11. Procurement Management

Used to obtain goods, services, or scope from outside the organization, in a formal way.

Process Group Procurement Management Process
Initiating None
Planning Plan Procurement Management
Executing Conduct Procurements
Monitoring & Controlling Control Procurements
Closing None

Process Primary Outputs
Plan Procurement Management Procure Mgt. Plan, Independent Cost Estimates, Make or Buy Decisions, Procure. Strategy, Bid Documents, Procure SOW, Source Selection Criteria
Conduct Procurements Selected Sellers, Agreement
Control Procurements Closed Procurements, Work Performance Info, Change Req.

There are two Procurement Roles that a project manager could likely play in the same project:

  • Buyer – the organization or party purchasing (procuring) the goods or services from the seller.
  • Selling – The organization or party providing or delivering the goods or services to the buy.

There are three Contract Types for procuring goods and services, which can make a large difference in who bears the risk. 

Type of Contract Wear Bears the Risk Explanation
Fixed Price Seller Cost overruns are not passed to the buyer
Cost Plus Fixed Fee Buyer Buy has risk of overrun
Cost Plus Incentive Fee Buyer & Seller Buyer has most risk, but incentive fee motivates seller
Time & Materials Buyer Buyer has most risk

Fixed Price Contracts

  • Firm Fixed Price (FFP) – Price is fixed with no provision for cost or performance overruns. Risk is fully on seller.
  • Fixed Price Incentive Fee (FPIF) – Price is fixed with an incentive fee for meeting a target specified in the contract
  • Fixed Price Economic Price Adjustment (FP-EPA) – Popular in cases where fluctuations in exchange or interest rates may impact the project, like consumer price index, cost of living, etc. This helps project the buyer or seller.

Cost Reimbursable Contracts

  • Cost Plus Fixed Fee (CPFF) – Seller passes the cost back to the buyer and received an additional fixed fee upon completion. The fee is calculated as a percentage of the planned cost.
  • Cost Plus Incentive Fee (CPIF) – Seller passes the cost back to the buyer and gets an incentive fee for meeting a target specified in contract. 
  • Cost Plus Award Fee (CPAF) – Seller passes the costs back to the buyer, but the seller’s profit (Award Fee) comes from a decision on whether or not to grant it, made by the buyer based on the seller’s performance, which cannot be appealed. 

Time and Materials Contract – Seller charges for time and cost of materials needed to complete the work.

Point of Total Assumption – Cost point in a project where a subcontractor assumes responsibility for all additional costs. It is found by:

Target Cost + (Ceiling Price - Target Price) / Buyer's Overrun %