12.1 Plan Procurement Management – A Guide to the Project Management Body of Knowledge (PMBOK® Guide), Fifth Edition

12.1 Plan Procurement Management

Plan Procurement Management is the process of documenting project procurement decisions, specifying the approach, and identifying potential sellers. The key benefit of this process is that it determines whether to acquire outside support, and if so, what to acquire, how to acquire it, how much is needed, and when to acquire it. The inputs, tools and techniques, and outputs of this process are depicted in Figure 12-2. Figure 12-3 depicts the data flow diagram of the process.

Plan Procurement Management identifies those project needs that can best be met or should be met by acquiring products, services, or results outside of the project organization, versus those project needs which can be accomplished by the project team. When the project obtains products, services, and results required for project performance from outside of the performing organization, the processes from Plan Procurement Management through Close Procurements are performed for each item to be acquired.

The Plan Procurement Management process also includes evaluating potential sellers, particularly if the buyer wishes to exercise some degree of influence or control over acquisition decisions. Thought should also be given to who is responsible for obtaining or holding any relevant permits and professional licenses that may be required by legislation, regulation, or organizational policy in executing the project.

The requirements of the project schedule can significantly influence the strategy during the Plan Procurement Management process. Decisions made in developing the procurement management plan can also influence the project schedule and are integrated with Develop Schedule, Estimate Activity Resources, and make-or-buy analysis.

The Plan Procurement Management process includes evaluating the risks involved with each make-or-buy analysis. It also includes reviewing the type of contract planned to be used with respect to avoiding or mitigating risks, sometimes transferring risks to the seller.

12.1.1. Plan Procurement Management: Inputs

12.1.1.1 Project Management Plan

Described in Section 4.2.3.1. The project management plan describes the need, justification, requirements, and current boundaries for the project. It includes, but is not limited to, the scope baseline contents:

  • Project scope statement. The project scope statement contains the product scope description, service description and result description, the list of deliverables, and acceptance criteria, as well as important information regarding technical issues or concerns that could impact cost estimating. Identified constraints may include required delivery dates, available skilled resources, and organizational policies.
  • WBS. The work breakdown structure (WBS) contains the components of work that may be resourced externally.
  • WBS dictionary. The WBS dictionary and related detailed statements of work provide an identification of the deliverables and a description of the work in each WBS component required to produce each deliverable.

12.1.1.2 Requirements Documentation

Described in Section 5.2.3.1. Requirements documentation may include:

  • Important information about project requirements that is considered during planning for procurements, and
  • Requirements with contractual and legal implications that may include health, safety, security, performance, environmental, insurance, intellectual property rights, equal employment opportunity, licenses, and permits—all of which are considered when planning for procurements.

12.1.1.3 Risk Register

Described in Section 11.2.3.1. The risk register provides the list of risks, along with the results of risk analysis and risk response planning. Updates to the risk register are included with project document updates described in Section 11.5.3.2, from the Plan Risk Responses process.

12.1.1.4 Activity Resource Requirements

Described in Section 6.4.3.1. Activity resource requirements contain information on specific needs such as people, equipment, or location.

12.1.1.5 Project Schedule

Described in Section 6.6.3.2. Project schedule contains information on required timelines or mandated deliverable dates.

12.1.1.6 Activity Cost Estimates

Described in Section 7.2.3.1. Cost estimates developed by the procuring activity are used to evaluate the reasonableness of the bids or proposals received from potential sellers.

12.1.1.7 Stakeholder Register

Described in Section 13.1.3.1. The stakeholder register provides details on the project participants and their interests in the project.

12.1.1.8 Enterprise Environmental Factors

Described in Section 2.1.5. The enterprise environmental factors that can influence the Plan Procurement Management process include, but are not limited to:

  • Marketplace conditions;
  • Products, services, and results that are available in the marketplace;
  • Suppliers, including past performance or reputation;
  • Typical terms and conditions for products, services, and results or for the specific industry; and
  • Unique local requirements.

12.1.1.9 Organizational Process Assets

Described in Section 2.1.4. The various types of contractual agreements used by the organization also influence decisions for the Plan Procurement Management process. The organizational process assets that influence the Plan Procurement Management process include, but are not limited to:

  • Formal procurement policies, procedures, and guidelines. Most organizations have formal procurement policies and buying organizations. When such procurement support is not available, the project team should supply both the resources and the expertise to perform such procurement activities.
  • Management systems that are considered in developing the procurement management plan and selecting the contractual relationships to be used.
  • An established multi-tier supplier system of prequalified sellers based on prior experience.

All legal contractual relationships generally fall into one of two broad families: either fixed-price or cost reimbursable. Also, there is a third hybrid type commonly in use called the time and materials contract. The more popular contract types in use are discussed below as discrete types, but in practice it is not unusual to combine one or more types into a single procurement.

  • Fixed-price contracts. This category of contracts involves setting a fixed total price for a defined product, service, or result to be provided. Fixed-price contracts may also incorporate financial incentives for achieving or exceeding selected project objectives, such as schedule delivery dates, cost and technical performance, or anything that can be quantified and subsequently measured. Sellers under fixed-price contracts are legally obligated to complete such contracts, with possible financial damages if they do not. Under the fixed-price arrangement, buyers need to precisely specify the product or services being procured. Changes in scope may be accommodated, but generally with an increase in contract price.
    • Firm Fixed Price Contracts (FFP). The most commonly used contract type is the FFP. It is favored by most buying organizations because the price for goods is set at the outset and not subject to change unless the scope of work changes. Any cost increase due to adverse performance is the responsibility of the seller, who is obligated to complete the effort. Under the FFP contract, the buyer should precisely specify the product or services to be procured, and any changes to the procurement specification can increase the costs to the buyer.
    • Fixed Price Incentive Fee Contracts (FPIF). This fixed-price arrangement gives the buyer and seller some flexibility in that it allows for deviation from performance, with financial incentives tied to achieving agreed upon metrics. Typically such financial incentives are related to cost, schedule, or technical performance of the seller. Performance targets are established at the outset, and the final contract price is determined after completion of all work based on the seller's performance. 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 (FP-EPA). This contract type is used whenever the seller's performance period spans a considerable period of years, as is desired with many long-term relationships. It is a fixed-price contract, but with a special provision allowing for pre defined final adjustments to the contract price due to changed conditions, such as inflation changes, or cost increases (or decreases) for specific commodities. The EPA clause needs to relate to some reliable financial index, which is used to precisely adjust the final price. The FP-EPA contract is intended to protect both buyer and seller from external conditions beyond their control.
  • Cost-reimbursable contracts. This category of contract involves payments (cost reimbursements) to the seller for all legitimate actual costs incurred for completed work, plus a fee representing seller profit. Cost-reimbursable contracts may also include financial incentive clauses whenever the seller exceeds, or falls below, defined objectives such as costs, schedule, or technical performance targets. Three of the more common types of cost-reimbursable contracts in use are Cost Plus Fixed Fee (CPFF), Cost Plus Incentive Fee (CPIF), and Cost Plus Award Fee (CPAF).
    A cost-reimbursable contract provides 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.
    • Cost Plus Fixed Fee Contracts (CPFF). The seller is reimbursed for all allowable costs for performing the contract work, and receives a fixed-fee payment calculated as a percentage of the initial estimated project costs. A fee is paid only for completed work and does not change due to seller performance. Fee amounts do not change unless the project scope changes.
    • 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. In CPIF contracts, if the final costs are less or greater than the original estimated costs, then both the buyer and seller share costs from the departures based upon a prenegotiated cost-sharing formula, for example, an 80/20 split over/under target costs based on the actual performance of the seller.
    • Cost Plus Award Fee Contracts (CPAF). The seller is reimbursed for all legitimate costs, but the majority of the fee is earned only based on the satisfaction of certain broad subjective performance criteria defined and incorporated into the contract. The determination of fee is based solely on the subjective determination of seller performance by the buyer, and is generally not subject to appeals.
  • 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. They are often used for staff augmentation, acquisition of experts, and any outside support when a precise statement of work cannot be quickly prescribed. These types of contracts resemble cost-reimbursable contracts in that they can be left open ended and may be subject to a cost increase for the buyer. The full value of the agreement and the exact quantity of items to be delivered may not be defined by the buyer at the time of the contract award. Thus, T&M contracts can increase in contract value as if they were cost-reimbursable contracts. Many organizations require not-to-exceed values and time limits placed in all T&M contracts to prevent unlimited cost growth. Conversely, T&M contracts can also resemble fixed unit price arrangements when certain parameters are specified in the contract. Unit labor or material rates can be preset by the buyer and seller, including seller profit, when both parties agree on the values for specific resource categories, such as senior engineers at specified rates per hour, or categories of materials at specified rates per unit.

12.1.2. Plan Procurement Management: Tools and Techniques

12.1.2.1 Make-or-Buy Analysis

A make-or-buy analysis is a general management technique used to determine whether particular work can best be accomplished by the project team or should be purchased from outside sources. Sometimes a capability may exist within the project organization, but may be committed to working on other projects, in which case, the project may need to source such effort from outside the organization in order to meet its schedule commitments.

Budget constraints may influence make-or-buy decisions. If a buy decision is to be made, then a further decision of whether to purchase or lease is also made. A make-or-buy analysis should consider all related costs—both direct costs as well as indirect support costs. For example, the buy-side of the analysis includes both the actual out-of-pocket costs to purchase the product, as well as the indirect costs of supporting the purchasing process and purchased item.

Available contract types are also considered during the buy analysis. The risk sharing between the buyer and seller determines the suitable contract types, while the specific contract terms and conditions formalize the degree of risk being assumed by the buyer and seller. Some jurisdictions have other types of contracts defined, for example, contract types based on the obligations of the seller—not the customer—and the contract parties have the obligation to identify the appropriate type of contract as soon as the applicable law has been agreed upon.

12.1.2.2 Expert Judgment

Expert judgment is often used to assess the inputs to and outputs from this process. Expert purchasing judgment can also be used to develop or modify the criteria that will be used to evaluate seller proposals. Expert legal judgment may involve the services of legal staff to assist with unique procurement issues, terms, and conditions. Such judgment, including business and technical expertise, can be applied to both the technical details of the acquired products, services, or results and to various aspects of the procurement management processes.

12.1.2.3 Market Research

Market research includes examination of industry and specific vendor capabilities. Procurement teams may leverage information gained at conferences, online reviews and a variety of sources to identify market capabilities. The team may also refine particular procurement objectives to leverage maturing technologies while balancing risks associated with the breadth of vendors who can provide the materials or services desired.

12.1.2.4 Meetings

Research alone may not provide specific information to formulate a procurement strategy without additional information interchange meetings with potential bidders. By collaborating with potential bidders, the organization purchasing the material or service may benefit while the supplier can influence a mutually beneficial approach or product.

12.1.3. Plan Procurement Management: Outputs

12.1.3.1 Procurement Management Plan

The procurement management plan is a component of the project management plan that describes how a project team will acquire goods and services from outside the performing organization. It describes how the procurement processes will be managed from developing procurement documents through contract closure. The procurement management plan can include guidance for:

  • Types of contracts to be used;
  • Risk management issues;
  • Whether independent estimates will be used and whether they are needed as evaluation criteria;
  • Those actions the project management team can take unilaterally, if the performing organization has a prescribed procurement, contracting, or purchasing department;
  • Standardized procurement documents, if needed;
  • Managing multiple suppliers;
  • Coordinating procurement with other project aspects, such as scheduling and performance reporting;
  • Any constraints and assumptions that could affect planned procurements;
  • Handling the long lead times to purchase certain items from sellers and coordinating the extra time needed to procure these items with the development of the project schedule;
  • Handling the make-or-buy decisions and linking them into the Estimate Activity Resources and Develop Schedule processes;
  • Setting the scheduled dates in each contract for the contract deliverables and coordinating with the schedule development and control processes;
  • Identifying requirements for performance bonds or insurance contracts to mitigate some forms of project risk;
  • Establishing the direction to be provided to the sellers on developing and maintaining a work breakdown structure (WBS);
  • Establishing the form and format to be used for the procurement/contract statements of work;
  • Identifying prequalified sellers, if any, to be used; and
  • Procurement metrics to be used to manage contracts and evaluate sellers.

A procurement management plan can be formal or informal, can be highly detailed or broadly framed, and is based upon the needs of each project.

12.1.3.2 Procurement Statement of Work

The statement of work (SOW) for each procurement is developed from the project scope baseline and defines only that portion of the project scope that is to be included within the related contract. The procurement SOW describes the procurement item in sufficient detail to allow prospective sellers to determine if they are capable of providing the products, services, or results. Sufficient detail can vary based on the nature of the item, the needs of the buyer, or the expected contract form. Information included in a SOW can include specifications, quantity desired, quality levels, performance data, period of performance, work location, and other requirements.

The procurement SOW is written to be clear, complete, and concise. It includes a description of any collateral services required, such as performance reporting or post-project operational support for the procured item. In some application areas, there are specific content and format requirements for a procurement SOW. Each individual procurement item requires a SOW; however, multiple products or services can be grouped as one procurement item within a single SOW.

The procurement SOW can be revised and refined as required as it moves through the procurement process until incorporated into a signed agreement.

12.1.3.3 Procurement Documents

Procurement documents are used to solicit proposals from prospective sellers. Terms such as bid, tender, or quotation are generally used when the seller selection decision will be based on price (as when buying commercial or standard items), while a term such as proposal is generally used when other considerations, such as technical capability or technical approach are paramount. Common terms are in use for different types of procurement documents and may include request for information (RFI), invitation for bid (IFB), request for proposal (RFP), request for quotation (RFQ), tender notice, invitation for negotiation, and invitation for seller's initial response. Specific procurement terminology used may vary by industry and location of the procurement.

The buyer structures procurement documents to facilitate an accurate and complete response from each prospective seller and to facilitate easy evaluation of the responses. These documents include a description of the desired form of the response, the relevant procurement statement of work (SOW) and any required contractual provisions. With government contracting, some or all of the content and structure of procurement documents may be defined by regulation.

The complexity and level of detail of the procurement documents should be consistent with the value of, and risks associated with, the planned procurement. Procurement documents are required to be sufficient to ensure consistent, appropriate responses, but flexible enough to allow consideration of any seller suggestions for better ways to satisfy the same requirements.

Issuing a procurement request to potential sellers to submit a proposal or bid is normally done in accordance with the policies of the buyer's organization, which can include publication of the request in public newspapers, in trade journals, in public registries, or on the internet.

12.1.3.4 Source Selection Criteria

Source selection criteria are often included as a part of the procurement documents. Such criteria are developed and used to rate or score seller proposals, and can be objective or subjective.

Selection criteria may be limited to only the purchase price if the procurement item is readily available from a number of acceptable sellers. Purchase price in this context includes both the cost of the item and all ancillary expenses such as delivery.

Other selection criteria can be identified and documented to support an assessment for more complex products, services, or results. Some possible source selection criteria are:

  • Understanding of need. How well does the seller's proposal address the procurement statement of work?
  • Overall or life-cycle cost. Will the selected seller produce the lowest total cost of ownership (purchase cost plus operating cost)?
  • Technical capability. Does the seller have, or can the seller be reasonably expected to acquire, the technical skills and knowledge needed?
  • Risk. How much risk is embedded in the statement of work, how much risk will be assigned to the selected seller and how does the seller mitigate risk?
  • Management approach. Does the seller have, or can the seller be reasonably expected to develop, management processes and procedures to ensure a successful project?
  • Technical approach. Do the seller's proposed technical methodologies, techniques, solutions, and services meet the procurement documents requirements or are they likely to provide more or less than the expected results?
  • Warranty. What does the seller propose to warrant for the final product, and through what time period?
  • Financial capacity. Does the seller have, or can the seller reasonably be expected to obtain, the necessary financial resources?
  • Production capacity and interest. Does the seller have the capacity and interest to meet potential future requirements?
  • Business size and type. Does the seller's enterprise meet a specific category of business such as small business (disadvantaged, specific programs, etc.) as defined by the organization or established by governmental agency and set forth as a condition of the agreement award?
  • Past performance of sellers. What has been the past experience with selected sellers?
  • References. Can the seller provide references from prior customers verifying the seller's work experience and compliance with contractual requirements?
  • Intellectual property rights. Does the seller assert intellectual property rights in the work processes or services they will use or in the products they will produce for the project?
  • Proprietary rights. Does the seller assert proprietary rights in the work processes or services they will use or in the products they will produce for the project?

12.1.3.5 Make-or-Buy Decisions

A make-or-buy analysis results in a decision of whether particular work can best be accomplished by the project team or needs to be purchased from outside sources. If the decision is to make the item, then the procurement plan may define processes and agreements internal to the organization. A buy decision drives a similar process of reaching agreement with a supplier for the product or services.

12.1.3.6 Change Requests

A decision that involves procuring goods, services, or resources typically requires a change request. Other decisions during procurement planning can also create the need for additional change requests. Change requests are processed for review and disposition through the Perform Integrated Change Control process (Section 4.5). Changes to the project management plan, its subsidiary plans, and other components may result in change requests that impact procurement actions. Change requests are processed for review and disposition through the Perform Integrated Change Control process (Section 4.5).

12.1.3.7 Project Documents Updates

Project documents that may be updated include, but are not limited to:

  • Requirements documentation,
  • Requirements traceability matrix, and
  • Risk register.