CompTIA Project+ PK0-004 – Managing the Project Procurement Part 1

1. Building or buying a solution?

One of the things you’ll have to solve for in your exam and probably as a project manager in your organization is the determination of should you build it or should you buy it. So in this brief presentation, I’m going to show you a quick way to make make a financial decision on building or buying. In this particular approach, what you need to do is to first identify how much will it cost you to build the solution. And then once you build the solution, like a piece of software for example, once you build it, there may be a monthly fee associated with building it. So for example, if you build a piece of software, accounting piece of software for your internal organization and then what’s the labor or the maintenance cost or whatever the fee may be every month to maintain that build.

So in this example, it’s $65,000 to build it and every month you’re going to spend $8,500 to maintain it. That would be part of the lifecycle cost of the product. Now a vendor comes to you and they say, hey, you could buy it from us for $52,000. So considerably less than your build. However, you have to sign a contract with us and the maintenance for that is $10,500 a month. So upfront you’re going to pay $52,000 every month, you’re going to pay ten five. Now to make the determination of should you buy it or build it, here’s what you do. You first find the difference of buy and build, which in this case is $13,000. Then you find the difference of your monthly maintenance fees, which in this case is $2,000.

All right? Now you divide the differences. You say, okay, 13,000 divided by 2000 a month equals 6. 5 months. Now what does that 6. 5 months tell us? It means that if you were to build the solution, the solution will pay for the difference of the buy in 6. 5 months. In other words, if you build it at $8,500 a month, in six and a half months it will pay for itself. Because every month when you buy it’s going to be $2,000 difference per month. So what this would mean, if you’re going to keep the solution longer than six and a half months, it’s more cost effective to build it. If you’re going to keep the solution less in six and a half months, it’s better to buy it. So know this quick way to make a buy versus build decision.

2. Planning project procurement

As the project manager, chances are you’ll have to deal with vendors. And this means that you’ll have to plan for procurements. You’re going to have to plan to spend money. And as also always before you buy something you want to plan. So that’s what’s happening in this lecture is planning for procurement. This is a project management process that documents the procurement approach in your organization. So enterprise environmental factors. It also defines the procurement decisions. It helps you to identify all of your potential sellers. So the vendors that you’ll work with and then what’s the approach you’ll take to acquire resources and services? And that approach is the procurement management processes. So how will you request for bids and quotes and proposals and then how will you interact with the vendors? Let’s look at this process here.

In order to plan procurement management, we need several inputs in order to create several outputs. So you’ll begin with your project management plan, your requirements documentation that can help you identify what you need to buy the risk register. Recall that one of our risk responses is transference. So when you transfer a risk, you’re dealing with a vendor often. What are the activity resource requirements? Member resources aren’t just people but things, materials, what’s the project schedule? So when will you need to procure? Activity cost estimates, the stakeholder register and then of course, enterprise environmental factors and organizational process assets. Now, some tools and techniques here, you’ve already seen one.

The make or buy analysis. You may have to do some expert judgment, market research and then meetings. You’re going to meet with the vendors and people in your company to make the best decision on what and how to procure. Now, the outputs of planning creates the procurement management plan. The procurement statement of work. The statement of work is what you give to the vendors, the sellers, so that they can evaluate what you want them to do. It’s a document kind of like your scope statement, but it’s the statement of work for the portion of your project that the vendor will provide. Then you have procurement documents. These are things like quotes and bids and proposals and then the request for those items. Source selection criteria.

How will you choose the vendor? You the make or buy decision change request and project document updates. The procurement overview is process of identifying who’s the buyer and who’s the seller and what’s that relationship like. The buyer is a stakeholder for the seller. If you hire me to build you a house, my project is to build the house. I am the seller. I’m building a house for you. You are my stakeholder. That’s all that we’re talking about here. The seller, me, my company that is building the house is the project management team. The terms and conditions of the contract are for me. I have to abide by these terms and conditions. Now there are terms and conditions for you as well. Because you have to pay me. So that would be one of the terms.

We may have external and internal contracts. Now, external contracts is really easy to see where you hire me to build you a house. You’re the buyer, I’m the seller. Internal contracts, some organizations use internal billing or bill backs where in my department we’ll develop the software. But you have to pay for the developer’s time from your department’s budget. So that’s the idea of internal contracts. Now, market conditions is a way to describe what’s happening in the market and how that affects the purchase price. So these are some terms you should know for your exam. First off, we have the sole source. Now I’m going to give you kind of a really cheesy way to remember these. Sole source means that there’s only one person, only one organization that can provide what you need.

Now, a sole source, you think of James Brown, the Godfather of Soul. There’s only one James Brown. Just like with the Soul source, there’s only one company that can provide what you need in your project. Now, single source, there are lots of singles available, but you prefer your sweetie. You prefer that one individual for you. So single source means there are lots of companies out there that can provide the service. But you have a favorite vendor that you like to work with. So that’s single source. And then we have an oligopoly like Monopoly. But oligopoly means that the market conditions are so tight that what one vendor, what one seller does affects the rest of the marketplace.

Oil is a good example of an oligopoly. So is airfare. So if one airfare company or one airline has a big sale on their tickets to a particular destination, then you might see other airlines follow suit. But an Oligopoly describes that the market conditions are so tight, what happens with one vendor affects the rest of the marketplace planning for purchases. So these are some things that go into your procurement Management plan. Will you procure yes or no? So build or buy, what exactly will you procure? So this is in your statement of work, how much to procure also in your statement of work, when to procure part of your procurement management plan? So these are the questions that are answered in the Procurement Management Plan.

3. Identifying source selection criteria

A really important question that you have to answer as the project manager is which vendor will you purchase from? Of course you want to choose the best vendor for project success, but there’s a lot of factors that go into source selection. And so in this lecture, we’re going to look at all of the different things you might consider when it comes to choosing a vendor to provide services for your project. So, source selection criteria. First off, does the vendor understand the need? Do they really understand what they want you to do? The lifecycle costing, lifecycle cost describes whatever solution the vendor gives you. How much will it take for you to maintain it each month? If you’ve ever purchased a water heater or refrigerator or a stove, some appliance, there’s often a big yellow sticker on that piece of equipment, and it will say what the cost to maintain that equipment is each year.

Like electrical and any maintenance you may have to do. It kind of gives you an idea of what you’re going to spend. That’s a life cycle cost. So if you’re developing a piece of software, you hire a vendor to do that for you. They may tell you, well, this is what it is to create the code and then this will be how much we’re going to charge to maintain it for the year. That’s a life cycle cost. You might want to know what the technical capabilities are of the vendor. Have they done this type of work before? What risks are associated with selecting a particular vendor? What’s that vendor’s management approach or their technical approach to the work? Will they provide a warranty? This next step here is pretty important. What’s the financial capacity of the vendor? Oftentimes when we go to choose a vendor, we might be a little skittish towards people that are in a startup environment or that it’s a one man show.

Because there’s a financial issue where let’s just say, for example, I’m building a house for you and it’s just me, I’m by myself and you have to pay for the house at the end. Will I have enough money to purchase the materials and pay the labor to reach the end of the project? So in a very long term project, there may be some concerns about a small business. Do they have the financial capacity to deliver throughout the project? Are we going to come up against cash flow problems for that smaller vendor? Now, that can happen with large vendors too. That’s not being biased against small vendors. And in fact, I’ve written a book on project management for small business. And that’s one of the things I talk about in that book, is the financial capacity of how we have to be realistic as a small business going into a client and being able to take the duration of the project and to have the finances to pay for the materials and to pay for the help and to make a profit.

And that leads into the next point here, the production capacity and interest. Can that business, can they actually produce? Are they bogged down with a lot of other work? And maybe our project is the small project that they’re not real interested in. What’s the business size and the type of business? Have you worked with this seller before? What references can they provide? Who retains the intellectual property rights? And that’s something that you really have to nail down as well with the proprietary rights. So for example, I know an instance of a lady who had a small business and she developed some software for an organization and the organization was under the assumption that they had the proprietary rights, they had the intellectual rights to this software, to the code.

And this particular lady in her contract, she said no, that she retained the intellectual rights, so she had the right, she won and the hospital paid her and then she took that code and redeveloped it and packaged it up a little differently and sold it to other hospitals. So it’s just something that you have to pay attention to so you don’t get burned as to who owns the rights. Now, seller Selection here some ways to choose a seller. A weighting system is where we give different weights to different categories to choose a seller. So cost, experience, scheduling and so on. And then you can see in this little histogram, each seller is scored in each category. Now this could also be called a weighted system where we have different scores. Instead of every category being worth 20, some categories might be worth 30 or 40.

So we’re weighted towards particular areas of interest for our selection. Recall that an independent estimate, sometimes called a should cost estimate, is where we have someone create an estimate for our purchase and that estimate serves as a means for all other estimates that we compare it to a screening system. This is a way of screening out vendors so anyone that comes in above 150,000, we will not be working with them, or anyone that can’t finish by August 31 won’t work with them, or years of experience or whatever qualifiers you want to choose. Contract negotiation is part of seller selection. So you negotiate with different vendors and then whoever gives you the best deal through that negotiation is who you’ll go with. Now, let me just add a point there about contract negotiation and the best deal. Really, when we negotiate, we want to be fair for both parties. We don’t want the vendor to resent what we’re asking.

So we want to do what’s fair for our organization, but also what’s fair and equitable for the individual doing the work on the other end of that deal, seller rating systems. Your company may have a seller rating system where your company deals with 50 different vendors and then whenever someone deals with that vendor, they write up a little review. So internally you could look at that seller rating system, the website Yelp or Angie’s List, or even on Amazon. These are seller rating systems where you want to track the performance and get an idea of how well or reliable that service or vendor may be. Expert Judgment I’m going to use someone smarter than me to help me make the best decision and then proposal evaluation. Often I use expert Judgment, my project team and other people in the organization to evaluate the proposal and see if it’s a good thing, a good deal what the vendor is proposing.

4. What’s in the procurement management plan?

The Procurement Management Plan comes about by procurement planning, but it’s the plan that will define how you will procure. It addresses the types of contracts you’re allowed to use, it addresses the client vendor relationship, and it also defines any enterprise environmental factors that you must adhere to. Let’s take a look at the procurement Management Plan. And like I said, it documents the procurement approach. It defines the procurement decisions, the potential sellers, and the approach that you must use to actually purchase so resources and services. And that is the enterprise environmental factor. Most project managers that I meet struggle with procurement on their exam because they don’t actually do procurement in their DayToday role. Often procurement is handled through a centralized contracting or procurement office.

But for your exam, it’s important to understand procurement as if you were the individual actually completing the procurement process. So the procurement management Plan, the output of procurement planning, it defines the type of contracts you could use, risk management issues, that independent estimate, organizational procurement procedures, those procurement documents. How do you work with multiple sellers? Like on a large project, you may have a lot of sellers that are participating in contributing goods or services. The procurement management plan also coordinates the actual procurement activities. Your organization may have a 30 or 45 day lead time to actually purchase items. So when you need materials in your project, you need to think back and include that procurement activity, include that lead time that it takes to actually procure.

Constraints and assumptions must also be considered for procurement management planning. So remember, a constraint is anything that restricts your options. So deadlines, they have a financial cap, those are constraints and then assumptions. It’s easy to make assumptions about vendors. Like, you assume they’re going to follow the Statement of work, you assume they’re going to hit their deadlines as promised. As I mentioned, that lead time is a factor that affects a lot of project managers. So that required procurement lead time recall those make or buy decisions that we looked at earlier. Scheduling deliverables in the contract. So if you have hiring a vendor to do a large project, you may have some milestones with due dates that are in the contract. And then your vendors may have to provide some performance bonds or insurance.

So if they have errors and omissions, or if they have defects that they will be responsible for, that financially responsible for that. The procurement management plan also defines the work breakdown structure. This is provided by the seller. The form and format for the Statement of work documents recall the Statement of work documents comes from the buyer to the seller. So that if I want to hire you to develop a piece of software, the Statement of Work would describe the requirements and the expectations for you to perform. Your company may have some pre qualified sellers, like a preferred vendors list. And then you may also need some metrics for evaluations, usually time and cost and quality, so that when a vendor does work, you’re measuring for were they on time? Was the work done with quality? And did they come in on budget?

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