Chapter 12 Project Procurement Management Information Technology Project Management Fourth Edition 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 Learning Objectives cont d 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 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 India is the leading country for U S offshore outsourcing 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 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 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 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 Project Procurement Management Processes cont d 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 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 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 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 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 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 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 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 Figure 12 2 Contract Types Versus Risk 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 Procurement Management Plan Describes how the procurement processes will be managed from developing documentation for making outside purchases or acquisitions to