CONTRACT MANAGEMENT PRINCIPLES AND PRACTICES

Introductions Instructor

Name Background

Students/Course Participants Name Company PM and procurement experience Motivations for taking course

What do you want out of the class?

Formalities Introductions Logistics

Timing and breaks Student kits Training center facilities

Distractions Cell phones and pagers on vibrate

Special needs? Rules of classroom engagement Lets get started

Course Objectives1. This course will teach you how to effectively manage all

aspects of project procurement.2. Youll discover the terms, techniques, and tools of how to

convert project needs into outsourced goods and services.3. In this skills-building course, you will spend up to 70% of

class time working on contracting activities fromrequirements documentation to contract closure.

4. Exercises include the development of a procurementstrategy, contract selection, revising and updating SOWs(Statement of Work), risk management, negotiated claimssettlement, and collection of lessons learned.

After taking this course, you will be able to: Describe steps and stages of contract management from needs analysis

to closure Define terms and terminology of contracting and procurement Explain legal requirements of contracts and their implications Perform stakeholder mapping and expectations analysis Convert project objectives to contract requirements Describe applications and weaknesses of contract types Explain risk transfer through contracting terms and conditions Describe procurement planning, from needs analysis to creation of bid

packages Explain the importance of the SOW (Statement Of Work) Conduct procurements and bid on packages through source selection

and awarded contracts Describe negotiation principles

Course Outline

Day One Day Two Day Three

Section 1 Section 2 Section 3 Section 4 Section 5 Section 6Introduction to Procurement Management

Project Analysis Plan Procurements

Conduct Procurements

Administer Procurements

Close Procurements

Terminology Contracts

Stakeholders Success

Determine project needs

Documentation Advertise Choose vendor

Manage contract

Lessons learned

Section 1: Introduction to Procurement Management

Terminology Contracts Contracting Success Stakeholders Procurement Process Success

Contract Management Principles and Practices

Introduction to Procurement Management

Day One Day Two Day Three

Section 1 Section 2 Section 3 Section 4 Section 5 Section 6Introduction to Procurement Management

Project Analysis Plan Procurements

Conduct Procurements

Administer Procurements

Close Procurements

Terminology Contracts

Stakeholders Success

Determine project needs

Documentation Advertise Choose vendor

Manage contract

Lessons learned

Section 1 ObjectivesAfter completing this section, you will be able to:

Estimate the time required for procurementprocesses

Define the terminology used in procurementmanagement and contract management

Describe what contracts are and when they are used Outline the spectrum of stakeholders involved in

procurements Apply contract management success criteria

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Exercise 1-1: Estimating Procurement Schedules

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InstructionsWork in groups to complete the following tasks. Be prepared to share your results with the class.1. Estimate durations for activities in the Contract

Schedule Network Diagram. Provide estimates in terms of both minimum and maximum amounts for each step.

2. Total the durations to calculate how much time procurement can add to project schedules. Estimate both the upper and lower limits.

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Exercise 1-1: Contract Schedule Network Diagram

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Exercise 1-1: Schedule Network Diagram

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Exercise 1-1: Schedule Network Diagram (cont.)

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Exercise 1-1: Schedule Network Diagram (cont.)

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Evaluate proposals

Exercise 1-1: Schedule Network Diagram (cont.)

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Exercise 1-1: Debrief Which procurement steps are unnecessary? How can the process be shortened? Who should decide how to shorten the process?

Terminology Procure Procurement Procurement management Contracts Contract management Procurement management vs. contract

management

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Procure To procure is to acquire

Typically refers to sources outside of organizations www.YourDictionary.com

To get or bring about by some effort; obtain; secure to procure supplies, work, a settlement, etc.

To obtain

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Procurement/Procurement Management All the processes relating to the acquisition of

goods and services From preparation of documents and processing of

requisitions through to receipt of goods and services Includes approval of invoices and related payments

Also known as: Sourcing Outsourcing Purchasing Contracting

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Procurement Steps Plan Prepare bid documents and distribute Receive responses from bidders Evaluate proposals Interview bidders Conduct negotiations Award contracts Determine work start date Manage contracts Review performance (extend or terminate) End contracts

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Contract Management

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The management of contracts made withcustomers, vendors, partners, or employees

Creation, execution, and performance withthe objective of optimizing outcomes whileminimizing risk

Responsibilities include: Negotiating terms and conditions Ensuring compliance with terms and conditions Documenting and agreeing to changes that arise

during contract implementation or execution

Contract Management Scope Plan Prepare and distribute bid Obtain bidder responses Evaluate proposals Interview bidders Conduct negotiations Award contracts Determine work start date Manage contracts Review performance End contract

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?

??

Contract management

responsibilities vary

Contracts A mutually binding agreement that obligates the

seller to provide the specified products, services, or results, and obligates the buyer to provide monetary or other valuable consideration. PMBOK Guide, Fourth Edition

Synonyms Agreement (MoA) Understanding (MoU) Purchase order (PO)

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A contract represents a mutually bindingagreement that obligates the seller to providesomething of value (e.g., specified products,services, or results) and obligates the buyer toprovide monetary or other valuablecompensation. An agreement can be simple orcomplex, and may reflect the simplicity orcomplexity of the deliverables or required effort(PMBOK Guide, Fifth Ed., 2013)

Legal Definition of Contract An agreement between two or more persons that

creates an obligation to do or not to do a particularthing

A binding, legal agreement that is enforceable in acourt of law An exchange of promises or commitments If promises or commitments are not satisfied, the law

will provide a remedy More than mere promises because the courts can

be used to enforce these promises

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Contract Elements Legal capacity Consideration Offer Legal purpose Acceptance

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Agreement has been reached when an offer capable ofimmediate acceptance is responded to with an unqualified

acceptance.The parties reaching agreement must have the necessarycapacity to commit to the contract and the contract must notbe either trivial, ambiguous, impossible, or illegal.

Contract Matters (Terms) Duress Minor Estoppel Privity

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Discussion Activity When should contracts be used?

When there is room for misunderstanding about whatwill be done by whom, and when the parties want thecourts to serve as the final arbitrator in the event ofconflict

When are contracts pointless or unnecessary? When there is no recourse or no assets worth seizing

How effective are contracts at keeping peoplehonest? They are not effective at all. Contracts do not force

people to be honest.

Purpose of Contracts Document obligations and allocate risks.

Define relationships between parties through terms andconditions.

Define objectives, responsibilities, and requirementsthrough a SOW.

Clarify roles and responsibilities. Define performance criteria. Document penalties and actions in the event of

noncompliance (breach of contract).

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Contracts in Procurement Procurement is the process of acquiring goods and

services from outside an organization. Contracts are used in procurement to document

commitments that transfer risk (in exchange forbenefits).

Example: Company A will pay Company B a specifiedamount of money to complete a job. Then it becomesCompany Bs responsibility to finish all work by acertain date or be penalized.

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Example of Risk Transfer A company has a project with objectives that include the

expansion of a data network to a new building. The choicesof how to proceed are:

1. Attempt to complete the required work with thecompanys existing workforce and skill sets.

2. Contract the work out to another company(procurement).

Choosing to contract out the work transfers the problems(risks) associated with the expansion to the contractor inexchange for a financial reward.

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Contract Risk Equals Responsibility What kind of risks can be transferred through

contracting? Is it possible for a company to pay for risk transfer but

still retain responsibility for the risk?

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Definitions of Success Neutral definition

Organizations definition of success

PMs definition of success

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The right work done at the right time with a minimum ofconflict and confusion. Both parties are satisfied.

Lowest price, least grief (unfortunate outcome; trouble).If the other party is satisfied then we probably overpaidthem.

Vendors who deliver what is needed, on time, onschedule, and on cost, with the least amount of confusion,conflict, and management supervision.

Contract Failure vs. Contracting Failure Contract failure

Interests of both parties are not protected by the contract. Contract does not account for events that occur. Wording is vague and subject to interpretation.

Contracting or procurement failure Relationship between buyer and seller does not work. Sides forced to resort to courts for conflict resolution.

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Criteria for Success What are the ingredients of contracting success?

Clear definitions: Expectations: Scope, schedule, cost Methodology: Procedures, processes, and practices Consequences: Rewards and penalties

Fair compensation Experience: Buyers, sellers, and contract managers

(on both sides) Honest and open communication

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Student Guide Structure

Do not read case study material out of order or before being instructed to do so.

Course notes and exercise instructionsInstructor Case StudyStudent Case StudySection Review AnswersGlossaryRecommended Reading

Guide

Case Study Instructions for Exercises1. Quickly read case study and exercise instructions

for the instructor case study. Painting Project

2. Instructor walks through exercises and uses the instructor case study as an example.

3. Students work in teams on the same exercise using the student case study. PC Upgrade Project

4. Teams present their analysis to the class.

Exercise 1-2: Analyzing Procurement Strategy

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InstructionsComplete the following tasks:1. Read the student case study in Case Study Section: 1 (CS1).2. Identify risks (good or bad) that have been created by or are

poorly managed by the procurement strategy developed todate. Use the SWOT Outline and the SWOT worksheet toanalyze the procurement strategy and to define the pros andcons of individual risks or opportunities. SWOT stands forStrengths, Weaknesses, Opportunities, and Threats.

3. Rank the procurement strategy on a scale of 1 to 10, with 1as terrible (no chance of success) and 10 as brilliant(guaranteed to succeed).

4. Be prepared to present and justify your risk analysis andrankings to the class.

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SWOT AnalysisSWOT AnalysisSWOT is the analysis of Strengths, Weaknesses, Opportunities, and Threats of an organization, project, or option (PMI PMBOK, 5-th Ed). This technique examines the project from each of the strengths,

weaknesses, opportunities, and threats (SWOT) perspectives to increasethe breadth of identified risks by including internally generated risks.

The technique starts with identification of strengths and weaknesses ofthe organization, focusing on either the project, organization, or thebusiness area in general. SWOT analysis then identifies anyopportunities for the project that arise from organizational strengths, andany threats arising from organizational weaknesses.

The analysis also examines the degree to which organizational strengthsoffset threats, as well as identifying opportunities that may serve toovercome weaknesses.

SWOT Outline and SWOT WorksheetSWOT OutlineUse this table to highlight what you believe to be true aboutstrengths, weaknesses, opportunities, and threats with regardto each of the headings in the SWOT Outline. For example,indicate the SWOT with regard to skills or experience.

SWOT WorksheetUse the grid to analyze individual risks, both good and bad.

Worksheets: SWOT Outline

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S W O TSkills Easy to inspect Tricky quality controlExperience Project manager lacks experience

Vendors know how to cheat

Knowledge Lot of expertise availableMarketing Easy to find contractors

Not sure if best contacted

Not enough response

Costs No fixed price expectationDont know what is fair

Price fixing by contractors

Savings Innovative bids

Operations Everyone is awareDisruption inevitable

Keep staff informed

Painters irresponsible

Ethics Good intentionsManagement demanding

Painting Project

SWOT Worksheet Example

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STRENGTHS Can request guarantees Problems easy to detect Common problem that must

have a simple solution

WEAKNESSES No screening being done for

criminals Huge exposure to theft

OPPORTUNITIES Bids from bonded

companies only Pre-screen all contractor

staff

THREATS Crimes may be committed

after end of contract Promises are not guaranteed Late detection could be

disastrous

Security risk: Theft or damagePainting Project

SWOT Worksheet Example (cont.)

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STRENGTHS Should be easy to determine

what has been done

WEAKNESSES Not clear what action to take

if quality is inadequate No clearly stated quality

standards

OPPORTUNITIES Discuss and agree to quality

standards before signing contract

THREATS Manipulation by contractor Shortcuts that are not easy

to recognize

Quality controlPainting Project

SWOT Worksheet Example (cont.)

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STRENGTHS Least potential for

interruption of operations Lots of time available

WEAKNESSES No plans for supervision by

IYFM Potential for surprises in

morning

OPPORTUNITIES Work on weekends under

supervision

THREATS Work may not proceed as

fast as possible Problems may be hidden

rather than discussed

Painting ProjectNights-only schedule

Exercise 1-2: Discussion Points: PC Upgrade Project Weaknesses in procurement strategy

Not clarifying minimum standards prevents lowest bidsfrom being received.

Not specifying how bids are to be structured provides toomuch room for creative results and makes it difficult tocompare responses. Should have a response form (template)

Lack of specifics with regard to peripherals means youmay not receive even the minimum standard.

Schedule information is vague. Nonprofit organization is not committed legally to

disposal. What is plan B?

Exercise 1-2: Discussion Points: PC Upgrade Project (cont.) What should be in an RFQ?

Minimum performance and quality requirements Overall objectives (if minimums are to be exceeded) Instructions for how to respond in a way that

simplifies comparisons between offers Every line of SOW has implications.

SOW is meant to avoid confusion. Details at the beginning avoids conflicts later.

Failing to plan is planning to fail.Alan Lakein

Definition of Stakeholders

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Person or organization (e.g., customer, sponsor,performing organization, or the public) that isactively involved in the project, or whose interestsmay be positively or negatively affected byexecution or completion of the project

A stakeholder may also exert influence over theproject and its deliverables

PMBOK Guide, Fourth EditionStakeholder. An individual, group, or organization who may affect, be affected by, or perceive itself to be affected by a decision, activity, or outcome of a project - PMBOK Guide, Fifth Edition

Stakeholder Mapping: Internal Projects

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Project

PMTeam

Corporation

CustomerSponsor

UsersSen. Mngmt

RegulatorsCompetitors

Stakeholders in the Procurement Process Who has a stake in the procurement process?

Whose interests must be considered? How does the need for procurements (purchases from

outside of an organization) change the PMs responsibilities in a project?

Stakeholder Map with Procurements

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Project

PMTeam

Corporation

CustomerSponsor

UsersSen. Mgmt

RegulatorsCompetitors

Procurement Dept.

Legal Dept.

Finance Dept.

Procurement Team

Vendor 3Sales Team

Delivery TeamSponsor

Sen. MgmtShareholders

Vendor 2Sales Team

Delivery TeamSponsor

Sen. MgmtShareholders

Vendor 1Sales Team

Delivery TeamSponsor

Sen. MgmtShareholders

Stakeholder Map with Subcontractors

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Project

PMTeam

Corporation

CustomerSponsor

UsersSen. Mgmt

RegulatorsCompetitors

Procurement Dept.

Legal Dept.

Finance Dept.

Procurement Team

Vendor 3Vendor 2Vendor 1Subcontractor

Subcontractor

Subcontractor

Procurement Players Project needs analysis Procurement planning Prepare requirements doc. Prep. and distribute bid doc. Receive responses from bidders Evaluate proposals Interview bidders Negotiate Award contract Start date of work Contract management Review performance End contracts Lessons learned

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Project team

Procurement team

Project team

Project team

With help

With input from others

With help

Contract Schedule vs. Stakeholders Who are the stakeholders in each step?

Buyer-Seller Stakeholder Map

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Our teamProject

Legal dept.

Procurement dept.Finance dept.

Their teamSpokesperson

Subcontractors

Sales teamDelivery team

Stakeholder Roles for the Buyers Side Project team

Analyzes project needs Ensures procurement process meets needs of project

Procurement department Analyzes procurement needs Ensures process meets needs of organization

Contract manager or procurement administrator Contact point between project, procurement department, and

seller Legal department

Ensures that the commitments being exchanged meet needs of organization and can be legally enforced

Finance department Involved in all matters relating to credit, payments, and

financing 1-35

Stakeholder Roles for the Sellers Side Sponsor/spokesperson/sales manager

Communicates and negotiates with purchasing organization Vendor sales team

Evaluates customer needs from sales perspective Prepares proposals or bids

Vendor delivery team Evaluates customer needs from operational perspective Develops strategy and delivers the product or service

Subcontractors Are responsive to needs of vendor first and buyer second Are employed by vendor, not buyer

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Buyer Stakeholder Expectations Project team

Procurement team will deliver required products and services as promised.

Process will be time-consuming and complex. Project team has little or no control over process.

Procurement department will: Follow rules. Define requirements with no room for ambiguity. Bring in other departments as necessary.

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Buyer Stakeholder Expectations (cont.) Contract manager or procurement administrator

Project team understands the formal processes and will cooperate.

Vendor team understands the formal processes and will act accordingly.

Legal department Formal processes will be followed, with all exceptions escalated

for a legal opinion. Finance department

Spending and debt decisions will be made with input from finance department.

Other stakeholders They will be involved if decisions directly affect them.

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Buyer Stakeholder Expectations (Combined for PSD Only) Project team

Procurement team will deliver required products and services as promised. Process will be time-consuming and complex. Project team has little or no control over process.

Procurement department will: Follow rules. Define requirements with no room for ambiguity. Bring in other departments as necessary.

Contract manager or procurement administrator Project team understands the formal processes and will cooperate. Vendor team understands the formal processes and will act accordingly.

Legal department Formal processes will be followed, with all exceptions escalated for a legal opinion.

Finance department Spending and debt decisions will be made with input from finance department.

Other stakeholders They will be involved if decisions directly affect them.

Seller Stakeholder Expectations Vendor sponsor/salesperson/sales manager

Buyer requirements are clear and concise. Contract manager understands and can explain buyer needs. Process will be fair, open, and honest. All communications (negotiations) will go through sales

manager. Vendor sales team

The main focus is closing the sale. Sell it first and then figure out how to build it.

The devil is in the details.

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Seller Stakeholder Expectations (cont.) Vendor delivery team

Sales team will overpromise. Nothing is as easy as it sounds at first. Problems will arise during execution.

Subcontractors Everyone understands each others role. Subcontractors role has been clearly articulated to buyer. Everyones legal responsibility is clearly understood.

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Seller Stakeholder Expectations (Combined for book) Vendor sponsor/salesperson/sales manager

Buyer requirements are clear and concise. Contract manager understands and can explain buyer needs. Process will be fair, open, and honest. All communications (negotiations) will go through sales manager.

Vendor sales team The main focus is closing the sale. Sell it first and then figure out how to build it.

The devil is in the details. Vendor delivery team

Sales team will overpromise. Nothing is as easy as it sounds at first. Problems will arise during execution.

Subcontractors Everyone understands each others role. Subcontractors role has been clearly articulated to buyer. Everyones legal responsibility is clearly understood.

Subcontractor

Communication Chain

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ProjectVendor Delivery

TeamContract Manager

Sales ManagerCustomer

Translation #1 Translation #2 Translation #3 Translation #4 Translation #5

How Can PMs Streamline the Process? Serve the interests of all stakeholders in the chain.

Help with due diligence. Make it easy for them to do what you want.

Define requirements in ways others can understand. Make it as easy as possible for the procurement process

to serve the projects needs.

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The procurement process is a safeguard; it should not be

circumvented, just streamlined.

Basis of Procurement Success Planning:

Requirements that are clear and coherent to all members of the procurement chain

Procurement process that is understood by all Clear roles and responsibilities Steps, stages, and players

Processes that fulfill the information and due diligence needs of important stakeholders

Proactive management of risks Plan ahead to avoid problems

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Summary Contract schedule network diagram

It takes longer than you want it to Terminology

Procure, procurement, procurement management, contract management, contract

Contracts Elements and related terms Purpose Risk transfer

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Summary (cont.) Contracting success and failure

Definitions Stakeholders

Who does what Who expects what Communications chain

Ingredients for success Streamline Plan

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Section Review 1. A contract requires a signature in order to be

enforceable in a court of law.a. Trueb. False

2. The term capacity in the context of a contract refers to _____.a. A selling organizations ability to do the workb. The dollar value of the commitmentc. The authority level of the personnel committing

an organization to the contractd. The volume of transactions in the contract

Knowledge Check1-43

3. Why are procurement protocols necessary and desirable?Procurement protocols are in place to protect the organization from misunderstanding, unscrupulous vendors, and incompetent employees. They embody lessons learned so as to avoid repeating errors of the past.

4. _____________ is the key to contracting success, and the application of _________ ________ is key to effective planning.

Knowledge Check

Planning

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lessons learned

Section Review