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186 Cards in this Set

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What is risk management
Risk Management is the process of measuring, or assessing risk and then developing strategies to manage the risk.
For risk management the strategies employed are what?
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.
What is Project Risk Management
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.
These processes include the following:
-Risk Management Planning
-Risk Identification
-Qualitative Risk Analysis
-Quantitative Risk Analysis
-Risk Response Planning
-Risk Monitoring and Control
Risk Management Planning
Deciding how to approach, plan, and execute the risk management activities for a project.
Risk Identification
Determining which risks might affect the project and documenting their characteristics
Qualitative Risk Analysis
Prioritizing risks for subsequent further analysis or action by assessing and combining their probability of occurrence and impact.
Quantitative Risk Analysis
Numerically analyzing the effect on overall project objectives of identified risks.
Risk Response Planning
Developing options and actions to enhance opportunities, and to reduce threats to project objectives.
Risk Monitoring and Control
Tracking identified risks, monitoring residual risks, identifying new risks, executing risk response plans, and evaluating their effectiveness throughout the project life cycle.
When are projects at greatest risk?
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.
RISK PLANNING & ANALYSIS
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.
Risk management planning
Planning for risk management
Plan should include risk management tasks, responsibilities, activities and budget.
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
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.
Risk management planning
Creating anonymous risk reporting channel.
Each team member should have possibility to report risk that he foresees in the project.
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.
Risk management planning
Summarizing planned and faced risks,
effectiveness of mitigation activities and effort spend for the risk management.
Why is Project risk is an uncertain event or condition
if it occurs, has a positive or a negative effect on at least one project objective, such as time, cost, scope, or quality.
Utility Function
The stakeholder analysis will reveal their willingness to accept risk—which is also known as their utility function.
PROJECT CHARTER AND RISK
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.
The types of risk:
-Business
-Pure
-Known
-Unknown
Risk and the WBS
(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
output of risk management planning
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)
Risk Breakdown Structure
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.
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
Probability and Impact Matrix
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
The specific combinations of probability and impact that lead to a risk being rated as “high,” “moderate,” or “low” importance
Prob x impact == rish
-high
-medium
-low
PMI defines risk identification as
determining which risk events are likely to affect the project and documenting the characteristics of each.
This process involves identifying three related factors
1) potential sources of risk (schedule, cost, technical, legal, and so on),
(2) possible risk events, and (3) risk symptoms.
The timing of risk identification is also of vital importance.
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.
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
How are Project Risks Identified?
-Brainstorming
-Delphi Technique
Brainstorming
Generally completed together as a project. The risks are identified in broad terms, characteristics detailed, categorized
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.
Interviewing
Through questions and discussion, the person being interviewed shares his/he insight on what risks are perceived in the project.
Root cause ID
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.
SWOT Analysis
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.
NB
Risk identification happens early in the project to allot time for risk response planning. Risk identification also happens throughout the project.
NBNB
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.
Risk Register
outputs from Risk identification
-Identified Risks
-Potential Responses
-Root Cause (If known)
-Updated risk categories
DIAGRAMMING IN RISK MANAGEMENT
You’ll want to note that the diagramming techniques described and used here are the same as those for quality
Ishikawa, cause-and-effect diagrams or fishbone diagrams. (All three names are used interchangeably) -
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.
System or process flow charts
show the relation between components and how the overall process works. These are useful for identifying risks between system components.
Influence diagrams
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.
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.
QUANTITATIVE RISK
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.
the techniques used in QUANTITATIVE RISK are:
Monte Carlo simulation and decision tree
These are used to:
-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.
How the process works?
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.
Risk Quantification
Will have hard values numbers etc not high medium low
PMI® defines risk quantification
as evaluating risks and risk interactions to assess the range of possible project outcomes.
What is the primary objective
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
Probability Distributions
Prob of Los Vs Magnitude of impact
Expected Monetary Value
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.
Is emv as good as the others
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.
Expected value
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
Decision-Tree Analysis
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.
Modeling / Simulation
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.
Monte Carlo Analysis
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.
When is this analysis used
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.
Why is Monte Carlo better than the others?
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.
RISK RESPONSE PLANNING
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.
What happes during risk response planning?
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.
Negative Risk Response Strategies
’s important to know how to handle both positive and negative risk.
Avoidance
Mitigation
Transference
Avoidance
The project plan is altered to avoid the identified risk.
Mitigation
Effort is made to reduce the probability, impact, or both of an identified risk in the project before the risk event occurs.
Transference
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.
Positive Risk Response Strategies
’s important to know how to handle both positive and negative risk.
Exploit
Share
Enhance
Exploit
Used in conjunction with positive impacts where the host organization wants to ensure the positive risk definitely happens.
Share
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.
Enhance
Seeks to facilitate or strengthen the cause of the opportunity, and proactively targeting and reinforcing its trigger conditions, to potentially increase probability
RISK MONITORING AND CONTROL
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.
Other purposes of Risk Monitoring and Control are to determine if:
-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.
Why is what happended in previous projects useful
you can recongnise the risks
Checklists
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
Risk Management: Risk Management Planning
Inputs
Enterprise Environmental Factors
Organizational Process Assets
Project Scope Statement
Project Management Plan
Risk Management: Risk Management Planning
TnT
Planning Meetings and Analysis
Risk Management: Risk Management Planning
Outputs
Risk Management Pl
Risk Management: Risk Identification
Inputs
Enterprise Environmental Factors
Organizational Process Assets
Project Scope Statement
Risk Management Plan
Project Management Plan
Risk Management: Risk Identification
TnT
Documentation Reviews
Information Gathering Techniques
Checklist Analysis
Assumptions Analysis
Diagramming Techniques
Risk Management: Risk Identification
OUtputs
Risk Register
Risk Management: Qualitative Risk Analysis
Inputs
Organizational Process Assets
Project Scope Statement
Risk Management Plan
Risk Register
Risk Management: Qualitative Risk Analysis
TnT
Risk Probability and Impact Assessment
Probability and Impact Matrix
Risk Data Quality Assessment
Risk Categorization
Risk Urgency Assessment
Risk Management: Qualitative Risk Analysis
Outputs
Risk Register (updates
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
Risk Management: Quantitative Risk Analysis
TnT
Data Gathering and Representation Techniques
Quantitative Risk Analysis and Modeling Techniques
Risk Management: Quantitative Risk Analysis
Outputs
Risk Register (updates
Risk Management: Risk Response Planning
Inputs
Risk Management Plan
Risk Register
Risk Management: Risk Response Planning
TnT
Strategies for Negative Risks
Strategies for Positive Risks
Strategies for Both
Contingent Response Strategy
Risk Management: Risk Response Planning
Outputs
Risk Register (updates)
Project Management Plan (updates)
Risk Related Contractual Agreements
Risk Management: Risk Monitoring and Control
Inputs
Risk Management Plan
Risk Register
Approved Change Requests
Work Performance Information
Performance Reports
Risk Management: Risk Monitoring and Control
TnT
Risk Reassessment
Risk Audits
Variance and Trend Analysis
Technical Performance Information
Reserve Analysis
Status Meetings
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
proOJECT PROCUREMENT
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
The Project Procurement Management processes include the following
Plan Purchases and Acquisitions
Plan Contracting
Request Seller Responses
Select Sellers
Contract Administration
Contract Closure
Plan Purchases and Acquisitions
determining what to purchase or acquire and determining when and how.
Plan Contracting
documenting products, services, and results requirements and identifying potential sellers.
Request Seller Responses
obtaining information, quotations, bids, offers, or proposals, as appropriate.
Select Sellers
reviewing offers, choosing among potential sellers, and negotiating a written contract with each seller
Contract Administration
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.
Contract Closure
completing and settling each contract, including the resolution of any open items, and closing each contract applicable to the project or a project phase.
If the buyer is the organization seeking the service or product
Then the seller is the provider of the service or contract and is referred to as the vendor, the supplier, or the contractor
Who is the buyer
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.
WHo is the seller
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.
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:
-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).
PLANNING PURCHASES
Identifies project needs to purchase products, services, or results outside the project organization, and project needs to be accomplished by the project team.
Project Managers and the PMO can create a Procurement Management Plan template:
-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).
MAKE-OR-BUY ANALYSIS
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.
But or make
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
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?
The purpose is to determine what to procure from outside the project team and when the procurement should occur.
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
Buy or Rent?
Calculate which is cheaper>
CONTRACT TYPES AND RISKS
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:
Cost-Reimbursable Contracts
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:
Direct costs
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.
Indirect costs
Those costs attributed to the cost of doing business. Examples include utilities, office space, and other overhead costs.
Types of contracts
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)
see the sheet this came from
see the sheet this came from
see the sheet this came from
see the sheet this came from
PROCUREMENT MANAGEMENT PLAN
This is an output to Plan Purchases and Acquisitions. It specifies how the procurement activities will be managed
The plan details as follows
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
Contract Statement of Work
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.
Plan Contracting
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.
What does soliciton planning involve
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.
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
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
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.
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.
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.
SELECTING SELLERS
-Contract negotiation
-Weighting system
-Screening system
-Independent estimates
Contract negotiation
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
Weighting system
Method for quantifying qualitative data to minimize the effect of personal prejudic
Screening system
Establishment of minimum performance requirements for one or more of the evaluation criteria
Independent estimates
Preparation of the procuring organization’s own estimate as a reference point against which contractor proposals are compared
when does it makes sense to allow noncompetitive contractor selection
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
How do you agree?
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.
NB
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.
Here are some possible negotiation tactics:
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
The project manager’s negotiation objectives are to:
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
CONTRACT ADMINISTRATION
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
Processes applied to Contract Admin.
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.
Risk Monitoring and Control to ensure that risks are mitigated
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
At a minimum, the following items are usually documented in the contract:
Delivery schedule
Payment schedule
Method for determining the price
Handling of changes
Warranties
Insurance
Inspections
Delays
Termination
Subcontracts
Performance bonds
Results of Contract Administration
Payment Requests and schedules
Correspondence
Requested changes
Performance evaluations
can you change the contract
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.
Standard Clauses
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).
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
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”
Standard Clauses
Doctrine to waiver
The relinquishing of one party’s contract rights because of lack of enforcement of those rights
Standard Clauses
Delays
Who caused it
Nature of the interruption
Impact
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
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
Elements of a Legally Enforceable Contract
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
CHANGES AND CHANGE CONTROL
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
Undefined Work
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.”
ORGANIZING FOR CONTRACT MANAGEMENT
According to PMI, a company can assign project-contracting responsibility in a centralized or decentralized manner.
Centralized Contracting
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.
Centralized Contracting
Advantages
More economical
Easier to control overall contracting efforts
Higher degree of contracting specialization
Orders can be consolidated across several projects
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
Decentralized Contracting
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.
Decentralized Contracting
Advantages
Project manager has more control
Contracting personnel are more familiar with project needs
More flexible and adaptable to project needs
Decentralized Contracting
Disadvantages
Duplication of contracting efforts across projects
Higher costs
No standard contracting policies
Privity of Contract
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.
Foreign Currency Exchange
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.
CONTRACT CLOSEOUT
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.
This process supports the Close Project process (within Project Integration Management).
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.
Key Outputs
Organizational Process Assets (updates).

Contract file, Deliverable acceptance, and Lessons learned documentation
Procurement Management: Plan Purchases and Acquisitions Inputs
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
Procurement Management: Plan Purchases and Acquisitions
TnT
Make or Buy Analysis
Expert Judgment
Contract Types
Procurement Management: Plan Purchases and Acquisitions
Outputs
Procurement Management Plan
Contract Statement of Work
Make-or-Buy Decisions
Requested Changes
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
Procurement Management: Plan Contracting
TnT
Standard Forms
Expert Judgment
Procurement Management: Plan Contracting
Outputs
Procurement Documents
Evaluation Criteria
Contract Statement of Work (updates
Procurement Management: Request Seller Responses
Inputs
Organizational Process Assets
Procurement Management Plan
Procurement Documents
Procurement Management: Request Seller Responses
TnT
Bidder Conferences
Advertising
Develop Qualified Sellers List
Procurement Management: Request Seller Responses
Outputs
Qualified Sellers List
Procurement Document Package
Proposals
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
Procurement Management: Select Sellers
TnT
Weighting System
Independent Estimates
Screening System
Contract Negotiation
Seller Rating Systems
Expert Judgment
Proposal Evaluation Techniques
Procurement Management: Select Sellers
Outputs
Selected Sellers
Contract
Contract Management Plan
Resource Availability
Procurement Management Plan (updates)
Requested Changes
Procurement Management: Contract Administration
Inputs
Contract
Contract Management Plan
Selected Sellers
Performance Reports
Approved Change Requests
Work Performance Information
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
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
Procurement Management: Contract Closure
Inputs
Procurement Management Plan
Contract Management Plan
Contract Documentation
Contract Closure Procedure
Procurement Management: Contract Closure
TnT
Procurement Audits
Records Management System
Procurement Management: Contract Closure
Outputs
Closed Contracts
Organizational Process Assets (updates)