Kate’s last project went really well. In fact, maybe a little too well. The company’s customer base grew so much that now the IT department’s technical support staff is overwhelmed. Customers who call up looking for technical support have to spend a long time on hold, and that’s not good for the company.

Kate: No problem. The hard part will be figuring out how to manage the transition. Are we going to try to expand the team immediately, or call in a supplier to help us out?

Ben: Whoa, hold on there! Is going outside the company even an option?

Kate: Look, our tech support team is already at full capacity, and it’ll take months to upgrade the facilities to handle more people...not to mention to hire and train the staff. We may be able to handle it ourselves, but there’s a good chance that the easiest way to get the job done is to go outside our company to find a vendor to do the work.

Ben: But isn’t it kind of risky thinking about working with another company? I mean, what if it goes out of business during our project? Or what if it costs too much?

Kate: Well, we’ll need to make sure that we answer those questions. But this isn’t the first time our company’s brought on a contractor like this. The legal department has done this kind of thing before. I’ll set up a meeting with somebody over there and see if they can help us out.

Ben: OK, you can follow up on that. But I’m still not sure about this.

You need to be involved because it’s your project, and you’re responsible for it.

One of the most common mistakes people make on the exam (and in real life) is to assume that if another company is selling products or services for your project and they don’t deliver, it’s not your problem. After all, you’ve got a contract with the company, right? So if they don’t deliver, they won’t get paid.

Well, it’s not that simple. Yes, there are plenty of sellers who fail to deliver on their agreements. But for each seller that doesn’t deliver, there’s a frustrated project manager whose project ran into trouble because of it. That’s why a lot of the Procurement Management tools and techniques are focused on selecting the right seller and communicating exactly what you’ll need to the people doing the work.

Agreement Process Magnets

There are four Procurement Management processes. They’re pretty easy to understand—you can probably guess which ones are which from their descriptions. Connect the description of each process with its name, and then try to guess which process group it’s in.

Descriptions of each process	Process names	Process groups
Plan out what you’ll purchase, and how and when you will need the contracts to be negotiated for your project.	_________________	_________________
Decide on the seller (or sellers) you are going to work with, and finalize and sign the contract.	_________________	_________________
Keep tabs on the contract. Make sure your company is getting what you paid for.	_________________	_________________
Confirm that the work was done right and that all obligations are fulfilled on both sides.	_________________	_________________

Agreement Process Magnets Solutions

There are four Procurement Management processes. They’re pretty easy to understand—you can probably guess which ones are which from their descriptions. Connect the description of each process with its name, and then try to guess which process group it’s in.

Descriptions of each process	Process names	Process groups
Plan out what you’ll purchase, and how and when you will need the contracts to be negotiated for your project.
Decide on the seller (or sellers) you are going to work with, and finalize and sign the contract.
Keep tabs on the contract. Make sure your company is getting what you paid for.
Confirm that the work was done right and that all obligations are fulfilled on both sides.

Thanks for coming by, Steve. We’re looking for a contractor to handle tech support while we bring on more people in our call center. How do we normally handle this stuff?

Here’s how it usually works. I’ll actually write the contract and do the negotiation. But before I do that, I’ll need to sit down with you to understand what the contract has to accomplish.

Kate: So I’m not involved at all?

Steve: Oh, you’re definitely involved. You need to help with the negotiations, because you’re the only person who really understands what we’re trying to accomplish with the contract.

Kate: OK, that makes sense. So when do we get started?

Steve: Well, not so fast. We need to be really sure that the way we pick our vendors is absolutely fair. We’ve got some company guidelines that you’ll need to follow. And once we’ve got the contract signed and the work is under way, we’ll need to meet to make sure the contract is really being followed. And if there’s a problem and we need to negotiate a change to the contract, you’ll need me to do it.

Kate: OK, I can handle that. So should I start working on something to send out to sellers?

Steve: Not quite. Before we even get started with all of that, are you sure we really need to contract this work?

Procurement is pretty intuitive, and the four Procurement Management processes follow a really sensible order. First you plan what you need to contract; then you plan how you’ll do it. Next, you send out your contract requirements to sellers. They bid for the chance to work with you. You pick the best one, and then you sign the contract with them. Once the work begins, you monitor it to make sure the contract is being followed. When the work is done, you close out the contract and fill out all the paperwork.

You can have several contracts for a single project

The first Procurement Management process is Plan Procurement Management. It’s a familiar planning process, and you use it to plan out all of your procurement activities for the project. The other three processes are done for every contract. Here’s an example. Say you’re managing a construction project, and you’ve got one contract with an electrician and another one with a plumber. That means you’ll go through those three processes two separate times, once for each contractor.

Control Procurements When the contract is under way, you stay on top of the work and make sure the contract is adhered to. You monitor what the contractor is producing and make sure everything is running smoothly. Occasionally, you’ll need to make changes to the contract. Here’s where you’ll find and request those changes.

Close Procurements When the work is done, you’ll close your contract out. You’ll make sure that the product that is produced meets the criteria for the contract, and that the contractor gets paid.

You need to think about all of the work that you will contract out for your project before you do anything else. The Plan Procurement Management process is all about figuring that out, and writing up a plan for how you’ll do it.

Because sometimes it’s not worth having your team do part of the job.

If your company needed to renovate your office, would you hire the carpenter, electrician, and builders? Would you buy the power tools, cement mixer, trucks, and ladders? Of course not. You’d hire a contractor to do the work, because it would cost too much to buy all that stuff for one job, and you wouldn’t want to hire people just for the job and then fire them when it was done. Well, the same goes for a lot of jobs on your projects. You don’t always want to have your company build everything. There are a lot of jobs where you want to hire a seller.

Make or Buy Magnets

Figure out whether or not Kate and Ben should contract out the tech support work by organizing these facts about the project into make or buy columns. The first few have been done for you.

Note

This really is how a lot of people handle make or buy decisions—looking at all of the information you have for the project and using it to determine whether the facts line up under “Make” or “Buy.”

Make or Buy Magnets Solutions

Figure out whether or not Kate and Ben should contract out the tech support work by organizing these facts about the project into make or buy columns. The first few have been done for you.

Doing make or buy analysis just means understanding the reasons for the contract and deciding whether or not to contract out the work. Once you’ve done that, if you still think contracting is an option, then you should have a good idea of what you need to get out of the contracting process.

It’s a good idea to know a little bit about the most commonly used contract types. They can help you come up with a contract that will give both you and the seller the best chance of success.

There are just a few more things you need to know about any contract to do procurement work.

Every contract needs to outline the work to be done and the payment for that work.

Always pay attention to the point of total assumption.

You should always make sure both the buyer and seller are satisfied.

The two big outputs of Plan Procurement are the procurement documents and source selection criteria. The procurement documents are what you’ll use to find potential sellers who want your business. The source selection criteria are what you’ll use to figure out which sellers you want to use.

There are a bunch of different documents you might want to send to sellers who want to bid on your work.

You’ll usually include the procurement statement of work (SOW) so that sellers know exactly what work is involved.

An invitation for bid (IFB) is a document that tells sellers that you want them to submit proposals. You’ll also hear of people using requests for information (RFI) and requests for proposals (RFP).

There’s another kind of invitation—an invitation for quote (IFQ). This is a way to tell sellers that you want them to give you a quote on a fixed-price contract to do the work.

A purchase order is something you’ll send out to a seller who you know that you want to work with. It’s an agreement to pay for certain goods or services.

In some cases you’ll want to allow for more flexibility in your contract. If you’re hiring a seller to build something for you that you’ve never built before, you’ll often encourage them to help you set the scope instead of locking it down.

Decide in advance on how you want to select the sellers.

There are a lot of ways you can select a potential seller. Figuring out if a seller is appropriate for your work is something that takes a lot of talking and thinking—and there’s no single, one-size-fits-all way of selecting sellers. But there are some things that you should definitely look for in any seller:

Contract Magnets

Which of the magnets are part of the procurement documents, and which of them are part of the source selection criteria?

Answers in Contract Magnets Solution.

The next step in procurement is pretty straightforward. You use the Conduct Procurements process to, well, get the word out to sellers and see what kind of responses you get. Once you narrow down your list of sellers to a few who look like they might be good candidates, you evaluate all of their responses against your source selection criteria and choose the vendor you’re going to work with. All that’s left to do after that is to get it all on paper...and then you award the contract!

Use outputs from the Plan Procurement Management process to find the right seller

When you perform the Conduct Procurements process, you’ll start with some of the outputs you created in Plan Procurement Management. Here’s how you’ll use them:

	The make or buy decisions you made will come in handy because they’ll tell you what you need to find a contractor to help out with and what you’ll do yourself.		Use the source selection criteria to evaluate the sellers that respond to you. By evaluating all of your sellers using the same criteria, you’ll be sure that you evaluate everyone fairly and find the right seller for your company.
	Procurement documents will have all of the information that you’ll actually give to potential sellers to help them bid on your contract. Two of the most commonly used procurement documents are the RFI and the RFP. RFI: Request for information documents are sent to potential sellers to ask for information about their capability to do the work. RFP: Request for proposal is when you give a seller the opportunity to examine your procurement documents and write up a proposal of how they’d do the work.		The procurement statement of work is where you write out all of the work that needs to be done by a contractor. It tells you the scope of the work that you’re going to contract to another company.

Executing process group

You’ve figured out what services you want to procure, and you’ve gone out and found a list of potential sellers. Now it’s time to choose one of them to do the project work—and that’s exactly what you do in Conduct Procurements.

What’s my Purpose

Here are some of the proposals that Kate is evaluating. Match each one up to the contract type that’s most important for the proposal.

Kate’s procurement project had been going really well...or so she thought. But it turns out there’s a problem.

You wouldn’t just start off a project and then assume everything would go perfectly, would you? Well, you can’t do that with a contract either. That’s why you use the Control Procurements process.

Monitoring & Controlling process group

The idea behind the Control Procurements process is that staying on top of the work that the seller is doing is more difficult than working with your own project. That’s because when you hire a seller to take over part of your project, the team who’s doing the work doesn’t report to you. That’s why the first three inputs are especially important. The approved change requests are the way that you change the terms of the contract if something goes wrong, and the work performance data and work performance reports are how the seller tells you how the project is going.

Tools

The tools and techniques for Control Procurements are all there to help you work with the seller. Some of them help you look for any potential problems with the seller and make changes to correct them. Others help you with the day-today administration work that you need to do in order to keep your project running.

When the seller’s work is done, it’s time to close the contract, and that’s when you use the Close Procurements process. Even if your contract ends disastrously (or in court), you still need to close out the contract so that you can make sure all of your company’s responsibilities are taken care of—and that you learn from the experience.

Contractcross

Give your right brain something to do. It’s your standard crossword; all of the solution words are from this chapter.

Across 1. The kind of contract where the buyer pays a lump sum. 6. In a T&M contract, the buyer pays for ______, which includes equipment, office space, administrative overhead costs, and anything else (other than labor) that has to be paid for. 9. The procurement ______ of work defines the portion of the project’s scope that the seller will work on for the contract. 12. The potential sellers submit seller ______ to a buyer to explain how the contract will be fulfilled. 14. A request for _____ is a document that asks sellers for the price of the work. 16. The ___ contract has high risk to the seller because the seller must cover costs that go beyond the price. 17. This kind of analysis is determine whether to procure a service or stay within the company. 19. The buyer selects the ______ selection criteria before contacting potential sellers. 20. This kind of fee is used in cost-plus contracts to encourage the seller to increase performance. 21. The ________ management system stores all of the documents, communications, and information relating to the contract.

Down 2. Even if the buyer fails to deliver on a contract and it has to be terminated early, you still need to perform the _____ Procurements process. 3. A force _______ clause protects both the buyer and seller from things like war and natural disasters preventing the completion of the contract. 4. An invitation for _____ is a document that tells sellers you want them to submit proposals. 5. Some organizations maintain a ______ seller list of sellers pre-screened based on past experience with them. 7. ______ documents contain all of the information the seller wants to communicate to potential buyers. 8. A buyer is sometimes required to use ________ in order to announce a project to all potential sellers. 10. A disagreement between the buyer and seller is called a ______. 11. The contract-related process in the Monitoring and Controlling group is called ________ Procurements. 13. The company or organization that’s performing services for the contract. 15. In this kind of contract, the seller is paid the costs as well as a fee that’s determined based on the buyer’s evaluation of performance. 18. The company or organization that’s procuring services.

Answers in Sharpen your pencil Solution.

The 18-month contract’s ready to close! The seller did a great job handling technical support, and that gave Kate and Ben the time they needed to ramp up their own company’s team and facilities.

1. Answer: D

This contract is a time and materials contract. It’s charging a rate for labor and overhead for materials.

2. Answer: A

One of the most important things about a bidder conference is that no one seller is given better access to the buyer. They should all have the same opportunity to gather information, so that no single seller is given preferential treatment.

3. Answer: C

A fixed-price contract is the riskiest sort of contract for the seller. That’s because there’s one price for the whole contract, no matter what happens. So if it turns out that there’s a lot more work than expected, or the price of parts or materials goes up, then the seller has to eat the costs.

4. Answer: C

This is just the definition of the point of total assumption.

5. Answer: C

This is a simple make-or-buy decision, so you can work out the math. The contractor’s quote of $19,000 per week for a 16-week job means that buying will cost you $19,000 x 16 = $304,000. On the other hand, if you decide to keep the work in-house, then it will cost you $35,000 for the engineer, plus $15,000 per week for 16 weeks: $35,000 + (16 x $15,000) = $275,000. It will be cheaper to make it rather than buy it!

6. Answer: A

This question describes make-or-buy analysis, which is part of the Plan Procurement Management process.

7. Answer: C

One of the most important things that you do when you’re finding sellers during the Conduct Procurements process is to select the sellers that will do the work. And the qualified seller list is an input that you use for that.

8. Answer: B

One of the most important parts of Procurement Management is that both the buyer and the seller want to feel like they’re getting a good deal. Every procurement should be a win-win situation for both parties!

9. Answer: C

This may look like a tough problem, but it’s actually pretty easy. Just figure out how much the rental would cost you for each of the answers:

Now look at what the excavator would cost for 25 months. It would cost $105,000 plus $20,000 for the maintenance costs, for a total of $125,000. So at 25 months, the excavator is worth buying—but before that, it makes more sense to rent.

10. Answer: D

The time and materials (T&M) contract is the riskiest one for the buyer, because if the project costs are much higher than the original estimates, the buyer has to swallow them, while the seller keeps getting paid for the time worked.

11. Answer: D

Both cost-plus and fixed-price contracts are based on the idea that you know how long the contract is going to last. A seller would only agree to a fixed-price contract if there’s a good idea of how much it’s going to cost. And a cost-plus contract will hurt the buyer if it goes over. Only the time and materials contract will give both the buyer and seller a fair deal if neither has a good idea of how long the work will take.

12. Answer: A

Contracting is a pretty linear process—first you plan the contract, then you put together a package of procurement documents to send to potential sellers, and then you select a seller and start the work. So you send out a request for proposals after you’ve put together the procurement document package so that you can select a seller for the job.

13. Answer: D

You put together the source selection criteria as part of the Plan Procurement Management process. That way, you can use the criteria when you’re looking at the responses you get from sellers.

14. Answer: C

You can always change a contract, as long as both the buyer and the seller agree to it. When you do that, you need to use the contract change control system—just like with any other change.

15. Answer: C

It’s easy to get mixed up with all of these audits, but if you think about how they’re used, it gets less confusing. When you’re performing Control Procurements, the most important part of your job is to figure out if the products that the seller is producing meet your requirements. By the time closure happens, the products have all been completed—if there was a problem, you should have caught it during Control Procurements. All you can do now is come up with any lessons learned so that you can avoid mistakes in the future.