Procurement and contracts

0:00Sara: Welcome to Project Management Exam Prep.

0:02This episode is about procurement and contracts.

0:06Every project management exam tests it, because suppliers often get much of a project's

0:11money, and the contract decides who pays when things change.

0:14Leo: You will learn how the three bodies frame it, when to buy, which contract to choose,

0:21and how to negotiate and manage the deal.

0:23We finish with a drill, so keep a pen ready.

0:26Sara: Let us start with the three lenses. What does IPMA® say?

0:31Leo: IPMA®, the International Project Management Association, sets out its standard in

0:36the Individual Competence Baseline, the ICB4.

0:40Its procurement element runs from agreeing what to buy to supervising the contract.

0:46It often asks you to contribute, because specialists lead parts of it.

0:51Negotiation has an element of its own.

0:54Sara: And PMI®?

0:55Leo: PMI®, the Project Management Institute, publishes the PMBOK® Guide,

1:01its guide to the project management body of knowledge.

1:04The eighth edition gives procurement no domain of its own.

1:08A planning process sets the sourcing strategy, and an appendix covers contracts.

1:15The outline of PMI®'s Project Management Professional exam, the PMP®,

1:20has a task to plan and manage procurement, with contract types and a negotiation

1:25strategy.

1:26Sara: And APM?

1:28Leo: APM, the Association for Project Management, publishes the APM Body of Knowledge.

1:34It treats procurement strategy early, and contract management during delivery.

1:40The syllabus of APM's Project Management Qualification, the PMQ,

1:45asks for the procurement strategy, supplier selection with negotiation,

1:49and ways to pay suppliers.

1:51Sara: Where do the words differ?

1:53Leo: In three places. First, the other party.

1:58PMI® says seller or vendor, APM says supplier, and the ICB4 says suppliers and partners.

2:07Sara: Second?

2:08Leo: Paying for actual costs. PMI® calls it cost-reimbursable.

2:14APM and the ICB4 say cost plus.

2:18Sara: And third?

2:19Leo: Where negotiation sits. The ICB4 makes it a people competence.

2:24APM places it under conflict resolution.

2:28PMI®'s exam outline puts it in the procurement task.

2:31Sara: What is the core, whichever exam you take?

2:34Leo: Three ideas. One: make or buy. Buy when you lack the skills or the people in time.

2:41Make when the work is core, or you must keep the know-how.

2:45Compare full costs: managing a supplier takes your time too.

2:50Sara: Two?

2:50Leo: Buying is a cycle. Plan the need, the contract type and how you will choose.

2:57Select: ask the market for information, a proposal or a quote,

3:02and judge bids on weighted criteria published in advance: best value,

3:07not lowest price. Contract: negotiate with a clear mandate, and sign.

3:13Manage delivery, changes and claims. Close: check every obligation is met,

3:19and settle the money.

3:20Sara: Does that change in agile work?

3:22Leo: Yes. A linear project fixes the scope, then the price.

3:27In iterative work the scope moves, so the contract fixes the team,

3:32the rate and the timebox instead: for example, capped time and materials,

3:38with working results every iteration. PMI® calls this agile contracting.

3:43Sara: And three?

3:44Leo: A contract is a relationship you manage.

3:48Review the supplier on agreed indicators, and price changes by the contract's rules.

3:54Record every instruction, because a claim is a demand for money or time.

3:59When the supplier falls short, act in steps: talk, a formal notice,

4:04renegotiation, and only then the lawyers.

4:08Sara: Now the contract types. Both model sheets are free in the description.

4:12Leo: Each type answers one question: who carries the cost risk if the work costs more?

4:19Fixed price: a set price for a defined scope.

4:22The supplier carries the risk, and prices it in.

4:25Quentin Fleming, in his book Project Procurement Management, says it works when

4:29the buyer knows exactly what it wants, can specify it precisely,

4:33and expects no change.

4:35Sara: And at the other end?

4:37Leo: Cost plus fee: the buyer pays actual costs plus a fee, and carries most of the risk.

4:42It fits work nobody can define yet. Three types sit in between.

4:47Target cost shares overruns and savings against an agreed target,

4:50by a ratio. Unit price pays a rate per unit delivered.

4:55Time and materials pays for time used, so a cap limits the risk.

4:59Sara: So which one is best?

5:02Leo: None on its own. The less you can define, the more risk the buyer keeps.

5:08APM warns that the buyer never passes on all of it: a supplier may walk away,

5:13or go out of business.

5:15Sara: Now the negotiation. How do I prepare?

5:19Leo: As in any negotiation, look behind positions to interests.

5:24Then add numbers. Roger Fisher and William Ury coined the term BATNA,

5:29short for "best alternative to a negotiated agreement".

5:33It is your real plan if the talks break down.

5:37Its value, adjusted for quality and risk, is your walk-away point:

5:41accept nothing worse. APM calls it your bottom line.

5:45The negotiation scholar Howard Raiffa called it the reservation price.

5:50Sara: And the other side?

5:51Leo: Estimate theirs too, as an assumption: a supplier's floor is often near its cost.

5:57Between the two walk-away points lies the zone of possible agreement,

6:02the ZOPA. No overlap means no deal, and each side takes its BATNA.

6:07Sara: And inside the zone?

6:09Leo: Trade, not only on price: offer what is cheap for you and valuable to them.

6:15Improve your BATNA first, and never bluff.

6:19Agree who may commit how much: the PMBOK® Guide wants the lead negotiator to hold

6:24the authority to sign. APM's four steps are prepare, open, bargain and close.

6:32Then write the agreement down.

6:34Sara: How does this change between Mid-level and Senior?

6:38Leo: First, the two levels. They are this series' own labels.

6:41Mid-level means leading moderately complex projects, the level of IPMA® Level C and

6:47PMI®'s PMP® exam. Senior means leading complex projects and people,

6:53the level of IPMA® Level B and of APM's chartered status, Chartered Project Professional.

7:00At Mid-level, you run one contract well.

7:03Take Parking Permits Online, a city project that moves resident parking permits

7:07online in eight months. The supplier has a fixed price of four hundred and twenty

7:12thousand euros. The project manager, Anna, checks each extra request against the

7:17tender. Real changes are priced at the contract's day rate, and paid from a change

7:22budget that only the steering group can release.

7:25Sara: And at Senior level?

7:27Leo: You design the contract strategy with the specialists.

7:31Take One City Account, a thirty-month city project that brings fourteen online services

7:37under one login, led by Anna some years later.

7:41The platform supplier has a fixed price for the core, time and materials for changes,

7:46and delay damages. The integration partner has capped time and materials,

7:51because old systems hide surprises. And Anna sets each negotiator's mandate within

7:58the limits the steering board delegated to her.

8:01Sara: Now the drill. A city is moving resident parking permits online.

8:06Its supplier has a fixed price, and the contract prices changes at seven hundred

8:11and fifty euros a day. The city wants residents to change a permit's licence plate

8:16online. The supplier quotes forty-eight days: thirty-six thousand euros.

8:21The city's IT team could build it for twenty-four thousand, but the supplier would

8:26charge six thousand to check it and keep its warranty.

8:29How do you prepare the negotiation?

8:31Leo: Pause and write your answer. You have forty-five seconds.

9:19Sara: Where do you start?

9:21Leo: Check the contract first: if the tender asked for plate changes,

9:26the work is inside the fixed price. If it is new, your BATNA is the IT team.

9:33Twenty-four thousand plus six thousand is thirty thousand, your walk-away point.

9:37Thirty thousand divided by seven hundred and fifty is forty days,

9:41so the quote is eight days above your limit.

9:44Sara: And the supplier's side?

9:46Leo: Estimate its floor near its cost: say twenty-six thousand.

9:50So the zone runs from about twenty-six to thirty thousand.

9:54Ask for a breakdown of the days, and trade: offer a later delivery,

9:58after go-live, when its team is free. Get your mandate from the steering group first,

10:03since only it releases the change budget.

10:06Sara: What lifts that to Senior?

10:08Leo: A Senior answer looks past this deal. In-house beats the quote,

10:14but it splits the warranty and pulls the IT team from other work.

10:18Say your alternative is real, without bluffing: the city needs this supplier after

10:24go-live. And fix the system: agree prices for typical changes now.

10:29Sara: How do the exams ask this?

10:32Leo: IPMA®'s written exam asks for open answers; at Level B it may be oral.

10:37IPMA®'s certification also includes an interview, where assessors ask about your

10:42own projects, so note one contract you managed.

10:46The PMP® exam uses scenarios, and questions built on a case study or a chart.

10:51APM's PMQ asks for short written answers, such as when a fixed price fits.

10:57Sara: Let us recap.

10:59Leo: One. Make or buy first, on full costs.

11:02Sara: Two. Buying is a cycle, from plan to close.

11:06Choose on best value, not lowest price.

11:09Leo: Three. The contract type sets who carries the cost risk.

11:14In iterative work, let the scope flex.

11:18Sara: Four. Your BATNA sets your walk-away point, and the zone of agreement lies between

11:24the two limits.

11:25Leo: And five. Manage the contract as a relationship, with changes by its rules and records

11:31for claims.

11:33Sara: The two model sheets and the study handout are linked in the description.

11:37Next time: quality and continuous improvement.