Procurement Management  

The processes required to acquire goods and services, to attain project scope, from outside the performing organization

Plan Procurement's Management  

The process of documenting project purchasing decisions, specifying the approach, and identifying potential sellers
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1. Project management plan
The project management plan describes the need, justification, requirements, and current boundaries for the project. (Scope statement - WBS -WBS dictionary)

2.  Requirements documentation  
Requirements with contractual and legal implications that may include health, safety, security, performance, environmental, insurance, intellectual property rights, equal employment opportunity and Licenses, and permits .

3.  Risk register  
The risk register provides an understanding of risks uncovered to date.
4.  Activity resource requirements  
Activity resource requirements contain information on specific needs such as people, equipment, or location.
5.  Project schedule 
Project  schedule  contains  information  on  required  timelines  or  mandated deliverable dates.
6.  Activity cost estimates  
Cost estimates developed by the procuring activity are  used to evaluate the reasonableness of the bids or proposals received from potential sellers. 

7.  Stakeholder register  
Stakeholder register provides details on the project participants and their interests in the project.  
8.  Enterprise environmental factors   
These factors are company culture and existing systems that your project will have to deal with or can use.
ü Marketplace conditions.  
ü - Products, services, and results that are available in the marketplace.  
ü - Suppliers, including past performance or reputation.  
ü - Typical terms and conditions for products, services, and results or for the specific industry.  ü - Unique local requirements.

9.  Organizational process assets  
- Formal procurement policies, procedures, and guidelines.  
- Most organizations have formal procurement policies and buying organizations.  
- Management  systems  that  are  considered  in  developing the procurement management plan and selecting the contract types to be used.  
- An established multi-tier supplier system of pre-qualified sellers based on prior experience.

Fixed Price (FP, or Lump Sum, Firm Fixed Price)

  • Used for acquiring goods or services with well-defined specifications or requirements and when there is enough competition to determine a fair and reasonable fixed price before the work begins.  
  • This is the most common type of contract.  
  • If the costs are more than the agreed-upon amount, the seller MUST bear the additional costs.  
  • Therefore, the buyer has the LEAST cost risk in this type of contract, provided the buyer has a completely defined scope.  
  • It could be said that the seller is most concerned with the procurement statement of work (SOW) in this type of contract.
  • Sellers in some industries may not have the detailed accounting records of past project activities required to accurately estimate future projects.  
  • Buyers may not have the expertise to prepare a complete procurement statement of work.
-  Contract = $250M. 
1.  Fixed Price Incentive Fee (FPIF)
  • Profits (or financial incentives) can be adjusted based on the seller meeting specified performance criteria such as getting the work done faster, cheaper, or better.      
  • The final price is calculated by a formula based on the relationship of final negotiated costs to the total target cost.      
  • A variation on a FPIF is a FPIF successive target contract, in which the target for the incentive is changed after the first target is reached.
Contract = $110 M. An additional $10,000 or percentage/month early the project is finished will be paid to the seller.
2 . Fixed Price Award Fee (FPAF) 
  • The buyer pays a fixed price (which includes fee) plus an award amount (a bonus) based on performance.      
  • This is very similar to the FPIF contract, except the total possible award amount is determined in advance and apportioned out based on performance.      
  • In many instances, the award paid is judged subjectively. Therefore, procedures must be in place in advance for giving out the award, and a board must be established to help make the decision fairly.     
  • The cost to administer the award fee program versus the potential benefits must be weighed in the decision to use this type of contract.      
  • Contract = $110 M . For every month performance exceeds the planned level by more than 15% , an additional $5,000 is awarded to the seller, with maximum award of $70,000.
3.  Fixed Price Economic Price Adjustment (FPEPA)
  • If there are questions about future economic conditions (future prices) for contracts that exist for a multi-year period, a buyer might choose a fixed price contract with economic price adjustment.      
  • Future costs of supplies and equipment that the seller might be required to provide under contract might not be predictable. 
A similar type of contract is called fixed price with prospective price re determination.
Contract = $110 M, but a price increase will be allowed in year two based on the U.S. Consumer Price Index report for year one.
Contract = the contract price is $110 M but a price increase will be
allowed in year two to account for increases in specific material costs.

Purchase Order (PO)

  • A purchase order is the simplest type of fixed price contract. 
This type of contract is normally unilateral (signed by one party) instead of bilateral (signed by both parties).
  • It is usually used for simple commodity procurements.  
  • Purchase orders become contracts when they are "accepted by performance (e.g, equipment is shipped by the seller-a unilateral PO).  
  • Though unilateral purchase orders are most common, some companies will require the seller's signature on a purchase before the buyer will consider the purchase order official.  
  • In that case, it is the signature that forms the "acceptance" needed to make a contract.

Contract to purchase 30 M.L. of wood at $9 per meter 

Time and Material (T&M) or Unit Price 
  • The buyer pays on a per-hour or per-item basis.  
  • It is frequently used for service efforts in which the level of effort CAN NOT be defined at the time the contract is awarded.  
  • It has elements of a fixed price contract and a cost reimbursable contract.  
  • The seller's profit is built into the rate, so they have NO incentive to get the work done QUICKLY or efficiently.  
  • For these reasons, this type of contract is BEST used for work valued at small dollar amounts and lasting a short amount of time.  
  • To make sure the costs do not become higher than budgeted, the buyer may put a "'Not to Exceed" clause in the contract and thus limit the total cost they are required to pay.
  •  The buyer has a Medium amount of cost risk compared with cost reimbursable and fixed price contracts.
- Contract = $100 /hour + expenses or materials at cost.  
- Contract = $100 /hour + materials at $5/L.M of wood.

Cost Reimbursable (CR)

  • A cost reimbursable contract is used when the exact scope of work is uncertain and, therefore, costs cannot be estimated accurately enough to effectively use a fixed price contract.      
  • This type of contract provides for the buyer to pay the seller allowable incurred costs to the extent prescribed in the contract.     
  • This type of contract requires the seller to have an accounting system that can track costs by project.      
  • Here the buyer has the most cost risk because the total costs are unknown.      
  • Example; Research and development or information technology projects in which the scope is unknown are typical examples of cost reimbursable contracts.

Cost Contract :      

  • A cost contract is one in which the seller receives no fee (profit).     
  • It is appropriate for work performed by nonprofit organizations. 

- Contract = Cost. (without profit). 

1. Cost Plus Percentage of Costs (CPPC) OR Cost Plus Fee (CPF)
  • Requires the buyer to pay for all costs plus a percentage of costs as a fee.     
  • This type of cost reimbursable contract is not allowed for U.S. federal acquisitions or procurement under federal acquisition regulations and is bad for buyers everywhere.     
  • Sellers are not motivated to control costs because they will earn a profit on every cost without limit.

- Contract = Cost + 10% of costs as fee. 

2.  Cost Plus Fixed Fee (CPFF) 
  • Provides for payment to the seller of actual costs plus a negotiated fee that is fixed before the work begins.     
  • The fee does not vary with actual costs, thus providing some incentive for the seller to control costs.     
  • The fee may be adjusted as a result of changes to the procurement statement of work.

- Contract = Cost + $100,000 .  

3.  Cost Plus Award Fee (CPAF) 
  •  The buyer pays all costs and a base fee plus an award amount (a bonus) based on performance. 
  • This is similar to the CPIF contract, except the incentive is a potential award, rather than a potential award or penalty. 
  • The award amount in a CPAF contract is determined in advance and apportioned out depending on performance. 
  • This is a type of incentive contract. In some instances, the award given out is judged subjectively, Therefore, procedures must be in place in advance for giving out the award, and a board is established to help make the decision fairly. 
  • As with a FPAF contract, the cost to administer an award fee program vs. the potential benefits must be weighed in the decision to use this type of contract.
  • Contract  = Cost +  $5,000  (for every month production exceeds 100,000  units).
Maximum award available is $50,000  
- Contract = Cost + an award fee (to be determined) for each deliverable completed at least 7 days early.

4. Cost Plus Incentive Fee (CPIF)      

  • Provides for the seller to be paid for actual costs plus a fee that will be adjusted based on whether the specific performance objectives stated in the contract are met.     
  • In this type of contract, an original estimate of the total cost is made (the target cost) and a fee for the work is determined (a target fee).     
  • The seller then gets a percentage of the savings if the actual costs are less than the target costs or shares the cost overrun with the seller.
- Contract = Cost estimated + $100,000 (target fee)


1. Make-or-buy analysis
  • When the decision is made to complete a project, the company also makes a decision about doing the work themselves or outsourcing some or all of the work.  
  • The costs involved in managing the procurement should be considered. 
  • The direct costs of the product should be considered.  
  • The cost savings of purchasing a product or service may be outweighed by the cost of managing the procurement.  
  • One of the main reasons to "buy" is to DECREASE risk to the project's constraints. It is better to "make" if:  
  • You have an idle plant or workforce.
  •  You want to retain control.  
  • The work involves proprietary information or procedures.

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The Author: Walid Refat
                                       Walid Refat
I'm competent Civil Project Engineer with possessing a proven track record of preparing and executing project plans and programs, ensuring that work is carried out in accordance with the companies procedures and clients satisfaction. Able to ensure timely, safe and cost effective design and implementation during the life cycle of projects from conception till customer satisfaction .

Area of Interest

Construction- Civil construction - civil - Construction project coordination - Quality control - Infrastructure - Piping - Sewage network - Potable water- Storm water - gas piping - Housing Project - Potable water network - Storm water - Infrastructure Facilities. HDPE piping Project Solid Waste Management & utilization-Water Resource Management/Wastewater Treatment.

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