With excerpts from my Project Management Novel, I will illustrate the many processes of the PMBOK. Here is the eighteenth one: Plan Procurements. Use this map to see how this process fits into the scheme of processes.
Next morning, the monks were focused on getting the materials onsite for the rest of the tower. During the initial planning sessions, Gwilym had been surprised at hearing the level of expertise that existed amongst him team. They seemed determined to do everything on the steeple themselves. But now that he had worked with the team for a few weeks, he was realizing that the monks compensated energy for lack of experience.
He watched as a group of them, bearing axes and knives, headed into the forest to cut down trees for the tower supports. He had seen those same monks before doing other activities and doubted if they had the skill to cut down trees that would work for the tower. He asked Fathers Drew and Crawford along with Fred and Bleddyn into the common room and shut the door.
“Father Drew,” he started. “You know as well as I do that we cannot use green timber to support the steeple.”
“But we cannot wait two years to complete the steeple either. Does your design not prevent shrinkage from causing the tower to collapse?”
“It does so for the minimal amount of shrinkage that remains on two-year old wood. But it will cause warping of the entire logs if you try it on green wood.”
“We are monks with a vow of poverty. We do not have gold to buy our materials. We have to make it all ourselves.”
“There are times, father, when it is cheaper in the long run to pay a professional to do your work for you. This is one of those times. As far as money is concerned, you needn’t worry. Just trade green wood for dry. Most sawyers will trade two green logs for one seasoned log.”
“That seems fair. What can we do about stone?”
“Once again, you have an large source of free labor. Trade stone for your men helping the quarryman to cut twice as much as needed. You also have other items that can be sold for silver or bartered for goods. You farm, you shear your sheep for high quality wool, you card this wool and spin it ready for weaving. This Abbey has much wealth that can be used to buy materials or services.”
“That will allow us to transfer more of those risks we identified earlier,” said Father Drew.
“Aye, it will. And it will speed things up and ensure that they are done right. We need to look at our activities and plan which things we make and which we buy.”
Fred spoke up. He was holding his project management guide and had a page ready to go. “Will we call this section Plan Procurements?”
“That’s a fine name Fred. Good work! Now, let’s look at our Scope, our Work Breakdown Structure, our Schedule, our Requirements and our Risk Register and see which items make more sense to buy rather than make.”
The group spent the next hour going over all the above documents and identified some key items that would be made better, faster, safer or cheaper in the long run than trying to build them with the monks.
Abbot Crawford spoke up. “Have ye experience with the kinds of contracts one uses with these craftsmen. We are the sellers, never the buyers. And we have only ever used one style of purchase: Silver on the barrelhead. But I have seen craftsmen dealing and their ways are confusing.”
“Aye, father. There are many different ways to buy goods and services. They come with different risks and rewards and different ones can be used when you care more about schedule than you do money. Let me try and list them here so we can decide which works best for each item we need to buy”
“First, there are Fixed Price contracts.
Firm fixed price – On these, the price doesn’t change unless scope does.
Fixed price with incentive – The seller gets a fixed price plus an incentive if they do something well, like finish ahead of schedule. You can also add a penalty clause if they’re late.
Fixed price with adjustments – If something in the nature of the activity has a variable price, like the price of wheat that year, you allow that to move but everything else is fixed.
Then there are Cost based contracts. But remember, only authorized costs get reimbursed.
Cost plus fixed fee – Here, the seller gets their costs reimbursed plus we give them a fee for their trouble.
Cost plus incentive – These are similar to fixed price plus incentive but based on cost. In these, if the costs are more or less than estimated, we and the seller share extra costs or savings in a pre-determined split, usually 3/4:1/4
Cost plus award – The seller only receives the award if they complete the major deliverable, otherwise they are just reimbursed for their costs
Finally there are Time and material contracts: We pay the sellers based on their rate and a pre-determined cost for all materials. They make their profits on the rate.”
Fred was writing down the details of these different contracts. Abbot Crawford and Father Drew were looking over his shoulder, whispering the spelling of the more difficult words into his ears.
Father Drew spoke up. “So which is the best type of contract for us?”
“There is no best contract. They depend on the situation. If you want to take no risk in cost and don’t care when the deliverable is complete, use firm fixed price. If you want to reward the completion of a particularly difficult item, Cost plus award might work best. If you want to encourage speed of delivery, try a fixed price plus incentive. Also, the seller might want to limit their risks when dealing with changing prices by using Fixed Price with adjustments or Time and Material. You just need to know what the different types are, see how your risks are minimized and your costs will vary and choose the best type for each situation.”
The Abbot shook Gwilym’s hand and thanked him. “It has been an education. Well Father Drew, with these ideas, I think we can make contracts for the work that we need to farm out to others. Let’s do it.”