Plan Procurement Management

00:01 Hello and welcome.

00:03 This module will focus on the plan procurement management process and the PMBOK guide. The difficulty in memorization are rated as low because you've probably been exposed to many of these concepts in your day to day job exam importance as medium, much like all the other Planning processes that develop a management plan.

00:26 And of course, the major output from this process is our procurement management plan. The plan Procurement Management Processes is one of four processes in procurement management knowledge area and the PMBOK guide. It's the one that establishes the Procurement Management Plan, which provides guidance on how we do the other procurement activities throughout the life of the project.

00:54 The particular domain task that the planned procurement management process helps us to understand better is Planning Task 7, which says develop the procurement management plan based on the project scope, budget and schedule in order to ensure that the required project resources will be available.

01:15 The key theme of the plan procurement management process is, of course, the development of a procurement management plan to provide guidance for all the rest of our procurement activity.

01:27 Now, given that some projects can do a whole lot of procurement and procure a lot of goods and services, the Procurement Management Plan could be crucial to the success or otherwise of your project.

01:43 The particular inputs that we may find useful in the development of our procurement management plan include our project management plan and all the other subsidiary plans, documents and baselines that make it up.

01:57 This will be our scope management plan, schedule management plan, cost management plan, etc.

02:03 because all of these things may or may not have an element of procurement to them. The risk management plan would be very important as well, because it would sit out the risks that are inherent in procuring goods or services externally.

02:22 We may also find a quality management plan important here because it will set the quality standards which we have to ensure are embedded in our procurement negotiations. And of course, our human resource management plan would be an important subset of the project management plan to have access to here because many of the things we will be procuring will be human resources or personnel to work on our project. Some other important inputs include our requirements documentation.

02:54 Because we're probably going to go to the marketplace to procure goods or services to deliver requirements.

03:01 And so having those requirements, documentation available to us to describe the requirements we're trying to deliver will help us develop our procurement documents.

03:13 We'll also want our risk register because it will outline and help us assess the consequence and impact of any uncertainty related to procurement activities.

03:25 Our specific activity resource requirements.

03:29 Will be very valuable to us.

03:32 These are an output from the estimate activity resources process and the time management knowledge area, and they are a description of the resources we need to complete the work of the project.

03:47 So if our procurement activities are focused on procuring personnel, we will need the activity resource requirements in order to understand who and when we need people.

04:01 Or need our project schedule, because it will give us the timing of major deliverables and other activities so we can include this information in our procurement management plan.

04:12 We'll also need our activity cost estimates because these give us our first estimate of the costs we expect to pay for particular activities on our project during the procurement processes.

04:25 We're going to go out and find some actual costs via tenders or quotes, and we need to be able to compare those to our activity cost estimates to see how accurate our estimates were.

04:36 And if anything needs to change about our total project budget.

04:41 We might also want our stakeholder register because it outlines the stakeholders that have an interest in our procurement activities, and we may want to talk with them about their expectations, about our procurement. Relevant enterprise environmental factors include government legislation and consumer guarantees, legislation that may impact our procurement decisions and in fact, much of the legal system is built up around resolving procurement disputes. So those are the sorts of enterprise environmental factors that we may find useful in developing our procurement management plan.

05:23 They can get particularly complicated when we're doing international procurement and having to look across different countries rules and regulations for their particular ones that apply to contract law or procurement management.

05:38 We may also want some relevant organizational process assets in the form of our project management methodology or the specific parts of it relating to procurement management, like a blank template for a procurement management plan. Some overviews and foundational concepts of procurement management include for the purposes of the exam, it's very USA government based in its approach.

06:09 So if you have any dealings with the US government, you'll find the section particularly easy.

06:17 You'll also find the section particularly easy and straightforward if you've been involved in formal processes for soliciting tenders or proposals. Whatever happens, though, you should remember that any procurement process, because it is a legal process at the end of the day with a signed contract should always be a formal documented process.

06:41 This is not a process of handshakes, verbal confirmation and good intention.

06:47 This is a process of documentation.

06:50 At the end of the day, any decisions you make during this procurement process.

06:56 You could find yourself answerable to a court of law.

07:00 So keep that in mind, keep everything formal and documented.

07:05 Some other tips throughout this process, you're going to see me refer to either the buyer or the seller.

07:13 In the exam, the default position, unless specified, will be that you are the buyer of goods or services and you are looking to procure these from a seller of goods and services.

07:26 But read the question carefully because at times it may turn the scenario around and give a description that implies or outlines that you are the seller of goods and services to somebody else's project.

07:41 This is particularly important.

07:44 Especially when choosing the type of contract you would prefer.

07:49 So read the question carefully.

07:51 Remember, the default is that you are the buyer.

07:54 But read the question to determine if in this instance it's outlining your position as one of seller of goods or services to somebody else.

08:03 So let's take a look at some of the tools and techniques that may be useful to us.

08:08 The first one is make or buy analysis.

08:12 This is where you are going to make a decision about whether it's better, whether the benefits outweigh the costs of doing it yourself or procuring the goods or services from an external vendor.

08:25 Now, make or buy analysis involves you looking at a lot of different factors risk competency.

08:31 Do you have to train yourself up to do it or do you currently have that competency staff availability? Do you actually have staff available to do it now, or is it better to bring in external resources, ownership of intellectual property also as one of those important considerations? Generally, the default position is that whoever makes the goods or provides the services owns the intellectual property associated with them. So if you want a different situation from this, you'll need to put that into your procurement documents and contracts that are signed.

09:05 Completing make or buy analysis will tell you whether it's better for you to do the goods or services yourself, or make them yourself or buy them from external sources.

09:17 Expert judgment is also an important tool or technique here, particularly your experience, the experience of project team members and also possibly the procurement division within your organization.

09:30 It's not uncommon for large organizations to have a division related to procurement activities.

09:38 If such, then you want to consult with these people to help and get their experience in your procurement management plan.

09:46 As a general rule, if your organization does have a procurement division and they have rules around procurement, you should follow those rules or get explicit written permission to deviate from those rules.

10:01 Market research is an important tool technique to use as well, because you may want to find out what is the appetite for sellers in your market.

10:12 What's the demands on them? What's the price doing? What's the delivery time doing this? Market research may impact your make or buy analysis.

10:22 You may also want to run meetings with those stakeholders that you've identified as having useful information and input into the development of your procurement management plan. The outputs from the planned procurement management process are, of course.

10:39 Our procurement management plan.

10:42 And like all the other management plans, it provides guidance on the rest of our procurement management activities throughout our project lifecycle.

10:51 Another important output is our procurement statement of work.

10:56 You may recall the statement of work is a high level narrative description of the work to be done on the project, which is generally found in the Project Charter.

11:08 Here, though, the procurement statement of work is slightly different.

11:13 It's a statement of work of what we want done by our procurement activities, and they'll be individual statements of work for each bit of procurement we want.

11:23 So if we're going looking for people to provide consultancy services and project management, our project statement of work will relate to the type of work we want when we want it done.

11:35 If we're going looking for goods to help us build a house, our procurement statement of work will relate to the goods we want, the standards we expect to be met and perhaps even the delivery date.

11:46 So the procurement statement of work is really like a mini scope statement that we want delivered by external vendors.

11:55 And we'll take these procurement statements of work, and we will put them inside our procurement documents.

12:01 There's many types of procurement documents and we'll look at some of the more common ones shortly.

12:07 We may also wish to produce source selection criteria.

12:12 When we go to the market with our procurement documents and we put a competitive situation in place and get multiple responses from potential sellers, we may want to have some source selection criteria to help us select which seller we're going to do business with and sign contracts with. Now we may simply choose the lowest price or we have multiple selection criteria.

12:40 We may select the seller based on price.

12:43 Previous experience expertise The staff allocated their financial stability ownership of intellectual property.

12:51 There's a whole range of factors that you could put in to your source selection criteria, and obviously you can take it one step further and give each of those a weighting.

13:02 You may choose to give more weighting to the price or perhaps an organization's health and safety or environmental record.

13:10 The development of source selection criteria during this Planning phase means that you're ready to go into procurement negotiations with an already established. Having done your make or buy analysis, you would have completed your make or buy decisions, you'll know which goods and services you've decided to make yourself and which goods or services you've decided to go to the market to procure from external vendors or sellers.

13:39 You may also issue some change requests.

13:43 Now, this is the only time in the PMBOK guide that a change request is an output from a Planning process.

13:50 This is because as part of our procurement management work and the development of the plan and make or buy analysis and decisions and the development of procurement statements of work, we may need to go back and change certain things we may need to change. The scope of our project may need to change the cost or time estimates for our project. There are several things that we could change as a result of our procurement decisions. Of course, like any other change requests, though, these change requests go on to be an input into the perform integrated change control process where they are considered according to our change control process and decisions made.

14:30 The final output will be project document updates, particularly lessons learned, the things that we learn about procurement, the things that we learnt about our make or buy decisions are all important things to capture in our lessons learned documentation.

14:47 Now, let's take a closer look at some of the things you need to know in terms of the procurement documents.

14:54 These are generally in the form of contracts that we issue, although we will look at some other types of procurement documents shortly.

15:02 There will always be questions in the exam about the types of contracts and who they favor, either the buyer or the seller.

15:10 So let's take a look at the three general categories of contract.

15:15 And discuss whether the risk is with the buyer or the seller.

15:20 The first general type of contract and remember, there are many specific forms of this with their own names.

15:27 But the general category is called fixed price or lump sum contract.

15:32 This is where, as part of the negotiations, the seller gives a fixed price for a known scope of work.

15:40 There are several other different forms of it.

15:42 There's fixed price plus incentive fee or fixed price plus economic price adjustment, particularly if the contract is over several years and you need to adjust the initial prices by agreed economic price adjustments.

15:56 Now, with the fixed price, it works best when you've got a known and very well defined scope of work because then the sellers can look at that and they can give you an accurate fixed price.

16:10 So the risk is with the seller.

16:13 The buyer has very little risk.

16:16 They've agreed to a fixed price should the seller have used poor estimating techniques.

16:23 The risk is with them.

16:25 They still need to deliver it for that price.

16:29 A cost reimbursable form of contract is very popular, and you can have cost reimbursable, plus fixed fee cost reimbursable plus incentive fee.

16:39 And essentially, they're in agreement between buyer and seller that the buyer will reimburse the costs of the seller, plus a certain fee to cover things like profit and overheads.

16:53 Here in these form of contract, depending on exactly the wording of them.

16:58 Generally speaking, the risk is shared between buyer and seller.

17:04 The third general form of contract, a time and materials, and this is simply an agreement that the buyer says, I will reimburse you for all of the time and materials you spend.

17:16 Obviously, the risk is with the buyer, the seller is very happy. They can continue to go on and on and on, and they'll always be reimbursed or paid for exactly what they've spent.

17:29 Generally speaking, you would only use a time and materials form of contract for emergency works or for very small parcels of work. We're doing a full fixed price contract.

17:42 The time involved in that outweighs the actual.

17:46 Time of the contract.

17:48 So just to clarify, in terms of where the risk is for fixed price contracts, the risk is with the seller.

17:58 For time and materials contracts, the risk is with the buyer.

18:03 So if you're a seller, you would prefer a time and materials contract. If you're a buyer, you would prefer some form of fixed price contract. So keep those things in mind for the exam, because there's generally one or two questions on that topic.

18:25 Now we're going to give you one more formula.

18:29 This is the point of total assumption.

18:32 Now this topic comes in and out of the exam, we need you to take it in with your brain dump and write it down as soon as you can and case you get a question in the exam about it.

18:46 Now, the question in the exam may just need you to know what the point of total assumption is, but it may also require you to calculate the point of total assumption. So let's take a look at what the point of total assumption is.

19:02 First up. It is the point in a fixed price incentive fee form of contract at which the seller of goods or services assumes total responsibility for all cost increases.

19:18 So point of total assumption where the seller assumes total responsibility for all cost increases.

19:26 Remember, it requires a fixed price incentive fee form of contract that has within it a target price, a ceiling price, a target cost and an agreed percentage split of cost overruns.

19:44 Obviously, the difference between the target cost and the target price is the incentive to the seller. But after the target price, the incentive starts to get eaten into because the seller is responsible for some of the overrun, depending on exactly what that agreed percentage split of cost overruns is, and at some point the incentive is gone. And at that point, the seller assumes total responsibility for all cost increases.

20:15 So the formula for calculating the point of total assumption or PTA is. The target cost, plus the selling price minus the target price divided by the buyers percentage share of cost overrun.

20:34 So we'll go through that again.

20:36 The point of total assumption calculation uses the formula.

20:41 The target cost plus the ceiling price minus the target price divided by the buyer's percentage share of cost overrun.

20:53 Graphically, this is how it looks.

20:57 The red line is what the seller is going to spend.

21:01 The Green Line is what the buyer is going to pay as per the contractual documents. Now, if the contract were to end at that first bend and the curve, the incentive fee is the gap between the green and the red lines.

21:18 However, if the project doesn't end there.

21:21 We have that percentage share of cost overruns coming into it, beginning to eat into the incentive for the seller, and at some point the incentive is all gone, but the buyer pays no more.

21:36 And at that point, the seller assumes total responsibility.

21:42 Let's take a look at an example.

21:45 So if we have a ceiling at target cost of $50,000.

21:54 If we have a target price of $54,000 and a ceiling price of $60,000.

22:03 And the cost overruns are paid 75 percent by the buyer.

22:08 So if the cost is $50,000, the client will pay $54,000, then center fee there is $4,000.

22:20 But if the cost goes up by $1000.

22:25 The client only pays another $750 more, that 75 percent of the cost overrun.

22:33 So if the cost goes up from $50,000 to $ 51,000, the client pays $54,750.

22:42 And the incentive fee has gone from $4,000 to $3,750 . Now.

22:52 If the cost is fifty four thousand.

22:56 Then the client pays an additional three thousand or fifty seven thousand.

23:00 That's 75 per cent of the $4000 increase.

23:04 And you can see what's happening here.

23:06 That incentive figure's getting eaten away and we're approaching that ceiling price. And if the cost is $58,000, so that's an extra $8,000.

23:18 The client pays $60,000, which is an additional $6,000, and that's the ceiling. And after $58,000, every dollar spent is a dollar out of the seller's pocket.

23:32 So that is the point of total assumption.

23:35 The point at which the seller assumes total responsibility for all costs, the buyer is not worried any longer.

23:41 Obviously, they're probably a little bit annoyed, but the project didn't come in at $54,000 and came in at $60,000.

23:48 But beyond that point, the seller assumes total responsibility for all costs.

23:56 Now, the other sorts of procurement documents that you could put out include a request for information or RFI, an expression of interest or EOI, an invitation for bid IFB, perhaps a tender notice or request for proposal RFP request for quotation is an RFQ.

24:19 Now, if you've been through any of the processes to issue or agree or negotiate on any of these.

24:27 This procurement process will seem straightforward and easy to.

24:32 But in summary, the developed procurement management plan process develops a procurement management plan, which provides guidance for the rest of our procurement activities.

24:45 As part of this planning process will also do make or buy decisions, will decide on which form of contract we're going to use, will produce procurement documents and will also develop some source selection criteria to assist us when it comes to selecting the successful seller. Thank you very much.

25:08 This has been an introduction and overview to the planned procurement management process and the PMBOK guide.