LECTURE 16 Procurement

8/10/2019 LECTURE 16 Procurement

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Introduction All projects require procurements. You need materials, equipment, consultants,

training, and many other goods and services.

Project procurement management is the process

of purchasing the products necessary formeeting the needs of the project scope.

Procurementmeans acquiring goods and/orservices from an outside source. Procurement is theterm generally used by government, while businessuses the term purchasingand outsourcingiscommonly used by the industry.


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Outsourcing in Procurement?

Outsourcingis a growing practice within the

industry, and it is important to appreciate the

reasons it is adopted:

To reduce both fixed and recurrent costs.

To allow the client organization to focus on its

core business.

To access skills and technologies.

To provide flexibility.

To increase accountability.


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Procurement Management ProcessesProject Procurement Managementincludes the

following processesfor acquiring goods and servicesfrom outside the project organization:

Procurement planning: determining what to procureand when.

Solicitation planning: documenting productrequirements and identifying potential sources.

Solicitation: obtaining quotations, bids, offers, orproposals as appropriate.

Source selection: choosing from among potentialvendors.

Contract administration: managing the relationshipwith the vendor.

Contract close-out: completion and settlement of thecontract.


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Procurement Management

Processes & Key Outputs

The figure below summarises the major processes involvedin procurement management, and identifies importantmilestones associated with each stage.For example, after procurement planning the key milestoneis the make or buy decision. This will determine if furtherprocurement management processes are required.


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Procurement Planning

Procurement planning involves identifying which projectneeds can be best met by using products or servicesoutside the organization. It includes deciding:

Whetherto procure.

Whatto procure. Howto procure.

How muchto procure.

Whento procure.

It is essential to be thorough and creative whenplanning procurement. Even though a company may beviewed as a competitor, it will often be advantageous tocollaborate on some projects.


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Inputs to Procurement

Planning

The inputs needed for procurement planning include:

The project scope statement.

Product description.

Market conditions.

Constraints and assumptions.

It is important to define the scope of the project, the

products, market conditions, and constraints and

assumptions. However, it is also essential to know

exactly whyyou want to procure goods or services.


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Tools and Techniques

Procurement management will often incorporate the

following:

Make-or-buy analysis: determining whether a

particular product or service should be made or

performed inside the organization or purchased from

someone else. Often involves financial analysis.

Experts, both internal and external, are valuable

assets in procurement decisions. Internal experts are particularly useful in providing

knowledge of organizational and personnel issues.

External experts can provide expert judgment,

especially with regard to vendors and technology

issues.


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Types of ContractsA contract is a mutually binding agreement that obligates

the Seller to provide the specified products or services --obligating the Buyer to pay for them. Contracts should clarify responsibilities and define key

deliverables.

Contracts are used because they are legally binding. there is more accountability!

Different types of contracts::

Fixed price or Lump Sum: involve a fixed total price for a

well-defined product or service.

Cost Reimbursable: involve payment to the seller for directand indirect costs.

Unit Price Contracts: require the buyer to pay the seller a

predetermined amount per unit of service.


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Fixed Price Contracts

Fixed priceor lump sum contractsinvolve a fixed totalprice for a well-defined product or service. Thesecontracts are particularly suited where supplies orservices can be clearly specified before tenders are

invited. The buyer incurs little risk in this situation. Fixed price contracts may also include incentivesfor

meeting or exceeding project objectives. They may alsoinclude safeguards in the form of penalty clauses,however these may be difficult to apply before the

consequences of delay are felt. An important considerationis that any changes to

resource requirements due to project revision(change)is likely to lead to additional claims by, and extrapayment to the contractor.


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Cost Reimbursable Contracts

Cost Reimbursable or Cost-Pluscontracts involve payment tothe seller for direct and indirect actual costs. These contracts areoften used for projects that include the provision of goods andservices associated with new technologies. The buyer absorbs

more risk with the type of contract, which has three forms: Cost plus incentive fee (CPIF):the buyer pays the seller

for allowable performance costs plus a predetermined feeand an incentive bonus.

Cost plus fixed fee (CPFF):the buyer pays the seller for

allowable performance costs plus a fixed fee paymentusually based on a percentage of estimated costs.

Cost plus percentage of costs (CPPC):the buyer pays theseller for allowable performance costs plus a predeterminedpercentage based on total costs.


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Unit Price Contracts Unit price contractsrequire the buyer to pay the

seller a predetermined amount per unit of service,and the total value of the contract is a function of thequantities needed to complete the work.

Unit price contracts are also called a time andmaterials contract, and may incorporate volumediscounts.

This type of contract is often used for services thatare needed when the work cannot be clearlyspecified and total costs cannot be estimated in acontract. Many contract programmers and

consultants prefer to use unit price contracts.


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Contract Types Versus Risk

The figure below summarises the spectrum of risk to thebuyer and seller for different types of contract. Note that alow risk option for a buyer will be high risk for the seller,

and visa-versa.


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Statement of Work (SOW)

Many contracts include a Statement of Work (SOW).A

statement of work is a description of the work required for

the procurement. The SOW describes the work in sufficient

detail to allow prospective sellers to determine if they are

capable of providing the goods and services required, andto allow them to determine an appropriate price.

A good SOW gives bidders a better understanding of the

buyers expectations, and therefore should be as clear,

concise and as complete as possible. It should describe allthe services required, and include performance reporting

requirements. The SOW shou ld speci fy the product of

the project , use indu stry terms , and refer to industry

standards.


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Statement of Work (SOW) Template

I. Scope of Work:Describe the work to be done to detail. Specify the hardware andsoftware involved and the exact nature of the work.

II. Location of Work: Describe where the work must be performed. Specify the

location of hardware and software and where the people must perform the work

III. Period of Performance:Specify when the work is expected to start and end,

working hours, number of hours that can be billed per week, where the work mustbe performed, and related schedule information.

IV. Deliverables Schedule:List specific deliverables, describe them in detail, and

specify when they are due.

V. Applicable Standards: Specify any company or industry-specific standards that

are relevant to performing the work.

VI. Acceptance Criteria: Describe how the buyer organization will determine if the

work is acceptable.

VII. Special Requirements: Specify any special requirements such as hardware or

software certifications, minimum degree or experience level of personnel, travel

requirements, and so on.


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Solicitation Planning

Solicitation planninginvolves preparing of thedocuments needed for requesting bids (solicitation), anddetermining the evaluation criteria for the award of a

contract. Common documents used in this process are: Request for Proposals: used to solicit proposals

from prospective sellers where there are severalways to meet the sellers needs.

Requests for Quotes: used to solicit quotes for well-defined procurements.

Invitations for bid or negotiationand initialcontractor responsesare also part of solicitationplanning.


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Outline for a Request for Proposal (RFP)

I. Purpose of RFP

II. Organizations Background

III. Basic Requirements

IV. Hardware and Software Environment

V. Description of RFP Process

VI. Statement of Work and Schedule Information

VII. Possible Appendices

A. Current System Overview

B. System Requirements

C. Volume and Size Data

D. Required Contents of Vendors Response to RFP

E. Sample Contract


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Solicitation

Solicitation (or Tendering)involves obtainingproposals, tenders or bids from prospective sellers.Prospective sellers do most the work in this process,usually at no cost to the buyer or the project. Thebuying organization is responsible for advertising therequest to tender (the solicitation).Organizations can advertise to procure goods andservices in several ways:Approaching the preferred vendor.

Approaching several potential vendors.Advertising to anyone interested.

A bidders conference or similar meeting between thebuyer and the prospective sellers can help clarify thebuyers expectations.


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Source Selection

Once buyers receive proposals, they must select avendor or decide to cancel the procurement.

Source selectioninvolves:

Evaluating bidders proposals.Choosing the best one.

Negotiating the contract.

Awarding the contract.

It is highly recommended that buyers use formalevaluation procedures for selecting vendors.

Buyers often create a short list.


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Source Selection

After developing a short list of possible sellers,organizations will often undertake more detailedevaluation.

The following figure lists items that might be partof an evaluation of the top three vendors for alarge information technology project.

All of the evaluation criteria are given a certain

number of possible points (based on rankedimportance), and the project team members andother stakeholders then evaluate each proposalby assigning points to each criteria.


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Detailed Criteria for Selecting Vendors


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Contract Administration

Contract administrationensures that thesellers performance meets contractualrequirements. Contracts are legal

relat ionships, and are subject to thecontract law in the country where theproject is conducted, and in the case ofinternational projects, the country of

supply.

You may read FIDIC Contract Documentsfor better guidelines


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However, due to their complexity, manyproject managers ignore contractualissues.

This can resul t in ser ious p rob lems.

Ideally, the project manager and theproject team should be actively involvedwith contract law expertsin thepreparation and administration ofcontracts.


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Project members must be aware ofthe legal problems they might

cause by not understanding acontract.

In particular, most projects involvechanges, and these changes mustbe handled properly for itemsunder contract.


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Change Control for Contracts

Change control is an important part of the contract

administration process.The following must be applied where there are

contracts:

Changes to any part of the project need to be

reviewed, approved, and documented by the samepeople in the same way that the original part of theplan was approved.

Evaluation of any change should include an impact

analysis. How will the change affect the scope, time,cost, and quality of the goods or services beingprovided?

Changes must be documented in writing. Projectteam members should also document all important

meetings and telephone phone calls.


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Contract Close-out

Contract close-out is the final project procurement

management process. It includes:

Product verificationto determine if all work was

completed correctly and satisfactorily. Administrative activitiesto update records to

reflect final results.

Archiving informationfor future use.

Procurement auditsare often undertaken during

contract close-out to identify lessons learned in the

procurement process.


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Conclusion - 1

It is essential that organizations obtain goodcontracts that minimize risk while ensuringoptimum results through effective contractadministration.

With the current competitive and demandingconditions found in projects, i t is very importantto prepare contracts with great care and

expert ass istance.

It is equally important to in i t iate and fol loweffect ive con tract adm inist ration pro cedures.


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Conclusion

The following guidelines can help can assist inpreparing proposals, contracts and administrativeprocedures:

Use checklistsand templateswhere appropriate.

Evaluate risksby reference to suggested contractprovisions where appropriate.

All major proposals and contracts, and contractswith questionable provisions, should be reviewed

by a contract law expert. Appropriate pricing and/or insuring of risk

under the contract.

Periodic review, improvement and updating of

contract preparation and administrationrocedures.


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