Ontracting and Procurement in Project ManagementPhase 1 Individual Project

7-10 slides with speaker notes

Your manager had asked you to follow up your discussion with a presentation outlining how the procurement process would integrate with the rest of the project. Create a PowerPoint presentation for your manager.

Your PowerPoint should be 7-10 slides (not including title, reference, and introductory slides) with speaker notes of 200-250 words for each slide.

Objective: Describe how contracting and procurement support achievement of project objectives
Integrate contracting and procurement activities into overall project cost and schedule
Describe how contracting and procurement support achievement of project objectives
Integrate contracting and procurement activities into overall project cost and schedule

Course materials provide additional information for your class studies.


ACME Development Corporation (ADC) a developer of custom homes and apartment complexes has decided to standardize their project management practices and processes across the national organization. The goal is to standardize on one single project scheduling tool, and have the tool installed and to be operational within 90 days. To this end they are forming a central Project Management Office (PMO). Until now, project managers (there are 40 presently on staff distributed all over the USA) have been able to use whatever scheduling tool they liked, within their budget constraints. They have also been able to buy equipment and engage contractors at will. The PMO will be determining one scheduling tool that all PMs will be expected to use, exclusive of any other scheduling tools. The PMO will also develop and implement a standardized procurement process. Since the PMs are located across the USA, a web-based solution seems likely to be the most successful tool.

As the Project Manager, you have been charged with implementing the procurement process and you decide your first project will be purchasing the scheduling tool for ACME Development Corporation.

Presentation: Project Negotiations
There are two main negotiating formats: informal and formal. Formal negotiations are primarily used when significant costs and risks are involved. Types of contracts negotiated formally include Requests for Proposal (RFPs), Requests for Quotation (RFQs) and labor union contracts. Typically, a company documents processes for issuing and negotiating these types of contracts. Formal negotiations are planned to the last detail, including the choice of meeting room, seating assignments, strictly-enforced formal agendas, and required presentation formats. It is not unusual for formal negotiations to include secret signals between one team s participants, walkouts, secret consultations, and other seemingly intimidating tactics. The formality of the process helps to ensure impartiality towards vendors, and allows for consultation among team members. Most government contracts are negotiated following formal guidelines.
Informal negotiations are those that are conducted in the project manager s office or a nearby conference room. There is no formal agenda, and to a non-participant it would appear to be just another meeting. Generally, these kinds of negotiation sessions are between the project manager (PM) and a trusted vendor currently doing business with the company. Impartiality is not a consideration. Costs and risks are usually relatively low. A PM is expected to use this format when contracting for on-site consultants performing specialized short-term services.

There are three phases to negotiating: pre-negotiation, negotiation, and post-negotiation. During the pre-negotiation phase, project managers plan their negotiating strategy and the techniques they will use. If done correctly, this phase will take the most time. When planning your negotiating strategy, consider the following:

Any negotiation has formal and informal elements. It is the PM s responsibility to decide which strategies will work best for the current situation, and will structure negotiations accordingly. Sometimes, just a simple agenda with a list of discussion topics is better than no agenda at all.
Determine and prioritize your needs. All negotiations involve compromise. Both parties should come to the meeting with the list of things they must have and those they are willing to forfeit. For instance, if you want a contractor to work on-site with your own team, you will be asked to pay for travel and expenses, provide an office, phone, computer, access badge, and security clearances. By deciding if having the contractor on-site is truly worthwhile, you will be in a better position to negotiate wages and reimbursement limits.
Understand your counterpart in negotiations. Exercise due diligence. How much business has this vendor conducted with your company in the past? Talk to others that have used the vendor. Perform a financial analysis. Obtain copies of the vendor s financial reports. Is the vendor s company a leader in the industry? Is the vendor s company in good financial standing? What is their reputation, their capacity to deliver, their market share, and so on? When does their financial quarter and fiscal year end?
Establish rapport with vendor representatives. The contract binds companies to terms, but negotiations take place between people. It is likely that you will be dealing with these people for some time. Adversarial attitudes do not make working together comfortable or sustainable. Give the person sitting across from you a reason to want to do business with you, and they will.

Article: Risk Management
Risk Management
Risk Management in any project has the same basic factors. These are the identification of risks, the quantification and qualification of risks, the monitoring of risks, plus risk control and response. Risk response factors are the factors that most affect the relationship between risk and contract and procurement management.

Chege and Rwelamila suggest a strong link between the management of risk and chosen procurement strategy. Lowe and Whitworth maintain that for a successful contract and procurement strategy, the allocation of risk must be central. How this risk is allocated is determined largely by the procurement strategy itself. For example, if the main focus of the project is to design and build, then the client will bear most of the risk. In a fixed price strategy, contractor and client assume a similar amount of risk.

One suggestion is to choose a procurement strategy that allocates the risk to whoever is best able to manage it. Consequently, the client must first consider risk allocation before choosing the procurement strategy. This allows the client to best choose the procurement strategy that allocates risk management to the correct party. This, however, does create the risk in determining and allocating correctly the risk to the party most able to manage it.

The following table depicts the approximation to the allocation of risks by procurement strategy.

Procurement Strategy Allocation of Risk to the Client Allocation of Risk to the Contractor
Design and Build 10% 90%
Develop and Build 30% 70%
Traditional Fixed Priced or Lump Sum 50% 50%
Management Contracting (Cost Plus) 70% 30%

It is also beneficial for the client to consider certain factors when determining the correct allocation of risk. They are speed of process; certainty of price; flexibility in accommodating design changes; quality of contractor s reputation, design, or skills; complexity of contractor (will subcontractors be used); and level of desired risk acceptance, avoidance, or mitigation.

Chege, Lucy W. and Pantaleo D. Rwelamila. Risk Management and Procurement Systems  An Imperative Approach.2002. paper2.pdf,

Questions and Answers

Question #1
What are some of the major negotiating strategies that I can use to prepare my contract negotiation?

Negotiation strategies are formed during pre-negotia