PMP Exam Flashcards: Procurement, Contracts, Make-or-Buy, Vendor Selection

The three main contract types are fixed-price, cost-reimbursable, and time and materials. Fixed-price contracts set a total price for the defined scope, placing cost risk on the seller. Firm fixed-price is the most common with no price adjustment. Fixed-price incentive fee rewards the seller for exceeding performance targets. Cost-reimbursable contracts reimburse the seller's actual costs plus a fee, placing cost risk on the buyer. Cost plus fixed fee adds a set profit. Cost plus incentive fee adjusts profit based on performance.

Use a fixed-price contract when the scope of work is well-defined and unlikely to change, the seller can reasonably estimate costs, and you want cost certainty with minimal buyer risk. Use a cost-reimbursable contract when the scope is uncertain or likely to evolve, such as research and development or early-phase design, when the buyer needs flexibility to direct the work, and when no seller will accept the risk of a fixed price due to uncertainty.

A make-or-buy analysis is a decision technique comparing the costs, benefits, and risks of producing a deliverable internally versus purchasing it from an external vendor. Factors favoring make include keeping core competencies in-house, maintaining control over quality and schedule, protecting proprietary information, and lower long-term cost when demand is high. Factors favoring buy include lack of internal expertise, lower cost through vendor economies of scale, reduced management burden, and flexibility to scale resources.

A statement of work, or SOW, is a detailed description of the products, services, or results to be provided by the seller under a contract. It defines the scope of procurement work with enough specificity for prospective sellers to determine if they can perform the work and to price their proposals accurately. A procurement SOW typically includes background and context, objectives and goals, scope of work with specific tasks and deliverables, acceptance criteria, performance standards, schedule requirements, and applicable standards or regulations.

The vendor selection process begins with developing selection criteria such as technical capability, past performance, price, management approach, and financial stability. Vendors submit proposals or bids in response to the request for proposal or request for quotation. The evaluation team scores each proposal against the weighted criteria. Techniques include weighted scoring models, independent estimates for comparison, expert judgment, and best and final offer requests. Negotiations may follow to clarify terms before contract award.

A Request for Proposal, or RFP, solicits detailed proposals from vendors describing their approach, methodology, team, timeline, and price for a defined scope, used when the solution requires evaluation of technical approach, not just price. A Request for Quotation, or RFQ, solicits price quotes for a well-defined, standardized product or service where the buyer knows exactly what they want and selection is primarily based on cost.