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The Project Procurement Management processes address the contractual issues associated with any purchases made by the project and if the project is done under contract for a customer, these processes address those items also.

Quick reference

Project Procurement Management

The Project Procurement Management processes address the contractual issues associated with any purchases made by the project and if the project is done under contract for a customer, these processes address those items also.

When to use

Project Procurement Management processes are used whenever a supplier is required to complete the project activities at any time in the project lifecycle.  They are also used for those situations where the project work is done under contract to a customer.

Instructions

Project Procurement Management

“Project Procurement Management includes the processes necessary to purchase or acquire products, services, or results needed from outside the project team.” PMBOK® Guide

Unlike many of the other project activities, procurement activities have legal implications.  These must be accomplished in accordance with applicable contract law.  Depending upon the country, industry, or even customer, there are specific requirements that must be followed.  For that reason, if you have a great deal of supplier activity on your project, you may want to consider putting a dedicated procurement specialist on your project team. 

There is a special case of procurement activities that occurs when a project is being done under contract for a customer.  Many organizations will have a separate contract management department to manage the customer relationship.  When this occurs, the project manager must work closely with the contracts department to ensure a clear understanding of requirements, deliverables, and interface relationships.

Project Procurement Management Processes

There are three Project Procurement Management Processes.  They relate to each other as shown in the diagram below. The three processes are:

  • 12.1 Plan Procurement Management: “The process of documenting project procurement decisions, specifying the approach, and identifying potential sellers.” PMBOK® Guide
  • 12.2 Conduct Procurements: “The process of obtaining seller responses, selecting a seller, and awarding a contract.” PMBOK® Guide
  • 12.3 Control Procurements: “The process of managing procurement relationships, monitoring contract performance, making changes and corrections as appropriate, and closing out contracts.” PMBOK® Guide

Contract Types

There are several different types of contracts used with projects.  These contracts each have several variations.  In a manufacturing or operational setting, a typical supplier is selected and the contract written in order to get a specific item or items at the lowest possible cost.  This means that there is a clear and precise specification or statement of work.  It also often means that there is not intended to be any changes in the contract.  A project environment is often quite different from that.  Many times there is no specification at the start of the project.  Also, on many projects maintaining schedule and delivery dates is much more important than cost.  Further, exceeding the terms of the contract (performance or schedule) will often be of great value to the buyer.  When those conditions exist, it should impact the contract type.

Risks can often be accounted for in contracts with priced options and incentive and penalty clauses.  Be careful when using incentive and penalty clauses.  Balance the penalties and incentives across the three sides of the project management triangle.  For instance if you incentivize early delivery, be certain that you also penalize poor quality or incomplete deliverables.

The table below outlines the three primary contract types with some of the characteristics of each.

Definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Sixth Edition, Project Management Institute, Inc., 2017, Pages 701, 702, 713, and 717. PMBOK is a registered mark of the Project Management Institute, Inc.

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  • 00:04 Hi, I'm Ray Sheen.
  • 00:05 Let's talk about Project Procurement Management knowledge area.
  • 00:09 The Project Management Body of Knowledge, the PMBOK guide definition is,
  • 00:14 Project Procurement Management includes the processes necessary to purchase or
  • 00:19 acquire products, services, or results needed from outside the project team.
  • 00:25 That means that this project management area addresses how to manage project work
  • 00:29 that is done by individuals or
  • 00:30 organizations outside the performing organization or project team.
  • 00:35 There's often an additional level of complexity because of
  • 00:38 contractual compliance issues.
  • 00:40 These processes will also provide guidance for
  • 00:43 those instances when the project work, the product, service, or
  • 00:47 result that is being provided, is done under contract for a buyer.
  • 00:52 Another reason this knowledge area is highlighted is that the procurement work
  • 00:55 has a legal component associated with contract law.
  • 00:58 Because of that, many of the normal day-to-day interactions and discussions
  • 01:03 must take on a more formal nature to comply with terms of the contract.
  • 01:08 There are three procurement management processes.
  • 01:10 The first is Plan Procurement Management, which is the standard process to set
  • 01:15 policies and templates for use by the project team.
  • 01:18 Next is Conduct Procurements.
  • 01:20 This is the process for deciding what suppliers to use and
  • 01:23 awarding the contracts.
  • 01:25 Once the contract is placed, it must be managed and
  • 01:28 that's what the Control Procurements process does.
  • 01:31 This process continues on until the procurement is over to ensure that
  • 01:35 everything is correctly done and the contract is completely closed.
  • 01:38 There are several different contract types.
  • 01:42 Let's look at these and understand the differences and
  • 01:45 when you would use each one.
  • 01:46 The first one is a fixed-price contract.
  • 01:48 This is the most commonly used contract type.
  • 01:51 This is appropriate when the scope of work is clearly defined.
  • 01:54 The deliverables are specified in the contract statement of work.
  • 01:57 The price, and sometimes the schedule, are then the items that are negotiated or
  • 02:02 are used for selecting between the suppliers.
  • 02:04 Once the price is set, it cannot change without a contract modification.
  • 02:09 The seller or supplier bears the risk of overrun and underrun.
  • 02:13 The buyer bears the risk of having specified everything correctly.
  • 02:17 If there are changes in what is required or when they must pay,
  • 02:21 the variations to this type of contract are based upon incentives or
  • 02:24 punishing some aspect of supplier performance, usually quality or schedule.
  • 02:30 The next type is cost reimbursable.
  • 02:32 In this case, there normally are no specific deliverables defined.
  • 02:35 Instead, the type of work or a general description of the result is described.
  • 02:40 The buyer agrees to pay the seller their actual expenses
  • 02:43 while they are doing that work.
  • 02:45 So the only thing that is negotiated is the categories of work that must be
  • 02:48 reimbursed and the type of calculation for profit that will be used.
  • 02:52 The buyer bears all of the cost risk.
  • 02:55 Positive risk if the work doesn't take much effort, and
  • 02:57 negative risk if it takes a lot of effort.
  • 03:00 The seller has the risk of finding the right resources to do the work.
  • 03:04 The profit could be a set amount, a sliding scale based upon several factors,
  • 03:09 or a set amount based upon hitting some preset performance targets.
  • 03:13 The third type is the time and material contract.
  • 03:16 This is also used for the case when there's only a general description of
  • 03:19 the type of work to be done or the effort needed to create the deliverable cannot be
  • 03:23 accurately estimated.
  • 03:24 Unlike cost reimbursable, which pays the actual costs, this approach
  • 03:29 will negotiate a rate for a type or category of work that is being done.
  • 03:33 The buyer bears the risk of high costs if there's a lot of that work needed to
  • 03:37 complete the project.
  • 03:39 The seller bears the risk of low profits if only a small amount of work is needed
  • 03:43 to complete the project.
  • 03:45 Incentives and penalties can be included on these contracts also, and
  • 03:49 are usually tied to schedule or quality goals.
  • 03:53 Let's now look at the relationships between these processes.
  • 03:56 We'll start with the plan procurement management process.
  • 03:59 This process creates a procurement management plan that is incorporated into
  • 04:03 the project management plan.
  • 04:04 And just like with every other knowledge area, the project management plan is
  • 04:08 an input to all the other processes in this knowledge area, and
  • 04:11 is even an input to the plan procurement management process.
  • 04:15 Conduct procurements and
  • 04:17 control procurements will create updates back to the project management plan.
  • 04:21 And in this case also, these three processes are creating updates
  • 04:25 to some of the documents that are created in the other processes.
  • 04:30 But we also have a special class of documentation within this knowledge
  • 04:33 management area and that is the procurement documents.
  • 04:36 These are originally created by the plan procurement management and
  • 04:40 are then used by both conduct procurement and control procurement processes.
  • 04:44 These documents include things like a bid strategy or a make buy plan.
  • 04:48 In addition,
  • 04:49 the control procurement process will create updates to these documents.
  • 04:54 The procurement management processes appears pretty simple, but
  • 04:58 don't forget that there are lots of connections between these processes and
  • 05:03 other management processes.
  • 05:04 So make sure you understand what's happening.

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