Procurement Planning

Procurement Planning: Shopping Smart for Your Project 🛒

Imagine you’re building a giant treehouse. You need wood, nails, rope, maybe some cool glass windows. But wait—should you make the rope yourself or buy it from a store? Should you hire someone to cut the wood, or do it yourself? That’s exactly what Procurement Planning is all about in project management!

The Big Picture: What is Procurement?

Procurement = Getting stuff (goods/services) from outside your team.

Think of it like this: You’re the captain of a ship, and your ship needs supplies. You can:

• Make things yourself (grow your own food)
• Buy things from others (trade with other ships)

Procurement Planning is deciding what to buy, how to buy it, and from whom.

1. Plan Procurement Management

What Is It?

This is your shopping plan. Before running to the store, smart shoppers make a list!

Plan Procurement Management = Documenting project purchasing decisions, specifying the approach, and identifying potential sellers.

Simple Example

You need 100 chairs for an event:

• Do you buy them or rent them?
• Buy from one store or multiple?
• Pay all at once or in parts?

graph TD
    A["Project Need"] --> B{Make or Buy?}
    B -->|Make| C["Use Internal Team"]
    B -->|Buy| D["Find Sellers"]
    D --> E["Choose Contract Type"]
    E --> F["Select Seller"]

Key Outputs

2. Make or Buy Analysis

The Core Question

Should we do it ourselves or pay someone else?

This is like deciding: Should I bake a birthday cake or buy one from the bakery?

When to MAKE

✅ You have the skills ✅ You have the time ✅ It’s cheaper to do internally ✅ It’s a secret recipe (proprietary work)

When to BUY

✅ Someone else is an expert ✅ You’re too busy ✅ It’s cheaper outside ✅ You need it only once

Real Example

Building a Mobile App:

The Magic Formula

Total Cost of Making = Direct Costs + Indirect Costs + Opportunity Cost
Total Cost of Buying = Purchase Price + Contract Admin Costs

Choose whichever is LOWER!

3. Procurement Strategy

What Is It?

Your game plan for getting external goods/services. It answers:

• How will we find sellers?
• How will we pick one?
• What contract will we use?

Key Strategy Decisions

graph TD
    A["Procurement Strategy"] --> B["Delivery Method"]
    A --> C["Contract Payment Type"]
    A --> D["Procurement Phases"]
    B --> E["Single Source?"]
    B --> F["Multiple Suppliers?"]

Delivery Methods

Simple Example

Building a Website:

• Strategy 1: Hire one agency for everything (design + development + hosting)
• Strategy 2: Hire designer separately, developer separately, buy hosting separately
• Strategy 3: Use a turnkey platform like Wix

4. Contract Types Overview

The Three Big Families

Think of contracts like paying for a taxi ride:

graph LR
    A["Contract Types"] --> B["Fixed Price"]
    A --> C["Cost Reimbursable"]
    A --> D["Time & Materials"]
    B --> E["Seller Risk ⬆️"]
    C --> F["Buyer Risk ⬆️"]
    D --> G["Shared Risk ↔️"]

Quick Rule of Thumb

• Know exactly what you want? → Fixed Price
• Scope is fuzzy? → Cost Reimbursable
• Need flexibility? → Time & Materials

5. Fixed Price Contract Types

The Family of “Set Prices”

Fixed Price contracts are like ordering from a menu—the price is the price!

FFP (Firm Fixed Price)

• Price is locked. No changes.
• Seller eats any cost overruns.
• Example: “Build me a shed for $5,000. Period.”

FPIF (Fixed Price Incentive Fee)

• Base price + bonus for good work.
• Example: “Build for $5,000. Finish early? Get $500 extra!”

FPEPA (Fixed Price with Economic Price Adjustment)

• Price can adjust for inflation or market changes.
• Used for multi-year contracts.
• Example: “Build for $5,000 this year. Next year’s work adjusts with lumber prices.”

Comparison Table

6. Cost Reimbursable Contracts

The Family of “Pay What It Costs + Extra”

You pay the seller’s actual costs plus a fee for their profit.

CPFF (Cost Plus Fixed Fee)

• Pay all costs + fixed dollar amount fee.
• Fee doesn’t change regardless of cost.
• Example: “I’ll pay your costs + $10,000 profit, no matter what.”

CPIF (Cost Plus Incentive Fee)

• Pay costs + bonus for performance.
• Good work = bigger fee!
• Example: “Costs + 10% profit. Beat the deadline? 15% profit!”

CPAF (Cost Plus Award Fee)

• Pay costs + subjective bonus.
• Buyer decides how much extra based on satisfaction.
• Example: “Costs + up to $5,000 based on how happy I am.”

CPPC (Cost Plus Percentage of Costs)

• Pay costs + percentage of those costs.
• ⚠️ DANGEROUS! Higher costs = higher profit for seller.
• Often banned in government contracts.

graph TD
    A["Cost Reimbursable"] --> B["CPFF"]
    A --> C["CPIF"]
    A --> D["CPAF"]
    A --> E["CPPC ⚠️"]
    B --> F["Fixed Fee"]
    C --> G["Incentive Fee"]
    D --> H["Award Fee"]
    E --> I["% of Costs - Risky!"]

Risk Reality Check

7. Time and Materials (T&M) Contracts

The Flexible Middle Ground

T&M = Pay for time spent + materials used.

Think of hiring a plumber:

• $80/hour for labor
• Plus whatever pipes cost

How It Works

Total Payment = (Hourly Rate × Hours Worked) + Material Costs

Example

Hiring a Consultant:

• Rate: $150/hour
• Hours worked: 40
• Materials: $500 in software licenses

Total = (150 × 40) + 500 = $6,500

When to Use T&M

✅ Scope is unclear ✅ Work is unpredictable ✅ Quick start needed ✅ Small or short projects

When to AVOID T&M

❌ Large, well-defined projects ❌ Seller might pad hours ❌ No budget ceiling

Pro Tip: Add a Ceiling!

T&M with Cap = “Pay hourly, but never more than $20,000 total.”

This protects you from runaway costs!

The Risk Spectrum

Here’s the big picture of who carries risk:

BUYER RISK ←──────────────────────────────→ SELLER RISK

CPPC → CPAF → CPFF → CPIF → T&M → FPEPA → FPIF → FFP
(All risk       (Shared)         (All risk
on buyer)                        on seller)

Memory Trick 🧠

• Fixed = Seller Sweats (they’re locked in)
• Cost Plus = Buyer Bleeds (they pay whatever it costs)
• T&M = Both Share (meet in the middle)

Putting It All Together

The Procurement Planning Flow

graph TD
    A["Identify Need"] --> B["Make or Buy Analysis"]
    B -->|Buy| C["Develop Procurement Strategy"]
    C --> D["Choose Contract Type"]
    D --> E["Prepare Bid Documents"]
    E --> F["Select Sellers"]
    F --> G["Award Contract"]

Real-World Scenario

Your company needs a new HR software system:

1. Make or Buy? → Buy (software development isn’t your expertise)
2. Strategy? → Single seller, competitive bidding
3. Contract Type? → Fixed Price (scope is well-defined)
4. Specific Type? → FPIF (give bonus for on-time delivery)

Key Takeaways

Final Wisdom

Procurement Planning is about being a smart shopper. You wouldn’t buy a car without:

• Knowing your budget
• Comparing options
• Understanding the warranty

Same with projects! Plan well, choose wisely, and your project will thank you.

Remember: The best contract is one where both parties feel like winners. Fair deals build lasting partnerships!

🎯 You’ve got this!