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Project Procurement, Contract Management, and

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Title: PowerPoint Presentation Author: Victoria Strohl-Miller Last modified by: Faisal Created Date: 3/11/2001 4:02:49 PM Document presentation format – PowerPoint PPT presentation

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Title: Project Procurement, Contract Management, and


1
Lecture 45
  • Project Procurement, Contract Management, and
  • Ethics
  • in
  • Project Management

2
Lecture 44 contents
  • What is Risk?
  • Primary Components
  • Tolerance of Risk
  • Risk Management
  • Cat of Risk
  • Risk Planning
  • Risk Assessment (identification and analysis)
  • Risk Handling
  • Risk Monitoring
  • Qualitative Risk Rating

3
Lecture 45
  • Procurement
  • Procurement Cycles
  • Requirement cycle
  • Requisition Cycle
  • Solicitation cycle
  • Award Cycle
  • Admin cycle
  • 2. Type of contract
  • Six Categories of Contract
  • Ethics in Project Management

4
  • Self-pity is our worst enemy
  • if we yield to it,
  • we can never do anything wise in this world
  • - Helen Keller

5
  • To be prepared is half the victory.
  •  Miguel de Cervantes Saavedra

6
  • Treat people as if they were
  • what they ought to be,
  • you
  • help them to become
  • what
  • they are
  • capable of being
  • - Johann Wolfgang von Goethe

7
  • The quality of a person's life is in direct
    production to their commitment to excellence,
  • regardless of their chosen field of endeavor.

8
  • The race is not always to the swift...
  • but to those
  • who keep
  • on running.

9
  • In three words,
  • I can sum up everything I've learned about life
    It goes on. - Robert Frost

10
Action in Your Project
  • Action may not
  • always bring
  • happiness,
  • but there is
  • no happiness
  • without Action
  • - Benjamin Disraeli

11
Procurement
  • Acquisition of goods/services.
  • Procurement ( contracting)
  • is a Process that involves
  • -Two Parties with
  • Different objectives
  • Who Interact in
  • a given market segment.

12
  • Good Procurement Practices includes
  • Corporate profitability by
  • Taking advantage of
  • Quantity discounts,
  • Minimize Cost/Financial Problems,
  • Seeking out Quality Suppliers.

13
  • As Procurement Contributes To Profitability
    Procurement is Often Centralized,
  • -Results in Standardized practices
  • -Lower Paper work Cost

14
  • Objectives of Procurement Planning are to select
    one of following for the Procurement of all
    Goods/Services
  • From Single Source.
  • From Multiple/source.
  • Procure only small portion of Goods/Services
  • Procure none of Goods/Services

15
  • Environment in which Procurement Take Place is
    Critical factor.
  • There are two environments
  • Macro
  • Micro.
  • Macro environment includes General external
    variables that can Influence How When we do
    Procurement and it Includes
  • Recessions,
  • Inflation,
  • Cost of borrowing money,
  • Unemployment.

16
  • Micro environment is the internal to Firm Include
    Procurement /Contract System five cycles
  • Requirement Cycle Defines boundaries of Project
  • Requisition Cycle analysis of sources
  • Solicitation Cycle Bidding process
  • Award cycle Contractor selection Contract
    Award
  • Contract Admin Cycle Managing subcontractor
    until Completion of the Contract.

17
  • Several Activities of Procurement Process that
    overlaps Several of Cycles.
  • These cycles are conducted In parallel,
    especially Requisition Solicitation.

18
  • 1. Requirement Cycle
  • First Step in Procurement Process Definition of
    Project Specifically Requirements

19
  • Requirement Cycle Includes
  • Defining the need for the project
  • Development of the statement of work,
    specifications, and work breakdown structure
  • Performing a make or buy analysis
  • Laying out the major milestones and the
    timing/schedule
  • Cost estimating, including life-cycle costing
  • Obtaining authorization and approval to proceed

20
  • Specifications
  • Written Pictorial or graphic Information describe
    define or specify services/item to be procured
  • Design (physical Characteristics)
  • Performance (measurable capabilities)
  • Functional Specification ( subset of Functional ,
    risk is on contractor)

21
  • 2. Requisition Cycle
  • Once the Requisition identification,
    Requisition form sent to Procurement to begin
    Requisition Process.

22
  • Requisition cycle Include
  • Evaluation confirming specification.
  • Confirming sources
  • Reviewing past performance of sources
  • 4. Producing Solicitation Package (S/P)
  • Solicitation Package sent to each possible
    Supplier for Playing Field is level.

23
  • Specification Package Includes
  • Bid documents (usually standardized)
  • Listing of qualified vendors (expected to bid)
  • Proposal evaluation criteria
  • Bidder conferences
  • How change requests will be managed
  • Supplier payment plan

24
  • 3. Solicitation Cycle
  • Selection of Acquisition Method is the Critical
    Element in Solicitation Cycle.
  • Three Acquisition Methods
  • Advertising
  • Negotiation
  • Small Purchases (off supplies)

25
  • Advertising company goes out for sealed bids.
  • There are no negotiations. Competitive market
    forces determine the price and the award goes to
    the lowest bidder.

26
  • Negotiation is when the price is determined
    through a bargaining process. In such a
    situation, the customer may go out for a
  • Request For Information (RFI)
  • Request For Quotation (RFQ)
  • Request For Proposal (RFP)
  • The request for Proposal (RFP) is the most costly
    endeavor for the vendor.

27
  • Large proposals contains
  • separate volumes for cost, technical Performance,
    Management History, Quality, facilities,
    subcontractor Management, Others.

28
  • On Large contracts the Negotiation Process may
    Also Includes Price, Quantity, Quality Timing.
  • Vendor Relations are critical during contract
    negotiations.
  • Can Shorten Process due to
  • Integrity of relationship
  • Previous history

29
  • Award Cycle (A/C)
  • Result in a signed contract. Several types of
    Contracts.
  • So Negotiation process also Include selection
    of the Type of Contract.

30
  • Objectives of Award Cycle is to negotiate a
    contract
  • -Type Price
  • -Result in reasonable Contractor risk Provide
    Contractor risk with Greatest Incentive for
    Efficient Economic Performance.

31
  • There are certain basic elements of most
    contracts.
  • Mutual Agreement There must be an offer and
    acceptance.
  • Consideration There must be a down payment.
  • Contract Capability The contract is binding only
    if the contractor has the capability to perform
    the work.
  • Legal Purpose The contract must be for a legal
    purpose.
  • Form Provided By Law The contract must reflect
    the contractor's legal obligation, or lack of
    obligation, to deliver end products.

32
  • The Two Most Common Contract Forms are completion
    contracts and term contracts.
  • Completion Contract The contractor is required
    to deliver a DEFINITIVE END PRODUCT. Upon
    delivery and formal acceptance by the customer,
    the contract is considered complete, and final
    PAYMENT CAN BE MADE.

33
  • 2. Term contract
  • The Contract Is Required To Deliver A Specific
    "Level Of Effort," Not An End Product.
  • The effort is expressed in Woman/Man-days (Months
    Or Years) over a Specific Period Of Time using
    Specified Personnel Skill Levels And Facilities.
  • When The Contracted Effort Is Performed, the
    contractor is under no further obligation. Final
    payment is made, irrespective of what is actually
    Accomplished Technically.

34
  • Final Contract also called Definitive contract,
  • Follows normal Contracting Procedures. E.g.
    Negotiation of all Contractual Terms
    Condition on Cost Schedule prior to
    Initiation of Performance.

35
  • Negotiating of contract and preparing it for
    signatures may require months of preparation. If
    the customer needs the work to begin immediately
    or if long-lead procurement is necessary, then

36
  • Customer may provide the contractor with a
    letter contract or letter of intent (LOI). The
    letter contract is a preliminary written
    instrument authorizing the contractor to begin
    immediately
  • The Manufacture Of Supplies Or
  • The Performance Of Services.

37
  • Final contract price
  • Must be negotiated
  • after performance begins,
  • Definitive contract
  • must
  • still be negotiated.

38
  • Types of contract selection based upon following
  • Overall degree of Cost Schedule Risk
  • Type complexity of Requirement (technical Risk)
  • Extent of Price Competition
  • Cost/Price Analysis
  • Urgency of Requirements
  • Performance period
  • Contractor's Responsibility (and Risk)
  • Contractor's Accounting System (Report Earn
    Value reporting?)
  • Concurrent Contract (contract take A back seat to
    existing work?)
  • Extent of Subcontracting (how much work
    contractor out source?)

39
  • General six types of contracts
  • Fixed-price (FP),
  • Cost -plus-fixed-fee (CPFF),
  • Cost-plus-percentage-fee (CPPF),
  • Guaranteed Max-Shard Savings (GMSS),
  • Fixed-price Incentive- Fee (FPIF),
  • Cost-Plus-Incentive-Fee (CPIF)

40
  • First Category
  • Fixed-price or
  • Lump-sum contract

41
  • Contractor carefully Estimate Target Cost.
  • Contractor required to Perform work at negotiated
    Contract Value.

42
  • If Estimated target cost is low then Total
    Profit reduced may vanish.
  • Contractor may not be able to underbid
    competitors So Contractor assumes a Large risk.

43
  • Lump-sum
  • Provides Max Protection to Owner for ultimate
    Cost of Project.
  • Disadvantage
  • Requiring a Long Period For Preparation
    Adjudications of Bids.

44
  • Because of a Lack of knowledge of
  • Local conditions,
  • all contractors Include
  • Excessive
  • Contingency.

45
  • Chang Requested
  • By owner after Award of contract Lead to
    Troublesome Sometimes Costly extras

46
  • 2nd Category
  • Cost-Plus-
  • Fixed-Fee
  • (CPFF)

47
  • Cost Plus Fixed Fee (CPFF)
  • If Accurate Pricing Not Possible in Any Other
    way.
  • So we use CPFF, so Cost may vary but Fee remains
    same.
  • Contractor agrees only to use Best Efforts to
    Performance
  • Good/Poor Performance
  • Rewarded equally.

48
  • Total Rs/ Profit likely To Produce Low Rate of
    Return reflects Small Amount of Risk By
    contractor.
  • Fixed Fee - small Age Of Tot/true Cost.
  • CPFF Required Company books
  • be audited.

49
  • 3 Cost-Plus-Percentage
  • fee Contract

50
  • Provides Maximum flexibility to owner Permits
    Owner Contractor to work together
    cooperatively on All Technical, Commercial,
    Financial Problems.
  • -No Financial Assurance of Ultimate Cost.

51
  • No financial incentive to contractor this
    because of High building cost (Compared with
    other forms).
  • Only meaningful Incentive can be
  • Inc competition
  • Prospects for
  • Follow-on contracts.

52
  • 4th Category of Contracts
  • Guaranteed
  • Maximum-Share Savings

53
  • Contractor-Gets Fixed Fee for his Profit and
    Reimbursed for the Actual Cost of Engineering,
    Materials, Construction Labor, all Other Job
    Costs,
  • But only up to Ceiling figure established as
    Guaranteed maximum"

54
  • Savings below the" Guaranteed Maximum are Shared
    between Owner Contractor, where as Contractor
    Assumes the Responsibility
  • For any Overrun beyond Guaranteed Maximum
    Price.

55
  • Contract form Combines advantages as well as
    disadvantages of Both Lump Sum Cost-Plus
    Contracts.
  • Best form for Negotiated Contract as it
    Establishes a Maximum Price At Earliest Possible
    Date

56
  • Though contract awarded without Competitive
    Tenders.
  • -Yet Protects owner Against being Overcharged,

57
  • Unique in that Owner Contractor share
    Financial Risk Both have Real incentive To
    Complete Project At lowest Possible Cost.

58
5th Category of Contract
  • Fixed-Price-
  • Incentive-fee Contracts

59
  • These are Same as Fixed-Price contracts Except
    have some Provision for Adjustment of the
    Total Profit by a formula.
  • This Formula Depends on Final Total Cost at
    Completion of Project

60
  • Formula Agreed to in advance By Owner
    Contractor.
  • To use this Both Project or Contract
    Requirements Must be firmly established

61
  • Provides An incentive to Contractor To
  • a) Reduce Cost
  • b) Increase profit
  • Both Owner Cost Share in Risk Savings.

62
  • 6th Cat.
  • Cost-Plus-Incentive-
  • Fee Contracts

63
  • Same as Cost Plus Contracts, Except have
    Provide for Adjustment of Fee as Determined
    By a Formula
  • Compares Total Project Cost to Target Cost.
  • Formula agreed to in advance by Owner
    Contractor. Used for Long Duration or RD
    Type Project.

64
  • 5. Contract Admin Cycle
  • Contract Administrator is Responsible for
    Compliance By the Contractor to Contract's Terms
    Conditions
  • To Make Sure Final Product is Fit for Use.

65
  • Functions of contract administrator Include
  • Change Management
  • Specification interpretation
  • Adherence to Quality
  • Warranties
  • Subcontractor Management
  • Production surveillance
  • Waivers
  • Contract breach
  • Resolution of disputes
  • Project Termination
  • Payment Schedule
  • Project Closeout

66
  • Part Two
  • Ethics

67
Ethical Origins
  • Societal Ethics
  • Standards of Members of Society
  • use when dealing with
  • each other.
  • Based on
  • Values standards

68
Societal Ethics
  • Found in Societys
  • Legal Rules,
  • Norm, Mores.
  • Codified in the
  • Form of Law
  • Society Customer.

69
  • Norms dictate
  • how people
  • Should behave.
  • Societal ethics vary based
  • On a given Society.
  • Strong beliefs in one country
  • differ elsewhere.

70
  • Professional Ethics
  • Values standards used by
  • Group of Managers in workplace.
  • Applied when Decision
  • not Clear-Cut Ethically.
  • Physicians/Lawyers
  • Professional Associates
  • (PMA, Bar Council)

71
Values
  • An individuals Basic
  • convictions of
  • What is Right Wrong

72
  • Values
  • Basic beliefs About what
  • one should or
  • should not do?
  • What is
  • is not important?

73
  • Individual Ethics
  • Values of an individual
  • resulting from their
  • family upbringing.

74
  • Behavior
  • not illegal,
  • Yet People still
  • disagree
  • If not
  • ethical.

75
  • Ethics of top Project Manager
  • set the
  • tone for
  • Project

76
  • Ethics Codes
  • Policies
  • Provide sign of top Managements desires in
  • Project Based
  • Organizational culture

77
Why Behave Ethically?
  • Project Manager should behave ethically
  • To Avoid Harming others. Managers Responsible for
    Protecting Nurturing Resources
  • In their Charge.

78
  • Leadership, Culture, Incentive
  • Compensation Plans help Shape
  • Individual Ethical behavior
  • in Project Management

79
Promoting Ethics
  • Evidence Showing Ethical Managers
  • benefit
  • over long term .

80
  • Ethical Control System in Project Management
  • Formal System to encourage
  • Ethical Management.
  • Project Management Firms appoint an Ethics
    Ombudsman to monitor practices. Communication
    standards
  • To all employees.

81
  • Ethical culture firms increasingly seek to make
    good ethics part of norm organizational culture.

82
  • Ethical decisions involve
  • Normative Judgment implies
  • something is good or bad,
  • right or wrong, better or worse.
  • Morality Societys accepted
  • norms of behavior

83
  • Should you pay compensation pay to laid off
    workers?
  • May December Stakeholder Return.
  • Should you buy goods from overseas firms that
    hire children?
  • If you dont Children may not earn enough money
    to eat.

84
Views of Ethical Decision-Making
Utilitarian
Rights
Justice
Decision makers seek to impose and enforce
rules fairly and impartially
Decisions made solely on the basis of outcomes
or consequences
Decisions are concerned with respecting and
pro- tecting basic rights of individuals
85
  • Code of Ethics
  • Professional organizations Project Management
    Institute (PMI)
  • Taking a serious look at developing
  • Requirements for a Professional Project manager.

86
Ethics obligation matrix.
87
  • CODE OF ETHICS FOR PROJECT MANAGERS
  • PREAMBLE Project Managers, in the pursuit of
    their profession, affect the quality of life for
    all people in our society. Therefore, it is vital
    that Project Managers conduct their work in an
    ethical manner to earn and maintain the
    confidence of team members, colleagues,
    employees, clients and the public.

88
  • ARTICLE I Project Managers shall maintain high
    standards of personal and professional conduct.
  • Accept responsibility for their actions.
  • Undertake projects and accept responsibility only
    if qualified by training or experience, or after
    full disclosure to their employers or clients of
    pertinent qualifications.
  • Maintain their professional skills at the state
    -of-the-art and recognize the importance of
    continued personal development and education.
  • Advance the integrity and prestige of the
    profession by practicing in a dignified manner.
  • Support this code and encourage colleagues and
    co-workers to act in accordance with this code.
  • Support the professional society by actively
    participating and encouraging colleagues and
    coworkers to participate.
  • Obey the laws of the country in which work is
    being performed.

89
  • ARTICLE II Project Managers shall, in their
    work
  • Provide the necessary project leadership to
    promote maximum productivity while striving to
    minimize costs.
  • Apply state-of-the-art management tools and
    techniques to ensure schedules are met and the
    project is appropriately planned and coordinated.
  • Treat fairly all project team members, colleagues
    and co-workers, regardless of race, religion,
    sex, age or national origin.
  • Protect project team members from physical and
    mental harm.
  • Provide suitable working conditions and
    opportunities for project team members.
  • Seek, accept and offer honest criticism of work,
    and properly credit the contribution of others.
  • Assist project team members, colleagues and
    co-workers in their professional development.

90
  • ARTICLE III Project Managers shall, in their
    relations
  • with employers and clients
  • Act as faithful agents or trustees for their
    employers or clients in professional or business
    matters.
  • Keep information on the business affairs or
    technical processes of an employer or client in
    confidence while employed, and later, until such
    information is properly released.
  • Inform their employers, clients, professional
    societies or public agencies of which they are
    members or to which they may make any
    presentations, of any circumstances that could
    lead to a conflict of interest.
  • Neither give nor accept, directly or indirectly,
    any gift, payment or service of more than nominal
    value to or from those having business
    relationships with their employers or clients.
  • Be honest and realistic in reporting project
    cost, schedule and performance.

91
  • ARTICLE IV Project Managers shall, in fulfilling
    their responsibilities to the community
  • Protect the safety, health and welfare of the
    public and speak out against abuses in those
    areas affecting the public interest.
  • Seek to extend public knowledge and appreciation
    of the project management profession and its
    achievements.

92
  • Part Two ends

93
Social Responsibility
  • Social Power
  • Social Responsibility Concept
  • Project Management Organization must behave
    Proactively Business has certain social
    responsibility because power it wields
  • Be a Good Corporate Citizen

94
Social Responsibility Pyramid
Good Corporate Citizen
Do What is Right, Just
Obey the Law
Make Enough Money To Survive
95
Levels of Social Responsibility
Reactive (Obstruction)
Proactive
Defensive
Accommodative
High
Level of Social Responsibility
Low
96
Social Responsiveness
  • Accommodative Response Managers realize need
    for social responsibility.
  • Try to balance interests of all S/H.
  • Proactive response Manager actively embrace
    social responsibility.
  • Go out of their way to learn about help
    Stakeholders
  • Good Corporate Citizen

97
Why be Responsible?
  • Managers accrue benefits by being responsible.
  • Workers Society benefit.
  • Quality of Life in Society improve.
  • It is the right thing to do.
  • Whistleblowers a per reporting illegal
  • or unethical acts.
  • Now protected by law
  • Social audit Managers specifically take ethics
    business into account when making decisions.

98
The Social Audit

Profitability
99
Arguments For Social Responsiveness
  • Business is
  • involved in
  • social issues

100
  • Business resources to
  • tackle todays complex societal problems

101
  • A better society means
  • a better environment for doing business
  • Corporate social action
  • will prevent
  • Government intervention

102
How Firms Can Improve Their Social Responsiveness
(Ethical Performance)
  • Establish and publish their own Code of Ethics
  • Ombudsmen - (committee, task force) to review the
    corporate past behavior
  • Protect whistle-blowing - when an employee
    discloses an illegal, immoral, or unethical
    action committed by a member of the organization
  • Training programs - ethical sensitivity training
  • Controlling compliance - corporate social audit
    (or ethics audit)
  • Leadership - demonstrate commitment from leaders
  • Involve personnel at all levels

103
  • Part Three
  • Recap of the course

104
  • Management
  • Project Management
  • Project Manager
  • Project Proposal
  • Project Feasibility
  • Project Selection Method
  • Project Planning
  • Scope
  • Charter
  • Quality ( 3-4 )
  • Productivity

105
  • Leadership
  • Communication
  • Ethics
  • Costing
  • Pricing
  • Risk Management
  • Procurement
  • Close out Note

106
  • Part Four
  • Project Management Institute (PMI)

107
  • Procurement Management Processes
  • Project Procurement Management involves engaging
    in a systematic process to purchase or acquire
    the needed products, services, or results from an
    outside source which will perform the work.
    Procure Management encompasses contract
    management and control processes necessary to
    administer contracts or purchase orders. It also
    includes processes which assist in administering
    a contract to assure the buyer/seller
    relationships are properly managed. The
    procurement management processes are

108
  • Plan Purchases and Acquisitions Plan Purchases
    and Acquisitions process involves ascertaining
    what is needed, and when it is needed. Then how
    to assure you have what you need when you need
    it. (Novel concept!) This is completed as a part
    of the planning process group.

109
  • Plan Contracting The Plan Contracting process
    involves documenting the products, services, and
    results requirements and identifies potential
    sellers. Plan Contracting is commonly first
    engaged in the planning process group.

110
  • Request Seller Responses Request Seller
    Responses process obtains information,
    quotations, bids, offers, or proposals from
    sellers as appropriate. This is a part of the
    executing process group

111
  • Select Sellers The Select Sellers process is
    where the offers are reviewed, and a chosen
    vendor rises to the top of the Analytical
    Hierarchy Process. Commonly negotiations are
    started in written form. This is commonly a part
    of the executing process group.

112
  • Contract Administration - The Contract
    Administration Process manages all aspects of the
    contract and the relationship between the buyer
    and the seller including managing seller
    performance and changes, providing a basis for
    future work, and managing the relationship with
    the projects buyer. This is a part of the
    monitoring and controlling process grouping.

113
  • Contract Closure - The Contract Closure Process
    assures completion and settling terms of any
    contracts including resolving any open items and
    closing each contract.

114
  • Each Procurement Management process results in a
    specific deliverable which is used as the
    foundations for the subsequent process. Combined
    the procurement management processes provide a
    best practice pattern for managing contracts and
    vendor relationships on a project.
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