Study guide
4.8 Planning & Managing Procurement
Project Management Professional PMP
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1 Chapter 1: Introduction & Fundamentals
1.1 About the PMP Exam 1.2 What is a Project? 1.3 Project, Program & Portfolio Management 1.4 The Project Manager Role 1.5 PMBOK 7 Principles Overview 1.6 Performance Domains Overview 1.7 What Changed in the July 2026 PMP Exam
2 Chapter 2: People Domain Part 1
2.1 Managing Conflict 2.2 Leading a Team 2.3 Supporting Team Performance 2.4 Empowering Team Members 2.5 Training & Development 2.6 Building a Team 2.7 Removing Impediments
3 Chapter 3: People Domain Part 2
3.1 Negotiating Project Agreements 3.2 Collaborating with Stakeholders 3.3 Building Shared Understanding 3.4 Engaging Virtual Teams 3.5 Defining Team Ground Rules 3.6 Mentoring Stakeholders 3.7 Emotional Intelligence
4 Chapter 4: Process Domain - Planning
4.1 Determining Project Methodology 4.2 Integrating Project Planning 4.3 Planning & Managing Scope 4.4 Planning & Managing Schedule 4.5 Planning & Managing Budget 4.6 Planning & Managing Quality 4.7 Planning & Managing Resources 4.8 Planning & Managing Procurement
5 Chapter 5: Process Domain - Execution & Control
5.1 Executing with Urgency for Value 5.2 Managing Communications 5.3 Assessing & Managing Risks 5.4 Engaging Stakeholders 5.5 Managing Project Changes 5.6 Establishing Project Governance 5.7 Managing Project Issues 5.8 Managing Project Artifacts 5.9 Knowledge Transfer & Closure
6 Chapter 6: Business Environment Domain
6.1 Planning & Managing Compliance 6.2 Evaluating & Delivering Benefits 6.3 External Environment Changes 6.4 Supporting Organizational Change
7 Chapter 7: Agile & Hybrid Approaches
7.1 Agile Mindset & Values 7.2 Scrum Framework 7.3 Kanban & Lean 7.4 Extreme Programming (XP) 7.5 Hybrid Project Management 7.6 Agile Planning & Estimation 7.7 Agile Metrics & Tools
8 Chapter 8: Predictive (Waterfall) Approaches
8.1 Predictive Lifecycle 8.2 Scope Management 8.3 Schedule Management 8.4 Cost Management 8.5 Quality Management 8.6 Risk Management Process 8.7 Procurement & Contracts 8.8 Change Control
4.8 Planning & Managing Procurement
Key Takeaways Explain This Topic AI
Fixed-Price contracts place maximum risk on the seller, while Cost-Reimbursable contracts place maximum risk on the buyer
The three main contract categories are Fixed-Price (FFP, FPIF, FPEPA), Cost-Reimbursable (CPFF, CPIF, CPAF, CPPC), and Time & Materials (T&M)
Make-or-buy analysis compares the total cost and benefits of producing in-house versus outsourcing to external vendors
Source selection criteria typically include price, quality, technical capability, delivery schedule, financial stability, and past performance
In Firm Fixed Price (FFP) contracts, the seller has maximum incentive to control costs because they bear all cost overrun risk
Last updated: January 2026
Procurement management involves acquiring goods and services from external sources. Understanding contract types and their risk implications is critical for the PMP exam and effective project management.
Procurement Management Processes
- Process Purpose Key Output
- Plan Procurement Management Document procurement decisions and approach Procurement Management Plan
- Conduct Procurements Obtain seller responses and select sellers Selected Sellers
- Control Procurements Manage procurement relationships Work Performance Information
- Make-or-Buy Analysis
Make-or-buy analysis determines whether to produce goods/services internally or purchase from external sources.
Factors to Consider
- Make (In-House) Buy (Outsource)
- Core competency Not a core competency
- Capacity available Capacity not available
- Need to maintain control Willing to delegate control
- Trade secrets/IP protection No proprietary concerns
- Better quality in-house Better quality from vendor
- Cost-effective internally Cost-effective externally
- Cost Comparison Example
- Factor Make Buy
- Direct Costs $100,000 $80,000
- Indirect Costs $30,000 $5,000
- Opportunity Cost $20,000 $0
- Total Cost $150,000 $85,000
Decision : Buy is more cost-effective in this example.
Beyond Cost
Consider non-financial factors:
Quality : Which option delivers higher quality?
Risk : What are the risks of each option?
Control : How important is control over the work?
Capability Development : Is this a skill we should develop?
Confidentiality : Are there proprietary concerns?
Contract Types
Contracts are categorized by how risk is allocated between buyer and seller.
- Risk Spectrum BUYER RISK ←——————————————→ SELLER RISK
- ↓ ↓
- Cost-Reimbursable Time & Materials Fixed-Price
- (CPPC → CPFF) (T&M) (FPIF → FFP)
- Fixed-Price Contracts
In Fixed-Price contracts, the seller agrees to deliver for a set price, assuming most of the cost risk.
Types of Fixed-Price Contracts
- Type Description Risk
- Firm Fixed Price (FFP) Set price regardless of seller costs Maximum seller risk
- Fixed Price Incentive Fee (FPIF) Base price with incentive for performance Shared risk
- Fixed Price with Economic Price Adjustment (FPEPA) Adjusts for economic changes over time Shared risk
- Firm Fixed Price (FFP)
- Most common contract type
- Seller agrees to a specific price regardless of actual costs
- Maximum incentive for seller to control costs
- Best for : Well-defined scope, low uncertainty
- Fixed Price Incentive Fee (FPIF)
- Base price with performance incentives/penalties
- Includes a price ceiling - costs above ceiling are seller's responsibility
- Formula : Final Price = Target Price + [(Actual Cost - Target Cost) x Buyer Share Ratio]
Example :
- Target Cost: $100,000
- Target Profit: $10,000
- Target Price: $110,000
- Price Ceiling: $120,000
- Share Ratio: 80/20 (Buyer 80%, Seller 20%)
If Actual Cost = $105,000:
- Cost Overrun = $5,000
- Buyer Pays Additional: $5,000 x 80% = $4,000
- Final Price = $110,000 + $4,000 = $114,000
- Cost-Reimbursable Contracts
In Cost-Reimbursable contracts, the buyer reimburses the seller's costs plus a fee, assuming most of the cost risk.
Types of Cost-Reimbursable Contracts
- Type Fee Calculation Seller Incentive
- Cost Plus Fixed Fee (CPFF) Fixed dollar amount Moderate to complete on time
- Cost Plus Incentive Fee (CPIF) Based on meeting performance targets Strong to meet targets
- Cost Plus Award Fee (CPAF) Based on buyer's subjective evaluation Moderate to satisfy buyer
- Cost Plus Percentage of Costs (CPPC) Percentage of actual costs NONE - incentive to increase costs
- Cost Plus Fixed Fee (CPFF)
- Buyer reimburses all allowable costs
- Seller receives fixed fee (not affected by actual costs)
- Fee calculated as percentage of estimated costs
- Best for : Undefined scope, high uncertainty
- Cost Plus Incentive Fee (CPIF)
- Buyer reimburses costs plus incentive fee
- Fee based on achieving specified objectives
- Cost savings/overruns shared between buyer and seller
- Best for : When performance targets can be defined
- Cost Plus Percentage of Costs (CPPC)
- Fee is percentage of actual costs
- Worst for buyer - seller has incentive to increase costs
- Prohibited for US government contracts
- Time and Materials (T&M) Contracts
T&M Contracts combine elements of both fixed-price and cost-reimbursable:
- Aspect Characteristics
- Labor Fixed hourly/daily rates
- Materials Actual cost plus markup
- Duration Variable based on actual time
- Risk Shared between buyer and seller
- When to Use T&M
- Scope cannot be fully defined
- Need quick start while scope is clarified
- Short-term or staff augmentation needs
- Work of unknown duration
- T&M Risk Mitigation
To limit buyer risk, add:
- Not-to-exceed (NTE) clause : Maximum total cost
- Time limit : Maximum duration
- Progress milestones : Regular checkpoints
- Contract Type Comparison
- Factor Fixed-Price Cost-Reimbursable T&M
- Scope Definition Well-defined Poorly defined Partially defined
- Buyer Risk Low High Moderate
- Seller Risk High Low Moderate
- Seller Incentive Control costs Depends on type Complete work
- Price Certainty High Low Moderate
- Best For Known scope R&D, unclear scope Staff augmentation
- Source Selection Criteria
Criteria for evaluating and selecting vendors:
Common Selection Criteria
- Criterion Description Weight Example
- Price/Cost Total cost including hidden costs 25%
- Technical Capability Ability to meet technical requirements 25%
- Quality Quality management systems, track record 20%
- Past Performance References, history 15%
- Delivery Schedule Ability to meet timeline 10%
- Financial Stability Financial health of vendor 5%
- Weighted Scoring Example
- Vendor Price (25) Technical (25) Quality (20) Past Perf (15) Schedule (10) Financial (5) Total
- A 8 9 8 7 8 9 8.15
- B 9 7 9 8 7 8 8.00
- C 7 8 7 9 9 7 7.80
- Selected : Vendor A (highest weighted score)
- Procurement Documentation
- Key Documents
- Document Purpose
- Procurement Management Plan How procurement will be managed
- Statement of Work (SOW) Describes work to be performed
- Request for Proposal (RFP) Requests detailed proposals from vendors
- Request for Quotation (RFQ) Requests price quotes for known items
- Request for Information (RFI) Gathers information from potential vendors
- Bid Documents Formal invitation for bids
- Contract Legal agreement with selected vendor
- Key Takeaways
- Make-or-buy analysis compares in-house vs. outsourced options
- Fixed-Price contracts put risk on seller; Cost-Reimbursable on buyer
- FFP has maximum seller risk; CPPC has maximum buyer risk
- T&M shares risk and is best for undefined scope
- Source selection criteria should be weighted and used objectively
- CPPC is prohibited for US government contracts