25.4 Planning Purchases and Acquisitions

	Planning procurements is the first major process in procurement management and its main output project procurement management plan.
	It typically involves the following activities:

		Considering whether to outsource or not (make or buy decision), how to outsource, how much to outsource and when to outsource.
		Deciding upon which items/services to be purchased to best meet the project needs.
		Reviewing the risks involved in each make-or buy decision.
		Considering potential sellers.
		Reviewing the type of contract planned to be used.

Inputs

		Project management plan: including the risk register, risk related contractual agreements, resource requirements, project schedule, activity cost estimates and cost baseline.
		Requirements Documentation: these include all requirements with contractual and legal implications such as:

Health and safety aspects

25.4 Planning Purchases and Acquisitions

			Security aspects
			Performance aspects
			Environmental Aspects
			Insurance aspects
			Licenses and permits
			Project Scope Statement
			Work breakdown Structure
			WBS Dictionary
			Enterprise Environmental Factors
			Organizational Process Assets

Tools and Techniques

Make-or-Buy Analysis: this is a general management technique to facilitate structured decision-making.

The primary decision from the analysis is to find if it is more cost-effective to make the product or service -required by the organization- in-house or to buy it from an external supplier.

25.4 Planning Purchases and Acquisitions

			A make or buy analysis is only carried out where the option of doing the work in-house exists.
			The project manager is in charge for carrying out the analysis; however he/she is not the one to take the make or buy decision; it's the project sponsor responsibility to do so, as illustrated in figure 25.1.

Figure 25.1 Make-or-Buy Analysis Roles and Responsibilities

	The two most important factors to consider in the analysis are the cost and the availability of production capacity.
	Figure 25.2 provides a table highlighting the main costs to be considered for both the "make" and "buy" analysis.

25.4 Planning Purchases and Acquisitions

Figure 25.2: Costs to be considered for the Make-or Buy Analysis

Contract Types: Contract type should be selected in compliance with the degree of risk assumed by both the buyer (organization) and the seller (service or product provider).

Contracts typically fall into one of the following two categories:

25.4 Planning Purchases and Acquisitions

Fixed-price contracts: This type contract involves a fixed total price for a well-defined product and it may 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 type of contract involves payment to the seller for seller's actual costs, plus a fee typically representing seller profit. Three common types of cost-reimbursable contracts are CPF, CPFF, and CPIF.
			Cost-Plus-Fee (CPF) or Cost-Plus-Percentage of Cost (CPPC): in this type of contract the 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): in this type of contract the 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.

25.4 Planning Purchases and Acquisitions

Cost-Plus-Incentive-Fee (CPIF): in this type of contract the 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.

Expert Judgment

Outputs

Procurement Management Plan: this is the main output of the process and is an additional component of the project management plan.

			This document describes how all the other procurement management processes are to be managed.
			It outlines the following –in detail or broadly based on the complexity of the project-:

				What items and/or services will be procured for the project from external suppliers (sellers)
				Types of contracts to be utilized
				How risk procurement to be managed
				The process for acquiring those items
				Scheduling the timeframes for delivery

25.4 Planning Purchases and Acquisitions

Contract Statement of Work: this is typically developed from the project scope statement, WBS, and WBS dictionary.

				Each statement of work describes the appropriate section of the project scope for a related procurement contract to be used by potential sellers so that they can make informed decisions regarding their ability to handle the required work.
				Additional information included in the contract statement of work includes the project objectives, specifications for the items or services being procured, project schedule and any other details needed by the seller to be able to deliver the products or services.

			Make-or-Buy Decisions: it is the act of making a strategic choice between manufacturing a product internally (in-house) or purchasing it externally (from an outside supplier).
			If the product or service is cheaper to buy than make or if the organization lacks the sufficient production capacity to produce it in-house, the buy decision is probably made.
			Other factors affecting the decision to buy rather than to make include the following:

				the small volume requirements,
				the desire of multiple sourcing

25.4 Planning Purchases and Acquisitions

			The fact that the item is not critical to the organization's strategy.
			Similarly, factors that may affect the decision to make rather than to buy include the following:
			The required expertise is available internally
			The required production capacity is available internally
			Better quality control or proprietary technology that needs to be protected
			This output is based on the make or buy analysis (discussed in the previous section). Hence the decision should be documented with supporting information on why such a decision has been made.
			Requested Changes

25.4 Planning Purchases and Acquisitions

25.4 Planning Purchases and Acquisitions