BSBPMG408A Apply Contract and Procurement Procedures 1 Apply Contract and Procurement Procedures Introduction to Procurement C ertificate IV in Project

BSBPMG408A Apply Contract and Procurement Procedures1

Apply Contract andProcurement Procedures

Introduction to Procurement

Certificate IV in Project Management 17871Qualification Code BSB41507

Unit Code BSBPMG408A


• Includes processes to purchase or acquire products or services from outside of the project team

• It also includes the contract management and change control processes required to develop and implement purchase orders and contracts

• The project procurement processes form the lifecycle of any contract that is established as part of that process

• A complex project can involve managing multiple contracts or subcontracts simultaneously

• Purchasing interactions with government departments and large organisations are often dictated by complex and formal procurement policies and procedures

Project Procurement Management

Adapated from PMBOK 4th Edition


• Project procurements often involve a formal contract, contracts are legal documents between a buyer and a seller that are mutually binding

• Sellers are obliged to provide the specified products or services

• Buyers are obliged to provide monetary compensation• Some contracts are extremely complex and others can be

very simple• Contracts will include terms and conditions specified by the

buyer and negotiated with the seller• Contracts normally require an extensive negotiation and

approval process including expert assistance form procurement and legal professionals

Procurement Contracts



Procurement Approaches

Quotation

ClosedTender

PreviousSupplier

OpenTender

PreferredSuppliers

• Often requires three to five quotes and selecting the lowest or the one that best fits the requirements

• Proposals are sought from a pre-selected group of potential suppliers

• Proposals are sought from all potential suppliers

• Recurring purchasing from a previously selected and well performing supplier

• Pre-qualified list of potential suppliers for different categories of products or services


• Procurement processes for large organisations and government departments normally include some form of tender process

• Tender processes can be very complex and time consuming so they are normally reserved for major procurement, often over a particular monetary threshold

• There are different types of tenders available – open and closed

• There are many different potential steps that can be included in the tender process depending on the preferences and policies of the purchasing organisation

• Tenders result in a legally binding contract between the buyer and the seller

Tender Process



Common Tender Process

NegotiateContract

AnnounceSelection

ReviewSelectionCriteria

SupplierSubmissions Requirements

BriefingSession

IssueRequest

ForProposal

PreQualification

Briefing

ReviewRespondents

Request forInformation

ProcurementProcess

Selection

BusinessRequirements

Definition


Tender Definitions

RFI – Request for Information• An open enquiry that spans the market seeking broad data and

understanding

RFQ – Request for Quotation• An opportunity for potential suppliers to competitively cost the final

chosen solution(s)

RFT – Request for Tender• An opportunity for potential suppliers to submit an offer to supply

goods or services against a detailed tender


Tender Definitions

RFP – Request for Proposal• An opportunity for potential suppliers to submit a detailed proposal

on their ability to meet the requirements of the tender

Supplier Briefings• Held by the buyer with all potential or short listed supplier to answer

questions and clarify requirements

EOI – Expression of Interest• An opportunity for potential suppliers to show interest in responding

to a tender


Procurement Policies and Procedures

• There are many excellent procurement related websites and resources available online –

www.tenders.gov.au – Federal government tenderswww.tenders.nsw.gov.au - NSW government tenderswww.tenders.vic.gov.au – VIC government tenderswww.vgpb.vic.gov.au – VIC purchasing boardwww.finance.gov.au/procurement/ - Federal purchasing policywww.apcc.com.au – AUS procurement and construction councilwww.treasury.gov.au/procurement/ - Federal government

procurement guidelines and information


Apply Contract and Procurement Procedures

Procurement Processes

Certificate IV in Project Management 17871Qualification Code BSB41507

Unit Code BSBPMG408A


Project Procurement Management Processes

PMBOK Project Procurement Management Processes -

12.1 Plan Procurements

12.2 Conduct Procurements

12.3 Administer Procurements

12.4 Close Procurements

PMBOK 4th Edition



Adapted from PMBOK 4th Edition

Initiation Planning Execution Close

Monitor

Control

• The process of documenting project purchasing decisions, specifying the approach and identifying potential suppliers.

• It identifies project needs that are best met by acquiring products or services from outside of the project organisation. It considers potential suppliers and the contractual arrangements that may be required to manage these external parties to achieve the project objectives.

• Closely related to Risk Management

• Occurs during Planning



• Inputs to Plan Procurements Scope Baseline - Scope Statement and WBS Requirements documentation Project Schedule Teaming Agreements - with third parties Risk Register Activity Resource Requirements Activity Cost Estimates Cost Performance Baseline Enterprise Environmental Factors

– Marketplace conditions and products/services available

– Suppliers past performance

– Typical terms and conditions

Organisational Process Assets– Formal procurements policies and procedures

– Preferred Supplier AgreementsAdapted from PMBOK 4th Edition



• Tools and techniques to Plan Procurements –


Make or BuyAnalysis

ExpertJudgement

ProcurementPolicies &

Procedures

PreferredSupplier

Agreements

ContractTypes

ProcurementApproach



Make or Buy Analysis

– Determines whether particular work can be accomplished by the project team or must be purchased from outside sources

– The capability may exist internally but may be committed to other projects

– Budget constraints can influence make or buy decisions

– Make or buy decisions need to cover the following –

Purchase versus lease

Related costs – direct costs and indirect support costs




Make or Buy Analysis: Would you make or buy given the following aims?

• Reduce costs• Easy integration of operations• Utilize skills of suppliers• Utilize existing capacity that may be idle• Maintain direct control• Small volume requirement• Having limited capacity or capability• Avoid unreliable supplier base• Maintain design/production secrecy• Supplement existing labor force• Stabilise existing workforce

From Kerzner and Saladris, 2006



Purchase vs Lease?

Consider the following situation:

You have the option to buy a piece of equipment for $12,000. You can also lease the equipment for $70 per day plus a one-time fee of $8,000. You need the equipment for 75 days.

Should you purchase or lease it?

What is the break-even point in days?

From Kerzner and Saladris, 2006



Expert Judgement – Consulting procurement and legal professionals– May be internal or external to the project organisation

Preferred Supplier Agreements– Many organisations (particularly government) negotiate

agreements with pre-qualified suppliers of regularly purchased products or services

– The project team then needs to select the supplier from the preferred supplier agreement

– It makes it much easier to find reputable suppliers and reduces requests for information within the market

– Exceptions normally need to be approved by an internal Procurement Department




Procurement Approach

– Once the Buy decision has been made, many different approaches can be used to procure the required products or services

– Three Quotes – traditionally three quotes are obtained for certain trades and then the cheapest is selected, depending on conditions

– Previous Supplier – may be related to preferred supplier agreements, a well known supplier that has been used in the past is automatically chosen

– Tender Processes – can be open to the entire market or closed to specific suppliers often from the preferred supplier list




Procurement Policies and Procedures

– Most large organisations and all government departments will have extensive policies and procedures to govern purchasing

– These often include – Preferred Supplier Agreements Purchase Ordering and Supply processes Delegated authorities for approval of expenditure

Contract Types

1. Fixed Price

2. Cost Reimbursable

3. Time and MaterialsAdapted from PMBOK 4th Edition


Fixed Price Contracts

• Involves setting a fixed total price for a defined product or service

• Often include financial incentives for achieving or exceeding objectives such as time, cost and quality

• Suppliers assume much of the delivery risk and are legally obligated to complete the contract

• Financial and legal penalties are common if the contract conditions are not met

• Normally the most complex to negotiate and administer



Types of Fixed Price Contracts

Firm Fixed Price Contracts (FFP)– Most common form of fixed price contract, favoured by most

buying organisations– Price is set at the outset and only subject to change if the scope of

work formally changes– Any cost increase due to poor performance is the responsibility of

the seller– The buyer must precisely specify the requirements, any changes to

the specification will normally result in additional costs– Doesn’t normally result in the BEST price for the product or service

Buyer Risk is LOW but must document detailed requirements

Seller Risk is HIGH so normally charge a premium



Fixed Price Incentive Fee Contracts (FPIF)– Similar to basic Fixed Price but with some flexibility based on

performance under the contract– Financial incentives and penalties are often negotiated based on

time, cost and quality– The Seller can receive additional payment if they outperform or

may be subject to addition costs if they under perform– Not popular with Sellers for new products or services, or high

risk procurement– Under FPIF a price ceiling is set, all costs above this are the

responsibility of the Seller

Similar Buyer and Seller Risk Profiles to Fixed Price

Much more COMPLEX to negotiate and administer



Fixed Price with Economic Price Adjustments (FP-EPA)– Normally used for long term contracts – Basic Fixed Price with clauses allowing for a variation in price

should economic conditions change– Price adjustments may be allowed due to inflation, commodity

price fluctuations and variations to exchange rates– Best if related to reliable, standard and externally calculated

financial indices– Should ideally allow for both price increases and price

decreases, but price decreases are often overlooked– Intended to protect both the Buyer and Seller from economic

conditions outside of their control

Lowest Risk Profile but COMPLEX to negotiate and administer


• Involves paying the Seller for all legitimate actual costs incurred plus an agreed fee for Seller profit

• May also include financial incentive or penalty clauses

• Delivery risk is shared between the Buyer and Seller

• Gives flexibility to the Buyer to redirect the Seller whenever the scope of work changes

• Especially popular where the Buyer cannot define detailed requirements or for high risk projects

• Financial and legal penalties are harder to enforce if the contract conditions are not met, simpler than Fixed Price to negotiate and administer

Cost Reimbursable Contracts



Types of Cost Reimbursable Contracts

Cost Plus Fixed Fee Contracts (CPFF)

– Seller is reimbursed for all allowable costs for performing the agreed work

– Seller receives a fixed fee payment calculated as a percentage of the initial estimated project cost

– The Fee is paid only for completed work and does not change due to Seller performance – no incentives or penalties

– The Fee can only be varied due to an agreed change in project scope

Low Risk Profile but COMPLEX to negotiate and administer

Loosely defined requirements can lead to disagreements over SCOPE



Cost Plus Incentive Fee Contracts


– Seller receives a predetermined incentive fee based on meeting agreed performance objectives

– If the final costs vary from the original estimate, then both the Buyer and the Seller share the cost overrun or underrun based on a predetermined percentage split

– Approach to changes in costs due to changes in scope is unclear and can cause conflict

Medium Risk Profile and COMPLEX to negotiate and administer

Loosely defined requirements can lead to disagreements over SCOPE



Cost Plus Award Fee Contracts (CPAF)


– The profit component of the fee is only earned based on the satisfaction of broad subjective performance criteria defined and incorporated into the contract

– The amount of the fee is based solely on the subjective assessment of Seller performance by the Buyer

– Generally includes a clause where no appeals can be made on the amount of the fee.

LOW Risk Profile for Buyer, HIGH Risk Profile for Seller

Very unpopular with Sellers


• Hybrid type of contract containing both aspects of cost-reimbursable and fixed-price contracts

• Often used to acquire consultants, contract staff and subject matter experts

• Also used when the Buyer cannot, or doesn’t want to, specify the statement of work or requirements in detail

• Gives flexibility to the Buyer to redirect the Seller whenever the scope of work changes

• Many organisations will require not-to-exceed values or time limits on such contracts in order to manage and monitor costs

Time and Material Contracts (T&M)

Risk is shared between the Buyer and Seller

VERY Common for contract labour



• Outputs of this process include – Procurement Management Plan

– Detailed contents covered in slide 22 and 23

Procurement Statements of Work– Derived from the project scope baseline– That portion of project scope to be included in the particular contract

Make or Buy Decisions– Included as a table of decisions in the Procurement Management Plan

Procurement Documents– Requests for Tender– Seller Evaluations– Contracts

Source Selection Criteria– Detailed in slide 24

Change RequestsAdapted from PMBOK 4th Edition


Monitor

Control


Procurement Management Plan

• The Procurement Management Plan describes how the procurement processes will be managed.

• It is critical that it is linked to relevant industry regulations and organisational policies and procedures.

• Common inclusions in the Procurement Management Plan – Links to organisational procurement management policies and procedures Types of contracts to be used and contract templates Delegated authorities and required involvement from internal purchasing,

finance and legal experts/departments Tender document templates Assumptions, constraints and risks related to procurement Schedules of contracted deliverables Preferred supplier lists Procurement metrics and performance measurements



Procurement

Item

Procurement

Manager

Requirements Sourcing Approach

Summary Selection Criteria

Contract

Type

Major

Risks

Key Dates

Budgeted

Amount

Budget estimate or allowance

Fixed Price, Cost reimbursable or Time and Materials, often includes performance criteria

• It is often very useful to document all procurement approaches and decisions in a table known as the Procurement Planning Register

• Includes information about the sourcing approach, type of contract, selection criteria, requirements, risks etc

• Content can be tailored to organisational policies and procedures

Name and position of the person responsible for managing the procurement – often NOT the Project Manager

Procurement Planning Register

Name of the item being purchased

Approach selected for the procurement eg – three quotes, preferred supplier, tender

Primary criteria on which the selection will be made

Summary requirements forthe product or service

Summary of Risks

Major date and dependencies


Selection Criteria

• Selection criteria are often included as part of tender documents and are used to rate or score different suppliers

• Facilitate and provides justification for procurement decisions• Can be limited to purchase price for commodity type items or can

also include other selection criteria such as reputation, financial viability, fit with requirements etc

• Often weighted based on relative importance

UnderstandingOf Requirements Industry

ExperienceTechnicalApproach

ManagementApproachRisk

TechnicalCapability

Overall orLifecycle Costs

IntellectualProperty

BusinessSize & Type

ProductionCapacity

FinancialViabilityWarranty Past

Performance& References


• The process of obtaining seller responses, selecting a seller and awarding the contract

• The team applies selection criteria to the bids or proposals received from the various sellers

• The process is sometimes repeated in more detail for major procurements once a short list of qualified vendors is identified

• Often referred to as the tender process

• Occurs during Execution




Monitor

Control



• Inputs to Conduct ProcurementsProject Management PlanProcurement Management PlanProcurement Planning registerProcurement DocumentsSource Selection CriteriaSeller Short ListSeller ProposalsRisk RegisterTeaming agreements with external companiesOrganisational Process Assets –

– Preferred supplier lists

– Preferred supplier agreements

– Lessons learned on past procurementsAdapted from PMBOK 4th EditionAdapted from PMBOK 4th Edition


Monitor

Control



• Tools and techniques to Conduct Procurements –


BidderConferences

ExpertJudgement


Procedures

IndependentEstimates or

Review

ProposalEvaluationTechniques

Advertising

ProcurementNegotiations

InternetSearch



Bidder Conferences

– Also known as Contractor Conferences, Vendor Conferences, Pre-Bid Conferences

– Meetings with all prospective sellers and representatives from the buyer

– Used to clarify requirements and answer questions prior to the submission of bids or proposals

– Ensure that all sellers have a clear and common understanding of the requirements and that no bidder receives preferential treatment

– Buyers must ensure that all prospective sellers hear every question and receive every answer




Expert Judgement – Consulting procurement and legal professionals– May be internal or external to the project organisation– Establishing multi disciplined review team for the proposals

Proposal Evaluation Techniques– Used for complex purchasing decisions where the selection is

made using pre-defined and weighted selection criteria– Requires complex spreadsheet and calculations of the

responses of a selection committee– The selection committee normally consists of project team

members, key stakeholders and subject matter experts who independently rate the selection criteria

– Results are then calculated and presented to the selection committee who may alter the outcome based on other considerations




Independent Estimates and Review– The purchaser may elect to have an independent specialist

prepare an estimate of costs to provide a benchmark for the seller responses

– Significant variations in the cost estimates of the different proposals can indicate deficiencies with the requirements or statement of work

– Can also use independent experts to review the outcomes of selection processes

Advertising

– Advertisements for prospective sellers are often placed in major newspapers or on specific websites that are regularly reviewed by the providers of commonly purchased products and services

– Low cost means of expanding the pool of prospective sellersAdapted from PMBOK 4th Edition



Internet Search – Now a major tools and influence on the availability of prospective

sellers and the outcomes of procurement decisions– Many commodities and off the shelf items can be quickly located

and secured at a fixed price on the internet– Not very useful for high risk and complex procurements, except

for the location of potential sellers

Procurement Negotiations

– Many large organisations and government departments will have a specific negotiation process to ensure a fair outcome

– Can include assistance from legal and purchasing professionals

– Can also include pro forma contracts and mandatory clausesAdapted from PMBOK 4th Edition



Procurement Policies and Procedures – Most large organisations and all government departments will

have comprehensive policies and procedures– It is critical that the project team are aware of these and that they

are followed, otherwise approval may not be obtained for purchasing requirements and timeframes can be severely impacted

– These procedures will also impact the project schedule during the planning stage as critical internal specialist may not be available when required by the project

– It is often mandatory to engage internal purchasing professionals and either internal or external legal professionals

– Purchasing decisions may need to be escalated to senior management or even the Board for approval, depending on the overall cost. This can also impact timelines.




• Outputs of this process include – Selected Sellers Procurement Contract

– Statement of Work, deliverables and requirements– Timeline and pricing– Performance and reporting procedures– Roles and responsibilities– Incentives and penalties– Acceptance criteria– Warranty and insurances– Confidentiality and intellectual property

Resource Calendars Change Requests Project Management Plan updates

– Cost, Scope and Schedule baseline– Procurement Management Plan

Project Document Updates– Requirements documentation– Risk Register



Monitor

Control


• The process of managing procurement relationships, monitoring contract performance and making changes or corrections as needed

• Undertaken by both the buyer and the seller as both parties need to ensure that the other is meeting their contractual obligations

• Many organisations treat contract administration as an administrative function separate from the project and it is carried out by a Purchasing Department or by a designated functional manager

• Managing these relationships both internally and externally can be a very complex communication activity with it’s own processes and procedures that must be followed, often dictated by the terms of the contract and internal policies and procedures

• Occurs during Monitoring and Control




Monitor

Control


• This process is closely related to the following project management processes –– Direct and Manage Project Execution

– Report Performance

– Perform Quality Control

– Perform Integrated Change Control

– Monitor and Control Risks

– Control Costs

• The Project Manager must regularly monitor the efficiency and effectiveness of this process in order to successfully manage the project and any dependencies

• Close financial management is also required to ensure that payments are being made according to the terms in the contract





• Inputs to Administer ProcurementsProcurement Documents

Project Management Plan

Contract

Performance and Status Reports– From the Seller

Approved Change Requests

Work Performance Information– Quality

– Costs

– Schedule

– Scope

Adapted from PMBOK 4th EditionAdapted from PMBOK 4th Edition



• Tools and techniques to Administer Procurements –


ContractChangeControl

PaymentSystems

ProcurementPerformance

Reviews


ProceduresInspections

& Audits

ClaimsAdministration



Contract Change Control – The process by which procurements can be modified, often

included in each specific contract and can vary between them– Closely related to the processes of Control Scope and Perform

Integrated Change Control– Often jointly managed by the Project Manager and the

purchasing department

Procurement Performance Reviews– A structured review of the seller’s progress to delivery the

contracted scope and quality within the cost and timeframe that have been agreed

– Performance information is compared against actual outcomes– Often conducted by the purchasing department or internal audit




Inspections & Audits – If required by the buyer, then these will be specified in the

contract– Often involves the buyer having access to regular external audit

reports on the seller, can include buyer procurement personnel

Performance Reporting– Regular status reports and performance information required of

the seller as specified in the contract– Tracks the seller’s performance against contractual obligations

of scope, quality, time and cost

Payment Systems– Payments to the seller are typically processed by the accounts

payable system after they have been authorised by project or procurement personnel




Claims Administration – Relates to contested changes where the buyer and seller cannot

agree on items such as Change Requests, Incentive Payments or Penalties

– Referred to as Claims, Disputes or Appeals– A resolution process is normally documented in the contract and

settlement via negotiation is preferred– If agreement cannot be reached then legal action may be

required

Records Management Systems– Used by the Project Manager to manage contract and

procurement documentation and records– Contains a retrievable archive of all contract documentation,

correspondence and performance reports




Procurement Policies and Procedures – Most large organisations and all government departments will

have comprehensive policies and procedures– It is critical that the project team are aware of these and that they

are followed, otherwise approval may not be obtained for purchasing requirements and timeframes can be severely impacted

– These procedures will also impact the project schedule during the planning stage as critical internal specialist may not be available when required by the project

– It is often mandatory to engage internal purchasing professionals and either internal or external legal professionals

– Purchasing decisions may need to be escalated to senior management or even the Board for approval, depending on the overall cost. This can also impact timelines.




• Outputs of this process include –

Procurement Documentation– Contract and supporting schedules– Change Requests– Claims and disputes

Organisational Process Assets– Correspondence regarding the contract– Payment schedules and requests– Seller performance evaluation documentation

Change Requests

Project Management Plan Updates– Procurement Management Plan– Baseline Schedule and Budget



Monitor

Control


• The process of Completing each project procurement

• Part of the overall Close Project Phase

• Involves the administrative activities related to claims, change requests and final procurement results

• Includes either the completion of each contract or the handover of contracts for on-going administration for the life of the product or service that has been purchased

• Early termination of a contract is a special case of procurement closure and can occur by mutual agreement or when either the buyer or seller fails to meet agreed terms and obligations

• Legal action can occur on unresolved claims even after the contract has been closed

• Occurs during Close




Monitor

Control



• Inputs to Close ProcurementsProcurement Documents

Project Management Plan

Contract

• Tools and techniques to Close Procurements –

Adapted from PMBOK 4th EditionAdapted from PMBOK 4th Edition

ProcurementAudits

RecordsManagement

SystemNegotiatedSettlements



Procurement Audits – A structured review of the procurement process that may have

been specified in the Plan procurements process and then carried out during Administer Procurements and Close Procurements

– The objective is to identify successes, failures and lessons learned

Negotiated Settlements– Final equitable settlement of all outstanding issues, claims and

disputes– Direct negotiation between the buyer and seller is preferred, if

not possible then mediation, arbitration or legal action may be required




Record Management Systems – Used by the Project Manager to manage contract and

procurement documentation and records– Contains a retrievable archive of all contract documentation,

correspondence and performance reports




• Outputs of this process include –

Closed Procurements

– Formal written notice of contract completion

– Contract closure performed as per terms and conditions of the contract and the Procurement Management Plan

Organisational Process Assets

– Procurement File

– Deliverable Acceptance and Sign Off

– Lessons Learned documentation



Monitor

Control


Team Assignment Criteria

Team AssignmentComponents

Marks Basic Competency Higher Competency

Procurement Register 10 Table of major procurement and contracting requirements for human and non-human resourcesSourcing approach detailed and responsibility assigned

Table of detailed procurement and contracting requirements including human and non-human resourcesSelection criteria and contract requirements also included

Assessment and selection approach

5 Detailed assessment and selection approach for a major procurement

Detailed assessment and selection approach for several major procurements

Procurement procedures 5 Basic procurement policies and procedures developed including contract review and approval

Advanced procurement policies and procedures developed including flowcharts and different processes as values increase

Total 20 13 to 16 17 to 20