Managing

Procurement
Duration: 60 Minutes

Determine the Procurement Need

1. You are the project manager of the HTG Project for your organization. This
project is to host a fitness event at a new community fitness center and
walking trail in your neighborhood. Your project will welcome people from
your city to tour the fitness center, walk the fitness trail, and participate in
some games and exercises. You’ll need to provide brochures about the
center, t-shirts for the fitness center, and refreshments for people walking
the trails. You’ll also need to hire four photographers to take pictures of
people using the trails and fitness center for the media. You have eight
weeks to complete the project before grand opening event. What additional
information would you as the project manager need to know to plan for
procurement?

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2. You’ve just learned that this event should bring 5,000 people to the grand
opening weekend. Will this change the procurement planning at all?

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3. You’ve just learned that you’ll also need to create postcards to send out to
over 25,000 people in the community surrounding the walking trail and
fitness center. How will this affect the project costs and procurement?

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Assignment: Managing Procurement ©Instructing.com, LLC 2

4. Given what you’ve read so far, what type of items do you need to procure?

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5. What type of contracts would you most likely use in this scenario?

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Assignment: Managing Procurement ©Instructing.com, LLC 3

6. John is a project manager of the NKL Project for his company. John has
discovered that to create a portion of his project deliverables, his team
could complete the project work for $17,650, with a monthly fee of $4,334.
A vendor that John has worked with in the past reports that they could
complete the same work for $13,450 but the monthly support for their
solution is $6,000. If John elects to create the solution in-house rather than
turn to the vendor, how long must the solution be in use to be more cost
effective than the vendor’s?

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7. As a project manager and PMP candidate, you need to recognize the

characteristics of each contract type. Here’s a quick table listing the seven
contract types. Write a quick description of each contract type to help you
remember the contracts and their characteristics. In the final column,
identify who carries the risk of cost overruns:

Contract Characteristic Risk Owner

Firm fixed price

Cost plus incentive fee

Fixed-price incentive fee

Fixed-price with economic price
adjustment
Cost plus fixed fee

Time and material

Cost plus award fee

Assignment: Managing Procurement ©Instructing.com, LLC 4

Administer Project Procurements

1. You are the project manager of the HNK Project for your organization. This
project is to build a web-based software product that will allow customers to
query information in a secured database. You have hired a web developer
to create social media applications and mobile phone applications that will
also allow access to the secure data. A change has been requested that
will affect the project scope for the entire project. This change will also
affect the procured services of the application developer. What are some
concerns you would have as the project manager in regard to the contract
and the approved change?

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2. In the space provided next draw an illustration for the change control
system and how a change in the project scope can also affect the contract.
(You can refer to Chapter 4 of this book for the complete change control
process if you find it helpful.)

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Assignment: Managing Procurement ©Instructing.com, LLC 5

3. You are serving as a project manager of a company that completes projects
for others. In your role as project manager for the seller, how can you best
represent the profit-driven goals of your company and still best represent
the buyer?

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4. Sandy is the project manager for her organization. Her organization has
hired the BAJ Contractors to build a large, stone patio as part of Sandy’s
current project. The BAJ Contractors company reports that they would like
to be paid for the materials and work performed so far. What activities
should Sandy complete in regard to the payment request?

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Assignment: Managing Procurement ©Instructing.com, LLC 6

Assignment Solution: Planning Project Procurement

Your answers may be slightly different than what’s presented here, but these are
the most ideal solutions.

1. What additional information would you as the project manager need to

know to plan for procurement?

You’ll want to review the project’s scope statement, WBS, and WBS
dictionary to help you determine what needs to be created. For example,
you’ll need specific details about the brochures, t-shirts, and types of
refreshments to be offered. You’ll also need information about the need for
the photographers. Will the photos be digital? Instant? And how will the
photos be used? The project’s scope baseline, schedule, and cost estimates
can all influence the procurement process. You may also want to reference
the risk register for risk-related contracts.

2. You’ve just learned that this event should bring 5,000 people to the grand
opening weekend. Will this change the procurement planning at all?

Yes, as costs can fluctuate, depending on the amount of people attending the
event. The project manager will need to consider what the participants will
receive, insurance coverage, staffing, and other cost-related concerns that
will be linked to procurement.

3. You’ve just learned that you’ll also need to create postcards to send out to
over 25,000 people in the community surrounding the walking trail and
fitness center. How will this affect the project costs and procurement?

The requirements of the 25,000 postcards will greatly affect the

procurement process. The project manager will need to consider the timing
for designing the postcard, printing the card, and mailing the card with
enough time for the recipients to react accordingly. A rush in production can
affect the pricing of the item to be procured.

4. Based on what you’ve read so far, what type of items do you need to
procure?

Based on this limited information, the project manager will need to procure
brochures, t-shirts, and refreshments. The project manager will also need to
procure photographers and postcards.

Assignment: Managing Procurement ©Instructing.com, LLC 7

5. What type of contracts would you most likely use in this scenario?

Ideally the project manager will use fixed-price contracts, though the rush
for postcards or other procurement could cause the project to be required to
use a cost-plus contract. The photographers may want to use a time and
materials contract, though there’s no evidence they’d need to.

6. John is a project manager of the NKL Project for his company. John has
discovered that to create a portion of his project deliverable, his team could
complete the project work for $17,650, with a monthly fee of $4,334. A
vendor that John has worked with in the past reports that they could
complete the same work for $13,450 but the monthly support for their
solution is $6,000. If John elects to create the solution in-house rather than
turn to the vendor, how long must the solution be in use to be more cost
effective than the vendor’s?

To solve this buy-versus-build decision follow these steps:

 Find the difference of buy and build: $17,650 – $13,450 = $4,200
 Find the difference of the monthly maintenance fee: $4,334 – $6,000 =
-$1,666
 Divide the difference of the out-of-pocket fees by the difference of the
monthly fees: $4,200 / $1,666 = 2.52
 If the in-house solution is going to be used for more than 2.5 months,
it’s better to build the solution than to buy the solution.

Assignment: Managing Procurement ©Instructing.com, LLC 8

7. As a project manager and PMP candidate, you need to recognize the
characteristics of each contract type. Here’s a quick table listing the seven
contract types. Write a quick description of each contract type to help you
remember the contracts and their characteristics. In the final column,
identify who carries the risk of cost overruns:

Contract Characteristic Risk Owner

Firm fixed price The seller offers a price for the The seller has the risk
work to be completed, and the of cost overruns.
price does not change.
Cost plus The buyer pays for the cost of The buyer has the risk
incentive fee the work plus an incentive for of cost overruns.
performance in the contract.
Fixed-price The seller offers a price for the The seller has the risk
incentive fee work to be completed, and the of cost overruns.
cost of the work does not
change. The buyer offers a
bonus for the seller to meet
certain performance objectives.
Fix price with The seller offers a price for the The seller has the risk
economic price work to be completed, but the of cost overruns, but
adjustment price could change based on the buyer could carry
economic conditions, such as the risk for the cost
inflations or cost of materials. increases based on
what’s happening in
the marketplace.
Cost plus fixed fee The buyer must pay for the The buyer has the risk
costs of the materials plus a of cost overruns.
fixed fee for the vendor to
complete the work.
Time and The seller charges the buyer for The risk is generally
materials the time, such as an hourly rate, distributed and low as
plus the cost of materials to long as the contract
complete the work. carries a not-to-exceed
clause.
Cost plus award The buyer must pay for the The buyer has the risk
fee costs of the work and materials of cost overruns, but
and the buyer awards the seller the seller has the risk
an award based on project of receiving a small
performance. The percentage award.
or amount of the award is
unknown to the seller until the
award is given.

Assignment: Managing Procurement ©Instructing.com, LLC 9

Assignment Solution: Administering the Project Contracts

1. You are the project manager of the HNK Project for your organization. This
project is to build a web-based software product that will allow customers to
query information in a secured database. You have hired a web developer
to create social media applications and mobile phone applications that will
also allow access to the secure data. A change has been requested that
will affect the project scope for the entire project. This change will also
affect the procured services of the application developer. What are some
concerns you would have as the project manager in regard to the contract
and the approved change?

A contract change control system is needed whenever procurement is used

in a project. Contract change control systems may be defined as part of the
organizational process assets, the enterprise environmental factors, and in
the contract itself. The buyer and the seller must be in agreement as to how
changes are allowed into the contract terms—though often changes require a
contract addendum or an entirely new contract, depending on the situation.
In this scenario the terms of the contract need to be inspected to determine
how changes are allowed. The project manager and the developer will also
need to discuss the changes and determine what additional fees, schedule
changes, and specific work is needed to make the changes happen.

2. In the space provided next draw an illustration for the integrated change
control and how a change in the project scope can also affect the contract.

Assignment: Managing Procurement ©Instructing.com, LLC 10

3. You are serving as a project manager of a company that completes projects
for others. In your role as project manager for the seller, how can you best
represent the profit-driven goals of your company and still best represent
the buyer?

Sellers can still represent the best interests of the buyer and make a profit.
As a project manager representing the buyer, you need not neglect the duties
of your organization or the best interest of the buyer. A balance of
obligations is needed: the project manager must represent the employer and
help the buyer meet their project goals. These objectives are not mutually
exclusive. The contract, however, should address the responsibilities and
expectations of both parties, and then the buyer and the seller adhere to the
agreed terms of the contract.

4. Sandy is the project manager for her organization. Her organization has
hired the BAJ Contractors to build a large, stone patio as part of Sandy’s
current project. The BAJ Contractors company reports that they would like
to be paid for the materials and work performed so far. What activities
should Sandy complete in regard to the payment request?

The terms of the contract should define the payment systems, procedures,
and conditions for payment to the BAJ Corporation. Sandy should reference
the contractual terms and then, if appropriate, complete a procurement audit
to confirm that the terms of the contract have been met and that the seller
qualifies for a payment. Sandy, as the buyer, should not delay the
contractual payment terms, as she has obligations in the contract as well.

Assignment: Managing Procurement ©Instructing.com, LLC 11