Planning and managing procurement entails the identification and sourcing of necessary materials, goods, or services for project execution. This process is crucial for a Project Management Professional (PMP) because the procurement management plan sets a clear direction on how project procurement will occur. As a PMP, understanding how to effectively plan and manage procurement is essential.
Procurement Management Process
The procurement management process involves four major steps:
- Plan Procurement Management: This initial step involves determining whether to make or buy, what to make or buy, and when and how. It mainly focuses on identifying potential sellers and what products or services they can provide.
- Conduct Procurement: This process involves the acquisition of the goods and services from outside the organization. It focuses on finding potential sellers, obtaining quotes, bids, or proposals, and then selecting a vendor based on set criteria.
- Control Procurement: Post procurement, it is necessary to ensure the sellers’ performance meets contractual obligations. This process also looks at managing any changes or disputes that occur over the duration of the project.
- Close Procurement: This final phase ensures all elements of the procurement process have been finalized, including payment and recording of all procurement actions.
As a PMP, managing these phases efficiently contributes significantly towards the successful execution of a project.
Procurement Management Plan
A procurement management plan is a critical part of project management, documenting how a project will acquire goods/services from outside organizations. It typically covers these main aspects:
- Procurement requirements
- Identification of potential sellers
- Procurement risk management
- Contract type determination
- Procurement metrics and measurements
- Management and oversight of procurement processes
Contract Types
A significant aspect of procurement planning is understanding and determining the right contract type. There are generally three types of contracts:
- Fixed-Price Contracts (FP): The price is fixed and not subject to change unless there are changes in the project scope.
- Cost-Reimbursable Contracts (CR): Requires the buyer to pay the seller’s actual costs and, in addition, a pre-determined fee usually representing seller’s profit.
- Time and Material Contracts (T&M): A hybrid type of contractual agreement that includes aspects of both cost-reimbursable and fixed-price contracts.
| Contract Type | Risk for Buyer | Risk for Seller |
|---|---|---|
| Fixed-Price (FP) | Low | High |
| Cost-Reimbursable (CR) | High | Low |
| Time and Materials (T&M) | Medium | Medium |
It’s crucial for the PMP to select the contract type that best fits the project risks and requirements.
Tools and Techniques
It’s worth noting that the project manager does not typically carry out procurement alone. In most cases, they will work in tandem with the procurement department or specialist. Some common procurement tools and techniques include:
- Market research to understand what products/services are available that might meet the project’s requirements.
- Bidder conferences to ensure that all potential vendors have a clear and common understanding of the procurement.
- Negotiation strategies to finalize the contractual agreements with suppliers.
The project manager must ensure that the selected vendors can reliably deliver all required resources within the specified time frames.
In conclusion, effective procurement management can make or break a project. Hence, as a project manager preparing for PMP certification, understanding of Procurement Management and ability to plan and manage it strategically is pivotal. By identifying required supplies, determining budget constraints, choosing reliable suppliers, and ensuring the timely delivery of supplies with an effective procurement management plan, a project manager can contribute to the overall project’s success.
Practice Test
“Procurement management refers to the effective acquisition of goods and services from an external source.” True/False?
- True
- False
Answer: True.
Explanation: Procurement management includes the processes involved to acquire goods and services, necessary for the successful completion of the project from an external source.
A procurement statement of work (SOW) provides a detailed description of what is expected from a seller in terms of performance and/or deliverables. True/False?
- True
- False
Answer: True.
Explanation: The statement of work (SOW) in procurement management outlines the specific tasks, budgets, schedules, and deliverables expected from a seller.
Which of the following are important factors to consider in procurement management?
- a) Cost
- b) Time
- c) Quality
- d) Risk
Answer: a, b, c, d.
Explanation: All these factors are crucial to consider in procurement management. They play a significant role in the proper planning and managing of procurement processes.
The make-or-buy decision is a major part of the procurement planning process. True/False?
- True
- False
Answer: True.
Explanation: The make-or-buy decision involves determining whether it would be more cost-effective and efficient to produce certain materials or services in-house or to purchase them from external sources.
A successful procurement management process leads only to cost savings. True/False?
- True
- False
Answer: False.
Explanation: Though cost saving is a key outcome, a successful procurement management process also leads to better quality assurance, risk management, and strategic alignment.
Contract type is not a crucial factor in procurement management. True/False?
- True
- False
Answer: False.
Explanation: The type of contract chosen plays a significant role in procurement management. It impacts cost, risk, and level of control over the seller.
Which among the following is not a typical type of contract used in procurement?
- a) Fixed-Price contract
- b) Cost-Reimbursable contract
- c) Time and Materials contract
- d) Retention contract
Answer: d. Retention contract
Explanation: Retention contracts are not typically considered in procurement as it is not a common practice.
The risk increases with the uncertainty of cost in the chosen contract type. True/False?
- True
- False
Answer: True.
Explanation: The level of uncertainty in cost can greatly increase the risk. It is thus crucial to choose the contract type carefully.
Procurement audits are always conducted at the end of the project. True/False?
- True
- False
Answer: False.
Explanation: Procurement audits can be conducted at any stage of the project. It is a continuous improvement process aimed at identifying the successes and failures in the procurement process.
The main output of the Conduct Procurements process is the ___________.
- a) Signed contract
- b) Procurement plan
- c) Procurement strategy
- d) Procurement audit
Answer: a. Signed contract
Explanation: The main output of the Conduct Procurements process is typically the signed contract, which is a formal, legally enforceable document that sets out all terms and conditions of the agreement.
Failure in procurement management may lead to project delays. True/False?
- True
- False
Answer: True.
Explanation: Inefficient procurement management can cause project overruns, delays, and escalated costs.
Interview Questions
What is procurement management in project management?
Procurement management is the process that includes planning, execution, control, and closure that is involved in the purchasing of goods and services from external sources needed for successful completion of the project.
What are the four major processes involved in procurement management?
The four major processes involved in procurement management are planning procurement management, conducting procurement, controlling procurement, and closing procurement.
What is the importance of a procurement management plan in project management?
A procurement management plan is critical as it specifies how a project will acquire goods/services from external sources. It guides the procurement processes throughout the project and helps maintain transparency and consistency in procurement-related decisions.
What is the purpose of the Conduct Procurements process?
The purpose of the Conduct Procurements process is to obtain seller responses, select a seller, and award a contract. It also involves managing procurement relationships, monitoring contract performance, and making changes and adjustments as needed.
What roles do the project manager and team play in procurement management?
The project manager and team play an instrumental role in defining procurement requirements, selecting suppliers, managing procurement relationships, and closing out procurements.
What is a procurement strategy?
A procurement strategy is a plan of action that outlines how the procurement process will be managed. It details the method of procurement, contract type, selection criteria, risk management, and supplier management strategies.
What is the “Control Procurements” process?
Control Procurements is the process of managing procurement relationships, monitoring contract performance, making changes and corrections as appropriate, and closing out contracts.
What is included in a Procurement Statement of Work (SOW)?
The Procurement Statement of Work (SOW) provides a detailed description of the product, service, or result to be procured. It includes specifications, quantity, quality standards, performance dates, place of delivery, and work requirements.
What is a source selection criteria in procurement management?
Source selection criteria are the factors used to evaluate and choose among potential vendors or suppliers. These may include factors like cost, delivery time, reputation, capacity, past performance, etc.
What are the three most common types of contracts used in procurement management?
The three most common types of contracts used in procurement management are Fixed Price (FP), Cost Reimbursable (CR), and Time and Material (T&M).
What are independent estimates in procurement management?
An independent estimate, or ‘should-cost’ estimate, is a cost estimate performed by a third party to compare with proposed vendor costs.
What is a risk register in the context of procurement?
In the context of procurement, a risk register is a document that contains information about identified risks, their impacts, and risk response plans. It’s used in procurement to address risks related to contracts and vendor management.
What is the main purpose of procurement audits?
The main purpose of procurement audits is to identify successes and failures in the procurement process that can be used for learning and process improvement in the future.
What is the purpose of contract closure in procurement management?
Contract closure in procurement management is the completion of the agreement made between the buyer and seller. It involves verifying that all work and terms of the contract have been fulfilled.
What is a make-or-buy analysis in procurement management?
A make-or-buy analysis is the process of deciding whether it’s more beneficial for a company to make a product itself, or to buy it from an external supplier. It typically considers factors like cost, capacity, and risk.
extutorials.com