Plan Purchases and Acquisitions

The Plan Purchases and Acquisitions process identifies which project needs can best be met by purchasing or acquiring products, services, or results outside the project organization, and which project needs can be accomplished by the project team during project execution. This process involves consideration of whether, how, what, how much, and when to acquire.

When the project obtains products, services, and results required for project performance from outside the performing organization, the processes from Plan Purchases and Acquisitions through Contract Closure are performed for each item to be purchased or acquired.

The Plan Purchases and Acquisitions process also includes consideration of potential sellers, particularly if the buyer wishes to exercise some degree of influence or control over contracting decisions. Consideration should also be given to who is responsible for obtaining or holding any relevant permits and professional licenses that may be required by legislation, regulation, or organizational policy in executing the project.

The project schedule can significantly influence the Plan Purchases and Acquisitions process. Decisions made in developing the procurement management plan can also influence the project schedule and are integrated with Schedule Development (Section 6.5), Activity Resource Estimating (Section 6.3), and make- or-buy decisions.

The Plan Purchases and Acquisitions process includes reviewing the risks involved in each make-or-buy decision; it also includes reviewing the type of contract planned to be used with respect to mitigating risks and transferring risks to the seller.

12-3. : Plan Purchases and Acquisitions: Inputs, Tools & Techniques, and Outputs

Section 12.1.1 Plan Purchases and Acquisitions: Inputs

.1 Enterprise Environmental Factors

Enterprise environmental factors (Section 4.1.1.3) that are considered include the conditions of the marketplace and what products, services, and results are available in the marketplace, from whom and under what terms and conditions. If the performing organization does not have formal purchasing or contracting groups, then the project team will have to supply both the resources and the expertise to perform project procurement activities.

.2 Organizational Process Assets

Organizational process assets (Section 4.1.1.4) provide the existing formal and informal procurement-related policies, procedures, guidelines, and management systems that are considered in developing the procurement management plan and selecting the contract types to be used. Organizational policies frequently constrain procurement decisions. These policy constraints can include limiting the use of simple purchase orders and requiring all purchases above a certain value to use a longer form of contract, requiring specific forms of contracts, limiting the ability to make specific make-or-buy decisions, and limiting, or requiring, specific types or sizes of sellers.

Organizations in some application areas also have an established multi-tier supplier system of selected and pre-qualified sellers to reduce the number of direct sellers to the organization and establish an extended supply chain.

.3 Project Scope Statement

The project scope statement (Section 5.2.3.1) describes the project boundaries, requirements, constraints, and assumptions related to the project scope. Constraints are specific factors that can limit both the buyer's and seller's options. One of the most common constraints for many projects is availability of funds. Other constraints can involve required delivery dates, available skilled resources, and organizational policies. Assumptions are factors that will be considered to be true, and which can include items such as the assumed availability of multiple sellers or a sole-source seller. Requirements with contractual and legal implications can include health, safety, security, performance, environmental, insurance, intellectual property rights, equal employment opportunity, licenses, and permits.

The project scope statement provides important information about project needs and strategies that are considered during the Plan Purchases and Acquisitions process. The project scope statement also provides the list of deliverables and acceptance criteria for the project and its products, services, and results. Consideration is given to all such factors that may need to be included in the procurement documentation and flowed down within a contract to sellers.

The product scope description component of the project scope statement provides important information about any technical issues or concerns related to the products, services, and results of the project that are considered during the Plan Purchases and Acquisitions process.

The work breakdown structure (WBS) and WBS dictionary components of the project scope statement provide the structured and detailed plan for the project scope:

.4 Work Breakdown Structure

The Work Breakdown Structure (Section 5.3.3.2) provides the relationship among all the components of the project and the project deliverables (Section 4.4).

.5 WBS Dictionary

The WBS dictionary (Section 5.3.3.3) provides detailed statements of work that provide an identification of the deliverables and a description of the work within each WBS component required to produce each deliverable.

.6 Project Management Plan

The project management plan (Section 4.3) provides the overall plan for managing the project and includes subsidiary plans such as a scope management plan, procurement management plan, quality management plan, and contract management plans, which provide guidance and direction for procurement management planning. To the extent that other planning outputs are available, those other planning outputs are considered during the Plan Purchases and Acquisitions process. Other planning outputs that are often considered include:

Risk register (Section 11.2.3.1). Contains risk-related information such as the identified risks, risk owners, and risk responses.
Risk-related contractual agreements (Section 11.5.3.3). Includes agreements for insurance, services, and other items as appropriate, that are prepared to specify each party's responsibility for specific risks, should they occur.
Activity resource requirements (Section 6.3.3.1).
Project schedule (Section 6.5.3.1).
Activity cost estimates (Section 7.1.3.1).
Cost baseline (Section 7.2.3.1).

Section 12.1.2 Plan Purchases and Acquisitions: Tools and Techniques

.1 Make-or-Buy Analysis

The make-or-buy analysis is a general management technique and a part of the project Plan Purchases and Acquisition process that can be used to determine whether a particular product or service can be produced by the project team or can be purchased. Any project budget constraints are factored in the make-or-buy decisions. If a buy decision is to be made, then a further decision of whether to purchase or rent is also made. The analysis includes both indirect as well as direct costs. For example, the buy-side of the analysis includes both the actual out-of- pocket costs to purchase the product as well as the indirect costs of managing the purchasing process.

In a make-or-buy analysis, if a buy decision is to be made, it also reflects the perspective of the project team's organization as well as the immediate needs of the project. For example, purchasing an item (anything from a construction crane to a personal computer) rather than renting or leasing it may or may not be cost effective from the perspective of the project. However, if the project team's organization has an ongoing need for the item, the portion of the purchase cost allocated to the project could be less than the cost of the rental. The cost allocation could be based upon a margin analysis.

The long-range strategy of the project team's organization is also a component in the make-or-buy analysis. Items needed for the performance of the project may not be available within the organization. However, the organization may anticipate future requirements for those items and the organization's plans may also be based on making the items in the future. Such considerations can lead to a make decision in spite of the current project constraints and requirements. When this occurs, the costs charged to the project can be less than the actual costs, with the difference representing the organization's investment for the future.

.2 Expert Judgment

Expert technical judgment will often be required to assess the inputs to and outputs from this process. Expert purchasing judgment can also be used to develop or modify the criteria that will be used to evaluate offers or proposals made by sellers. Expert legal judgment may involve the services of a lawyer to assist with non- standard procurement terms and conditions. Such judgment and expertise, including business expertise and technical expertise, can be applied to both the technical details of the procured products, services, or results and to various aspects of the procurement management processes.

.3 Contract Types

Different types of contracts are more or less appropriate for different types of purchases. The type of contract used and the specific contract terms and conditions set the degree of risk being assumed by both the buyer and seller. Contracts generally fall into one of three broad categories:

Fixed-price or lump-sum contracts. This category of contract involves a fixed total price for a well-defined product. Fixed-price contracts can also include incentives for meeting or exceeding selected project objectives, such as schedule targets. The simplest form of a fixed-price contract is a purchase order for a specified item to be delivered by a specified date for a specified price.

Cost-reimbursable contracts. This category of contract involves payment (reimbursement) to the seller for seller's actual costs, plus a fee typically representing seller profit. Costs are usually classified as direct costs or indirect costs. Direct costs are costs incurred for the exclusive benefit of the project (e.g., salaries of full-time project staff). Indirect costs, also called overhead and general and administrative costs, are costs allocated to the project by the project team as a cost of doing business (e.g., salaries of management indirectly involved in the project, cost of electric utilities for the office). Indirect costs are usually calculated as a percentage of direct costs. Cost-reimbursable contracts often include incentive clauses where if the seller meets or exceeds selected project objectives, such as schedule targets or total cost, then the seller receives an incentive or bonus payment. Three common types of cost-reimbursable contracts are CPF, CPFF, and CPIF.

Cost-Plus-Fee (CPF) or Cost-Plus-Percentage of Cost (CPPC). Seller is reimbursed for allowable costs for performing the contract work and receives a fee calculated as an agreed-upon percentage of the costs. The fee varies with the actual cost.
Cost-Plus-Fixed-Fee (CPFF). Seller is reimbursed for allowable costs for performing the contract work and receives a fixed fee payment calculated as a percentage of the estimated project costs. The fixed fee does not vary with actual costs unless the project scope changes.
Cost-Plus-Incentive-Fee (CPIF). Seller is reimbursed for allowable costs for performing the contract work and receives a predetermined fee, an incentive bonus, based upon achieving certain performance objective levels set in the contract. In some CPIF contracts, if the final costs are less than the expected costs, then both the buyer and seller benefit from the cost savings based upon a pre-negotiated sharing formula.

Time and Material (T&M) contracts. T&M contracts are a hybrid type of contractual arrangement that contains aspects of both cost-reimbursable and fixed-price type arrangements. These types of contracts resemble cost- reimbursable type arrangements in that they are open ended. The full value of the agreement and the exact quantity of items to be delivered are not defined by the buyer at the time of the contract award. Thus, T&M contracts can grow in contract value as if they were cost-reimbursable type arrangements. Conversely, T&M arrangements can also resemble fixed-price arrangements. For example, unit rates can be preset by the buyer and seller when both parties agree on the rates for a specific resource category.

The requirements (e.g., standard or custom product version, performance reporting, cost data submittals) that a buyer imposes on a seller, along with other planning considerations such as the degree of market competition and degree of risk, will also determine which type of contract will be used. In addition, the seller can consider some of those specific requirements as items that have additional costs. Another consideration relates to the future potential purchase of the product or service being acquired by the project team. Where such potential can be significant, sellers may be inclined or induced to charge prices that are less than would be the case without such future sale potential. While this can reduce the costs to the project, there are legal ramifications if the buyer promises such potential and it is not, in fact, realized.

Section 12.1.3 Plan Purchases and Acquisitions: Outputs

.1 Procurement Management Plan

The procurement management plan describes how the procurement processes will be managed from developing procurement documentation through contract closure. The procurement management plan can include:

Types of contracts to be used

Who will prepare independent estimates and if they are needed as evaluation criteria

Those actions the project management team can take on its own, if the performing organization has a procurement, contracting, or purchasing department

Standardized procurement documents, if they are needed

Managing multiple providers

Coordinating procurement with other project aspects, such as scheduling and performance reporting

Constraints and assumptions that could affect planned purchases and acquisitions

Handling the lead times required to purchase or acquire items from sellers and coordinating them with the project schedule development

Handling the make-or-buy decisions and linking them into the Activity Resource Estimating and Schedule Development processes

Setting the scheduled dates in each contract for the contract deliverables and coordinating with the schedule development and control processes

Identifying performance bonds or insurance contracts to mitigate some forms of project risk

Establishing the direction to be provided to the sellers on developing and maintaining a contract work breakdown structure

Establishing the form and format to be used for the contract statement of work

Identifying pre-qualified selected sellers, if any, to be used

Procurement metrics to be used to manage contracts and evaluate sellers.

A procurement management plan can be formal or informal, can be highly detailed or broadly framed, and is based upon the needs of the project. The procurement management plan is a subsidiary component of the project management plan (Section 4.3).

.2 Contract Statement of Work

Each contract statement of work defines, for those items being purchased or acquired, just the portion of the project scope that is included within the related contract. The statement of work (SOW) for each contract is developed from the project scope statement, the project work breakdown structure (WBS), and WBS dictionary. The contract SOW describes the procurement item in sufficient detail to allow prospective sellers to determine if they are capable of providing the item. Sufficient detail can vary, based on the nature of the item, the needs of the buyer, or the expected contract form. A contract SOW describes the products, services, or results to be supplied by the seller. Information included in a contract SOW can include specifications, quantity desired, quality levels, performance data, period of performance, work location, and other requirements.

The contract SOW is written to be clear, complete, and concise. It includes a description of any collateral services required, such as performance reporting or post-project operational support for the procured item. In some application areas, there are specific content and format requirements for a contract SOW. Each individual procurement item requires a contract SOW. However, multiple products or services can be grouped as one procurement item within a single contract SOW.

The contract SOW can be revised and refined as required as it moves through the procurement process until incorporated into a signed contract. For example, a prospective seller can suggest a more efficient approach or a less costly product than that originally specified.

.3 Make-or-Buy Decisions

The documented decisions of what project products, services, or results will be either be acquired or will be developed by the project team. This may include decisions to buy insurance policies or performance bonds contracts to address some of the identified risks. The make-or-buy decisions document can be as simple as a listing that includes a short justification for the decision. These decisions can be iterative as subsequent procurement activities indicate a need for a different approach.

.4 Requested Changes

Requested changes (Section 4.4) to the project management plan and its subsidiary plans and other components may result from the Plan Purchases and Acquisition process. Requested changes are processed for review and disposition through the Integrated Change Control process (Section 4.6).

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Plan Purchases and Acquisitions