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 management and control processes required to develop and administer agreements such as contracts, purchase orders, memoranda of agreements (MOAs), or internal service level agreements (SLAs). The personnel authorized to procure the goods and/or services required for the project may be members of the project team, management, or part of the organization’s purchasing department if applicable. Project Procurement Management processes include the following:
Projects routinely require procurements. Projects need materials, equipment, consultants, training, books, software, hardware, and lots of other stuff to help make them successful. Project procurement management is the process of purchasing the resources necessary to meet the needs of the project scope. It is also about the control and delivery of the promises made between the buyer and the seller.
Procurement management also involves planning, requesting seller information, choosing a source, administering the contract, and closing out the contract. Procurement management, as far as your Project Management Professional (PMP) exams are concerned, focuses on the practices from the buyer’s point of view, not the seller’s. Sometimes, you may be presented as the vendor that is completing a project for your customer, the buyer. You should also recognize that the seller could be seen as a contractor, subcontractor, vendor, or supplier. In whatever situation you encounter on your exam, always do what’s “fair” for both parties and what is in the best interest of the project scope. When you are buying anything from a vendor, the buyer needs a contract. A contract becomes a key input to many of the processes within the project. The contract, above anything else, specifies the rules and agreements for the project. Here is a neat twist: When the seller is completing his or her obligations to supply a product, the Project Management Institute (PMI) treats those obligations as a project. In other words, if ABC Electricians was wiring a building for your company, ABC Electricians would be the performing organization completing its own project. Your company becomes the customer of their project—and is, of course, a stakeholder in their project. In the scenarios described in this lesson, the seller will be outside of the performing organization. The buyer will be managing a project and procuring resources from a vendor. However, all of the details in this lesson can be applied to internal work orders, formal agreements, and contracts between organizational units within a single entity. Procurement Key Concepts
Important penalties and legal obligations have to be considerations as part of procurement management. The processes that are performed in procurement management describe the buyer–seller relationship. The expected deliverables and expected results from the buyer’s point of view should be stated clearly in the contract. The contract should also contain clauses specifically stating the contract’s terms and conditions. The definition of the procurement rules and the organizational members who have the authority to sign and administer the contract should be clearly stated in the contract. A contract is a legal and binding document, so the legal department of the requesting organization may perform a more thorough review process and approval process for contracts than is used for other types of project documents. The types of procurement activities necessary on more complex projects often warrant the creation of multiple contracts, which may be executed either sequentially or simultaneously. When performing decentralized purchasing activities, the project manager is usually given the authority to negotiate and sign contracts. When performing centralized purchasing activities, the authority to negotiate and sign contracts is given to a separate procurement department. Procurement Management Trends Following are some major trends and emerging practices that currently exist on a global scale with regard to procurement management: Tool Advancement Trends – The development tools that are used to manage project procurement possess significant improvements as compared to their predecessors. These include a single point for procurement advertising, and also a single point to obtain online procurement documents and templates. Advanced Risk Management Trends – Contracts written in today’s global environment often include specific risk management activities that are included in the contract. Contract Process Change Trends – Engineering and infrastructure megaprojects have started using internationally recognized standard contract forms and templates. This aids in the reduction of problem areas and claims when performing the activities outlined in the contract. Logistics & Supply Chain Management Trends – The effective management and flow of materials that exist on large construction and engineering projects that are executed using multiple contractors is becoming more and more crucial to the successful completion of these projects. Technology & Stakeholder Relations Trends – The use of technology (e.g., webcams) is helping to improve both relations and communications with project stakeholders on infrastructure and commercial construction projects. One of the specific benefits of using technology such as webcams is the minimization of onsite construction disputes since there is a record of the seller's activities. Trial Engagement Trends – Trial engagements with selected suppliers are being utilized more than in the past. Characteristic of these is that before a final commitment is made to one specific seller, multiple seller candidates are paid to provide initial work products and deliverables. The result is simultaneous project work progression and supplier evaluation.
Procurement Tailoring Consideration The application of procurement management processes by the project manager may need to be tailored since each project is unique. Following are key considerations that the project manager should keep in mind when applying the Project Procurement Management processes: Procurement Complexity – The complexity of procurements may be increased if there are several procurements occurring at the same time and using different sellers. Physical Location – The complexity of procurements may be increased if procurement sellers and buyers are separated by different time zones, countries or continents. Regulatory and Governance Environment – The complexity of procurements may be increased if organizational procurement policies are not properly integrated with the local laws and regulations that affect the performance of procurement activities. Contractor Availability – The complexity of procurements may be increased if there is a lack of available contractors able to perform the work involved in procurements.
CONSIDERATIONS FOR AGILE/ADAPTIVE ENVIRONMENTS Key considerations that the project team should keep in mind when working in an agile project environment include: Having specific sellers as project team members; The use of Master Service Agreements (MSAs) on larger projects to help govern the engagement of buyer team members and seller team members.
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 goods and services from outside the project and, if so, what to acquire as well as how and when to acquire it. Goods and services may be procured from other parts of the performing organization or from external sources. This process is performed once or at predefined points in the project.
Procurement planning is the process of identifying which parts of the project should be procured from resources outside of the organization. Generally, procurement decisions are made early on in the planning processes. Think about a large multibillion-dollar project, sometimes called a megaproject. This type of endeavor can span countries and introduce threats and opportunities for buyers and sellers, and lots of planning and procurement experts will be needed to create contracts for such a project. Contracts can be written to address the span of the project, currency exchange rates, and pricing for bulk purchasing. If the project does span multiple countries, however, the complexity of the contracting increases, to include international legalities, management of work in different countries, regulations, and even holidays, language, and culture. Large construction projects also address logistics and supply chain management through contracting. Procurement lead times, lead time to produce the materials needed, and then delivery of materials to job sites can become complex and will likely require expert judgment to help guide through the process, planning, and execution of the contracted work. Logistics can even include one- or two-year lead times for materials; the procurement processes could start even before the entire design of the product is complete based entirely on the early requirements in the project. Delays in delivery of materials can cost the project millions, so backup vendors and suppliers are often located to help alleviate the risk of missed opportunities. In addition, countries may require an organization to purchase materials from suppliers within the country where the project work is occurring, rather than importing all good from suppliers outside of the country. A popular trend in public projects is transparency—not just of the cost of the project, but also of the actual project work. Right now, you could search the Web and find live webcam footage of construction projects, access job reports, and web sites dedicated to information about public projects. Webcams serve not only as good public relations by the seller for the communities and taxpayers, but they can also affect claims, because the video evidence supports or denies claims of what happened on the job site. Organizations are also contracting with sellers on a trial basis, rather than committing to a long contract on their first engagement. The trial period enables both parties to see how the other works. Sellers would contribute to a portion of the project and, based on their performance, could then go on to be awarded additional project work if their work is acceptable to the buyer. Agile projects have considerations for procurement, too. Often in agile projects, the project team consists of both internal and contract-based developers. All members of the project team should be treated as part of the team and the team should not succumb to an “us-against-them” mentality. Agile projects might also be treated as a part of a master service agreement, where the agile project is an addendum or supplement to the contract; this enables the change-driven approach to agile to be effective and to abide by the terms of the contract. Procurement follows a logical approach, but you will still need to plan for each step: Create a statement of work or terms of reference to describe what is going to be procured. Determine a high-level budget of what the procured items or services should cost. In some cases, you will advertise the procurement opportunity. Determine the qualified sellers for the procurement opportunity. Give the sellers the statement of work and invitation to bid documents. Receive and review the sellers’ proposals for technical aspects, quality, and cost. Determine which seller you will purchase from. Negotiate the terms with the seller and finalize the contract. The project schedule is also important to consider when procurement decisions are made. Consider the time between when the purchase decision is made and when the purchase actually happens. Then consider the time between when the purchase happens and when the vendor actually delivers the goods or services. In light of the schedule, it’s often more practical to hire an expert to complete the work than to do the work in-house because of limited resources, the expertise of the internal resources, and the promised (or demanded) project completion date.
Example of the question: Mary is the project manager of the JHG Project. She has created a procurement statement of work (SOW) for a vendor. What project component is the procurement SOW based on? A. The project scope statement B. The work breakdown structure (WBS) C. The scope baseline D. The WBS dictionary
Answer: Right answer is C. The SOW is developed from the scope baseline. A, B, and D are all incorrect because these are the three components of the scope baseline.
There are six inputs to the plan purchases and acquisitions processes: Inputs into this process are: Project charter; Business documents: (Business case, Benefits management plan); Project management plan: (Scope management plan, Quality management plan, Resource management plan, Scope baseline); Project documents: (Milestone list, Project team assignments, Requirements documentation, Requirements traceability matrix, Resource requirements, Risk register, Stakeholder register); Enterprise environmental factors; Organizational process assets
Project charter - The charter defines the high-level objectives—what the project aims to accomplish, milestones, and the summary budget.
Business documents - A business case is often needed to ensure that what you are purchasing is in line with the project’s objectives and purpose. The benefits management plan is also needed to reference when the project benefits are needed, which will determine due dates and obligations for the seller in the contract.
Project management plan - The project management plan is needed because the decisions made in the project may affect the procurement process, and the procurement process can alter previous plans and decisions in the project. From the project management plan, you will pay special attention to the scope baseline as part of your procurement planning. Because the project scope statement defines the project work—and only the required work—to complete the project, it also defines the limitations of the project. You will also reference the quality management plan and the resource management plan.
Project documents - Within the big category of project documents, you will include seven documents for procurement planning: ü Milestone list - The project’s milestone list will contribute to scheduling requirements for the seller. ü Project team assignments - Project team assignments are referenced as an input to determine whether the project team has the needed skills or whether a vendor should perform the activities. ü Requirements documentation - The requirements documentation defines the requirements for project acceptance. These documents may also contain information about the contractual and legal obligations the project must adhere to. Consider technical requirements, safety, licenses and permits, insurance, environmental, and industry-specific requirements. ü Requirements traceability matrix - You will need to continue to trace the requirements to the actual deliverables, even if the deliverables are from a seller. ü Resource requirements - Resources include people and things. A project manager may need to hire a consultant, a contractor, or a new employee to complete the project work. Resource requirements may also include tools, equipment, and materials. All of this costs—money. ü Risk register – We have discussed the risk register in the previous lesson: the centralized database of all project risks and their impact. The risk exposure, risk owners, and risk responses may all need to be considered for possible procurement decisions. ü Stakeholder register - The project manager and team will need the contact information for the stakeholders interested in the procurement decisions. Some decisions in procurement may affect the interests of stakeholders— consider costs, materials, schedules, and contractual obligations. Enterprise environmental factors - These are the conditions of the marketplace — the available products, services, and results; the availability of the things you would like to purchase; and the terms and conditions of the purchase agreement. Enterprise environmental factors also include the seller’s past experience, regulatory requirements, legal advice for the purchasing, and any contract management systems your organization uses. Organizational process assets - The various types of contractual agreements used by the organization also influence decisions for the Plan Procurement Management process. The organizational process assets that can influence the Plan Procurement Management process include but are not limited to: ü Preapproved seller lists. Lists of sellers that have been properly vetted can streamline the steps needed to advertise the opportunity and shorten the timeline for the seller selection process. ü 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. ü Contract types. 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 used 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. Example of the question:
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There are multiple types of contracts when it comes to procurement. The project work, the market, and the nature of the purchase determine the contract type. Here are some general rules that CAPM and PMP exam candidates, and project managers, should know:
A contract is a formal agreement between the buyer and the seller. Contracts can be oral or written—although written is preferred. ü The United States backs all contracts through the court system. Example of the question: You are creating a new contract for some procured work in the project. Your manager wants you to define how issues and claims will be resolved, including the possibility of any lawsuits related to the procured work. The United States backs all contracts through which of the following? A. Federal law B. State law C. The court system D. Lawyers Answer: Correct answer is C. All contracts in the United States are backed by the U.S. court systems. A, B, and D are all incorrect answers.
ü Contracts should clearly state all requirements for product acceptance. ü Any changes to the contract must be formally approved, controlled, and documented. ü A contract is not fulfilled until all of its requirements are met. ü Contracts can be used as a risk mitigation tool, as in transferring the risk. All contracts have some level of risk; depending on the contract type, the risk can be transferred to the seller. If a risk response strategy is to transfer, risks associated with procurement are considered secondary risks and must go through the risk management process.
Example of the question: You are the project manager of the Adams Construction Project. Some of the work in the project contains pure risk that you are not willing to accept. You decide to mitigate the pure risks in this project. Which of the following may be used as a risk mitigation tool? A. The vendor proposal B. The contract C. The quotation D. Project requirements Answer: Right answer is B. Contracts can be used as a risk mitigation tool. Procurement of risky activities is known as transference; the risk does not disappear, but the responsibility for the risk is transferred to the vendor. A, C, and D are all incorrect. A vendor proposal, a quotation, and project requirements do nothing to serve as a risk mitigation tool.
ü There are legal requirements governing contracts. For a contract to be valid, it must meet the following requirements: Contain an offer, Be accepted, Provide for a consideration (payment), Be for a legal purpose; be executed by someone with the capacity and authority. ü The terms and conditions of the contract should define breaches, copyrights, intellectual rights, and force majeure. Contract Types – These include; 1) Fixed price (the defined product, service or result is delivered at a set price, 2) Cost-reimbursable (the seller is reimbursed for all costs incurred creating the defined product, service or result, and also receives a separate fee for the seller’s profit, and 3) Time & Material (the contract has a combination of fixed price and cost- reimbursable contract characteristics).
Force majeure is a powerful and unexpected event, such as a hurricane or other natural disaster
Example of the question: There are some risks that you can do little about. In your most recent project, for example, a tornado has wrecked your construction project. The tornado is known as what? A. A force majeure B. A risk transference C. Direct costs D. An unknown unknown Answer: Correct answer is A. Force majeure, sometimes called “an act of God,” is a natural disaster that can wreck a project. B, risk transference, is incorrect because this describes the response to the risk, not the tornado itself. C, direct cost, describes costs that cannot be shared with other organizations but that are attributed directly to your project. D, an unknown unknown, does not fully describe the tornado as well as A does, so this choice is also incorrect. Fixed-Price Contracts
These contracts must clearly define the requirements the vendor is to provide. They may also provide incentives for meeting or exceeding contract requirements—such as meeting deadlines—and require the seller to assume the risk of cost overruns, as the picture below demonstrates.
Fixed-price contracts transfer risk to the seller. Cost-Reimbursable Contracts These contract types pay the seller for the product. The payment to the seller includes a profit margin—the difference between the actual costs of the product and the sales amount. The actual costs of the product fall into two categories: ü Direct costs - Costs incurred by the project in order for the project to exist. Examples include the equipment needed to complete the project work, the salaries of the project team, and other expenses tied directly to the project’s existence. ü Indirect costs - Costs attributed to the cost of doing business. Examples include utilities, office space, and other overhead costs. Cost-reimbursable contracts require the buyer to assume the risk of cost overruns. There are three types of cost-reimbursable contracts: o Cost plus fixed fee o Cost plus percentage of costs o Cost plus incentive fee Cost plus percentage of costs is not used often—and is not allowed in many organizations. Do not plan to see this contract type on your exam
Time and Materials Contracts
Time and materials (T&M) contracts are sometimes called unit price contracts. They are ideal when an organization contracts out a small project or when smaller amounts of work within a larger project are to be completed by a vendor. T&M contracts, however, can grow dangerously out of control as more work is assigned to the seller. Although a T&M contract is easy to create and administer, it can pose a threat to the buyer if a “not-to-exceed” clause is not included in the contract. A not-to- exceed clause states the maximum amount of monies the vendor can bill for the contracted work. The Picture below is an example of how T&M contracts can pose a risk for the buyer:
Time and materials must have a not-to-exceed clause to protect the buyer
Example of the question: Ben is the project manager of the PLP Project. He has hired an independent contractor for a portion of the project work. The contractor is billing the project $120 per hour plus materials. This is an example of what? A. Cost plus fixed fee B. Time and materials C. Unit price D. Lump-sum Answer: Right answer is B. The contractor’s rate of $120 per hour plus the cost of the materials is an example of a time and materials contract. A is incorrect because a cost plus fixed fee contract charges the cost of the materials, plus a fixed fee, for the installation or work to complete the contract. C is incorrect because a unit price contract has a set price for each unit installed on the project. D is also incorrect because a lump-sum contract does not break down the time and materials
On your PMP examination, you can anticipate a few questions on contract types.
The contractual relationship between the buyer and the seller is often considered confidential. The terms, conditions, and private nature of a contractual relationship are known as Privity.
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Tools & Techniques: Expert judgment: Data gathering (Market research); Data analysis (Make-or- buy analysis); Source selection analysis; Meetings
Procurement planning should be done early in the planning processes, with certain exceptions. As needs arise, as project conditions change, or as other circumstances demand, procurement planning may be required throughout the project. Whenever procurement planning happens early in the project, as preferred, or later in the project, as needed, a logical approach to securing the proper resources is necessitated.
Expert Judgment – Those individuals or groups that possess specific expertise in areas such as procurement, contracts and compliance should be consulted while performing this process. Market research (Data gathering technique) - includes examination of industry and specific seller 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 specific procurement objectives to leverage maturing technologies while balancing risks associated with the breadth of sellers who can provide the desired materials or services.
Data Analysis - Make or Buy
The decision to make or buy a product is a fundamental aspect of project management and is a data analysis tool and technique. In some conditions, it is more cost-effective to buy; in others, it makes more sense to create an in-house solution. The make-or-buy analysis should be made in the initial scope definition to determine whether the entire project should be completed in-house or procured. As the project evolves, additional make-or-buy decisions are often needed. The initial costs of the solution for the in-house or procured product must be considered, but so, too, must the ongoing expenses of the solutions. For example, a company may elect to lease a piece of equipment. The ongoing expense of leasing the piece of equipment should be weighed against the expected ongoing expense of purchasing the equipment and the monthly costs to maintain, insure, and manage the equipment.
For example, the picture below shows the mathematical approach to determining whether it is better to create a software program in-house or to buy one from a software company. The in-house solution will cost your company $25,000 to create your own software package and, based on historical information, another $2,500 per month to maintain it.
Project managers need to know the make-or-buy process
The development company has a solution that will cost your company $17,000 to purchase, but the development company requires a maintenance plan for each software program installed, which will cost your company $2,700 per month. The difference between making the software and buying it is $8,000. The difference between supporting the software the organization has made and allowing the external company to support their software is only $200 per month.
The $200 per month is divided into the difference between creating the software internally and buying it—which is $8,000 divided by $200, or 40 months. If the software is to be replaced within 40 months, the company should buy the software. If the software will not be replaced within 40 months, it should build the software. There are multiple reasons why an organization may choose to make or buy. Table below provides some common reasons for making and buying.
Common Reasons to Make or Buy Software Source Selection Analysis – This involves prioritizing competing project demands prior to choosing a source selection method. Common source selection analysis methods include: ü Least Cost - The least cost method may be appropriate for procurements of a standard or routine nature where well-established practices and standards exist and from which a specific and well- defined outcome is expected, which can be executed at different costs. ü Qualifications Only - The qualifications only selection method applies when the time and cost of a full selection process would not make sense because the value of the procurement is relatively small. The buyer establishes a short list and selects the bidder with the best credibility, qualifications, experience, expertise, areas of specialization, and references; ü Quality Based/Highest Technical Proposal Score - The selected firm is asked to submit a proposal with both technical and cost details and is then invited to negotiate the contract if the technical proposal proves acceptable. Using this method, technical proposals are first evaluated based on the quality of the technical solution offered. The seller who submitted the highest-ranked technical proposal is selected if their financial proposal can be negotiated and accepted; ü Quality & Cost-Based - The quality and cost-based method allows cost to be included as a factor in the seller selection process. In general, when risk and/or uncertainty are greater for the project, quality should be a key element when compared to cost; ü Sole Source - The buyer asks a specific seller to prepare technical and financial proposals, which are then negotiated. Since there is no competition, this method is acceptable only when properly justified and should be viewed as an exception; ü Fixed Budget - The fixed-budget method requires disclosing the available budget to invited sellers in the RFP and selecting the highest-ranking technical proposal within the budget. Because sellers are subject to a cost constraint, they will adapt the scope and quality of their offer to that budget. The buyer should therefore ensure that the budget is compatible with the SOW and that the seller will be able to perform the tasks within the budget. This method is appropriate only when the SOW is precisely defined, no changes are anticipated, and the budget is fixed and cannot be exceeded. Meetings – Meetings held during Plan Procurements usually include potential bidder collaborative meetings and procurement management and monitoring meetings.
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The procurement planning process should happen early in the planning processes. The outputs of procurement planning enable the project manager and the project team to proceed with confidence in the procuring of products and services needed to complete the project successfully. If the project team determines early in the project that there is no need for procurements, then, obviously, the remaining procurement processes are unnecessary for the project.
Outputs from this process are: Procurement management plan; Procurement strategy; Bid documents; Procurement statement of work; Source selection criteria; Make-or-buy decisions; Independent cost estimates; Change requests; Project documents updates: (Lessons learned register, Milestone list, Requirements documentation, Requirements traceability matrix, Risk register, Stakeholder register); Organizational process assets updates. The Procurement Management Plan The procurement management plan contains the activities to be undertaken during the procurement process. It should document whether international competitive bidding, national competitive bidding, local bidding, etc., should be done. If the project is financed externally, the sources and availability of funding should be aligned with the procurement management plan and the project schedule. The procurement management plan can include guidance for: ü How procurement will be coordinated with other project aspects, such as project schedule development and control processes; ü Timetable of key procurement activities; ü Procurement metrics to be used to manage contracts; ü Stakeholder roles and responsibilities related to procurement, including authority and constraints of the project team when the performing organization has a procurement department; ü Constraints and assumptions that could affect planned procurements; ü The legal jurisdiction and the currency in which payments will be made; ü Determination of whether independent estimates will be used and whether they are needed as evaluation criteria; ü Risk management issues including identifying requirements for performance bonds or insurance contracts to mitigate some forms of project risk; and ü Prequalified sellers, if any, to be used. 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. PROCUREMENT STRATEGY Once the make-or-buy analysis is complete and the decision is made to acquire from outside the project, a procurement strategy should be identified. The objective of the procurement strategy is to determine the project delivery method, the type of legally binding agreement(s), and how the procurement will advance through the procurement phases. Delivery methods: Delivery methods are different for professional services versus construction projects. ü For professional services, delivery methods include: buyer/services provider with no subcontracting, buyer/services provider with subcontracting allowed, joint venture between buyer and services provider, and buyer/services provider acts as the representative. ü For industrial or commercial construction, project delivery methods include but are not limited to: turnkey, design builds (DB), design bid build (DBB), design build operate (DBO), build own operate transfer (BOOT), and others. Contract payment types: Contract payment types are separate from the project delivery methods and are coordinated with the buying organization’s internal financial systems. They include but are not limited to these contract types plus variations: lump sum, firm fixed price, cost plus award fees, cost plus incentive fees, time and materials, target cost, and others. ü Fixed-price contracts are suitable when the type of work is predictable and the requirements are well defined and not likely to change. ü Cost plus contracts are suitable when the work is evolving, likely to change, or not well defined. ü Incentives and awards may be used to align the objectives of buyer and seller. Procurement phases: The procurement strategy can also include information on procurement phases. Information may include: ü Sequencing or phasing of the procurement, a description of each phase and the specific objectives of each phase; ü Procurement performance indicators and milestones to be used in monitoring; ü Criteria for moving from phase to phase; ü Monitoring and evaluation plan for tracking progress; and ü Process for knowledge transfer for use in subsequent phase. Procurement Statement of Work In the procurement statement of work (the SOW), the seller fully describes the work to be completed and/or the product to be supplied. The SOW becomes part of the contract between the buyer and the seller. It is typically created as part of the procurement planning process, and it enables the seller to determine whether they can meet the written requirements of the SOW. Particular industries have different assumptions about what constitutes in SOW. What one industry calls an SOW may be called a statement of objectives (SOO) in another. An SOO is a document describing a problem to be solved by the seller. In procurement management, you may see terms of reference to identify the procured tasks for the seller, the standards, approval requirements, and schedule for the seller, and what the seller must submit to the buyer. The terms of reference statement is similar to the SOW but includes more about both parties agreeing to the particulars of the contracted work.
The SOW can be updated as the project moves through negotiations with the vendor or as more details about the purchase become available.
BID DOCUMENTS The primary outputs of the plan-contracting process are the Bid documents. These documents guide the relationship between the buyer and the seller. Communication between the buyer and the seller should always be specific as to the requirements and expectations of the seller. In initial communications, especially when requesting a price or proposal, the buyer should include the contract statement of work, relevant specifications, and, if necessary, any nondisclosure agreements (NDAs). Requests from buyers to sellers should be specific enough to give the seller a clear idea of what the buyer is requesting, but general enough to enable the seller to provide viable alternatives. Here are some specific documents the project manager—and the PMP candidates —should be familiar with: Invitation for bid (IFB) - From buyer to seller - Requests that the seller provide an estimate for the procured product or service. Request for quote (RFQ) - From buyer to seller - Requests that the seller provide a price for the procured product or service. Request for proposal (RFP) - From buyer to seller - Requests that the seller provide a proposal to complete the procured work or to provide the procured product. Purchase order (PO) - From buyer to seller - A form of unilateral contract that the buyer provides to the vendor that shows that the purchase has been approved by the buyer’s organization.
Request for information (RFI) - From buyer to seller -Requests that the seller provide more information about the seller’s products and/or services. Bid - From seller to buyer - Price is the determining factor in the decision-making process. Quotation - From seller to buyer - Statement of price for the procured product or service. Price is the determining factor in the decision-making process. Proposal - From seller to buyer - Other factors, such as skill sets, reputation, or ideas for the project solution, may be included and used in the decision-making process Source Selection Criteria Another output of the plan-contracting process is the evaluation criteria. This is used to rate and score proposals from the sellers. In some instances, such as with a bid or quote, the evaluation criteria are focused just on the price the seller offers. In other instances, such as a proposal, the evaluation criteria can be multiple values: experience, references, certifications, and more. The project management team can use any combination of the following questions to help determine which vendor should be selected to supply the project’s procurement needs: ü Does the vendor understand the project needs? ü What’s the overall cost of the project? ü What’s the life-cycle cost of the deliverable? ü Does the seller have the technical capability to complete the deliverable? ü What’s the vendor’s technical approach to the project’s needs? ü What’s the vendor’s management approach to creating the deliverable? ü Does the seller have the financial backing to deliver as promised? ü Will the vendor have sustained capacity and interest in the project’s deliverable for future assignments? ü What is the vendor’s business model? Is it a small business, woman-owned, or small disadvantaged business that may qualify for the contract as defined in some governmental agencies? ü Can the vendor provide references? ü Who retains the intellectual and proprietary property rights? These questions—and others—can help the project management team make the best decision when it comes to choosing which vendor should support the project.
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AGAIN, Remember:
Conduct Procurements is the process of obtaining seller responses, selecting a seller, and awarding a contract. The key benefit of this process is that it selects a qualified seller and implements the legal agreement for delivery. The end results of the process are the established agreements including formal contracts. This process is performed periodically throughout the project as needed. Once the plan-contracting process has been completed, you can begin the actual process of asking the sellers to participate. Fortunately, the sellers, not the buyers, perform most of the activity in this process—usually at no additional cost to the project. The sellers are busy trying to win the business. There are six inputs to the conduct procurement process: Inputs into this process are: Project management plan: (Scope management plan, Requirements management plan, Communications management plan, Risk management plan, Procurement management plan, Configuration management plan, Cost baseline); Project documents: (Lessons learned register, Project schedule, Requirements documentation, Risk register, Stakeholder register); Procurement documentation; Seller proposals, Enterprise environmental factors, Organizational process assets.
Project management plan: From the project management plan, you will reference the scope management plan, requirements management plan, communications management plan, risk management plan, procurement management plan, configuration management plan, and the cost baseline. All of the project management plan components will affect procurement. Project documents: The lessons learned register, project schedule, requirements documentation, risk register, and stakeholder register are all inputs for conducting procurements. Example of the question:
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Procurement documents: These are created in plan-contracting processes. These are the invitation for bid (IFB), request for proposal (RFP), and request for quote (RFQ) documents. You can also include any independent cost estimates and the source selection criteria. Example of the question:
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Seller proposals: Vendors will provide the project manager a response to an RFP, IFB, or RFQ. Proposals will undergo an evaluation to determine how well the proposals satisfy the procurement needs of the organization. Enterprise environmental factors: Laws and regulations are enterprise environmental factors that can affect the procurement processes. Other enterprise environmental factors to consider are the economic conditions, the marketplace conditions, past experiences with the seller, other agreements in place, and any contract management systems. Organizational process assets: Yes, you have seen organizational process assets throughout the project, but the specific asset you are considering is a history of qualified sellers. A list of qualified sellers (also preferred sellers or approved sellers) generally includes contact information, history of past experience with the seller, and other pertinent information. In addition to the internal qualified seller list, other resources can help you determine which sellers may qualify for the proposed work, including Internet resources, industry directories, trade associations, and so on.
Tools & Techniques: Expert judgment; Advertising; Bidder conferences; Data analysis: (Proposal evaluation); Interpersonal and team skills: (Negotiation).
Buy some donuts and make the coffee—all your bidders are coming over! A bidder conference, also called a contractor conference or vendor conference, is a meeting with prospective sellers to ensure that all sellers have a clear understanding of the product or service to be procured and are all on equal footing. Bidder conferences enable sellers to query the buyer on the details of the project statement of work to help ensure that their proposals are adequate and appropriate for the proposed agreement. At this point in the process, all sellers are considered equal.
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Have you ever opened your Sunday newspaper and checked out the classifieds? Chances are, you’ve seen classified ads announcing opportunities for organizations to bid on upcoming projects. That’s the idea behind this tool and technique. These advertisements usually run in newspapers or trade journals specific to the industry of the organization. Some government agencies require advertisements inviting sellers to solicit the project work, attend a bidder conference, or present a proposal for the described work.
One of the inputs to this process is to rely on your organizational process assets’ qualified sellers list. If the organization does not have such a list, the project management team can start creating one. The qualified sellers list can be created through trade magazines, interviews, the Internet, interviews with past customers, and even site visits. It is a bunch of fun! Once the sellers have presented their proposals, bids, or quotes (depending on what the buyer requested), you can examine their documents to determine which sellers are the best choices for the project work. In many instances, price may be the predominant factor for choosing a particular seller—but not always. Other factors besides price may also be taken into consideration:
ü The cost of an item may not reflect the true cost to the performing organization if the item cannot be delivered in a timely manner. If a seller promises to have a product on site by a specific date and fails to do so, the project can be delayed, costing the organization thousands—or more—in losses. ü Proposals can be separated into two categories: technical and commercial. The technical category describes the approach and methodology to complete the project work. The commercial category delves into the price to complete the project work. An evaluation takes into consideration both categories to determine the best choice for the project. ü Critical, high-priority projects may rely on multiple sellers to complete the project work. This redundancy can balance risk, cost, and opportunity among multiple vendors.
The procurement document package is a collection of documents prepared by the buyer and sent to each of the vendors that may participate in the procurement process. The procurement document package defines the requirements of the purchase, specifies the needs, and describes how the vendor should respond.
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The end result of requesting a seller response is, as expected, a collection of proposals, bids, or quotes, depending on what the buyer asked for. These documents indicate the sellers’ abilities and preparedness to complete the project work. The proposals should be in alignment with the stated expectations of the buyer, and they may be presented orally, electronically, or in hard-copy format. Of course, the relationship between the buyer and seller—and the type of information being shared— will determine which modality is the best choice of communication.
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For the performing organization to finalize the process of selecting, a vendor there must first be eligible sellers. Assuming more than one seller can satisfy the demands of the project; the project manager can rely on eight tools and techniques:
Weighting system: A weighting system takes out the personal preferences of the decision-maker in the organization to ensure that the best seller is awarded the contract. A weighting system creates a matrix, as shown below. Weights are assigned to the values of the proposals, and each proposal is scored. Because the weights are determined before reviewing the proposals, the process is guaranteed to be free of personal preferences and bias. The seller with the highest score is awarded the contract.
A weighting system scores values to the seller’s ability to deliver goods or services.
Independent estimates: These estimates are often referred to as “should/cost” estimates. These estimates are created by either the performing organization or outside experts to predict what the cost of the procured product should be. If there is a significant difference between what the organization has predicted and what the sellers have proposed, either the statement of work was inadequate or the sellers have misunderstood the requirements.
Screening system: A screening system is a tool that filters or screens out vendors that do not qualify for the contract. For example, the project manager could say that only vendors that have built eight bridges in Utah can qualify for the contract. Sellers that do not meet the requirements are removed from the selection process, and their proposals are not considered.
Contract negotiation: The performing organization creates an offer, and the seller considers the offer. The contract negotiation process is an activity to create a fair price for the work the seller is to complete. The performing organization and the seller must agree on the expectations, requirements, authorities, terms, technical and business management approaches, price, and any other pertinent factors covered within and by the contract prior to signing the contract.
Seller rating systems: Seller rating systems are used by organizations to rate prior experience with each vendor that it has worked with in the past. The seller rating system can track performance, quality ratings, delivery, and even contract compliance. The project manager of the current project can reference this internal seller rating system to determine the expectations of working with a vendor based on the vendor’s past performance.
Expert judgment: Sometimes, the project manager is not the best person to make a decision as to which vendor should be selected. Consider very large projects, such as building a new skyscraper. The project manager likely would not be the only person involved in making the procurement decision, but rather a team comprising different experts would contribute to the decision.
Proposal evaluation techniques: This big bucket of tools and techniques can include objective and subjective considerations from experts within the organization, weighting systems, multiple reviewers, scoring systems, screening systems—just about any source-selection technique that the project management team feels like using. The point is that there are many different approaches to compare and contrast proposals, so the project management team should use all of the appropriate techniques available to make the best decision for the good of the project.
Internet search: No doubt, the Internet has changed the way companies buy and sell goods and services. Many commercially available goods can be located online at a guaranteed fixed price for organizations. However, complex goods and services often can’t use the Internet for cost estimating, budgeting, and exact pricing. The Internet can be used as a tool for procurement, but it’s often just the start of the buyer–seller communication process.
Outputs from this process are: Selected sellers; Agreements; Change requests; Project management plan updates: (Requirements management plan, Quality management plan, Communications management plan, Risk management plan, Procurement management plan, Scope baseline, Schedule baseline, Cost baseline); Project documents updates: (Lessons learned register, Requirements documentation, Requirements traceability matrix, Resource calendars, Risk register, Stakeholder register); Organizational process assets updates.
The primary output, other than the selected seller, of the selecting seller process is a contract between the buyer and the seller. A contract is a legally binding agreement between the buyer and seller in which the seller provides the described product and the buyer agrees to pay for the product. Contracts are known by many names:
o Agreement; o Subcontract; o Purchase order; o Memorandum of understanding. A letter of intent is not a contract, but a letter stating that the buyer is intending to create a contractual relationship with the seller. A letter contract is a contract that may be used when the work needs to start immediately. A letter contract is often considered a “stopgap” solution in procurement.
Contracts have to be signed by a person with the power to authorize the requirements and payment specified in the contract. This role is called the delegation of procurement authority. Whether this person is the project manager depends on the procurement policies of the performing organization.
In some organizations, all contracts flow through centralized contracting. Centralized contracting requires all contracts for all projects to be approved through a central unit within the performing organization. Other organizations use a decentralized contracting approach, which assigns a contract administrator or contract officer to the project.
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Control Procurements is the process of managing procurement relationships; monitoring contract performance, and making changes and corrections as appropriate; and closing out contracts. The key benefit of this process is that it ensures that both the seller’s and buyer’s performance meet the project’s requirements according to the terms of the legal agreement. This process is performed throughout the project as needed.
Controlling procurements is the process of ensuring that both the buyer and the seller live up to the agreements in the contract. The project manager and the contract administrator must work together to make certain the seller meets their obligations, just as the vendor will ensure that the buyer lives up to their agreements as well. If either party does not fulfill its contractual requirements, legal remedies may ultimately be pursued.
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Agreements can be made any time prior to contract closure by mutual consent, in accordance with the change control terms of the agreement. It is important that these amendments are documented and capture in written form.
Because of the legal aspect, many organizations treat contract administration as an organizational function that is separate from the project. While a procurement administrator may be on the project team, this individual typically reports to a supervisor from a different department.
Control Procurements includes application of the appropriate project management processes to the contractual relationship(s) and integration of the outputs from these processes into the overall management of the project. This integration often occurs at multiple levels when there are multiple sellers and multiple products, services, or results involved.
Administrative activities may include:
o Collection of data and managing project records, including maintenance of detailed records of physical and financial performance and establishment of measurable procurement performance indicators; o Refinement of procurement plans and schedules; o Set up for gathering, analyzing, and reporting procurement-related project data and preparation of periodic reports to the organization; o Monitoring the procurement environment so that implementation can be facilitated or adjustments made; and o Payment of invoices.
The quality of the controls, including the independence and credibility of procurement audits, is critical to the reliability of the procurement system. The organization’s code of ethics, its legal counsel, and external legal advisory arrangements including any ongoing anti-corruption initiatives can contribute to proper procurement controls.
Control Procurements has a financial management component that involves monitoring payments to the seller. This ensures that payment terms defined within the contract are met and that compensation is linked to the seller’s progress as defined in the contract. A principal concern when making payments is to ensure there is a close relationship of payments made to the work accomplished. A contract that requires payments linked to project output and deliverables rather than inputs such as labor hours has better controls.
Agreements can be amended at any time prior to contract closure by mutual consent, in accordance with the change control terms of the agreement. Such amendments are typically captured in writing.
Inputs into this process are: Project management plan: (Requirements management plan, Risk management plan, Procurement management plan, Change management plan, Schedule baseline); Project documents: (Assumption log, Lessons learned register, Milestone list, Quality reports, Requirements documentation, Requirement traceability matrix, Risk register, Stakeholder register); Agreements; Procurement documentation; Approved change requests; Work performance date; Enterprise environmental factors, Organizational process assets.
ü Agreements – These are reviewed to verify that agreement terms and conditions are met. ü Procurement Documentation – This includes supporting documentation used during procurement process administration. ü Approved Change Requests – These may result from contract terms and conditions modifications. ü Work Performance Data – This may include seller project status data, activities status, and incurred costs. ü Enterprise Environmental Factors (EEFs) – They can be internal to the organization (e.g., contract management systems), or external to the organization (e.g., marketplace conditions). ü Organizational Process Assets (OPAs) – Examples include prequalified seller lists. Example of the question:
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Tools & Techniques: Expert judgment; Claims administration; Data analysis: (Performance reviews, Earned value analysis, Trend analysis); Inspection; Audits.
The actual process of completing procurement control relies heavily on communication between the project manager, the contract officer, and the seller. You will likely utilize expert judgment to help with laws and regulations, and sometimes for insight to the application area, the contract is addressing. The communications plan may have considerations for how and when the communication between the buyer and seller should take place and what the purpose of the communication should be. Several tools and techniques can assist the project management team with the contract administration process:
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Claims administration: Claims are disagreements between the buyer and the seller, usually centering on a change, who made the change, and even whether a change has occurred. Claims, also called disputes and appeals, are monitored and controlled through the project in accordance with the contract terms. The contract can, and usually does, determine the path to resolution, which may include arbitration or litigation to resolve the claims between the buyer and seller. No fun. Alternative dispute resolution is an agreed-upon approach to work out the claim without, usually, involving the expense of lawyers and court cases.
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It is important to follow the process flow outlined above on your projects when a claim is raised by either the buyer or the seller. Also, remember that Alternative Dispute Resolution (ADR) should always be the absolute last resort.
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Procurement performance reviews: The buyer has to confirm that the seller is living up to the terms of the contract. Specifically, the buyer reviews the quality of what the vendor has created, the cost of what has been created, and whether the vendor is on schedule and in alignment with the agreement and the project scope. All of these items are documented in the terms of the contract— no fudging from the vendors is allowed.
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Performance reporting: Performance reporting is the communication between the project manager and management on how the seller is performing under the guidelines in the contract. This is part of communications and should be documented within the communications management plan. The buyer has to confirm that the vendor is living up to the terms of the contract.
Contract change control system: The contract change control system defines the procedures for how the contract may be changed. The process for changing the contract includes the forms, documented communications, dispute resolution procedures, tracking methods, the procedures for getting the changes approved within the performing organization, and the conditions within the project, business, or marketplace that justify the need for the change. The system is part of integrated change control.
For the exam, remember that the contract defines the relationship, terms, and conditions. No verbal communication is legally binding unless it is specified in the contract. So, if you are asked a question about a situation where the seller requires additional concessions that are not in the contract, legally it cannot be approved. The only way to handle it is to update the contract
Inspections and audits: If you hired an architect to build your dream home, would you wait until the house is completely built before inspecting the work? Of course not! You would have to, and likely want to, perform periodic inspections, audits, and walkthroughs of the home as it is under construction. The same is true in project management: the buyer completes inspections and audits to confirm that the seller is abiding by the contracted requirements for the project.
Procurement control calls for communication between the seller and buyer, the project manager and the vendor, and the stakeholders. There must be significant documentation of the agreement between the buyer and the seller before the procured work begins. Once the procured work, service, or product has been delivered from the seller to the buyer, there must be agreement that the delivery is in alignment with the original agreement. The procurement control process has five outputs:
Outputs from this process are: Closed procurements; Work performance information; Procurement documentation updates; Change requests; Project management plan updates; (Risk management plan, Procurement management plan, Schedule baseline, Cost baseline); Project documents updates: (Lessons learned register, Resource requirements, Requirements traceability matrix, Risk register, Stakeholder register); Organizational process assets updates.
Contract closure is analogous to administrative closure. Its purpose is to confirm that the obligations of the contract were met as expected. The project manager, the customer, key stakeholders, and, in some instances, the seller, may finalize product verification together to confirm that the contract has been completed. Contract closure can also be linked to administrative closure, because it is the process of confirming that the work was finished. If the contract was terminated, contract closure is reviewed, and the contract is considered closed because of the termination. The project records should be updated to reflect the contract closure and the acceptance of the work or product.
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Contracts are usually terminated by the buyer. It is rare that the seller would terminate a contract. A contract can be terminated one of two ways:
Termination with cause: This occurs when the seller breaches the terms of the contract. The seller failed to perform the work or failed to perform the work correctly. If the contract had scheduled delivery dates that the seller did not meet, that is another possible reason to terminate because the seller is in default.
Termination for convenience: As the name suggests, the buyer elects to terminate the contract because of internal reasons such as shifts in priorities or marketplace demands or new leadership. The seller is not in default.
Financial compensation is different in these two situations, and you will need to know this for the exam. If the contract is terminated for cause, the buyer only compensates the seller for the accepted deliverables. If the contract is terminated for convenience, compensation is for all accepted deliverables and for all work in progress as well as reimbursement for expenses incurred in preparation for future work
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Auditing the Procurement Process
The successes and failures within the procurement process of the project are reviewed from the procurement planning stage through to contract closure. The intent of the audit is to learn what worked and what did not during the procurement processes. This knowledge can then be applied to other areas within the current project and to other projects within the performing organization.
Negotiating Settlements
Before the contract can be officially closed, all issues, disputes, claims, and disagreements must be settled between the buyer and the seller. The terms of the contract override all other agreements, so this is one of the first things the two parties must agree upon (again!). The goal is to settle the disagreement in a fair manner, usually through alternative dispute resolution, which can include mediation and arbitration. If the buyer and seller cannot agree upon a settlement to an issue, then the claim is escalated to litigation and the court system. Almost all contracts define the court where the claim and associated lawsuit will be filed.
Completing Contract Closure
Once the deliverables have been accepted and the contract has been closed, it is essential that you collect all of the contract information and record it in the contract file. A contract file is a complete indexed set of records of the procurement process and is incorporated into the administrative closure process. These records include financial information as well as information on the performance and acceptance of the procured work.
Assuming the procured work is acceptable and meets the requirements of the contract, the contract can be closed. The formal closure of a project comes in a written notice from the contract officer to the seller. The notice informs the seller that the work is acceptable and that the contract is considered closed. The formal closure process may vary according to the size of the project. The requirements for contract closure should be documented within the contract.
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Alternative dispute resolution: When an issue or claim must be settled before the contract can be closed, the parties involved in the issue or claim will try to reach a settlement through mediation or arbitration. Bid: A document the seller provides to the buyer. Price is the determining factor in the decision-making process. Bidder conference: A meeting of all the project’s potential vendors to clarify the contract statement of work and the details of the contracted work. Claims: Disagreements between the buyer and the seller, usually centering on a change, who did the change, and even whether a change has occurred. Claims are also called disputes and appeals, and are monitored and controlled through the project in accordance with the contract terms. Contract: A formal agreement between the buyer and the seller. Contracts can be oral or written—though written is preferred. Contract change control system: Defines the procedures for how a contract may be changed. The process for changing the contract includes the forms; documented communications; tracking; conditions within the project, business, or marketplace that justify the needed change; dispute resolution procedures; and the procedures for getting the changes approved within the performing organization. Contract statement of work (SOW also CSOW): A document that requires that the seller fully describe the work to be completed and/or the product to be supplied. The SOW becomes part of the contract between the buyer and the seller. Cost plus award fee contract: A contract that pays the vendor all costs for the project, but also includes a buyer-determined award fee for the project work. Cost plus fixed fee contract: A contract that requires the buyer to pay for the cost of the goods and services procured plus a fixed fee for the contracted work. The buyer assumes the risk of a cost overrun. Cost plus incentive fee: A contract type that requires the buyer to pay a cost for the procured work, plus an incentive fee, or a bonus, for the work if terms and conditions are met. Cost plus percentage of costs: A contract that requires the buyer to pay for the costs of the goods and services procured plus a percentage of the costs. The buyer assumes all of the risks for cost overruns. Direct costs: Costs incurred by the project in order for the project to exist. Examples include the equipment needed to complete the project work, salaries of the project team, and other expenses tied directly to the project’s existence. Fixed-price contracts: Also known as firm fixed-price and lump-sum contracts, these agreements define a total price for the product the seller is to provide. Fixed-price incentive fee: A fixed-price contract with opportunities for bonuses for meeting goals on costs, schedule, and other objectives. These contracts usually have a price ceiling for costs and associated bonuses. Fixed-price with economic price adjustments: A fixed-price contract with a special allowance for price increases based on economic reasons such as inflation or the cost of raw materials. Force majeure: An “act of God” that may have a negative impact on the project. Examples include fire, hurricanes, tornadoes, and earthquakes. Independent estimates: Estimates often referred to as “should cost” estimates, which are created by the performing organization or outside experts to predict what the cost of the procured product should be. Indirect costs: Expenses attributed to the cost of doing business. Examples include utilities, office space, and other overhead costs. Invitation for bid (IFB): From buyer to seller. Requests the seller to provide a price for the procured product or service. Letter contract: A stopgap contract that enables the vendor to begin working on the project immediately. It is often used as a stopgap solution. Letter of intent: Not a contract, but a letter stating that the buyer is intending to create a contractual relationship with the seller. Make-or-buy decision: A process in which the project management team determines the cost effectiveness, benefits, and feasibility of making a product or buying it from a vendor. Privity: The confidential and secret nature of the contractual relationship between the buyer and the seller. Procurement management plan: A project management subsidiary plan that documents the decisions made in the procurement planning processes. Procurement planning: A process to identify which parts of the project warrant procurement from a vendor by the buyer. Proposal: A document the seller provides to the buyer. The proposal includes more than just a fee for the proposed work. It also includes information on the vendor’s skills, the vendor’s reputation, and ideas on how the vendor can complete the contracted work for the buyer. Purchase order (PO): A form of unilateral contract that the buyer provides to the vendor showing that the purchase has been approved by the buyer’s organization. Quotation: A document the seller provides to the buyer. Quoted price is the determining factor in the decision-making process. Request for proposal (RFP): A document the buyer provides to the seller. Requests the seller to provide a proposal to complete the procured work or to provide the procured product. Request for quote (RFQ): A document the buyer provides to the seller. Requests the seller to provide a price for the procured product or service. Risk-related contractual agreements: When the project management team decides to use transference to respond to a risk, a risk-related contractual agreement is created between the buyer and the seller. Screening system: A tool that filters or screens out vendors that don’t qualify for the contract. Seller rating systems: Systems used by organizations to rate prior experience with each vendor that they have worked with in the past. The seller rating system can track performance, quality ratings, delivery, and even contract compliance. Terms of reference (TOR): Defines the obligations for the seller, what the seller will provide, and all of the particulars of the contracted work. Similar to the statement of work. Time and materials contract: A contract type in which the buyer pays for the time and materials for the procured work. This is a simple contract, usually for smaller procurement conditions. These contract types require a not-to-exceed clause, or the buyer assumes the risk for cost overruns. Weighting system: A system that removes the personal preferences of the decision- maker in the organization to ensure that the best seller is awarded the contract. Weights are assigned to the values of the proposals, and each proposal is scored