Chapter 12:

Project Procurement Management

Information Technology
Project Management,
Fifth Edition

• 1
 Learning Objectives
Understand the importance of project procurement
management and the increasing use of outsourcing for
information technology projects
Describe the work involved in planning purchases and
acquisitions for projects, the contents of a procurement
management plan and contract statement of work, and
calculations involved in a make-or-buy analysis
Discuss what is involved in planning contracting, including
the creation of various procurement documents and
evaluation criteria for sellers

2
 Learning Objectives (continued)
Understand the process of requesting seller responses
and the difference between proposals and bids
Describe the seller selection process and recognize
different approaches for evaluating proposals or
selecting suppliers
Discuss the importance of good contract
administration
Describe the contract closure process
Discuss types of software available to assist in project
procurement management

3
 Importance of Project Procurement
Management
 Procurement means acquiring goods and/or services from
an outside source
 Other terms include purchasing and outsourcing

 Experts predict that global spending on computer software

and services will continue to grow
 People continue to debate whether offshore outsourcing
helps their own country or not

4
 Debates on Outsourcing
Some companies, such as Wal-Mart, prefer to do no
outsourcing at all, while others do a lot of outsourcing

Most organizations do some form of outsourcing to meet

their IT needs and spend most money within their own
country

The U.S. temporary workforce continues to grow as people

work for temporary job agencies so they can more easily
move from company to company

5
 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

6
 Contracts
A contract is a mutually binding agreement that obligates
the seller to provide the specified products or services and
obligates the buyer to pay for them
Contracts can clarify responsibilities and sharpen focus on
key deliverables of a project
Because contracts are legally binding, there is more
accountability for delivering the work as stated in the
contract
A recent trend in outsourcing is the increasing size of
contracts
7
 What Went Wrong?
 Companies often change their minds about procurement; for
example, JPMorgan Chase announced a seven-year, $5 billion
deal to outsource much of its data processing to IBM, but they
revoked the contract less than two years into its existence
because the procurement plan no longer fit their business
strategy
 The Australian Computer Society says sending work offshore
may lower the number of students entering IT courses, deplete
the number of skilled IT professionals, and diminish the nation’s
strategic technology capability
 Procurement can also cause security problems, including the
protection of intellectual property, integrity of data, and the
reliability of infrastructure in offshore locations
8
 Project Procurement Management
Processes
 Project procurement management: acquiring goods and
services for a project from outside the performing
organization
 Processes include:
 Planning purchases and acquisitions: determining what
to procure, when, and how
 Planning contracting: describing requirements for the
products or services desired from the procurement and
identifying potential sources or sellers (contractors,
suppliers, or providers who provide goods and services to
other organizations)
9
 Project Procurement Management
Processes (continued)
Requesting seller responses: obtaining information,
quotes, bids, offers, or proposals from sellers, as appropriate
Selecting sellers: choosing from among potential suppliers
through a process of evaluating potential sellers and
negotiating the contract
Administering the contract: managing the relationship
with the selected seller
Closing the contract: completing and settling each
contract, including resolving any open items

10
 Figure 12-1: Project Procurement
Management Summary

11
 Planning Purchases and Acquisitions
 Identifying which project needs can best be met by using
products or services outside the organization

 If there is no need to buy any products or services from

outside the organization, then there is no need to
perform any of the other procurement management
processes

12
 What Went Right?
Several organizations, such as The Boots Company PLC in
England, outsource their IT services to save money
compared with the cost of running the systems themselves

Carefully planning procurement can also save millions of

dollars, as the U.S. Air Force did by using a unit pricing
strategy for a large office automation project

13
 Tools and Techniques for Planning
Purchases and Acquisitions
Make-or-buy analysis: general management technique
used to determine whether an organization should make or
perform a particular product or service inside the
organization or buy from someone else

Often involves financial analysis

Experts, both internal and external, can provide valuable

inputs in procurement decisions

14
 Make-or-Buy Example
 Assume you can lease an item you need for a project for
$800/day; to purchase the item, the cost is $12,000 plus a
daily operational cost of $400/day

 How long will it take for the purchase cost to be the same
as the lease cost?

15
 Make-or Buy Solution
Set up an equation so both options, purchase and lease, are
equal
In this example, use the following equation; let d be the
number of days to use the item:
$12,000 + $400d = $800d
Subtracting $400d from both sides, you get:
$12,000 = $400d
Dividing both sides by $400, you get:
d = 30
If you need the item for more than 30 days, it is more
economical to purchase it

16
 Types of Contracts
 Different types of contracts can be used in different
situations
 Fixed price or lump sum contracts: involve a fixed total price
for a well-defined product or service
 Cost reimbursable contracts: involve payment to the seller for
direct and indirect costs
 Time and material contracts: hybrid of both fixed price and
cost reimbursable contracts, often used by consultants
 Unit price contracts: require the buyer to pay the seller a
predetermined amount per unit of service
 A single contract can actually include all four of these
categories, if it makes sense for that particular
procurement
17
 Point of Total Assumption
The Point of Total Assumption (PTA) is the cost at
which the contractor assumes total responsibility for
each additional dollar of contract cost
Contractors do not want to reach the point of total
assumption because it hurts them financially, so they
have an incentive to prevent cost overruns
The PTA is calculated with the following formula:
PTA = (ceiling price – target price)/government share + target cost

18
 Cost Reimbursable Contracts
 Cost plus incentive fee (CPIF): the buyer pays the
supplier for allowable performance costs plus a
predetermined fee and an incentive bonus
 Cost plus fixed fee (CPFF): the buyer pays the supplier
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 supplier for allowable performance costs plus a
predetermined percentage based on total costs

19
 Figure 12-2: Contract Types Versus
Risk

20
 Contract Clauses
Contracts should include specific clauses to take into
account issues unique to the project

Can require various educational or work experience for

different pay rights

A termination clause is a contract clause that allows the

buyer or supplier to end the contract

21
 Procurement Management Plan
Describes how the procurement processes will be
managed, from developing documentation for making
outside purchases or acquisitions to contract closure

Content varies based on project needs

22
 Contract Statement of Work (SOW)
A statement of work is a description of the work required
for the procurement
If a SOW is used as part of a contract to describe only the
work required for that particular contract, it is called a
contract statement of work
A SOW is a type of scope statement

A good SOW gives bidders a better understanding of the

buyer’s expectations

23
 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.
24
 Planning Contracting
 Involves preparing several documents needed for potential
sellers to prepare their responses and determining the
evaluation criteria for the contract award
 Request for Proposals: used to solicit proposals from
prospective sellers
A proposal is a document prepared by a seller when there are
different approaches for meeting buyer needs
 Requests for Quotes: used to solicit quotes or bids from
prospective suppliers
A bid, also called a tender or quote (short for quotation), is a
document prepared by sellers providing pricing for standard
items that have been clearly defined by the buyer

25
 Figure 12-4: Request for Proposal
(RFP) Template
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
26
 Evaluation Criteria
It’s important to prepare some form of evaluation
criteria, preferably before issuing a formal RFP or
RFQ

Beware of proposals that look good on paper; be sure

to evaluate factors, such as past performance and
management approach

Can require a technical presentation as part of a

proposal

27
 Requesting Seller Responses
 Deciding whom to ask to do the work, sending
appropriate documentation to potential sellers, and
obtaining proposals or bids
 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

28
 Selecting Sellers
Also called source selection

Involves:

Evaluating proposals or bids from sellers

Choosing the best one

Negotiating the contract

Awarding the contract

29
Figure 12-5: Sample Proposal
Evaluation Sheet

30
 Seller Selection Process
Organizations often do an initial evaluation of all
proposals and bids and then develop a short list of
potential sellers for further evaluation

Sellers on the short list often prepare a best and final offer
(BAFO)

Final output is a contract signed by the buyer and the

selected seller

31
 Media Snapshot
Information technology has made a tremendous impact on
how organizations and individuals select sellers
The Interactive Advertising Bureau and
PricewaterhouseCoopers reported that U.S. Internet
advertising revenues for the first half of 2006 were almost
$8 billion, a new record and a 37 percent increase over the
first half of 2005
Google and Yahoo! charge advertisers each time a user
clicks on that advertiser’s site
Other companies, like DoubleClick, Inc., provide digital
marketing technology services

32
Administering the Contract
 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

 It is critical that project managers and team members watch

for constructive change orders, which are oral or written
acts or omissions by someone with actual or apparent
authority that can be construed to have the same effect as a
written change order
33
 Suggestions for Change Control in
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 phone calls

34
 Suggestions for Change Control in
Contracts (continued)
Project managers and teams should stay closely involved to
make sure the new system will meet business needs and
work in an operational environment

Have backup plans

Use tools and techniques, such as a contract change control

system, buyer-conducted performance reviews, inspections
and audits, and so on

35
 Best Practice
Accenture developed a list of best practices from
experienced outsourcers throughout the world:
1. Build in Broad Business Outcomes Early and Often
2. Hire a Partner, Not Just a Provider
3. It’s More Than a Contract, It’s a Business Relationship
4. Leverage Gain-Sharing
5. Use Active Governance
6. Assign a Dedicated Executive
7. Focus Relentlessly on Primary Objectives

36
 Closing the Contract
Involves completing and settling contracts and resolving
any open items
The project team should:
Determine if all work was completed correctly and
satisfactorily
Update records to reflect final results
Archive information for future use

The contract itself should include requirements for formal

acceptance and closure

37
 Tools to Assist in Contract Closure
Procurement audits identify lessons learned in the
procurement process

A records management system provides the ability to

easily organize, find, and archive procurement-related
documents

38
 Using Software to Assist in Project
Procurement Management
 Word-processing software helps write proposals and
contracts, spreadsheets help evaluate suppliers, databases
help track suppliers, and presentation software helps
present procurement-related information
 E-procurement software does many procurement functions
electronically
 Organizations also use other Internet tools to find
information on suppliers or auction goods and services

39
 Chapter Summary
Project procurement management involves acquiring
goods and services for a project from outside the
performing organization
Processes include:
Planning purchases and acquisitions
Planning contracting
Requesting seller responses
Selecting sellers
Administering contracts
Closing contracts

40