Procurement Formulas and Contracts

Video Activity

This lesson covers procurement. In this lesson, the instructor offers a whiteboard example of a formula that might be used on the PMP exam and shows how to calculate financial scenarios in a way that best benefits the project. In the process of procurement, it is important to remember the contact, which is the mutually binding agreement between buy...

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Time
5 hours 14 minutes
Difficulty
Intermediate
CEU/CPE
10
Video Description

This lesson covers procurement. In this lesson, the instructor offers a whiteboard example of a formula that might be used on the PMP exam and shows how to calculate financial scenarios in a way that best benefits the project. In the process of procurement, it is important to remember the contact, which is the mutually binding agreement between buyer and seller. The contact must contain these five components to make it legal:

  • Capacity
  • Consideration
  • Offer
  • Legal
  • Acceptance

[toggle_content title="Transcript"] The exam might ask you might ask you a renting on running equipment or buying. And I will give you a word problem. It could be, to rent equipment, could be $50 a day. To buy equipment, $700. In this example, it is ten dollars a day for maintenance. On the left side, I the rental information to start off with and on the right side, to buy the equipment. To rent is $50 day so its 50 times x. X being how many days. It's equal to 700 dollars which is the initial cost, plus ten times x for the maintenance cost per day. I want to simplify this formula. So am going to get rid of the variance over here, and make it a solid number. So $700 I am subtracting 10x so you get 40x on the left side down. I take this 10x and I move it over here and that give me 40x. 40x equals$ 700 now. Now I want to get rid of 40 and just have the x so x equals $700 divided by 40. X equals 17.5 days. How can I check this for an exam. I can take 50 times x. X being 17.5. you have a calculator on the computer so 50 times 17.5 is $875. 700 plus 10 times x. So 10 times 17.5, is 175. When I add that to the 700 I get 875. So left side equals the right side. So I know my math is good. The exam will give the multiple choice so I could say if the project is 16 days, in this scenario, do you buy or rent the equipment. Its only 16 days so it's less than 17.5 so in this scenario I would rent the equipment. If the project was three days, its more than 17.5 days in that case it makes sense to buy. You're doing whatever's financially best for the project. One other thing you have to understand for procurement, is what is a contract. Contract is a mutually binding agreement between buyer and seller. It must contain five components to be a real contract. The first is capacity. The individuals have to be of age. They need to have legal entities. You have to be mentally aware. You can't make a contract if you don't have the capacity. It must have consideration. This means, the item or service, has to go from the seller to the buyer. Must have an offer. There has to be an exchange between the buyer and the seller. The seller must get paid by the buyer to give whatever item. Has to be something for something. Has to be legal. You cannot make a contract for something illegal. Has to have acceptance. It has to have a way for the buyer to accept the product from the seller. Another huge part of procurement, they have to throw out names. You have to identify who is the seller, who is the buyer. From the exam, they can be addressing the person as a client a customer, a prime, a contractor, the government or a purchaser. Those are all types of buyers so know those as buyers. They can also be talking about the seller. The seller can be a contractor, just like in as a buyer. So you have to identify which contact they are talking about as contractor. The main ones are subcontractor, seller or vendor, service provider or supplier. Big thing is they are going to give you a word problem and it's just being able to identify who are they talking about in that problem. [/toggle_content]

Video Transcription
00:04
so the exam might ask you a question on run equipment or by and they'll give you a word sinner word problem. And
00:12
it could be to run equipment. Could be $50 a day
00:16
to buy. Equipment is $700. Plus, there's gonna be some kind of maintenance fee in this example. It's $10 a day,
00:23
uh,
00:24
for maintenance. So,
00:28
um,
00:29
I'm gonna put on the left side the rental information to start off with on the right side
00:34
to buy the equipment.
00:36
So to rent is $50 a day. So it's 50 times x X being how many days
00:42
it's equal to $7 which is the initial cost plus 10 times X for the, um,
00:49
the maintenance costs per day.
00:51
Well, I wanna simplify this formula,
00:55
so I'm gonna get rid of the variance over here
00:57
and making a Stalin number. So it's
01:00
$7.
01:02
I'm subtracting 10 acts, so I get 40 x on the left side now.
01:06
So I did was I took this 10 X
01:10
and I
01:11
moved it over here.
01:12
That gave me 40 X.
01:15
So 40 X equals $700. Now,
01:19
Now I want to get rid of 40 and just have it be ex. So X equals $7.
01:25
Divided by 40
01:26
x equals 17.5 days.
01:30
Well, how can I check this? You know, if I'm in the exam, I could take
01:34
15 times X X being 17.5.
01:38
Um, you'll have a calculator on the computer.
01:42
So 50 times 17.5 is $825
01:51
and
01:52
700 plus 10 times x. So 10 times 17.5 is 125.
02:00
When I add that to the 700 I get
02:02
8 75 So the last sign equals the right side.
02:07
So I know my math is good
02:09
and
02:10
the exam will give you multiple choice. So I could say,
02:15
if the
02:16
if the project is 16 days,
02:21
um in the scenario, do you
02:23
rent or do you buy the equipment off? It's only 16 days. It's less than 17.5.
02:30
It's in this scenario. I would run the equipment,
02:31
but the project was 20 days. It's more than 17.5 days.
02:37
In that case, it makes sense to buy your doing whatever is financially best for the project.
02:42
So one of the things you have to understand for a procurement is ah, what is a contract?
02:46
Contractors? A mutually, uh, finding agreement between buyer and seller.
02:53
It must contain five components to be a legal contract.
02:57
First is capacity.
03:00
The individuals have thio be of age. Um,
03:05
they need thio
03:07
have legal entities. So,
03:09
uh,
03:13
you have to be mentally aware you can't make a
03:17
can make a contract if you don't have the capacity
03:21
must have consideration. So this means
03:23
the
03:24
item or the service has to go from the cellar to the buyer
03:30
must have an offer. So there has to be
03:32
exchange between the buyer and the seller. So
03:36
there has to be, for example, the cellar must get paid by the buyer to give whatever item.
03:40
Um,
03:42
has to be something for something.
03:44
It has to be legal. You cannot make a contract for something illegal, um,
03:51
and
03:52
has to have acceptance. It has to have a way for the buyer to accept the product from the cellar.
04:00
So another a huge part in procurement,
04:04
they're gonna throw out names. So you have to be a little identify who is a seller who is the buyer.
04:10
So in the exam they could be addressing a person is a client, a customer, a prime, A contractor,
04:17
Uh, the government or a purchaser? Those are all types of buyer. So
04:23
no, those those buyers,
04:26
they can also be talking about a cellar. So a seller could be a contractor, just like in
04:31
as a buyer. So you have to feel identify
04:35
which content context they're talking about is a contractor.
04:40
Um, the main ones are subcontractor cellar or thunder
04:45
service provider or supplier.
04:47
Um,
04:48
it's the big thing is they're gonna
04:50
give you a word,
04:54
a word problem, and it's just being will identify. Who were they talking about in that word problem?
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