CHAPTER 2:PROJECT PROCUREMENT MANAGEMENT

1.Question: A contract obligates the seller to provide the specified product and obligates the buyer to pay for it. In this context, which of the following is a mandatory feature of a contract ?
1. Legally binding
2. Complicated
3. Very detailed statement of work
4. Sign-off by the seller

2.Question: In your project, you are entering into a lump-sum contract in the form of a purchase order. The contract is for a specified item to be delivered by a specific date for a specified price. In the contract, the profit is:
1. Determined by the buyer during contract sign-off
2. Determined by the seller during contract sign-off
3. Provided by the buyer to the seller at end of project if defined performance criteria are met
4. Not known at time of the contract sign-off

3.Question: While obtaining responses from prospective sellers, you mention that you will "Require certified PMPs as project managers for the project." This is an example of:
1. Objective Evaluation Criteria
2. Subjective Evaluation Criteria
3. Procurement Documents
4. Statement of Work
4.Question: In your project, you plan to sub-contract the machining of high-value equipment and are preparing documents needed to support the Request Seller Responses process and Select Sellers Process. Since your sub-contracting requirements are very demanding, you want to ensure that the sub-contracted project has a project team which comprises technical people with proven expertise in the field. This is an example of :
1. Objective Evaluation Criteria
2. Subjective Evaluation Criteria
3. Statement of Work
4. None of the above

5.Question: In your project, you are in the "Plan Contracting" process, where you are preparing documents needed to support the Request Seller Responses process and Select Sellers process. In this context, you are preparing Procurement Documents to seek proposals from prospective sellers. All the following statements about Procurement Documents are accurate EXCEPT:
1. The buyer structures procurement documents to facilitate an accurate and complete response from each prospective seller
2. Issuing a request to potential sellers to submit a proposal or bid is done formally in accordance with the policies of the buyer`s organization
3. With Government contracting, some or all of the content and structure of procurement documents can be defined by regulation.
4. The term proposal is usually used when seller selection decision will be based on price

6.Question: The process of identifying which products or services can be procured outside the project organization is done as part of:
1. Request Seller responses
2. Plan contracting
3. Contract Administration
4. None of the above
7.Question: Early termination of a contract is a special case of contract closure. This can happen because of (choose the best answer):
1. Default of buyer
2. Default of seller
3. Mutual agreement of the parties
4. Any of the above reasons

8.Question: In a make or buy analysis, you will lean towards making the product/service inhouse in all the following cases except:
1. Item under consideration is a capital item which can be used for other projects in the same organization (so, ongoing need of the item)
2. Your organization is going through a slack period and some resources are underutilized
3. The item under consideration is a Proprietary or business critical product which is core business for company
4. Item under consideration is non-core to your business, but your company has the requisite skills for developing the product in-house if required.


9.Question: Your company has decided to outsource one of its IT product development to another company. After evaluating all sellers, it was decided to select ABC IT Services for the contract. You are now clarifying the structure and requirements of the contract so that mutual agreement can be reached prior to signing the contract. All the following statements about Contract Negotiation are correct EXCEPT:
1. You have to discuss technical and business management approaches, proprietary rights, overall schedule, payments, and price
2. At the end of the contract negotiation, you will have a contract which can be signed by the buyer or seller
3. Project manager is the lead negotiator in the contract
4. Final contract language will reflect all agreements reached
10.Question: You are considering whether to buy or make a software product.

* If you buy, the cost is $ 80,000 and the cost of procurement and integrating in your company is $ 1000
* If you want to build yourself, the product will require 7 software engineers working 3 months. Salary of each software engineer is $ 4,000 per month. The overhead costs apportioned to the project will be $ 2,000.

Which option will you choose?
1. Buy
2. Build
3. Neither build nor buy
4. Need more information about the suppliers before making a decision

11.Question: As a buyer, you recently conducted a audit of your seller to determine weaknesses in the seller`s processes that need to be corrected. You want to document the results of your buyer audit, and the communication you had with the seller. This should be done using:
1. Performance Reports
2. Correspondence
3. Contract Documentation
4. Procurement Audits
12.Question: Since the buyer could not meet the requirements of the contract, you(the seller) want to terminate the contract early. This should be done as part of:
1. Procurement Planning
2. Contract Administration
3. Contract closure
4. Administrative closure

13.Question: You would like to obtain information, quotations, bids, offers or proposals from sellers as part of "Request Seller Responses" process. Which is the best thing to do during this process?
1. Determine whether a product should be outsourced or manufactured in-house
2. Ensure that prospective sellers clearly understand the technical and contract requirements
3. Clarify on the structure and requirements of the contract, before sign-off
4. Prepare an independent estimate to check the proposed price of the different sellers
14.Question: You are in the process of doing procurement planning and deciding on the most appropriate type of contract for the project. You should consider all the following types of contracts EXCEPT:
1. Cost plus Fixed Fee
2. Time And Material
3. Fixed Price with Incentive Fee
4. Cost plus Percentage of Cost
15.Question: If you would like to compare different suppliers and rate their proposals, you should use:
1. Bidder Conferences
2. Qualified Seller Lists
3. Procurement Documents
4. Evaluation Criteria
16.Question: A contract where the buyer reimburses the seller for the cost incurred by the seller, and also provides for a fixed amount of profit is also called:
1. Cost Plus Incentive Fee
2. Cost Plus Fixed Fee
3. Time and Material Contract
4. Cost Plus Percentage of cost
17.Question: A contract is legally binding in all the following cases EXCEPT:
1. Seller is not able to produce goods as part of the contract
2. The signatory for the contract leaves the company
3. Buyer is not able to satisfy financial obligations
4. The contract violates the law of the land
18.Question: You wanted to sub-contract building of 1,00,000 ball-bearings for your automobile company to a third party vendor. Accordingly, you had conducted an independent estimate of how much it would cost and the estimate was $ 500 per bearing. However, when you asked for bids and proposals from prospective sellers, the minimum price quoted was $ 750 per bearing. Your project sponsor wants to know why there was such a big anamoly in the "should-cost price" and estimates that you were getting from sellers. You state that the reason(s) is(are):
1. Contract statement of work was not adequate
2. Prospective sellers misunderstood the contract statement of work
3. Marketplace changed and input costs for manufacture of bearings had increased
4. Any one of the above


19.Question: You have contracted some work to a vendor, and would like to identify successes and failures that warrant recognition in the preparation or administration of other procurement contracts within the performing organization. This can be acheived using a:
1. Procurement Audit
2. Contract File
3. Contract Performance Reporting
4. Lessons Learned Documentation
20.Question: Contract Administration is the process of ensuring that the seller`s performance meets contractual agreements. All the following will facilitate Contract Administration EXCEPT
1. Contract
2. Work performance information
3. Approved change requests
4. Contract documentation

21.Question: In your new project, you have a critical deliverable to be provided within a short duration of 5 months. Because of the short duration, you do not have the luxury of going through Solicitation Planning and selecting the "best" supplier. So, you decide to do sign a contract with a supplier with whom your company has done some work in the past. The risk you are accepting in this situation is:
1. Ability of supplier to deliver the goods
2. Collusion between the supplier and your team
3. Lack of proper scope definition
4. Lack of a legally binding agreement
22.Question: You would like to provide incentives to sellers in contract so as to:
1. Align the goals of the buyer and seller
2. Ensure that there is no gold plating
3. Reduce cost for the buyer
4. Improve profits for the seller
23.Question: You are considering whether to buy or lease a machine for your heavy engineering plant. Here is some information your finance department provided you.

* If you buy, the cost is $ 29,000 and the one-time cost of procurement and integrating in your company is $ 1000
* If you lease, you have to pay $ 10,000 as down-payment and $ 5,000 per month license fee

What is the breakeven duration after which you should buy (instead of leasing) the product?
1. 3 months
2. 4 months
3. 5 months
4. Cannot be determined with available information
24.Question: In a fixed price contract, the buyer decides to increase the scope of the work to make the product better. In this case the buyer can do all the following except:
1. Issue a Contract Change Request
2. Start another Fixed Price contract to do the additional work
3. Start another Cost Reimbursable contract to do the additional work
4. Cancel the existing contract, and start a new contract
25.Question: If the scope of your project is not well defined, which type of contract helps in minimizing your(buyer`s) risk?
1. Fixed Price
2. Fixed Price with Incentive Fee
3. Cost plus Fixed Fee
4. Cost plus Percentage of Cost


ANSWERS:

1. Ans: 1
Justification: A contract is a legal relationship subject to remedy in the courts.

Reference: PMBOK Third Edition, Page Number: 270


2. Ans: 4
Justification: Fixed-price or lump-sum contracts: This category of contract involves a fixed total price for a well defined product... The simplest form of a fixed price contract is a purchase order for a specified item to be delivered by a specified date for a specified price.

Reference: PMBOK Third Edition, Page Number: 277

comments: The profit is not known at time of contract sign-off, only the Fixed price of the contract is determined at that time


3. Ans: 1
Justification: Evaluation Criteria are used to rate or score proposals. They may be objective (e.g., "The proposed project manager must be a certified PMP") or subjective (e.g. "The proposed project manager must have documented previous experience with similar projects)

Reference: PMBOK Third Edition, Page Number: 283



4. Ans: 2
Justification: Evaluation criteria are used to rate or score project proposals. They can be objective ... or subjective (e.g. the proposed project manager requires needs to have documented previous experience with similar projects).

Reference: PMBOK Third Edition, Page Number: 283


5. Ans: 4
Justification: A term such as bid, tender or quotation is generally used when the seller selection decision will be based on price (as when buying commercial or standard items), while a term such as proposal is generally used when other considerations, such as technical skills or technical approach are paramount.

Reference: PMBOK Third Edition, Page Number: 282


6. Ans: 4
Justification: Plan purchases and acquisitions - determining what to purchase or acquire and determining when and how.

Reference: PMBOK Third Edition, Page Number: 269



7. Ans: 4
Justification: Early termination... can result from a mutual agreement of the parties or from the default of one of the parties.

Reference: PMBOK Third Edition, Page Number: 295


8. Ans: 4
Justification: If it is a non-core item, it may make sense to consider outsourcing as an option - it may be cheaper than making the item inhouse.

9. Ans: 3
Justification: The project manager may not be the lead negotiator on the contract.

Reference: PMBOK Third Edition, Page Number: 288


10. Ans: 1
Justification:
If you buy, cost is : $ 80,000 + $ 1,000 i.e. $ 81,000
If you build, cost is : $ 4,000 x 7 x 3 + $ 2,000 = $ 86,000

So, it is better to buy


11. Ans: 2
Justification: Correspondence: Contract Terms and conditions often require written documentation of certain aspects of the buyer/seller communications, such as warnings of unsatisfactory performance and contract changes or clarifications. This can include the reported results of buyer audits and inspections that indicate weaknesses that the seller needs to correct.

Reference: PMBOK Third Edition, Page Number: 294



12. Ans: 3
Justification: Early termination of a contract is a special case of contract closure

Reference: PMBOK Third Edition, Page Number: 295



13. Ans: 2
Justification: Bidder conferences(a tool for Request Seller Responses process) are meetings with prospective sellers prior to preparation of a bid or proposal. They are used to ensure that all the sellers have a clear, common understanding of the procurement.

Reference: PMBOK Third Edition, Page Number: 285

comments:
* Option 1 is Make or Buy Analysis - done during Plan Purchases and Acquisitions
* Option 3 is Contract Negotiation - done during Select Sellers process
* Option 4 is Independent Estimates - done during Select Sellers process



14. Ans: 4
Justification: Cost plus Percentage of Cost is not a good option under any situation. It provides no incentive on the seller to control costs (as a matter of fact, the seller would like to increase costs to increase profits). So, the buyer should never enter into this type of contract - such contracts may also be considered illegal in some companies or government establishments



15. Ans: 4
Justification: Evaluation criteria are developed and used to rate or score proposals

Reference: PMBOK Third Edition, Page Number: 283



16. Ans: 2
Justification: Cost-plus-fixed-fee(CPFF): Seller is reimbursed for allowable costs for performing the contract work and receives a fixed fee payment calculated as a percentage of the estimated project costs. The fixed fee does not vary with the actual costs unless the project scope changes.

Reference: PMBOK Third Edition, Page Number: 278


17. Ans: 4
Justification: A contract is a legal relationship subject to remedy in the courts.

Reference: PMBOK Third Edition, Page Number: 289

comments: The only situation where a contract may be nullified is because it violates the law of the country.


18. Ans: 4
Justification: Independent estimates: .... Significant differences from these cost estimates can be an indication that the contract statement of work was not adequate, that the prospective seller either misunderstood or failed to respond fully to the contract statement of work, or that the marketplace changed

Reference: PMBOK Third Edition, Page Number: 288

19. Ans: 1
Justification: A procurement audit is a structured review of the procurement process from the Plan Purchases and Acquisition process through Contract Administration. The objective of the procurement audit is to identify successes and failures that warrant recognition in the preparation or administration of other procurement contracts on the project, or on other projects within the performing organization.

Reference: PMBOK Third Edition, Page Number: 296



20. Ans: 4
Justification: Contract documentation is an output from the Contract Administration process; all the other options are inputs and facilitate Contract Administration (Refer Figure 12-7)

Reference: PMBOK Third Edition, Page Number: 291


21. Ans: 1
Justification: The risk here is that even though the supplier has worked with the company in the past, they may not be having the required skills for the new project.


22. Ans: 1
Justification: Incentives are provided in contracts to ensure that the goals of both the buyer and seller are the same.


23. Ans: 2
Justification:
If you buy, cost is : $ 29,000 + $ 1,000 = $ 30,000
Assuming the lease is for M months, the cost is: $ 10,000 + $ 5,000 x M

So, breakeven point i.e. when The cost of buy = cost of lease
i.e. $ 30,000 = $ 10,000 + $ 5,000 x M
M = 20,000/5,000 = 4 months


24. Ans: 4
Justification: Cancellation of the contract has to be done by both the seller and buyer (i.e. it cannot be done unilaterally by the buyer)

25. Ans: 3
Justification: Option 3 is the best of the available options.

* Option 1 and Option 2: Fixed Price contract should not be entered into if scope is not well-defined
* Option 4 : Cost plus percentage of cost is not a good option because to increase profit, seller would try to increase costs.