Chapter 12: Project Procurement Management

TRUE/FALSE

	1.	Many private companies use the term procurement instead of purchasing.

ANS:	F	PTS:	1	REF:	462

	2.	The cost savings and use of offshore resources lower inflation, increase productivity, and lower interest rates.

ANS:	T	PTS:	1	REF:	462

	3.	Most people view offshore outsourcing as being good.

ANS:	F	PTS:	1	REF:	463

	4.	Many companies are realizing that they can use offshore outsourcing and create more jobs at home.

ANS:	T	PTS:	1	REF:	463

	5.	Few organizations use some form of outsourcing to meet their information technology needs.

ANS:	F	PTS:	1	REF:	463

	6.	According to a 2008 report on IT outsourceing trends in the U.S. and Canada, application development is the least popular form of IT outsourcing and was used by only 25 percent of organizations surveyed.

ANS:	F	PTS:	1	REF:	463

	7.	When an organization outsources work, it often does not have as much control over those aspects of projects that suppliers carry out.

ANS:	T	PTS:	1	REF:	464

	8.	The success of many information technology projects that use outside resources is often due to good project cost management.

ANS:	F	PTS:	1	REF:	465

	9.	If there is no need to buy any products or services from outside the organization, then there is no need to perform any of the other procurement management processes.

ANS:	T	PTS:	1	REF:	466

	10.	It is always less effective to hire skilled consultants to perform specific tasks for a short period of time than to hire or keep employees on staff full time.

ANS:	F	PTS:	1	REF:	468

	11.	Make-or-buy analysis involves estimating the internal costs of providing a product or service and comparing that estimate to the cost of outsourcing.

ANS:	T	PTS:	1	REF:	468

	12.	Experts outside the company, including potential suppliers themselves, cannot provide expert judgment.

ANS:	F	PTS:	1	REF:	469

	13.	The buyer absorbs less of the risk with cost-reimbursable contracts than they do with fixed-price contracts.

ANS:	F	PTS:	1	REF:	470

	14.	The total value of the contract is a function of the quantities needed to complete the work.

ANS:	T	PTS:	1	REF:	472

	15.	Any type of contract should include specific clauses that take into account issues unique to the project.

ANS:	T	PTS:	1	REF:	472

	16.	Some termination clauses state that the buyer can terminate a contract for any reason and give the supplier only 24 hours’ notice.

ANS:	T	PTS:	1	REF:	473

	17.	Contents of the procurement management plan will vary with project needs.

ANS:	T	PTS:	1	REF:	473

	18.	Lead times for purchases and acquisitions should not be included in a procurement management plan.

ANS:	F	PTS:	1	REF:	473

	19.	It is important to use appropriate words in a contract SOW such as may instead of must.

ANS:	F	PTS:	1	REF:	474

	20.	A contract SOW should not specify the location of the work.

ANS:	F	PTS:	1	REF:	474

	21.	The main sections of an RFP never include the statement of work and schedule information.

ANS:	F	PTS:	1	REF:	475-476

	22.	A key factor in evaluating bids, particularly for projects involving information technology, is the past performance record of the bidder.

ANS:	T	PTS:	1	REF:	477

	23.	Experts in source selection recommend that technical criteria should be given more weight than management or cost criteria.

ANS:	F	PTS:	1	REF:	478

	24.	It is customary to have contract negotiations during the source selection process.

ANS:	T	PTS:	1	REF:	479

	25.	The term “e-procurement” often describes various procurement functions that are now done electronically.

ANS:	T	PTS:	1	REF:	481

MULTIPLE CHOICE

	1.	An October 2005 Information Technology Association of America (ITAA)–sponsored report stated that spending for global sources of computer software and services is expected to grow at a compound annual rate of about ____ percent.
a.	10	c.	30	
b.	20	d.	40	

ANS:	B	PTS:	1	REF:	462

	2.	An October 2005 Information Technology Association of America (ITAA)–sponsored report stated that total savings from offshore resources during the 2005-2010 period are estimated to grow from $8.7 billion to ____.
a.	$10.2 billion	c.	$50.4 billion	
b.	$20.4 billion	d.	$107.9 billion	

ANS:	B	PTS:	1	REF:	462

	3.	“Outsourcing suppliers are often able to use economies of scale that may not be available to the client alone, especially for hardware and software.” refers to the ____ benefit of outsourcing.
a.	Reduce both fixed and recurrent costs	
b.	Allow the client organization to focus on its core business	
c.	Access skills and technologies	
d.	Provide flexibility	

ANS:	A	PTS:	1	REF:	464

	4.	“Most organizations are not in business to provide information technology services, yet many have spent valuable time and resources on information technology functions when they should have focused on core competencies such as marketing, customer service, and new product design.” refers to the ____ benefit of outsourcing.
a.	Reduce both fixed and recurrent costs	
b.	Provide flexibility	
c.	Access skills and technologies	
d.	Allow the client organization to focus on its core business	

ANS:	D	PTS:	1	REF:	464

	5.	“Organizations can gain access to specific skills and technologies when they are required by using outside resources.” refers to the ____ benefit of outsourcing.
a.	Reduce both fixed and recurrent costs	
b.	Provide flexibility	
c.	Access skills and technologies	
d.	Allow the client organization to focus on its core business	

ANS:	C	PTS:	1	REF:	464

	6.	“Outsourcing to provide extra staff during periods of peak workloads can be much more economical than trying to staff entire projects with internal resources.” refers to the ____ benefit.
a.	Reduce both fixed and recurrent costs	
b.	Provide flexibility	
c.	Access skills and technologies	
d.	Allow the client organization to focus on its core business	

ANS:	B	PTS:	1	REF:	464

	7.	There are ____ main processes of project procurement management.
a.	three	c.	five	
b.	four	d.	six	

ANS:	B	PTS:	1	REF:	465

	8.	____ involves determining what to procure, when, and how.
a.	Planning contracting	c.	Conducting procurements	
b.	Administrating procurements	d.	Planning procurements	

ANS:	D	PTS:	1	REF:	465

	9.	____ involves obtaining seller responses, selecting sellers, and awarding contracts.
a.	Conducting procurements	c.	Requesting seller responses	
b.	Selecting sellers	d.	Planning purchases and acquisitions	

ANS:	A	PTS:	1	REF:	465

	10.	Outputs of the ____ process include selected sellers, procurement contract awards, resource calendars, change requests, and updates to the project management plan and other project documents.
a.	Closing the contract	c.	Requesting seller responses	
b.	Conducting procurements	d.	Administering the contract	

ANS:	B	PTS:	1	REF:	465

	11.	____ involves managing relationships with sellers, monitoring contract performance, and making changes as needed.
a.	Closing procurements	c.	Requesting seller responses	
b.	Selecting sellers	d.	Administering procurements	

ANS:	D	PTS:	1	REF:	465

	12.	____ involves completion and settlement of each contract, including resolution of any open items.
a.	Exiting procurements	c.	Closing procurements	
b.	Closing out accounts	d.	Ending procurements	

ANS:	C	PTS:	1	REF:	466

	13.	For many projects, properly ____ some information technology functions can be a great investment.
a.	outsourcing	c.	increasing	
b.	scaling	d.	planning	

ANS:	A	PTS:	1	REF:	466

	14.	____ contracts involve a fixed total price for a well-defined product or service.
a.	CPFF	c.	Cost-reimbursable	
b.	Lump sum	d.	Time and material	

ANS:	B	PTS:	1	REF:	469

	15.	____ involve payment to the supplier for direct and indirect actual costs.
a.	CPFF contracts	c.	Cost-reimbursable contracts	
b.	Lump sum contracts	d.	Time and material contracts	

ANS:	C	PTS:	1	REF:	470

	16.	With a(n) ____ contract, the buyer pays the supplier for allowable performance costs along with a predetermined fee and an incentive bonus.
a.	CPFF	c.	CPPC	
b.	CPIF	d.	CPPF	

ANS:	B	PTS:	1	REF:	470

	17.	With a(n) ____ contract, the buyer pays the supplier for allowable performance costs plus a fixed fee payment usually based on a percentage of estimated costs.
a.	CPFF	c.	CPPC	
b.	CPIF	d.	CPPF	

ANS:	A	PTS:	1	REF:	471

	18.	With a(n) ____ contract, the buyer pays the supplier for allowable performance costs along with a predetermined percentage based on total costs.
a.	CPFF	c.	CPPC	
b.	CPIF	d.	CPPF	

ANS:	C	PTS:	1	REF:	471

	19.	From the supplier’s perspective, there is the least risk with a(n) ____ contract.
a.	CPFF	c.	CPPC	
b.	FFP	d.	CPFF	

ANS:	C	PTS:	1	REF:	472

	20.	The ____ is a description of the work required for the procurement.
a.	RFQ	c.	COW	
b.	RFP	d.	SOW	

ANS:	D	PTS:	1	REF:	474

	21.	Many organizations use ____ and templates to generate SOWs.
a.	details	c.	plans	
b.	outlines	d.	samples	

ANS:	D	PTS:	1	REF:	474

	22.	A(n) ____ is a document used to solicit proposals from prospective suppliers.
a.	RFQ	c.	COW	
b.	RFP	d.	SOW	

ANS:	B	PTS:	1	REF:	475

	23.	A(n) ____ is a document used to solicit quotes or bids from prospective suppliers.
a.	RFQ	c.	COW	
b.	RFP	d.	SOW	

ANS:	A	PTS:	1	REF:	475

	24.	Buyers typically develop a short list of the top ____ suppliers to reduce the work involved in selecting a source.
a.	one to two	c.	eight to ten	
b.	three to five	d.	twelve to fifteen	

ANS:	B	PTS:	1	REF:	478

	25.	____ change orders are oral or written acts or omissions by someone with actual or apparent authority that can be construed to have the same effect as a written change order.
a.	Direct	c.	Destructive	
b.	Constructive	d.	Instructive	

ANS:	B	PTS:	1	REF:	479

COMPLETION

	1.	____________________ means acquiring goods and/or services from an outside source.

ANS:	Procurement

PTS:	1	REF:	462

	2.	The term ____________________ is widely used in government.

ANS:	procurement

PTS:	1	REF:	462

	3.	A well-written ____________________—a mutually binding agreement that obligates the seller to provide the specified products or services and obligates the buyer to pay for them—can clarify responsibilities and sharpen focus on key deliverables of a project.

ANS:	contract

PTS:	1	REF:	464

	4.	______________________________ includes the processes required to acquire goods and services for a project from outside the performing organization.

ANS:	Project procurement management

PTS:	1	REF:	465

	5.	_________________________ involves completion and settlement of each contract, including resolution of any open items.

ANS:	Closing procurements

PTS:	1	REF:	466

	6.	A(n) ____________________ decision is one in which an organization decides if it is in its best interests to make certain products or perform certain services inside the organization, or if it is better to buy them from an outside organization.

ANS:	make-or-buy

PTS:	1	REF:	466

	7.	A(n) ____________________ contract has the least amount of risk for the buyer.

ANS:	
FFP (firm-fixed price)
firm-fixed price (FFP)
firm-fixed price
FFP

PTS:	1	REF:	470

	8.	_________________________ contracts are a hybrid of both fixed-price and cost-reimbursable contracts.

ANS:	
T&M (Time and material)
Time and material (T&M)
Time and material
T&M

PTS:	1	REF:	472

	9.	____________________ can be used in various types of contracts to require the buyer to pay the supplier a predetermined amount per unit of product or service.

ANS:	Unit pricing

PTS:	1	REF:	472

	10.	A(n) ____________________ is a contract clause that allows the buyer or supplier to end the contract.

ANS:	termination clause

PTS:	1	REF:	473

	11.	If a SOW is used as part of a contract to describe only the work required for that particular contract, it is called a(n) ____________________ statement of work.

ANS:	contract

PTS:	1	REF:	474

	12.	Many organizations use samples and ____________________ to generate SOWs.

ANS:	templates

PTS:	1	REF:	474

	13.	A(n) ____________________ is a document prepared by a seller when there are different approaches for meeting buyer needs.

ANS:	proposal

PTS:	1	REF:	475

	14.	A(n) ____________________ is a document prepared by sellers providing pricing for standard items that have been clearly defined by the buyer.

ANS:	
bid
tender
quote
quotation

PTS:	1	REF:	475

	15.	A(n) ____________________ conference is a meeting with prospective sellers prior to preparation of their proposals or bids.

ANS:	
bidders’
bidders
supplier
pre-bid

PTS:	1	REF:	477

	16.	Selecting suppliers or sellers, often called ____________________ selection, involves evaluating proposals or bids from sellers, choosing the best one, negotiating the contract, and awarding the contract.

ANS:	source

PTS:	1	REF:	478

	17.	Experts in source selection highly recommend that buyers use formal proposal ____________________ sheets during source selection.

ANS:	evaluation

PTS:	1	REF:	478

	18.	Tools to assist in contract closure include ____________________, negotiated settlements, and a records management system.

ANS:	procurement audits

PTS:	1	REF:	481

	19.	____________________ are often done during contract closure to identify lessons learned in the entire procurement process.

ANS:	Procurement audits

PTS:	1	REF:	481

	20.	A(n) ____________________ system provides the ability to easily organize, find, and archive procurement-related documents.

ANS:	records management

PTS:	1	REF:	481

ESSAY

	1.	What are four reasons that many companies are turning to outsourcing?

ANS:	
Reduce both fixed and recurrent costs. Outsourcing suppliers are often able to use economies of scale that may not be available to the client alone, especially for hardware and software. It can also be less expensive to outsource some labor costs to other organizations in the same country or offshore. Companies can also use outsourcing to reduce labor costs on projects by avoiding the costs of hiring, firing, and reassigning people to projects or paying their salaries when they are between projects.

Allow the client organization to focus on its core business. Most organizations are not in business to provide information technology services, yet many have spent valuable time and resources on information technology functions when they should have focused on core competencies such as marketing, customer service, and new product design. By outsourcing many information technology functions, employees can focus on jobs that are critical to the success of the organization.

Access skills and technologies. Organizations can gain access to specific skills and technologies when they are required by using outside resources. For example, a project may require an expert in a particular field or require the use of expensive hardware or software for one particular month on a project. Planning for this procurement will ensure that the needed skills or technology will be available for the project.

Provide flexibility. Outsourcing to provide extra staff during periods of peak workloads can be much more economical than trying to staff entire projects with internal resources. Many companies cite quicker flexibility in staffing as a key reason for outsourcing.

Increase accountability. A well-written contract—a mutually binding agreement that obligates the seller to provide the specified products or services and obligates the buyer to pay for them—can clarify responsibilities and sharpen focus on key deliverables of a project. Because contracts are legally binding, there is more accountability for delivering the work as stated in the contract.

PTS:	1	REF:	464

	2.	List and briefly describe the four main processes of project procurement management.

ANS:	
Planning procurements involves determining what to procure, when, and how. In procurement planning, one must decide what to outsource, determine the type of contract, and describe the work for potential sellers. Sellers are contractors, suppliers, or providers who provide goods and services to other organizations. Outputs of this process include a procurement management plan, statements of work, make-or-buy decisions, procurement documents, source selection criteria, and change requests.

Conducting procurements involves obtaining seller responses, selecting sellers, and awarding contracts. Outputs include selected sellers, procurement contract awards, resource calendars, change requests, and updates to the project management plan and other project documents.

Administering procurements involves managing relationships with sellers, monitoring contract performance, and making changes as needed. The main outputs of this process include procurement documentation, organizational process asset updates, change requests, and project management plan updates.

Closing procurements involves completion and settlement of each contract, including resolution of any open items. Outputs include closed procurements and organizational process asset updates.

PTS:	1	REF:	465-466

	3.	What are the three types of cost-reimbursable contracts? Briefly describe each type.

ANS:	
With a cost plus incentive fee (CPIF) contract, the buyer pays the supplier for allowable performance costs along with a predetermined fee and an incentive bonus. If the final cost is less than the expected cost, both the buyer and the supplier benefit from the cost savings, according to a pre-negotiated share formula. For example, suppose the expected cost of a project is $100,000, the fee to the supplier is $10,000, and the share formula is 85/15, meaning that the buyer absorbs 85 percent of the uncertainty and the supplier absorbs 15 percent. If the final price is $80,000, the cost savings are $20,000. The supplier would be paid the final cost and the fee plus an incentive of $3,000 (15 percent of $20,000), for a total reimbursement of $93,000.

With a cost plus fixed fee (CPFF) contract, the buyer pays the supplier for allowable performance costs plus a fixed fee payment usually based on a percentage of estimated costs. This fee does not vary, however, unless the scope of the contract changes. For example, suppose the expected cost of a project is $100,000 and the fixed fee is $10,000. If the actual cost of the contract rises to $120,000 and the scope of the contract remains the same, the contractor will still receive the fee of $10,000.

With a cost plus percentage of costs (CPPC) contract, the buyer pays the supplier for allowable performance costs along with a predetermined percentage based on total costs. From the buyer’s perspective, this is the least desirable type of contract because the supplier has no incentive to decrease costs. In fact, the supplier may be motivated to increase costs, since doing so will automatically increase profits based on the percentage of costs. This type of contract is prohibited for U.S. federal government use, but is sometimes used in private industry, particularly in the construction industry. All of the risk is borne by the buyer.

PTS:	1	REF:	470-471

	4.	What is a SOW? What is a contract SOW?

ANS:	
The statement of work (SOW) is a description of the work required for the procurement. Some organizations use the term statement of work to describe a document for describing internal work, as well. If a SOW is used as part of a contract to describe only the work required for that particular contract, it is called a contract statement of work. The contract SOW is a type of scope statement that describes the work in sufficient detail to allow prospective suppliers to determine if they are capable of providing the goods and services required and to determine an appropriate price. A contract SOW should be clear, concise, and as complete as possible. It should describe all services required and include performance reporting. It is important to use appropriate words in a contract SOW such as must instead of may. For example, must implies that something has to be done; may implies that there is a choice involved in doing something or not. The contract SOW should specify the products and services required for the project, use industry terms, and refer to industry standards.

Many organizations use samples and templates to generate SOWs. The contract SOW should specify the location of the work, the expected period of performance, specific deliverables and when they are due, applicable standards, acceptance criteria, and special requirements. A good contract SOW gives bidders a better understanding of the buyer’s expectations. A contract SOW should become part of the official contract to ensure that the buyer gets what the supplier bid on.

PTS:	1	REF:	474-475

	5.	What are RFPs and RFQs? How and why are these documents created, and what issues must be considered when creating them?

ANS:	
Two common examples of procurement documents include a Request for Proposal (RFP) and a Request for Quote (RFQ). A Request for Proposal (RFP) is a document used to solicit proposals from prospective suppliers. A proposal is a document prepared by a seller when there are different approaches for meeting buyer needs. For example, if an organization wants to automate its work practices or find a solution to a business problem, it can write and issue an RFP so suppliers can respond with proposals. Suppliers might propose various hardware, software, and networking solutions to meet the organization’s need. Selections of winning sellers are often made on a variety of criteria, not just the lowest price. Developing an RFP is often a very time-consuming process. Organizations must do proper planning to ensure they adequately describe what they want to procure, what sellers should include in their proposals, and how they will evaluate proposals.

A Request for Quote (RFQ) is a document used to solicit quotes or bids from prospective suppliers. A bid, also called a tender or quote (short for quotation), is a document prepared by sellers providing pricing for standard items that have been clearly defined by the buyer. Organizations often use an RFQ for solicitations that involve specific items. For example, if a company wanted to purchase 100 personal computers with specific features, it might issue an RFQ to potential suppliers. RFQs usually do not take nearly as long to prepare as RFPs, nor do responses to them. Selections are often made based on the lowest price bid.

Writing a good RFP is a critical part of project procurement management. Many people have never had to write or respond to an RFP. To generate a good RFP, expertise is invaluable. Many examples of RFPs are available within different companies, from potential contractors, and from government agencies. There are often legal requirements involved in issuing RFPs and reviewing proposals, especially for government projects. It is important to consult with experts familiar with the contract planning process for particular organizations. To make sure the RFP has enough information to provide the basis for a good proposal, the buying organization should try to put themselves in the suppliers’ shoes.

The main sections of an RFP usually include a statement of the purpose of the RFP, background information on the organization issuing the RFP, the basic requirements for the products and/or services being proposed, the hardware and software environment (usually important information for information technology related proposals), a description of the RFP process, the statement of work and schedule information, and possible appendices. A simple RFP might be three to five pages long, while an RFP for a larger, more complicated procurement might be hundreds of pages long.

Other terms used for RFQs and RFPs include invitations for bid, invitations for negotiation, and initial contractor responses. Regardless of what they are called, all procurement documents should be written to facilitate accurate and complete responses from prospective sellers. They should include background information on the organization and project, the relevant statement of work, a schedule, a description of the desired form of response, evaluation criteria, pricing forms, and any required contractual provisions. They should also be rigorous enough to ensure consistent, comparable responses, but flexible enough to allow consideration of seller suggestions for better ways to satisfy the requirements.

PTS:	1	REF:	475-476