PREPARATION

COURSE
BASED ON PMBOK V.5
BY
Eng. Ahmed Fahmy
MBA, PMP
 PROJECT
PROCUREMENT
MANAGEMENT
 Procurement vs Purchasing
• “Procurement” is the overarching function that describes
the activities and processes to acquire goods and services.
involves the activities involved in establishing fundamental
requirements, sourcing activities such as market research
and vendor evaluation and negotiation of contracts. It can
also include the purchasing activities required to order and
receive goods

• “Purchasing” refers to the process of ordering and receiving

goods and services. It is a subset of the wider procurement
process. Generally, purchasing refers to the process involved
in ordering goods such as request, approval, creation of a
purchase order record (a Purchase Order or P.O.) and the
receipting of goods.
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 Project procurement management
• Project procurement management includes the processes
necessary to purchase or acquire products, services, or results
needed from outside the project team.

• Project procurement management includes the contract

management and change control processes required to develop
and administer contracts, or purchase orders issued by
authorized project team members.

• Project procurement management also includes administering

any contract issued by an outside organization (the buyer) that
is acquiring the project from the performing organization (the
seller), and administering contractual obligations placed on the
project team by the contract.

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Negotiation strategies
• Deadline.
• Extreme demands.
• Good guy, bad guy.
• Missing man( limited authority)
• Attack
• Withdrawal
• Fait accompli
• Fair and reasonable
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Contracts
Contract (procurement) Statement of Work ( SOW )
• Each individual procurement item requires a separate contract
statement of work (SOW)
• SOW for each contract is developed from the project scope
statement, the project WBS, and the WBS dictionary
• Describe the procurement item in sufficient detail to allow
prospective sellers to determine if they are capable of providing the
item.
• Written to be clear, complete, and concise.
• Can be revised and refined as required as it moves through the
procurement process until it is incorporated into a signed contract.
• Multiple products or services may be grouped as one procurement
item with a single contract SOW

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Contracts (continue)
■ Contracts are a legally binding documents (formal agreement),
should state all requirements.
– Depending upon the application area, a contract can also be
called an agreement, an understanding, a subcontract, or a
purchase order.
■ Contract must be followed and everything provided in it must be
done.
■ Any change must be written and formally controlled and
approved by both parties.
■ Contracts are legal relationships subjects to remedy in the courts.
■ the project management team may seek support early from
specialists in contracting, purchasing, law, and technical
disciplines.
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Contracts (continue)
■ each contract life cycle may end during any phase of the project life
cycle.

■ Depending on the application area, the seller may be identified as a

contractor, subcontractor, vendor, service provider, or supplier.

■ Depending on the buyer’s position in the project acquisition cycle,

the buyer may be called a client, customer, prime contractor,
contractor, acquiring organization, service requestor, or purchaser.

■ The seller can be viewed during the contract life cycle first as a
bidder, then as the selected source, and then as the contracted
supplier or vendor.

■ The seller will typically manage the work as a project if the

acquisition is not just for shelf material, goods, or common products.

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Contracts (continue)
■ The buyer becomes the customer, and is thus a key project
stakeholder for the seller.
■ The seller’s project management team is concerned with all the
processes of project management, not only with those of this
Knowledge Area.
■ Terms and conditions of the contract become key inputs to many
of the seller’s management processes.
■ In this section, it is assumed that the buyer of an item for the
project is assigned to the project team and that the seller is
organizationally external to the project team.
■ It is also assumed that a formal contractual relationship will be
developed and exists between the buyer and the seller.

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Types of Contracts (1)
■ 1.Fixed Price (Lump Sum):
– Well defined scope/ product.
– Fixed total Price.
– Risk is on the seller.
– Fixed prices contracts types:
■ Firm Fixed Price (FFP)
■ Fixed Price Incentive Fees Contract (FPIF)
■ Fixed Price with Economic Price Adjustment
Contracts (FP-EPA)

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Types of Fixed price contracts
■ Firm fixed price contracts (FFP )
- The most commonly used contract type is the FFP.
- It is favored by most buying organizations.
- any cost increase due to adverse performance is the responsibility of the seller.
- the buyer must precisely specify the product or services to be procured.
■ Fixed price incentive fee contracts (FPIF )
- this fixed-price arrangement gives the buyer and the seller some flexibility in
that it allows for deviation from performance, with financial incentives tied
to achieving agreed to metrics.
Under FPIF contracts, a price ceiling is set, and all costs above the price ceiling
are the responsibility of the seller, who is obligated to complete the work.
■ Fixed price with economic price adjustment contracts (FB-EPA)
This contract type is used whenever the sellers performance period spans a
considerable period of years, as is desired with many long-term relationships
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Types of Contracts (2)
■ 2.Cost Reimbursable Contract:
– Scope is not exactly defined.
– Price is open based on the final costs the
product will incur.
– Risk is on the buyer.
– Cost reimbursable contracts types:
■ Cost Plus Fixed Fees Contracts (CPFF)
■ Cost Plus Incentive Fees Contracts (CPIF)
■ Cost Plus Award Fee Contracts (CPAF)

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Cost-reimbursable contracts
■ This category of contracts involve payments to the
seller for all legitimate actual costs incurred for
completed work, plus a fee representing seller
profit.

■ A cost-reimbursable contract gives the project

flexibility to redirect a seller whenever the scope of
work cannot be precisely defined at the start and
needs to be altered, or when high risks may exist in
the effort.

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Types of Cost-reimbursable contracts
■ Cost plus fixed fee contracts (CPFF)
The seller is reimbursed for all allowable costs for performing
the contract work, and receive a fixed fee payment calculated
as a percentage of the initial estimated project costs.
■ Cost plus award fee contracts (CPAF)
The seller is reimbursed for all legitimate costs, but the
majority of the fee is only earned based on the satisfaction of
certain broad subjective performance criteria defined and
incorporated into the contract
■ Cost plus incentive fee contracts (CPIF)
The seller is reimbursed for all allowable costs for performing
the contract work and receives a predetermined incentive fee
based upon achieving certain performance objectives as set
forth in the contract
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Types of Contracts (3)
■ 3. Time and material contracts (T&M)
Time and material contracts are a hybrid type of
contractual arrangement that contain aspects of
both cost-reimbursable and fixed-price contracts
– Cost is charged to identified tasks of an on
going activity, ex. Research or training.
– Scope per unit is defined.
– Risk is on the buyer. (seller has no incentive to
control costs)

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Types of Contracts
FFP (Firm
Fixed)  Fixed
 For a well-defined
FPI (Fixed Plus product or
Fixed Incentive) requirements.
FP-EPA (Fixed +  May include incentives
Economic Price  Reimbursement
Adjustment  Payment of actual
CPAF COST + PROFIT
Time & Material
(Cost Plus Award  Include direct &
Fee) indirect costs

CPFF  Time and Material

(Cost Plus Fixed  Fixed price per unit
Reimbursement
Fee)  Variable quantity

CPIF
(Cost Plus Incentive
Fee)
Range of Contract Types versus Risk

Fixed Price vs. Cost Reimbursable

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Fixed Price vs. Cost Reimbursable

Fixed Price vs. Cost Reimbursable

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Example 1: Cost Plus Incentive Fee
Seller managed to save on cost!
Target Cost $210,000
Cost savings = 210 – 200 = $10K Target Fee $25,000
Target Price $235,000
Seller’s share (incentive) of savings =
Sharing Ratio 80/20
20% * 10K = $2K Actual Cost $200,000

Seller’s total fees = 25 + 2 = $27K

Final price = cost + fees

= 200 +
27=$227k
Example 2: Cost Plus Incentive Fee
Seller EXCEEDED cost! Target Cost $150k
They will get penalized! Target Fee $20k
Target Price $170k
Excess Cost= 150 – 160 = ($10K) Sharing Ratio 80/20
Seller’s share (penalty) of loss = 20% * Actual Cost 160k

10K = ($2K)

Seller’s total fees = 20 - 2 = $18K

Final price = cost + fees

= 160 + 18 = $178k
Example 3: Fixed Plus Incentive
Seller EXCEEDED cost!
Target Cost $150k
They will get penalized! Target Fee $30k
Target Price $180k
Excess Cost= 150 – 210 = ($60K)
Sharing Ratio 60/40
Seller’s share (penalty) of loss = 40% * Actual Cost $210k
60K = ($24K) Ceiling $200k

Seller’s total fees = 30- 24 = $6K

Final price = cost + fees

= 210 + 6 = $216k

 The seller will only get the ceiling $200k

Example 4: Fixed Plus Incentive
Seller EXCEEDED cost! Target Cost $200k
They will get penalized! Target Fee $50k
Target Price $250k
Excess Cost= 250 – 200 = ($50K)
Sharing Ratio 60/40
Seller’s share (penalty) of loss = 40% * 50K Actual Cost $250k
= ($20K) Ceiling $260k
Seller’s total fees = 50- 20 = $30K

Final price = cost + fees

= 250 + 30 = $280k

 The seller will only get the ceiling $260k

Example 5: Fixed Plus Incentive
Seller is right on target cost! Bulls eye!
Target Cost $200k
No incentives. No penalty. Target Fee $50k
Target Price $250k
Seller’s total fees = 50
Sharing Ratio 60/40
Final price = cost + fees Actual Cost $200k
Ceiling $260k
= 200 + 50 = $250k
 Example 6: Fixed Plus Incentive
Seller saved on cost. Target Cost $200k
Target Fee $50k
Cost savings = 200 – 190 = $10k
Target Price $250k
Incentive = 40% * 10 = $4k Sharing Ratio 60/40
Actual Cost $190k
Seller’s total fees = 50 + 4 = $54k
Ceiling $290k
Final price = cost + fees

= 190 + 54= $244k

To be continued
Thank you

PMP V.5 by Eng. Ahmed Fahmy -- email: afahmyip@gmail.com 25