best met by using
products or services outside the organization.
It includes deciding
– whether to procure
– how to procure
– what to procure
– how much to procure
– when to procure

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 What Went Right?

• Several organizations, such as The Boots

Company PLC in England, outsourced their IT
services to save money compared with running
the systems themselves
• Carefully planning procurement can also save
millions of dollars, as the U.S. Air Force did by
using a flexible pricing strategy for a large
office automation project

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 Procurement Planning Tools and
Techniques
• Make-or-buy analysis: determining whether a
particular product or service should be made or
performed inside the organization or purchased
from someone else. Often involves financial
analysis
• Experts, both internal and external, can provide
valuable inputs in procurement decisions

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 Make-or Buy Example

• Assume you can lease an item you need for a

project for $150/day. To purchase the item, the
investment cost is $1,000, and the daily cost
would be another $50/day.
• How long will it take for the lease cost to be
the same as the purchase cost?
• If you need the item for 12 days, should you
lease it or purchase it?

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 Make-or Buy Solution
• Set up an equation so the “make” is equal to the “buy”
• In this example, use the following equation. Let d be the number
of days to use the item.
$150d = $1,000 + $50d
• Solve for d as follows:
– Subtract $50d from the right side of the equation to get
$100d = $1,000
– Divide both sides of the equation by $100
d = 10 days
• The lease cost is the same as the purchase cost at 10 days
• If you need the item for 12 days, it would be more economical to
purchase it

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 Types of Contracts
• Fixed-price or lump-sum: involve a fixed total price
for a well-defined product or service
• Cost-reimbursable: involve payment to the seller for
direct and indirect costs
• Time and material contracts: hybrid of both fixed-
price and cost-reimbursable, often used by consultants
• Unit price contracts: require the buyer to pay the seller
a predetermined amount per unit of service

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 Cost Reimbursable Contracts
• Cost plus incentive fee (CPIF): the buyer pays the
seller for allowable performance costs plus a
predetermined fee and an incentive bonus
• Cost plus fixed fee (CPFF): the buyer pays the seller
for allowable performance costs plus a fixed fee
payment usually based on a percentage of estimated
costs
• Cost plus percentage of costs (CPPC): the buyer pays
the seller for allowable performance costs plus a
predetermined percentage based on total costs

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 Figure 12-2. Contract Types
Versus Risk

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 Statement of Work (SOW)

• A statement of work is a description of the work

required for the procurement
• Many contracts, or mutually binding
agreements, include SOWs
• A good SOW gives bidders a better
understanding of the buyer’s expectations

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 Figure 12-3. Statement of Work (SOW) Template

I. Scope of Work: Describe the work to be done to detail. Specify the hardware and
software involved and the exact nature of the work.
II. Location of Work: Describe where the work must be performed. Specify the
location of hardware and software and where the people must perform the work
III. Period of Performance: Specify when the work is expected to start and end,
working hours, number of hours that can be billed per week, where the work must
be performed, and related schedule information.
IV. Deliverables Schedule: List specific deliverables, describe them in detail, and
specify when they are due.
V. Applicable Standards: Specify any company or industry-specific standards that
are relevant to performing the work.
VI. Acceptance Criteria: Describe how the buyer organization will determine if the
work is acceptable.
VII. Special Requirements: Specify any special requirements such as hardware or
software certifications, minimum degree or experience level of personnel, travel
requirements, and so on.

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 Solicitation Planning
• Solicitation planning involves preparing
several documents:
– Request for Proposals: used to solicit proposals
from prospective sellers
– Requests for Quotes: used to solicit quotes for
well-defined procurements
– Invitations for bid or negotiation and initial
contractor responses are also part of solicitation
planning

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 Figure 12-4. Outline for a Request
for Proposal (RFP)
I. Purpose of RFP
II. Organization’s Background
III. Basic Requirements
IV. Hardware and Software Environment
V. Description of RFP Process
VI. Statement of Work and Schedule Information
VII. Possible Appendices
A. Current System Overview
B. System Requirements
C. Volume and Size Data
D. Required Contents of Vendor’s Response to RFP
E. Sample Contract

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 Solicitation
• Solicitation involves obtaining proposals or
bids from prospective sellers
• Organizations can advertise to procure goods
and services in several ways
– approaching the preferred vendor
– approaching several potential vendors
– advertising to anyone interested
• A bidders’ conference can help clarify the
buyer’s expectations

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 Source Selection
• Source selection involves
– evaluating bidders’ proposals
– choosing the best one
– negotiating the contract
– awarding the contract
• It is helpful to prepare formal evaluation
procedures for selecting vendors
• Buyers often create a “short list”

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 Figure 12-5. Sample Proposal
Evaluation Sheet

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 Figure 12-6. Detailed Criteria for
Selecting Suppliers

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 Be Careful in Selecting Suppliers
and Writing Their Contracts
• Many dot-com companies were created to meet
potential market needs, but many went out of
business, mainly due to poor business planning,
lack of senior management operations
experience, lack of leadership, and lack of
visions. Check the stability of suppliers
• Even well-known suppliers can impede project
success. Be sure to write and manage contracts
well with all suppliers (see What Went Wrong?)

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 Contract Administration
• Contract administration ensures that the
seller’s performance meets contractual
requirements
• Contracts are legal relationships, so it is
important that legal and contracting
professionals be involved in writing and
administering contracts
• Many project managers ignore contractual
issues, which can result in serious problems

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 Suggestions on Change Control
for Contracts
• Changes to any part of the project need to be
reviewed, approved, and documented by the same
people in the same way that the original part of the
plan was approved
• Evaluation of any change should include an impact
analysis. How will the change affect the scope, time,
cost, and quality of the goods or services being
provided?
• Changes must be documented in writing. Project
team members should also document all important
meetings and telephone calls

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 Contract Close-out
• Contract close-out includes
– product verification to determine if all work was
completed correctly and satisfactorily
– administrative activities to update records to reflect
final results
– archiving information for future use
• Procurement audits identify lessons learned in
the procurement process

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 Using Software to Assist in Project
Procurement Management
• Word processing software helps in writing proposals and
contracts, spreadsheets help in evaluating suppliers,
databases help track suppliers, and presentation software aids
in presenting procurement-related information
• In the late 1990s and early 2000s, many companies started
using e-procurement software to do many procurement
functions electronically
• Companies such as Commerce One, Ariba, Concur
Technologies, SAS, and Baan provide corporate procurement
services over the Internet
• Organizations also use other Internet tools to help find
information on suppliers or auction goods and services

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