Procurement and closure - Planning and managing procurement

Learning Outcomes

This article explains planning and managing procurement as required for the PMP exam. After reading, you will know how to decide between internal and external work (make-or-buy), choose and administer contract types, establish clear statements of work, select sellers using defined criteria, and conduct proper procurement and project closure. You will also be able to describe risk sources in contracts, integrate closure activities, and anticipate common PMP exam traps in these areas.

PMP Syllabus

For PMP, you are required to understand how procurement planning, contract management, and closure fit with project success. Focus your revision on:

• Analyzing whether project work should be done internally or externally (make-or-buy decisions).
• Preparing procurement management plans and statements of work.
• Identifying and selecting appropriate contract types (fixed-price, cost-reimbursable, time and materials).
• Defining and applying source selection criteria to choose vendors.
• Managing contract changes, claims, and contract performance.
• Integrating procurement closure with project or phase closure, including validation, acceptance, and records management.
• Ensuring all contractual obligations are met, completion is formally accepted, claims settled, and documentation finalized.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is the primary purpose of a make-or-buy analysis in the procurement process?
   1. To compare contract types
   2. To decide which project work to outsource
   3. To negotiate seller incentives
   4. To analyze project risks
2. Which contract type gives the most cost certainty to the buyer when requirements are stable?
   1. Fixed-price
   2. Cost-reimbursable
   3. Time and materials
   4. Retainer
3. At what point must all open claims and unresolved disputes with vendors be settled?
   1. During contract negotiation
   2. At procurement closure
   3. After stakeholder engagement
   4. During project initiation
4. What key activity must a project manager complete to integrate procurement and project closure?
   1. Negotiate discounts
   2. Obtain formal acceptance of contracted deliverables
   3. Start a new procurement
   4. Ignore performance data

Introduction

Procurement and closure are critical to delivering projects on time and within budget. Effective procurement ensures clear expectations, proper resource allocation, and fair contractual relationships, while closure protects the organization by fulfilling obligations and documenting completion.

Procurement Planning and Make-or-Buy Analysis

Procurement planning determines if work should be completed internally or acquired from an external source. This analysis considers cost, skills, lead time, intellectual property, and risk.

Key Term: Procurement Management Plan
A documented strategy describing how project procurements will be planned, executed, managed, and closed, including roles and closure steps.

Key Term: Make-or-Buy Analysis
A systematic process that evaluates whether a project task should be done by the project team or outsourced to a vendor. It considers value, cost, skills, and delivery risk.

Developing Clear Statements of Work

The success of any procurement begins with a comprehensive and precise statement of work (SOW). The SOW should specify deliverables, required standards, milestones, and clear acceptance criteria.

Key Term: Statement of Work (SOW)
A detailed description of the procurement's desired deliverables, quality standards, milestones, and how deliverables will be accepted.

Choosing Contract Types and Distribution of Risk

Selecting the appropriate contract type manages risk and ensures clarity. The main contract types are:

• Fixed-price contracts: Best for well-defined requirements; seller assumes most risk. The total price is set in advance.
• Cost-reimbursable contracts: Suitable for uncertain work; buyer assumes most risk.
• Time and materials contracts: Both parties share risk; used for flexible or short-term needs.

Key Term: Fixed-Price Contract
A legal agreement with a set price for defined goods or services, transferring most risk to the seller.

Key Term: Cost-Reimbursable Contract
The buyer pays actual costs plus a fee. Used when work is uncertain or requirements may change.

Key Term: Time and Materials Contract
The buyer pays for actual work hours and materials, sometimes with a cost cap. Used for short-term or undefined work.

Source Selection and Seller Evaluation

A structured seller evaluation process uses predefined criteria to compare vendors on price, technical capability, delivery record, and ability to fulfil the SOW.

Key Term: Source Selection Criteria
Objective factors for scoring seller proposals, such as experience, price, technical approach, and past performance.

Contract Administration

Contract administration is the ongoing process of ensuring both parties meet their obligations, updating records, conducting performance reviews, addressing changes, and managing claims. Change is inevitable; contracts should specify clear change procedures.

Key Term: Change Control System
A defined procedure for requesting and approving contract and project changes, including authority levels and required documentation.

Key Term: Claim
A formal request from a buyer or seller for additional time, compensation, or relief due to disagreements or contract changes. Claims must be managed and settled before closure.

Procurement Closure and Project Closure

Procurement closure means verifying that all contractual deliverables are met, unresolved claims settled, and documentation archived before ending the relationship. Procurement closure must be integrated with phase or project closure for full accountability.

Key Term: Procurement Closure
The formal process of verifying that all procurement obligations have been met, closing contracts, and resolving all outstanding issues.

Key Term: Project (or Phase) Closure
The process of completing all project activities, accepting results, archiving documents, and releasing resources.

Closing Steps

Typical closure steps are:

1. Verify every contractual deliverable and standard has been fulfilled.
2. Obtain formal acceptance and signoff from the buyer.
3. Settle every remaining claim or dispute. Document any escalations.
4. Update records, archive documents, and complete administrative closeout.
5. Release project resources and vendors for future work.

Worked Example 1.1

A project is building a custom IT system. Midway, the PM determines that in-house skills are insufficient for a key module and decides to procure it externally. What approach should be used, and how should closure be managed?

Answer: The PM conducts a make-or-buy analysis, prepares an SOW, selects a contract type matching risk (e.g., fixed-price if requirements are clear), and evaluates vendors with documented selection criteria. Contract terms define expectations and closure steps, ensuring all obligations are fulfilled before formal closeout and resource release.

Worked Example 1.2

At the end of a construction project, a vendor claims delays due to changes in site conditions and requests additional payment. How should the project manager address this before contract closure?

Answer: The PM reviews all change orders, contract documentation, and the claim's basis. Negotiation or dispute resolution must settle the claim. Only when all claims are resolved—or a clear process for escalation is documented—can the procurement be formally closed.

Exam Warning

Failing to verify deliverables, settle claims, or fully archive contract data may result in legal exposure, confusion, or incomplete project closure. On the exam, incomplete closure steps are a frequent source of traps.

Revision Tip

Review the requirements of both procurement and project closure. Ensure your closure checklist includes deliverable validation, claim settlement, acceptance signoff, and resource release.

Summary

Procurement planning, contract management, and closure are essential to securing the right resources and protecting the organization from risk. Key activities are make-or-buy analysis, SOW preparation, contract selection, sourcing, performance monitoring, and integrating contract closure with overall project completion. Document all requirements, decisions, and closure steps for full accountability.

Key Point Checklist

This article has covered the following key knowledge points:

• Make-or-buy analysis guides outsourcing and resource strategy.
• SOWs set deliverable expectations for vendors.
• Contract types allocate risk and define payment.
• Source selection criteria ensure fair, objective vendor choice.
• Change control systems and claims management are part of contract administration.
• Procurement closure verifies obligations are met, claims settled, and resources released.
• Administrative and procurement closure must be coordinated for risk protection and full project completion.

Key Terms and Concepts

• Procurement Management Plan
• Make-or-Buy Analysis
• Statement of Work (SOW)
• Fixed-Price Contract
• Cost-Reimbursable Contract
• Time and Materials Contract
• Source Selection Criteria
• Change Control System
• Claim
• Procurement Closure
• Project (or Phase) Closure