Process · Topic 5 of 12
Procurement and Contract Types
Decide between make and buy, compare fixed price, cost reimbursable and time and materials contracts, then run source selection and close contracts.
- 5 min
- Make or buy analysis decides whether to do the work in house or buy it.
- The SOW describes the work, and source selection criteria describe how offers are judged.
- Use an RFQ for simple, defined items and an RFP when you need a solution proposal.
What it is
Procurement is obtaining goods, services or results from outside the project team or the organization. A buyer purchases from a seller, also called a vendor or contractor, under a legal agreement. The project manager plans what to buy, selects the seller, manages the work and closes the agreement.
The choice of contract decides who carries the risk. This is a favorite exam area.
How it works
Planning procurement
Planning starts with a make or buy analysis, which compares doing the work in house with buying it. Factors include capability, capacity, cost, speed and strategic importance. The procurement management plan records how procurement will run, and the statement of work (SOW) describes what the seller must deliver.
Source selection criteria set out how offers will be judged, such as price, technical approach, experience and past performance.
Procurement documents
Different documents suit different situations.
| Document | Purpose |
|---|---|
| Request for information (RFI) | Learn about the market and possible solutions |
| Request for quotation (RFQ) | Ask for a price for standard, well defined items |
| Request for proposal (RFP) | Ask for a solution and price when the need is complex |
| Invitation for bid (IFB) | Ask for a bid, often where price is the main factor |
A bidder conference lets all prospective sellers hear the same explanations, which keeps the process fair.
Contract types and risk
The three families differ in how cost risk is shared.
| Contract | How the seller is paid | Who carries cost risk |
|---|---|---|
| Firm fixed price (FFP) | Fixed price for a defined scope | Seller |
| Fixed price incentive fee (FPIF) | Fixed price plus an incentive for meeting targets | Shared, with a price ceiling |
| Fixed price with economic price adjustment (FP EPA) | Fixed price adjusted for defined cost changes such as inflation | Mostly seller, with protection against long term changes |
| Cost plus fixed fee (CPFF) | Costs reimbursed plus a fixed fee | Buyer |
| Cost plus incentive fee (CPIF) | Costs plus a fee tied to results, with shared savings | Shared |
| Cost plus award fee (CPAF) | Costs plus a fee awarded on subjective judgment | Buyer mostly |
| Time and materials (T&M) | Hourly rate plus materials at cost | Buyer, unless a ceiling applies |
Use fixed price when scope is clear. Use cost reimbursable when scope is uncertain, and the buyer needs flexibility. T&M suits short engagements, staff augmentation or work that cannot be defined yet.
Selecting the seller
The team issues the documents, answers questions, evaluates the proposals using the criteria, and negotiates. Weighted scoring against the criteria gives a consistent comparison. Negotiation aims to reach a fair agreement, and the final contract is signed by authorized people.
Negotiation strategy
Plan a negotiation before sitting down. A basic strategy covers the following points.
| Element | What to decide |
|---|---|
| Priorities and limits | What matters most, what is optional and the point beyond which you walk away |
| BATNA | Your best alternative to a negotiated agreement, which sets your walk away point |
| Approach | Win win (collaborative) when the relationship continues, or competitive (win lose) for a one off deal |
| Concessions | What you can trade, in what order, and what you expect in return |
| Team | Who negotiates, who has authority to agree and who advises |
Also study the other side's likely priorities and alternatives. Record what is agreed and confirm it in the contract.
Agile procurement
Agile work does not fit well with a rigid fixed scope contract. Agile arrangements can use time boxed work with variable scope, staged funding, or a multi tier contract that fixes a framework and allows each sprint or release to be agreed separately. Customers and sellers share the backlog and collaborate closely.
A hybrid project may use a fixed price contract for the stable core and a time and materials or staged arrangement for the uncertain part.
Managing the contract
During delivery, the project manager monitors seller performance against the contract, handles payments and approves changes. Contract changes follow the contract's own change control. Disputes and claims are handled through negotiation first, then mediation or arbitration, and litigation only as a last resort.
Closing procurement
Closure confirms that the work is complete and accepted, settles open claims, makes final payments and archives the records. The buyer gives formal written notice that the contract is complete.
Ask who pays for cost overruns. In a cost reimbursable contract the buyer pays, so the buyer needs to monitor the seller more closely.
What to remember for the exam
- Make or buy analysis decides whether to do the work in house or buy it.
- The SOW describes the work, and source selection criteria describe how offers are judged.
- Use an RFQ for simple, defined items and an RFP when you need a solution proposal.
- Firm fixed price puts the cost risk on the seller, and cost reimbursable puts it on the buyer.
- Fixed price suits clear scope, and cost reimbursable suits uncertain scope.
- T&M is a hybrid and can have open ended cost unless a ceiling is set.
- Incentive fees share savings or overruns using an agreed ratio.
- Agile procurement uses flexible, collaborative arrangements such as time boxed work.
- Close procurement with formal acceptance and archived records.
Common mistakes
Choosing FFP when scope is unclear. Sellers will add a large margin or resist change, and disputes follow.
Assuming cost plus has no risk for the buyer. The buyer carries cost risk and must monitor spending.
Mixing up RFQ and RFP. An RFQ asks for a price for something defined, and an RFP asks for a proposed solution.
Changing the contract informally. Changes must follow the formal process or become disputes.
Closing the project before closing contracts. Procurement closure must be completed before the project is closed.
Do not accept deliverables or authorize payments that are not covered by the agreement, because informal commitments are hard to defend later.
Check yourself
In which contract type does the seller carry the most cost risk?
Firm fixed price.
When is a cost reimbursable contract a good choice?
When the scope is uncertain or likely to change, and the buyer accepts the cost risk in return for flexibility.
What is the difference between an RFQ and an RFP?
An RFQ asks for a price on well defined items, while an RFP asks for a proposed solution and price for a more complex need.
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