Procurement Management in Software Project Management

Important stuff on Procurement management

What is Procurement Management?

• Is one of the nine PMBOK® areas
• Focuses on the acquisition and management of outside products and services
• Project teams require resources and many of these resources must be acquired externally– e.g., office supplies, technology, printing services, etc. 
• Organizations can also outsource entire business functions and business processes– e.g., data centers, call centers, accounting functions, and projects 
• Outsourcing was commonly called “subcontracting”
• Project teams can be outsourcing buyers and sellers 

PMBOK Definition:

The contract management and change control processes are required to administer contracts or purchase orders issued by authorized project team members. Project Procurement Management also includes administering any contract issued by an outside organization (the buyer) that is acquiring the project from the performing organization (the seller) and administering contractual obligations placed on the project team by the contract.  

Types of Cost:

Direct and Indirect Cost

Direct costs are defined as the costs that have been incurred only for the purpose of the project. One example of this type of cost can be the salaries of the full-time staff members, or equipment purchased exclusively for use in the project

Indirect costs represent costs that refer to more general, more broad types of costs, such as administrative costs and general overhead costs.

Types of Contract:

Fixed-Price or Lump-Sum Contracts 
– A total or fixed price is negotiated or set as the final price for a product or service
– May include incentives for meeting certain performance objectives or penalties if those objectives are not met 

Cost-Reimbursable Contracts 
– Payment or reimbursement is made to the seller to cover the seller’s actual direct costs (i.e., labour, materials, etc.) and indirect costs (i.e., admin. salaries, rent, utilities, etc.)
– May include incentives for meeting certain objectives or penalties if those objectives are not met
– Types
 • Cost-Plus-Fee (CPF) or Cost-Plus-Percentage Cost (CPPC)

    – The seller is paid for the costs incurred in performing the work as well as a fee based upon an agreed-on percentage of the costs

• Cost-Plus-Fixed-Fee (CPFF)

   – The seller is reimbursed for the total direct and indirect costs of doing the work but receives a fixed amount that does not change unless the project’s scope changes

• Cost-Plus-Incentive-Fee (CPIF)

   – The seller is reimbursed for the costs incurred in doing the work and receives a predetermined fee plus an incentive bonus for meeting certain objectives 

Time and Materials (T&M) Contracts
 – A hybrid of cost-reimbursable and fixed-price contracts
– The buyer pays the seller for both the time and materials required to complete the work 
• Resembles a cost-reimbursable contract because it is open-ended and the full cost of the project is not predetermined
• But can resemble a fixed-price contract if unit rates are set 

Outsourcing

Outsourcing provides more of a strategic approach, while project procurement management is more tactical approach.

Various outsourcing Relationships:

• Business Process Outsourcing 
– Where an organization turns over processes other than just IT    
• E.g., Accounting, Human Resources, R&D, etc. 
• Offshoring– Outsourcing to another country usually overseas in order to take advantage of labour arbitrage (cheaper labour) 

Various approaches to outsourcing:

– Full-In-sourcing    
    • The organization or project develops all products and services internally
– Full-Outsourcing     
    • All products and services are acquired from external sources 

– Selective Outsourcing     
    • Perhaps the best approach because it provides greater flexibility in choosing which processes or deliverables should be outsourced and which should be kept internal 

Credits to Prof Mahalaxmi S. faculty of Department of Information Technology from Don Bosco Institute of Technology, Kurla.