It forms a core component of the project procurement management knowledge area, which focuses on purchasing or acquiring products, services, or results needed for project completion. Let’s discuss this more in depth.
1. Procurement Strategy and PMP
In project management, procurement involves the processes required to purchase or acquire the products, services, or results needed from outside the project team. This strategy includes three fundamental parts:
Plan Procurement Management:
Develop a proper procurement management plan that identifies the types of products or services to procure, the contract types to use, the risks involved, and how to manage them.
Conduct Procurements:
Implement the procurement plan by obtaining seller responses, selecting a seller, and awarding contracts.
Control Procurements:
Manage procurement relationships, monitor contract performance, and make changes and corrections to contracts as needed.
In essence, the procurement strategy serves to ensure that the procured items fulfill the purpose they were purchased for, and contribute to the final project’s success.
2. Planning Procurement Strategy
The first step in planning a procurement strategy is understanding the project’s requirements. After this, the suitable type of contract should be identified. There are three types of contracts:
Fixed Price (FP):
The total price is not subject to any adjustment unless there are changes in project scope.
Cost Reimbursable (CR):
The seller is reimbursed for completed work plus a fee representing profit.
Time & Material (T&M):
Hybrid type contracts that comprise aspects of both FP and CR contracts.
Deciding which type to use depends on several factors such as project risk, project complexity, and the organization’s experience with vendors.
The risk and complexity of the procurement should also be considered. High-risk procurements might require risk mitigation strategies like insurance, performance bonds, or detailed contracts to ensure a smooth process.
3. Managing Procurement Strategy
The next phase, managing procurements, focuses on vendor relationships and contract performance. It involves the application of project management techniques to procurement processes to ensure that the seller’s performance meets contractual requirements.
A key aspect is the monitoring and control of commitments, ensuring that the promised goods or services are being delivered on time, and are of the expected quality.
While monitoring procurements, it’s crucial to review contracts periodically and evaluate performance against the defined acceptance criteria. Changes can often occur in project execution due to budget limitations, timeline constraints, and unexpected complications, which may require contract modifications.
In managing procurements, conflict resolution also becomes important. It’s vital for a project manager to understand how to resolve any procurement related conflicts and execute conflict resolution tactics while preserving the business relationship.
4. Applying Procurement Strategy in PMP Exam
In PMP exam, many questions are often based around procurement scenarios. You may be asked to interpret contract terms, decide on the best contract type to use, or manage procurement conflicts. Having a strong understanding of procurement planning and management will allow you to apply practical solutions to these scenario-based questions.
In conclusion, planning and managing a procurement strategy is crucial for successful project completion. Proper planning ensures the right materials and services are procured, and effective management ensures their optimal utilization. This broad view of procurement is vital for both project management practice and preparation for the PMP exam.
Practice Test
True or False: The procurement strategy is a part of the overall project management plan.
- True
- False
Answer: True
Explanation: The procurement strategy helps project managers to decide how to acquire the necessary goods and services for their project. Hence, it is indeed a part of the overall project management plan.
What is the main goal of the procurement planning process?
- A. To establish contracts with vendors
- B. To reduce procurement risks
- C. To identify what needs to be procured and when
- D. To identify potential vendors
Answer: C. To identify what needs to be procured and when
Explanation: The ultimate goal of procurement planning is to determine what needs to be procured and when. This helps in avoiding unnecessary delays and ensures the project stays on schedule.
True or False: Procurement strategies are only relevant for large-sized Projects.
- True
- False
Answer: False
Explanation: Procurement strategies are essential for all projects irrespective of their size. They provide a procurement direction and a basis for decision making that helps in the effective acquisition of goods and services.
Which step is not part of the procurement management process?
- A. Procurement planning
- B. Solicitation
- C. Project kickoff
- D. Contract administration
Answer: C. Project kickoff
Explanation: Project kickoff is not part of the procurement management process. It is a phase in the project management where the project’s objectives, scope and participants are formally recognized.
True or False: The Make-or-Buy decision is a key aspect of procurement planning.
- True
- False
Answer: True
Explanation: The Make-or-Buy decision involves taking a call on whether a particular product or service should be produced in-house, or bought from external suppliers. This decision is indeed a key aspect of procurement planning.
The process of managing procurement relationships, monitoring contract performance, and making changes when necessary is called:
- A. Vendor management
- B. Solicitation
- C. Contract administration
- D. Procurement strategy
Answer: C. Contract administration
Explanation: Contract administration involves the activities performed by the project manager after awarding the contract. This includes managing the relationship with the vendor, making changes when necessary, and monitoring the overall performance.
Multiple vendors should be used if:
- A. The project is very large
- B. The project is complex
- C. The project carries high risks
- D. All of the above
Answer: D. All of the above
Explanation: Using multiple vendors can help mitigate risks, handle complex projects better, and manage large projects efficiently.
True or False: Selection of procurement type can influence the overall procurement cost.
- True
- False
Answer: True
Explanation: The decision of procurement type (e.g. fixed cost, cost reimbursable, time and material) can significantly influence the cost of procurement.
In the context of project management, what does closing a procurement involve?
- A. Terminating contracts
- B. Documenting lessons learned
- C. Both A & B
- D. Neither A nor B
Answer: C. Both A & B
Explanation: Closing a procurement involves not only terminating contracts but also documenting lessons learned during the procurement process.
True or False: The cost of procurement is the same as the cost of the goods and services procured.
- True
- False
Answer: False
Explanation: The cost of procurement includes not only the cost of goods and services procured but also other aspects such as cost of resources involved in procurement activities, contract management, and time spent in procurement activities.
Interview Questions
What is the primary objective of procurement management?
The primary objective of procurement management is to obtain required materials, supplies or services from external sources in a timely manner and at the best possible price.
What are the four process steps in the Project Procurement Management Process?
The four process steps are Plan Procurement Management, Conduct Procurements, Control Procurements, and Close Procurements.
Which process in procurement management involves deciding whether to acquire outside support and documenting the requirements for a procured product or service?
The Plan Procurement Management process.
What is the role of a procurement manager?
A procurement manager is responsible for planning, managing, and executing procuring activities and may also have to negotiate with suppliers and vendors.
What does the term “make or buy” decision refer to in procurement strategy?
A “make or buy decision” refers to the internal analysis to determine whether a product or service should be produced in-house or externally purchased.
What is a procurement statement of work (SOW)?
A procurement statement of work (SOW) is a document that describes the specific services or tasks that a contractor will perform.
In procurement strategy, what is the difference between single-source and sole-source?
Single-source refers to using one preferred supplier, despite the presence of other suppliers, while sole-source refers to when there is only one supplier capable of fulfilling a contract.
What are the three types of contracts used in procurement?
The three types of contracts are fixed-price contracts, cost-reimbursable contracts, and time and materials contracts.
What is the purpose of a procurement audit?
A procurement audit is used to identify the success and failures that occurred during the procurement process to make improvements for future projects.
What is a bid document in procurement strategy and what does it entail?
A bid document is a comprehensive document sent to potential vendors detailing the project’s specifications and requirements in order for the vendors to create their proposals.
Why is risk assessment a significant part of the procurement planning process?
Risk assessment is significant in procurement planning because it helps to identify possible issues that could disrupt or affect the procurement process.
What is the purpose of centralizing procurement processes?
Centralizing procurement helps to increase efficiency, reduces redundancy, improves purchasing power, and allows for a more strategic approach to procurement.
What is the importance of a procurement contract in project management?
A procurement contract is important because it provides a legally binding assurance that the vendor will provide the specified product or service at the agreed-upon price.
What is the role of governance in procurement strategy?
Governance in procurement strategy ensures that procurement actions comply with the organization’s policies, procedures, and regulations.
What is a procurement plan and why is it important?
A procurement plan outlines the process for acquiring the necessary goods and services from external vendors. It is important because it guides the team in managing procurement activities, ensuring adherence to budget, timelines, and deliverables.
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