Procurement Management

Procurement Management is a groups of processes required to to purchase or acquire the products, services, or results needed from outside the project team to perform the work.

Processes

There are following processes which are part of Project Procurement Management.

  • Plan Procurement Management
  • Conduct Procurements
  • Control Procurements
  • Close Procurements
  • Few Important points

    Request for Proposal (RFP): A type of procurement document used to request proposals from prospective sellers of products or services. In some application areas, it may have a narrower or more specific meaning.

    Request for Quotation (RFQ): A type of procurement document used to request price quotations from prospective sellers of common or standard products or services.

    Statement of Work (SOW): A narrative description of products, services, or results to be supplied.

    War Room: A room used for project conferences and planning, often displaying charts of cost, schedule status, and other key project data.

    Sole Source refers to a market condition in which only one qualified seller exists in the market.

    Single Source refers to a market condition in which the company prefers to contract with only one seller.

    Oligopoly refers to a market condition where very few sellers exist, and the action of one seller will have impact on other seller prizes.

    Contract can be used as a risk management tool, as in transferring risk.

    Centralized Contracting refers to a separate contracting office that handles contracts for all projects. In De-centralized Contracting a contract administrator is assigned for each project.

    Force majeure is a powerful and unexpected event, such as hurricane or other disaster.

    Privity is contractual information between customer and vendor.

    The process of Close Procurement involves completing each procurement. The process involves verifying that all planned work as per the contract has been completed.

    Contract Work Breakdown Structure (CWBS): A portion of the work breakdown structure for the project developed and maintained by a seller contracting to provide a subproject or project component


    1. Plan Procurement Management


    2. Conduct Procurements


    3. Control Procurements


    4. Close Procurements


    These questions are randomly taken from TechFAQ360 PMP success kit



    Question - 7

    You have been assigned to manage a project that deals with setting up a railway line connecting two cities.The project is complex with a lot of contracting involved.You and experts in your organization are evaluating if the rail line alignment machinery should be purchased outright or if it would be better to lease.The cost of leasing the equipment is 1200 $ per day while the cost of an outright purchase is 96000 $ and a daily cost of 200 $.The duration of laying out the railway lines is scheduled to be an activity duration of 150 days.Should you purchase the machinery or be leased - which option would be more economical ?
    1.Lease the machinery as it will be cheaper by 84000 USD
    2.Purchase the machinery as it its usage beyond the 80th day would be more cost effective to purchase rather than lease
    3.Lease the machinery as it will be cheaper by 36000 USD
    4.Purchase the machinery as it its usage beyond the 96th day would be more cost effective to purchase rather than lease

    Correct Answers are : 4
    Explanation :

    The question is actually looking for a simple mathematical formula!.Do not get flustered by all the numbers. The activity duration is 150 Days .So cost of leasing is 150 * 1200 = 180000 , while cost of an outright purchase is 96000 + 200 * 150 = 96000 + 30000 = 126000 USD. So definitely leasing is not cheaper and purchasing the machinery is the better option. Now what is the breakeven point of a purchase - on the 96th day of usage of the machinery - the cost of purchase incurred is 115200 $ which is exactly the cost incurred if it were leased so 96th day is the break even point and hence the correct answer is option 4. Take a breather - relax and digest the details - they are not as hard as they look !

    Question - 20

    You have replaced an earlier project manager in a project .The earlier project manager has left the prganization and you are now responsible for the project.On reviewing the project management plan you are disturbed because a number of procurement contracts have been signed and they all turn out to be Cost plus fixed fee types of contracts - why are you worried ?
    1.Seller has no motivation to control cost and infact cost could spiral
    2.All the risk is now with the seller
    3.Contracts should always be T & M
    4.Contracts should always be Fixed Price

    Correct Answers are : 1
    Explanation :
    As a project manager - you indeed have a reason to be worried if your project has already signed off on Cost Plus Fee type of contracts.This is because in such contracts - you the buyer needs to pay the seller for all the costs and in addition an agreed percentage of the cost.As a result there is no motivation on the seller to control the costs - infact it is in the interest of the seller to increase the costs.It is not necessary that all projects should always be T & M or Fixed Price.Option A is clearly wrong since all the risks are infact with the buyer not the seller!

    Question - 22

    You are the project manager and decided to outsource a part of the project to a vendor. The vendor discovered some issues that impact the cost and schedule of its work. How does the vendor update the agreement?
    1.A new contract to be signed by your company and the vendor
    2.A contract addendum signed by your company and the vendor
    3.An SOW signed by you and the vendor
    4.None

    Correct Answers are : 1
    Explanation :
    A is the correct answer.

    A contract addendum signed by your company and the vendor. No need for new contract.

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