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186 Cards in this Set
- Front
- Back
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What is risk management
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Risk Management is the process of measuring, or assessing risk and then developing strategies to manage the risk.
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For risk management the strategies employed are what?
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include transferring the risk to another party, avoiding the risk, reducing the negative effect of the risk, and accepting some or all of the consequences of a particular risk. The Risk Management Plan (RMP) is the document prepared by a Project manager to foresee risks, to estimate the effectiveness and to mitigate them.
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What is Project Risk Management
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Project Risk Management includes the processes concerned with conducting risk management planning, identification, analysis, response and monitoring and control on a project; most of these processes are updated throughout the project. The objectives of Project Risk Management are to increase the probability and impact of positive events, and decrease the probability and impact of events adverse to the project.
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These processes include the following:
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-Risk Management Planning
-Risk Identification -Qualitative Risk Analysis -Quantitative Risk Analysis -Risk Response Planning -Risk Monitoring and Control |
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Risk Management Planning
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Deciding how to approach, plan, and execute the risk management activities for a project.
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Risk Identification
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Determining which risks might affect the project and documenting their characteristics
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Qualitative Risk Analysis
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Prioritizing risks for subsequent further analysis or action by assessing and combining their probability of occurrence and impact.
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Quantitative Risk Analysis
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Numerically analyzing the effect on overall project objectives of identified risks.
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Risk Response Planning
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Developing options and actions to enhance opportunities, and to reduce threats to project objectives.
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Risk Monitoring and Control
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Tracking identified risks, monitoring residual risks, identifying new risks, executing risk response plans, and evaluating their effectiveness throughout the project life cycle.
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When are projects at greatest risk?
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Project Risks are greater at the beginning of the project than at the end. On the exam it may also be posed, as project risk is lowest at the end.
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RISK PLANNING & ANALYSIS
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Risk analysis is a technique to identify and assess factors that may jeopardize the success of a project or achieving a goal. This technique also helps define preventive measures to reduce the probability of these factors from occurring and identify countermeasures to successfully deal with these constraints when they develop.
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Risk management planning
Planning for risk management |
Plan should include risk management tasks, responsibilities, activities and budget.
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Risk management planning
Assign a risk officer |
a team member other than a project manager who is responsible for foreseeing potential project problems. Typical characteristic of risk officer is a healthy skepticism
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Risk management planning
Maintaining live project risk database. |
Each risk should have the following attributes: opening date, title, short description, probability and importance. Optionally risk can have assigned person responsible for its resolution and date till then risk still can be resolved.
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Risk management planning
Creating anonymous risk reporting channel. |
Each team member should have possibility to report risk that he foresees in the project.
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Risk management planning
Preparing mitigation plans for risks that need to be mitigated. |
The purpose of the mitigation plan is to describe how this particular risk will be handled – what, when, by who and how will be done to avoid it or minimize consequences if it becomes a liability.
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Risk management planning
Summarizing planned and faced risks, |
effectiveness of mitigation activities and effort spend for the risk management.
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Why is Project risk is an uncertain event or condition
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if it occurs, has a positive or a negative effect on at least one project objective, such as time, cost, scope, or quality.
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Utility Function
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The stakeholder analysis will reveal their willingness to accept risk—which is also known as their utility function.
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PROJECT CHARTER AND RISK
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One of the first inputs to risk management is the project charter. The charter is needed in risk management planning because it identifies the business need of the project and the overall product description. Risks that can prevent the project from satisfying the business need of the project must be addressed. The product description must also be evaluated to determine what risks may be preventing the project work from obtaining the acceptable product description.
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The types of risk:
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-Business
-Pure -Known -Unknown |
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Risk and the WBS
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(WBS) serves as an input to the risk management planning processes. The WBS is needed to help the project manager, and the project team identify the components of the project and what risks may be unique to a particular area of the project versus a risk shared across the entire project
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output of risk management planning
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risk management plan (a plan that documents the procedures for managing risk throughout a project). The project team should review project documents and understand the organization’s and the sponsor’s approaches to risk. The level of detail will vary with the needs of the project. The best way to do that is through a Risk Breakdown Structure (RBS)
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Risk Breakdown Structure
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A source-oriented grouping of project risks that organizes and defines the total risk exposure of the project. Each descending level represents an increasingly detailed definition of sources of risk to the project.” The RBS is therefore a hierarchical structure of potential risk sources. The value of the WBS lies in its ability to scope and define the work to be done on the project; similarly the RBS can be an invaluable aid to understanding the risks faced by the project. Just as the WBS forms the basis for many aspects of the project management process, so the RBS can be used to structure and guide the risk management process.
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Risk Factors
For each risk.... |
Risk event : Precisely what might happen to the detriment of the project?
Risk probability : How likely the event is to occur Impact : The extent of loss or gain that could result |
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Probability and Impact Matrix
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probability/impact matrix or chart lists the relative probability of a risk occurring on one side of a matrix or axis on a chart and the relative impact of the risk occurring on the other. It lists the risks and then labels each one as high, medium, or low in terms of its probability of occurrence and its impact if it did occur. It can also calculate risk factors
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The specific combinations of probability and impact that lead to a risk being rated as “high,” “moderate,” or “low” importance
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Prob x impact == rish
-high -medium -low |
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PMI defines risk identification as
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determining which risk events are likely to affect the project and documenting the characteristics of each.
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This process involves identifying three related factors
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1) potential sources of risk (schedule, cost, technical, legal, and so on),
(2) possible risk events, and (3) risk symptoms. |
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The timing of risk identification is also of vital importance.
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PMI® advocates that risk identification should first be accomplished at the outset of the project and then be updated regularly throughout the project life cycle.
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Who is responsible for Identifying risk?
all project personnel should be encouraged to identify risks |
Project manager
Team members Risk management team (if one exists) Subject matter experts Customers End users Stakeholders |
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How are Project Risks Identified?
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-Brainstorming
-Delphi Technique |
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Brainstorming
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Generally completed together as a project. The risks are identified in broad terms, characteristics detailed, categorized
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Delphi Technique
-no on fears admitting problems or risks |
This is an anonymous method of querying experts about foreseeable risks within a project, phase, or component of a project. The results of the survey are generally analyzed by a third party, organized, and then circulated to the experts.
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Interviewing
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Through questions and discussion, the person being interviewed shares his/he insight on what risks are perceived in the project.
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Root cause ID
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The essence of this method is to continuously ask “Why”. When the question is asked enough time eventually it cannot be answered. The cause if the last “Why” answered is what needs to be fixed.
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SWOT Analysis
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SWOT means strengths, weaknesses, opportunities, and threats. SWOT analysis is the process of examining the project from each of the characteristic’s point of view.
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NB
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Risk identification happens early in the project to allot time for risk response planning. Risk identification also happens throughout the project.
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NBNB
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The project manager, the project team, customers, and other stakeholders are involved in the process. There are several methods to risk identification, though interviews and the Delphi Technique are two of the most common approaches.
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Risk Register
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outputs from Risk identification
-Identified Risks -Potential Responses -Root Cause (If known) -Updated risk categories |
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DIAGRAMMING IN RISK MANAGEMENT
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You’ll want to note that the diagramming techniques described and used here are the same as those for quality
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Ishikawa, cause-and-effect diagrams or fishbone diagrams. (All three names are used interchangeably) -
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These are great for root cause analysis of what factors are causing the risks within the project. The goal is to identify and treat the root of the problem, not the symptom.
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System or process flow charts
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show the relation between components and how the overall process works. These are useful for identifying risks between system components.
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Influence diagrams
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An influence diagram charts out a decision problem. It identifies all of the elements, variables, decisions, and objectives—and how each factor may influence another.
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QUALITATIVE RISK
-qualitative,” think of qualifying. Justifying. |
Qualitative risk analysis examines and prioritizes the risks based on their probability of occurring and the impact on the project if the risks did occur. It includes methods for prioritizing the identified risks for further action, such as Quantitative Risk Analysis or Risk Response Planning.
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QUANTITATIVE RISK
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Quantitative Risk Analysis is performed on risks that have been prioritized by the Qualitative Risk Analysis process as potentially and substantially impacting the project’s competing demands. The Quantitative Risk Analysis process analyzes the effect of those risk events and assigns a numerical rating to those risks. It also presents a quantitative approach to making decisions in the presence of uncertainty.
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the techniques used in QUANTITATIVE RISK are:
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Monte Carlo simulation and decision tree
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These are used to:
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-Quantify the possible outcomes for the project and their probabilities
-Assess the probability of achieving specific project objectives -Identify risks requiring the most attention by quantifying their relative contribution to overall project risk -Identify realistic and achievable cost, schedule, or scope targets, given the project risks -Determine the best project management decision when some conditions or outcomes are uncertain. |
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How the process works?
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Quantitative Risk Analysis generally follows the Qualitative Risk Analysis process. Quantitative Risk Analysis should be repeated after Risk Response Planning, as well as part of Risk Monitoring and Control, to determine if the overall project risk has been satisfactorily decreased.
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Risk Quantification
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Will have hard values numbers etc not high medium low
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PMI® defines risk quantification
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as evaluating risks and risk interactions to assess the range of possible project outcomes.
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What is the primary objective
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The primary objective of risk quantification is to use a set of structured tools to help decide which risk events warrant a response strategy of some kind. Risk quantification essentially helps in comparing and evaluating options. You will be heavily tested on the common tools used for quantifying risk
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Probability Distributions
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Prob of Los Vs Magnitude of impact
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Expected Monetary Value
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EMV is a statistical technique that calculates the average outcome when the future includes scenarios that may or may not happen. A common use of this technique is within decision tree analysis.
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Is emv as good as the others
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Modeling and simulation are recommended for cost and schedule risk analysis because it is more powerful and less subject to misapplication than expected monetary value analysis.
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Expected value
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Expected value is a statistical assessment of project value, not a prediction of final revenue or cost. Generally, in project risk assessment, we assess the best case and the worst case to determine the boundaries. Final actual value will probably fall between the two. The EMV is generally used as input to further analysis (for example, in a decision tree) because risk events can occur individually or in groups, in parallel or in sequence
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Decision-Tree Analysis
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A decision tree is a method to determine which of two decisions is the best to make. The purpose of the decision tree is to make a decision, calculate the value of that decision, or to determine which decision costs the least. Solving the decision tree provides the EMV (Expected Monetary Value) for each alternative, when all the rewards and subsequent decisions are quantified.
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Modeling / Simulation
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Project simulations allow the project team to play “what-if” games without affecting any areas of production. The Monte Carlo technique is the most common simulation.
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Monte Carlo Analysis
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A technique that computes, or iterates, the project cost or project schedule many times using input values selected at random from probability distributions of possible costs or durations, to calculate a distribution of possible total project cost or completion dates.
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When is this analysis used
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This method, also used in Project Time Management, is typically a computer program to estimate the many possible variables within a project schedule. Monte Carlo simulations predict probable risks, not an exact risk.
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Why is Monte Carlo better than the others?
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Monte Carlo analysis is considered a superior approach to analyzing the schedule when compared to PERT or CPM. This is true because PERT and CPM fails to account for path convergence and, as a result, tend to underestimate project durations. Another important point is that the choice of statistical distribution used in the Monte Carlo routine can have important effects on the results of the simulation.
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RISK RESPONSE PLANNING
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Risk Response Planning is the process of developing options, and determining actions to enhance opportunities and reduce threats to the project’s objectives. It follows the Qualitative Risk Analysis and Quantitative Risk Analysis processes.
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What happes during risk response planning?
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It includes the identification and assignment of one or more persons (the “risk response owner”) to take responsibility for each agreed-to and funded risk response. Risk Response Planning addresses the risks by their priority, inserting resources and activities into the budget, schedule, and project management plan, as needed.
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Negative Risk Response Strategies
’s important to know how to handle both positive and negative risk. |
Avoidance
Mitigation Transference |
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Avoidance
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The project plan is altered to avoid the identified risk.
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Mitigation
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Effort is made to reduce the probability, impact, or both of an identified risk in the project before the risk event occurs.
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Transference
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The risk is assigned to a third party, usually for a fee. The risk still exists, but the responsibility is deflected to the third party.
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Positive Risk Response Strategies
’s important to know how to handle both positive and negative risk. |
Exploit
Share Enhance |
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Exploit
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Used in conjunction with positive impacts where the host organization wants to ensure the positive risk definitely happens.
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Share
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3rd party partnerships that include forming risk-sharing partnerships, teams, special-purpose companies, or joint ventures, which can be established with the express purpose of managing opportunities.
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Enhance
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Seeks to facilitate or strengthen the cause of the opportunity, and proactively targeting and reinforcing its trigger conditions, to potentially increase probability
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RISK MONITORING AND CONTROL
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This is the process of identifying, analyzing, and planning for risks. The PM keeps track of the identified risks, reanalyzing of existing risks, monitoring trigger conditions for contingency plans, monitoring residual risks, and reviewing the execution of risk responses while evaluating their effectiveness.
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Other purposes of Risk Monitoring and Control are to determine if:
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-Project assumptions are still valid
-Risk, as assessed, has changed from its prior state, with analysis of trends -Proper risk management policies and procedures are being followed -Contingency reserves of cost or schedule should be modified in line with the risks of the project. |
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Why is what happended in previous projects useful
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you can recongnise the risks
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Checklists
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The advantage of a checklist to identify risks is that it’s a simple and direct approach to identify risks. The disadvantage of using a checklist for risk identification is that the participants may limit their risk identification to only the risk categories on the checkl
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Risk Management: Risk Management Planning
Inputs |
Enterprise Environmental Factors
Organizational Process Assets Project Scope Statement Project Management Plan |
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Risk Management: Risk Management Planning
TnT |
Planning Meetings and Analysis
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Risk Management: Risk Management Planning
Outputs |
Risk Management Pl
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Risk Management: Risk Identification
Inputs |
Enterprise Environmental Factors
Organizational Process Assets Project Scope Statement Risk Management Plan Project Management Plan |
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Risk Management: Risk Identification
TnT |
Documentation Reviews
Information Gathering Techniques Checklist Analysis Assumptions Analysis Diagramming Techniques |
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Risk Management: Risk Identification
OUtputs |
Risk Register
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Risk Management: Qualitative Risk Analysis
Inputs |
Organizational Process Assets
Project Scope Statement Risk Management Plan Risk Register |
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Risk Management: Qualitative Risk Analysis
TnT |
Risk Probability and Impact Assessment
Probability and Impact Matrix Risk Data Quality Assessment Risk Categorization Risk Urgency Assessment |
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Risk Management: Qualitative Risk Analysis
Outputs |
Risk Register (updates
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Risk Management: Quantitative Risk Analysis
Inputs |
Organizational Process Assets
Project Scope Statement Risk Management Plan Risk Register Project Management Plan Project Schedule Management Plan Project Cost Management Plan |
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Risk Management: Quantitative Risk Analysis
TnT |
Data Gathering and Representation Techniques
Quantitative Risk Analysis and Modeling Techniques |
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Risk Management: Quantitative Risk Analysis
Outputs |
Risk Register (updates
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Risk Management: Risk Response Planning
Inputs |
Risk Management Plan
Risk Register |
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Risk Management: Risk Response Planning
TnT |
Strategies for Negative Risks
Strategies for Positive Risks Strategies for Both Contingent Response Strategy |
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Risk Management: Risk Response Planning
Outputs |
Risk Register (updates)
Project Management Plan (updates) Risk Related Contractual Agreements |
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Risk Management: Risk Monitoring and Control
Inputs |
Risk Management Plan
Risk Register Approved Change Requests Work Performance Information Performance Reports |
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Risk Management: Risk Monitoring and Control
TnT |
Risk Reassessment
Risk Audits Variance and Trend Analysis Technical Performance Information Reserve Analysis Status Meetings |
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Risk Management: Risk Monitoring and Control
Outputs |
Risk Register (updates)
Requested Changes Recommended Corrective Actions Recommended Preventative Actions Organizational Process Assets (updates) Project Management Plan (updates |
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proOJECT PROCUREMENT
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Projects need materials, equipment, consultants, training, and many other goods and services. Project procurement management is the process of purchasing the products necessary for meeting the needs of the project scope
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The Project Procurement Management processes include the following
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Plan Purchases and Acquisitions
Plan Contracting Request Seller Responses Select Sellers Contract Administration Contract Closure |
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Plan Purchases and Acquisitions
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determining what to purchase or acquire and determining when and how.
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Plan Contracting
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documenting products, services, and results requirements and identifying potential sellers.
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Request Seller Responses
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obtaining information, quotations, bids, offers, or proposals, as appropriate.
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Select Sellers
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reviewing offers, choosing among potential sellers, and negotiating a written contract with each seller
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Contract Administration
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managing the contract and relationship between the buyer and seller, reviewing and documenting how a seller is performing or has performed to establish required corrective actions and provide a basis for future relationships with the seller, managing contract-related changes and, when appropriate, managing the contractual relationship with the outside buyer of the project.
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Contract Closure
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completing and settling each contract, including the resolution of any open items, and closing each contract applicable to the project or a project phase.
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If the buyer is the organization seeking the service or product
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Then the seller is the provider of the service or contract and is referred to as the vendor, the supplier, or the contractor
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Who is the buyer
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Depending on the buyer’s position in the project acquisition cycle, the buyer can be called a client, customer, prime contractor, contractor, acquiring organization, governmental agency, service requestor, or purchaser.
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WHo is the seller
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The seller can be viewed during the contract life cycle first as a bidder, then as the selected source, and then as the contracted supplier or vendor.
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The seller will typically manage the work as a project if the acquisition is not just for material, goods, or common products. In such cases:
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-Buyer becomes the customer, and is thus a key project stakeholder for the seller
-Seller’s project management team is concerned with all the processes of project management, not just with those of this Knowledge Area -Terms and conditions of the contract become key inputs to many of the seller’s management processes. The contract can actually contain the inputs (e.g., major deliverables, key milestones, cost objectives), or it can limit the project team’s options (e.g., buyer approval of staffing decisions is often required on design projects). |
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PLANNING PURCHASES
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Identifies project needs to purchase products, services, or results outside the project organization, and project needs to be accomplished by the project team.
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Project Managers and the PMO can create a Procurement Management Plan template:
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-Types of contracts.
-Independent estimates. -Actions project management team can take. -Standardized procurement documents -Managing multiple providers. -Coordinating procurement, scheduling and performance reporting. -Constraints and assumptions -Lead times -Make-or-buy decisions Setting schedule dates. -Identifying performance bonds or insurance contracts. -Direction provided to sellers. -Format for contract statement of work. -Identifying pre-qualified sellers. -Procurement metrics. -Contract Statement of Work -This document defines project scope that is included within the contract. -Describes collateral services required (e.g. post-project support). |
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MAKE-OR-BUY ANALYSIS
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The decision to make or buy a product is a fundamental aspect of management. In some conditions it is more cost effective to buy-while in others it makes more sense to create an in-house solution. The make-or-buy analysis should be made in the initial scope definition to determine if the entire project should be completed in-house or procured. As the project evolves, additional make-or-buy decisions are needed.
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But or make
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Reasons to Make
Reasons to Buy Less costly Less costly Use in-house skills In-house skills not available or don't exist Control of work Small volume of work Control of intellectual property More efficient Learn new skills Transfer risks Available staff Available vendor Focus on core project work Allows project team to focus on other work items |
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Reasoning
- The long-range strategy of the host organization is also a component in the make-or-buy analysis. The focus on a make-or-buy analysis: |
Is it more cost effective to make or buy the product or service?
Is it more time efficient to make or buy the product or service? Are the resources available within the organization to make the product or service? |
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The purpose is to determine what to procure from outside the project team and when the procurement should occur.
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Make-or-buy analysis should consider both the direct as well as the indirect costs of a prospective procurement. In this context, PMI considers the indirect costs of buying an item from the outside to include the cost of managing and monitoring the purchasing process.
Procure all or virtually all of the goods and services from a single supplier or from multiple suppliers Procure a significant portion of the goods and services from a single supplier or from multiple suppliers Procure a relatively minor portion of the goods and services from outside sources (single/multiple suppliers) Make everything in house; procure nothing from the outside |
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Buy or Rent?
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Calculate which is cheaper>
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CONTRACT TYPES AND RISKS
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The buyer’s objective is to place maximum performance risk on the seller, while maintaining incentive for economical and efficient performance. The seller’s objective is to minimize risk while maximizing profit potential. PMI ® recognizes three broad categories of contracts as follows:
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Cost-Reimbursable Contracts
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These contract types pay the seller for the product. In the payment to the seller there is a profit margin, which is the difference between the actual costs of the product and the sales amount. The actual costs of the product fall into two categories:
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Direct costs
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Those costs incurred by the project in order for the project to exist. Examples include equipment needed to complete the project work, salaries of the project team, and other expenses tied directly to the project's existence.
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Indirect costs
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Those costs attributed to the cost of doing business. Examples include utilities, office space, and other overhead costs.
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Types of contracts
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Fixed price (also called Lump Sum)
Cost-reimbursable contracts Cost plus fee or percentage (CPF / CPPC) Cost plus fixed fee (CPFF) Cost plus incentive fee (CPIF) Time and Material (T&M) |
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see the sheet this came from
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see the sheet this came from
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see the sheet this came from
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see the sheet this came from
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PROCUREMENT MANAGEMENT PLAN
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This is an output to Plan Purchases and Acquisitions. It specifies how the procurement activities will be managed
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The plan details as follows
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How vendors will be selected
The type of contracts to be used The procurement forms, such as contracts, the project team is required to use How multiple vendors will be managed to supply there contracted product The coordination between sellers and the project team and among project activities, project reporting, scheduling, business operations, and other project concerns |
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Contract Statement of Work
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In the Statement of Work (SOW), the seller fully describes the work to be completed and/or the product to be supplied. It should also describe how the project product or service is to be supported. The SOW becomes part of the contract between the buyer and the seller. The SOW is typically created as part of the procurement planning process, and it allows the seller to determine if it can meet the written requirements of the SOW.
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Plan Contracting
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This area of the PMBOK deals almost exclusively with completing standard (organizational) forms. The buyer structures procurement documents to facilitate an accurate and complete response from each prospective seller and to facilitate easy evaluation of the bids.
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What does soliciton planning involve
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Solicitation planning involves preparing the documents needed to support solicitation. This documentation is collectively called the "procurement documents," which are used to solicit proposals from prospective sellers. Procurement Contracting prepares the documents to support the following processes.
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Key Outputs
Project Managers and the PMO can create an Evaluation Criteria template: |
Understanding of need
Overall or life-cycle cost Technical capability Management approach Technical approach Financial capacity Production capacity and interest Business size and type References Intellectual property rights Proprietary rights |
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Evaluation Criteria
Used to rate and score proposals from the sellers. This is an Output of Plan Contracting. The selection process is based on several things: |
Independent Estimates
Company policies and procedures Screening systems to sift out sellers that do not qualify for the work Weighting system to make an unbiased selection of a seller |
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Request Seller Responses
The PMBOK outlines 3 preferred methods for this: |
Bidder Conference
Advertising Qualified Sellers list In this process, the PM obtains responses describing how prospective sellers can meet project requirements. |
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Key Outputs
Procurement Document Package |
Procurement Document Package
Buyer formal document sent to each seller. Proposals Seller document describing requested products, services, or results to be provided. |
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Finding potential sellers
Sellers can be found through a preferred vendor list, advertisements, industry directories, trade organizations, or other methods. The initial communication from the buyer to the seller is a request. Specifically, the seller issues one of the following documents: |
Request for Proposal - Used when there are multiple factors besides price to determine which seller is awarded the contract. The buyer is looking for a solution to a need.
Request for Quotation - Used when the deciding factor is price. Invitation for Bids - Used when the deciding factor is price. |
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SELECTING SELLERS
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-Contract negotiation
-Weighting system -Screening system -Independent estimates |
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Contract negotiation
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Clarification and mutual agreement on the structure and requirements of the contract According to PMI, a contract negotiation consists of five stages:
Protocol : Introductions are made and the atmosphere is set Probing : Negotiators identify issues of concern, as well as the strengths and weaknesses of the other party Scratch bargaining : The actual bargaining occurs and concessions are made Closure : Positions are summed up and final concessions are made Agreement: Documenting the final agreement |
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Weighting system
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Method for quantifying qualitative data to minimize the effect of personal prejudic
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Screening system
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Establishment of minimum performance requirements for one or more of the evaluation criteria
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Independent estimates
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Preparation of the procuring organization’s own estimate as a reference point against which contractor proposals are compared
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when does it makes sense to allow noncompetitive contractor selection
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When a contractor truly has a unique qualification that cannot be found or matched elsewhere
When other mechanisms exist to ensure that the price you are paying is reasonable. For example, you might have the in-house expertise to properly evaluate the contractor’s bid for reasonableness and accuracy When your project is under extreme schedule pressure. Competitive source selection almost always takes longer, because you must allow time to prepare a solicitation document, time for sending and receiving the solicitation, time for the prospective contractors to prepare and submit a proposal, and time for you to evaluate them all and make a selecti |
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How do you agree?
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The performing organization creates an offer and sends it to the seller. The seller then considers the offer. The performing organization and the seller must be in agreement on the expectations, requirements, authorities, terms, technical and business management approaches, price and any other pertinent factors covered within and by the contract prior to signing the contract. The final contract can be a revised offer by the seller or a counter offer by the buyer.
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NB
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A letter of intent is not a contract, but a letter stating the buyer is intending to create a contractual relationship with the seller. Letters of intent are often used when there is an emergency procurement need and a contract is not available immediately.
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Here are some possible negotiation tactics:
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Deadline : Imposing a deadline for reaching an agreement
Surprise : Taking the other party by surprise with new information Limited authority : Claiming inability to finalize the agreement just reached (a stalling tactic) Missing man : Claiming that the person with final authority is absent Fair and reasonable : Offering comparisons to other situations, for example, to show that the price offered is reasonable Strategic delay : Requesting a recess to divert attention from the present discussion or to regroup Reasoning together : Collaborating to work the problems out to the benefit of all Withdrawal : Making a false attack on an issue and then retreating (to divert attention from a weakness) Unreasonable : Making the other party’s request appear unreasonable Suggesting arbitration : An attempt to scare the other party into agreement Fait accompli : Claiming that a topic of dispute has already been decided or accomplished and cannot be changed |
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The project manager’s negotiation objectives are to:
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Obtain a fair and reasonable price, while still getting the contract performed within certain time and performance limitations
Develop a good relationship with the supplier |
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CONTRACT ADMINISTRATION
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Contract administration is the process of ensuring that the seller lives up to the agreements in the contract. The project manager and the contract administrator must work together to make certain the seller meets its obligations. If the seller does not fulfill its contractual requirements, then legal remedies may ultimately be pursued
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Processes applied to Contract Admin.
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Direct and Manage Project Execution to authorize the contractor’s work at the appropriate time
Performance Reporting to monitor contractor cost, schedule, and technical performance Perform Quality Control to inspect and verify the adequacy of the contractor’s product Integrated Change Control to assure that changes are properly approved, and that all those with a need to know are aware of such changes Risk Monitoring and Control to ensure that risks are mitigated. |
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Risk Monitoring and Control to ensure that risks are mitigated
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This process ensures the sellers and buyers perform according to the contract terms. During this step, the project manager, with help from the contracting specialists, monitors the vendor’s performance against the contract’s specifications, performance standards, and terms and conditions
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At a minimum, the following items are usually documented in the contract:
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Delivery schedule
Payment schedule Method for determining the price Handling of changes Warranties Insurance Inspections Delays Termination Subcontracts Performance bonds |
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Results of Contract Administration
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Payment Requests and schedules
Correspondence Requested changes Performance evaluations |
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can you change the contract
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Contracts can be amended any time prior to contract closure by mutual consent, in accordance with the change control terms of the contract. Such amendments may not always be equally beneficial to both the seller and the buyer.
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Standard Clauses
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Also, the use of standard clauses is encouraged where possible because they are legally sufficient for most contractual situations and because they cost less (customized contract language takes time and can sometimes be expensive to develop).
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Standard Clauses
Changes |
Changes to project scope constitute one of the major areas of cost growth
Control of change Who initiates a change request How change is funded Final approval authority Configuration control Do not price changes on a cost-plus basis; use lump sum |
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Standard Clauses
Warranties |
Establish a level of quality
Express warranty: Contract explicitly states what the level of quality is Implied warranty: Contract describes “merchantability” or “fitness of use” |
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Standard Clauses
Doctrine to waiver |
The relinquishing of one party’s contract rights because of lack of enforcement of those rights
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Standard Clauses
Delays |
Who caused it
Nature of the interruption Impact |
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Standard Clauses
Bonds |
Performance bond: secures for the buyer the performance and fulfillment of the contract
Payment bond: Guaranteed payment to subcontractors and laborers by the prime or the guarantor |
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Standard Clauses
Breach |
Failure to perform a contractual obligation
Measure for damage is the amount of loss sustained by an injured party Material breach: more serious than a contract breach Non-faulted party discharged from any further obligations—for example, when a contract stipulates that time is of the essence, failure to perform within the allotted time constitutes material breach and the project manager will not be required to accept late performance |
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Elements of a Legally Enforceable Contract
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Finally, you should be familiar with the elements of a legally valid (enforceable) contract:
The agreement must be voluntary (there must be both an offer and an acceptance) The people signing must have the legal capacity to do so There must be sufficient cause to contract—“consideration” must be provided to both parties The contract must be for a legal purpose and must not violate public policy |
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CHANGES AND CHANGE CONTROL
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All contracts should define the process by which any changes to the contract (project) can be accommodated and should include the paperwork, tracking systems, and approvals necessary for authorizing changes
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Undefined Work
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Undefined work becomes an issue when “time is of the essence.” The parties would like to proceed with the project, but the price and other important terms and conditions of the contract have not been specified or agreed to. This situation can arise either at the outset of a contractual relationship or as a result of significant changes to an ongoing contract. At the outset of a contract, a contractor will often proceed on the basis of a “letter contract” with the details to be worked out later. Obviously, a certain amount of trust exists in such a circumstance. When undefined work arises as a result of changes, contractors often proceed on the basis of an “undefinitized change order.”
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ORGANIZING FOR CONTRACT MANAGEMENT
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According to PMI, a company can assign project-contracting responsibility in a centralized or decentralized manner.
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Centralized Contracting
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With centralized contracting, a single function within the company is responsible for the entire contracting process for all projects. Contracting procedures typically are stringent and standardized. This form works best in functionally organized companies.
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Centralized Contracting
Advantages |
More economical
Easier to control overall contracting efforts Higher degree of contracting specialization Orders can be consolidated across several projects |
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Centralized Contracting
Disadvantages |
The contracting office can become a bottleneck if several projects have heavy needs at once
Less attention to the special needs of individual projects |
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Decentralized Contracting
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With decentralized contracting, each project manager controls the contracting process for his or her project. This form works best if companies follow the projectized organization.
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Decentralized Contracting
Advantages |
Project manager has more control
Contracting personnel are more familiar with project needs More flexible and adaptable to project needs |
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Decentralized Contracting
Disadvantages |
Duplication of contracting efforts across projects
Higher costs No standard contracting policies |
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Privity of Contract
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Privity of contract is a legal term that recognizes that the contractual relationship exists between a buyer and its prime contractor. No contract exists between the buyer and the subcontractors, and it is legally improper for a buyer to bypass a contractor and deal directly with a subcontractor(s).
Beyond the legal issue, there are other reasons for a buyer to be cautious about dealing with subcontractors. In doing so, the buyer may inadvertently relieve the prime contractor of certain responsibilities. For example, if a buyer informs a subcontractor that things might work better if the subcontractor would “try the following approach . . .” and the subcontractor runs into trouble, the prime contractor may rightfully claim that the buyer’s interference caused the problems. |
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Foreign Currency Exchange
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Whenever the buyer and the seller operate in different countries, one typically difficult issue always arises regarding the potential effects of fluctuating exchange rates. Mercifully, PMI ® does not require you to know any complicated formulas or procedures for the exam. You must simply be aware that all contracts should set forth the process for dealing with exchange rate issues. On many projects, the parties attempt to come up with some kind of process for preventing unfair or unintended gain or loss by either party.
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CONTRACT CLOSEOUT
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Contract closeout involves both product verification, that is verifying that the work was done, and administrative closeout, the updating of all contract records. Contract records are very important and include the contract itself and other relevant documentation such as progress reports, financial records, invoices, and payment records. These are often kept in a contract file, which should be part of the complete project file. Contract documentation is also important should a procurement audit be initiated. Such an audit is a structured review of the procurement process from procurement planning through contract administration. The purpose of the audit is to identify success and failures that warrant transfer to other procurement items on the current project or future projects.
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This process supports the Close Project process (within Project Integration Management).
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A contract file is completed and serves as historical record of the procurement process. It is also incorporated into the administrative closure process.
These records include financial information as well as information on the performance and acceptance of the procured work. Procured work is verified as acceptable and meets the requirements of the contract. The formal closure of a project comes in a written notice from the contract officer to the seller. The notice informs the seller that its work is acceptable and that the contract is considered closed. The requirements for contract closeout should be documented within the contract. |
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Key Outputs
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Organizational Process Assets (updates).
Contract file, Deliverable acceptance, and Lessons learned documentation |
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Procurement Management: Plan Purchases and Acquisitions Inputs
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Enterprise Environmental Factors
Organizational Process Assets Project Scope Statement Work Breakdown Structure WBS Dictionary Project Management Plan Risk Register Risk Related Contractual Agreements Resource Requirements Project Schedule Activity Cost Estimates |
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Procurement Management: Plan Purchases and Acquisitions
TnT |
Make or Buy Analysis
Expert Judgment Contract Types |
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Procurement Management: Plan Purchases and Acquisitions
Outputs |
Procurement Management Plan
Contract Statement of Work Make-or-Buy Decisions Requested Changes |
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Procurement Management: Plan Contracting
Inputs |
Procurement Management Plan
Contract Statement of Work Make-or-Buy Decisions Project Management Plan Risk Register Risk Related Contractual Agreements Resource Requirements Project Schedule Activity Cost Estimates Cost Baseline |
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Procurement Management: Plan Contracting
TnT |
Standard Forms
Expert Judgment |
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Procurement Management: Plan Contracting
Outputs |
Procurement Documents
Evaluation Criteria Contract Statement of Work (updates |
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Procurement Management: Request Seller Responses
Inputs |
Organizational Process Assets
Procurement Management Plan Procurement Documents |
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Procurement Management: Request Seller Responses
TnT |
Bidder Conferences
Advertising Develop Qualified Sellers List |
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Procurement Management: Request Seller Responses
Outputs |
Qualified Sellers List
Procurement Document Package Proposals |
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Procurement Management: Select Sellers
Inputs |
Organizational Process Assets
Procurement Management Plan Evaluation Criteria Procurement Document Package Proposals Qualified Sellers List Project Management Plan Risk Register Risk Related Contractual Agreements |
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Procurement Management: Select Sellers
TnT |
Weighting System
Independent Estimates Screening System Contract Negotiation Seller Rating Systems Expert Judgment Proposal Evaluation Techniques |
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Procurement Management: Select Sellers
Outputs |
Selected Sellers
Contract Contract Management Plan Resource Availability Procurement Management Plan (updates) Requested Changes |
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Procurement Management: Contract Administration
Inputs |
Contract
Contract Management Plan Selected Sellers Performance Reports Approved Change Requests Work Performance Information |
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Procurement Management: Contract Administration
TnT |
Contract Change Control System
Buyer-Conducted Performance Reviews Inspections and Audits Performance Reporting Payment System Claims Administration Records Management System Information Technology |
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Procurement Management: Contract Administration
Outputs |
Contract Documentation
Requested Changes Recommended Corrective Actions Organizational Process Assets (updates) Project Management Plan (updates) Procurement Management Plan Contract Management Plan |
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Procurement Management: Contract Closure
Inputs |
Procurement Management Plan
Contract Management Plan Contract Documentation Contract Closure Procedure |
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Procurement Management: Contract Closure
TnT |
Procurement Audits
Records Management System |
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Procurement Management: Contract Closure
Outputs |
Closed Contracts
Organizational Process Assets (updates) |
