Project Procurement PDF

10 PROJECT PROCUREMENT Procurement Management handles the acquisition of machinery, equipment, raw materials, supplies, and third-party services needed to complete a project. PMI defines project procurement management as the processes necessary to purchase or acquire products, services, or results n...

10 PROJECT PROCUREMENT Procurement Management handles the acquisition of machinery, equipment, raw materials, supplies, and third-party services needed to complete a project. PMI defines project procurement management as the processes necessary to purchase or acquire products, services, or results needed from outside the project team. It involves managing contracts, MOUs, or agreements that bind third parties to provide supplies or support services. Every procurement action is governed by the procurement management plan and the contract terms and conditions. These are the primary reference documents for procurement.  Make-or-Buy Analysis  The first step in procurement is to determine what needs to be procured, including which parts of the project will be outsourced, through a make-or-buy analysis. Works produced internally by the team are classified under "make," while those procured externally are classified under "buy." Procurement processes are initiated and performed only for decisions classified under "buy." In a make-or-buy analysis, the team evaluates the possibility, feasibility, and advantages of producing internally versus outsourcing. Some of the considerations that influence the make-or-buy decision include: 1. Cost Efficiency: Comparing the costs of internal production, including labor, materials, and overhead, against the cost of outsourcing. 2. Expertise and Skills: Assessing whether the team has the necessary expertise and skills to perform the task at the required quality level. 3. Resource Availability: Evaluating the availability of internal resources, such as manpower, equipment, and technology. 1|Page 4. Focus on Core Activities: Considering whether outsourcing non-core activities would allow the team to concentrate on core competencies. 5. Scalability and Flexibility: Determining if outsourcing provides greater scalability and flexibility to meet changing project demands. 6. Time Constraints: Analyzing whether outsourcing can help meet tight deadlines or accelerate project timelines. 7. Quality Requirements: Ensuring that external providers can meet the quality standards required for the project. 8. Risk Management: Identifying risks associated with both internal production and outsourcing, and choosing the option that better mitigates these risks. 9. Innovation and Technology: Assessing access to advanced technologies and innovative solutions that may be available through outsourcing. 10. Regulatory Compliance: Who has the necessary certifications, licenses and expertise to meet regulatory and compliance requirements. 11. Geographic Considerations: Factoring in logistical and operational considerations based on the location of resources, markets, or regions. 12. Burden of Oversight or Supervision: Evaluating the level of oversight and supervision required for internal production versus outsourcing, and whether managing outsourced activities may reduce the internal managerial burden. 13. Contractual Requirements: Considering any contractual obligations or stipulations that mandate certain tasks to be outsourced to third-party providers.  Buy-or-Rent Analysis  By extension, "buying" encompasses decisions to outrightly purchase, rent, hire, or lease. When renting, hiring, or leasing is an option, a second layer of analysis—buy- or-rent analysis—is necessary. This analysis helps the team decide whether to buy or rent based on cost-effectiveness. Generally, the rule of thumb is to buy when it’s cheaper to buy and rent when it’s cheaper to rent. The buy-or-rent analysis involves calculating the break-even point, the day when the cumulative rental cost equals the purchase price, to determine the most prudent decision. 2|Page   Procurement Statement of Work  A procurement statement of work outlines the required deliverable under a buying decision. Third-party entities are invited to bid or tender based on this statement of work to assess their interest, suitability, and qualifications for the project.  Source Selection Analysis  Once the procurement statement of work is established, the next step is to plan how to identify the most suitable vendor. A source selection analysis is conducted to find the best candidate for the procurement. In competitive bidding, multiple parties express interest, and a source selection criteria document is used to determine the most suitable vendor. Common considerations include: 1. Cost: Total cost of the bid in alignment with internal benchmarks or expectations. 2. Experience: The vendor’s experience and track record in delivering similar products or services. 3. Reputation: The vendor's reputation and reliability based on past performance. 4. Technical Capability: The technical skills and capabilities of the vendor to deliver specifications at the required quality. 5. Infrastructure: The vendor's possession of the required infrastructure to deliver the goods or services. 6. Delivery Time: The ability of the vendor to deliver on time. 7. Financial Stability: The financial health and stability of the vendor. 8. Compliance: The vendor’s ability to adhere to regulatory and contractual requirements. 9. Support Services: Availability of post-purchase support and services. 10. Flexibility: The ability of the vendor to accommodate changes and handle unforeseen issues. 11. Risk: The risks associated with the vendor and how they plan to mitigate them. 12. Innovation: The vendor's ability to offer innovative solutions or added value beyond the basic requirements. 3|Page   Single Sourcing & Sole Sourcing  Single sourcing refers to the decision to snub the competition and procure a product or service from one chosen supplier, even though multiple suppliers are available in the market. This decision may be made due to the supplier's superior quality, better pricing, established relationships, convenience, or strategic reasons. On the other hand, sole sourcing occurs when there is only one supplier available in the market that can provide the required product or service. In this case, the buyer has no choice but to procure from this single supplier. This eligibility situation arises due to the unique nature of the product or service, patents, specialized skills, or technological exclusivity.  The Procurement Management Plan  Procurement planning is conducted by the team led by the project manager or a procurement officer assigned to the project. In cases of centralized contracting, procurement is managed at the organizational level by a dedicated procurement unit or department to support the project. The first step in procurement management is creating the Procurement Management Plan, which serves as a guiding policy document for all procurement activities throughout the project life cycle. If any changes to policy or direction are required or requested during the project, the Procurement Management Plan must be updated accordingly.  Procurement Documents  Documents play a crucial role in the procurement process, facilitating communication, evaluation, transparency and fairness in the selection of suppliers. The process typically begins with an invitation to bid or tender, where a public announcement is 4|Page made inviting interested parties to submit their proposals for the contract. These procurement documents include all the necessary information for suppliers to prepare their bids, such as the Statement of Work (SOW), Terms of Reference (TOR), contract terms, evaluation criteria, and submission instructions. Before issuing the invitation to bid, the initiating entity or buyer prepares an independent estimate. This estimate serves as a benchmark for evaluating the bids provided by potential sellers, ensuring that the prices quoted are reasonable and within budget. In addition to the bid documents, several other types of procurement documents are used throughout the process such as Request for Information (RFI), Request for Proposal (RFP), Request for Quotation (RFQ), and the Invitation to Bid (ITB). Once a supplier is selected, contract documents are prepared to formalize the agreement. These documents include the final terms and conditions, the SOW, pricing, schedules, and any other relevant details. Purchase Orders (PO) are then issued to confirm the purchase of products or services, outlining quantities, agreed prices, and delivery terms. 1. Statement of Work (SOW): The SOW is a detailed document that outlines the work to be performed, the deliverables, timelines, and performance standards. It is often included as part of an RFP or RFQ. 2. Terms of Reference (TOR): Similar to an SOW, the TOR outlines the objectives, scope, and deliverables of a project. It is often used in consulting services and complex projects. 3. Contract Documents: Once a supplier is selected, contract documents are prepared to formalize the agreement. These documents include the final terms and conditions, SOW, pricing, schedules, and any other relevant details. 4. Request for Information (RFI): This document is used to gather information about potential suppliers and their capabilities. It helps the buyer understand the market and the options available. 5. Request for Proposal (RFP): An RFP is issued when the buyer is looking for a detailed proposal on how the supplier would meet the project's requirements. It includes the scope of work, timelines, pricing, and other relevant details. 5|Page 6. Request for Quotation (RFQ): An RFQ is used when the buyer needs a price quote for specific products or services. It is typically used for straightforward purchases where the specifications are clear and well-defined. 7. Invitation to Bid (ITB): This document is used to invite suppliers to submit a bid for a contract. It is similar to an RFQ but is usually used for larger, more complex projects. The focus is often on price, and the lowest bid that meets the requirements may be selected. 8. Purchase Order (PO): A PO is an official document issued by the buyer to the supplier, indicating the products or services to be purchased, quantities, agreed prices, and delivery terms. It serves as a legally binding contract once accepted by the supplier.  Procurement Strategy  The buying entity must develop a procurement strategy for each procurement. This strategy outlines an efficient process, from order to delivery, ensuring the timely supply of goods and services while minimizing cost and risk in the supply chain. It explores the risks associated with both local and global outsourcing and identifies the most optimized methods for meeting the project's needs. Additionally, the procurement strategy provides a comprehensive roadmap for the procurement activities, guiding the entire process to achieve the desired outcomes efficiently.  Pre-qualified Seller List  When the procurement process is expected to take an unduly long time and pose unnecessary schedule risks, maintaining a pre-approved seller list can be beneficial. This approach is particularly useful when the buyer frequently purchases the same type of service. By keeping a list of credible sellers, the procurement process can be expedited, reducing delays and mitigating associated risks. 6|Page   Bidder Conferences  A bidder conference is an organized forum between the buyer and all prospective sellers to discuss the requirements of the contract and establish clarity. This conference allows any prospective seller to ask questions and receive answers towards the common objective. It is crucial that all participants are treated equally, ensuring no prospective seller gains an undue advantage in understanding the contract work and associated requirements.  Proposal Evaluation  All submissions by prospective sellers undergo a thorough evaluation process to determine the most suitable candidate. Proposal evaluations must be conducted with integrity and impartiality. Any member of the evaluation panel who has a conflict of interest must declare their situation and recuse themselves from the evaluation process.  Contracts  Once a supplier is selected, contract documents are prepared to formalize the agreement. There are two major types of contracts to consider, with a third type being a hybrid of the first two. The nature of the scope and the completeness of the requirements largely determine which contract type is most suitable. When the scope can be fully quantified at the time the contract is being written, a fixed price can be determined. For projects whose requirements evolve throughout the project life cycle, determining an upfront cost at the beginning of the contract will be difficult, necessitating a dynamic approach to contract pricing. In conclusion, a fixed price contract is more suitable for traditional, predictive waterfall projects, whereas a cost- reimbursable contract is more suitable for dynamic, and evolving requirements. 7|Page   Fixed Price Contracts  A Fixed Price Contract is a type of agreement where the buyer and seller agree on a set price for the complete scope of work, regardless of the actual costs incurred during the project. This contract type is most suitable for projects where the scope and requirements are well-defined and unlikely to change. The agreed-upon price remains constant, putting the buyer in control of the budget. The seller assumes the risk of cost overruns, as they must complete the project within the agreed price. Fixed Price Contracts are commonly used in waterfall projects, where detailed planning is done upfront and changes are minimal. This encourages efficiency and cost control by the seller, as any cost savings directly benefit their profit margin. There are different types of fixed price contracts, which are slight variations of the parent type of contract. In a Firm Fixed Price (FFP) Contract, the price remains constant, providing financial predictability for both parties. A Fixed Price Incentive Fee (FPIF) Contract allows seller some incentives for meeting certain predefined targets such as cost savings or early completion. A Fixed Price plus Economic Price Adjustment (FP-EPA) Contract allows for a fixed price to be adjusted based on changing economic conditions, such as inflation, market price increments and exchange rate fluctuations for cross-currency transactions. This type of contract includes predefined criteria for adjustments, protecting both the buyer and seller from significant economic changes over the contract period, ensuring fairness in pricing amidst fluctuating market conditions.  Cost Reimbursable Contracts  A Cost Reimbursable Contract is an agreement where the buyer reimburses the seller for all legitimate project costs incurred, plus an additional fee representing the seller’s profit. This contract type is typically used when the project scope and requirements are not fully defined or are expected to evolve over the course of the 8|Page project. Because the scope of work can’t be fully quantified and much information on how requirements will evolve does not exist, upfront costing becomes impossible. Simply put, the cost evolves with the evolution of the scope. In a Cost Reimbursable Contract, the seller is allowed room to make expenditures in the best interest of the project. There is no set fixed price, allowing the seller to explore creative solutions as the scope develops. This flexibility shifts much of the financial risk to the buyer, as they are responsible for covering all costs. However, these contracts provide the necessary adaptability to accommodate changes in project scope and requirements, making them suitable for dynamic and uncertain projects, such as those often seen in research and development or complex construction projects. As the scope evolves, cost expenditures are made, putting the seller in control of the budget while the buyer assumes the cost risk. Because cost reimbursable contracts place the risk on the buyer, many buyers are tempted to force a fixed price on projects that actually require a cost reimbursable approach, which is a poor practice. Cost reimbursable contracts are ideal for discovery works, where the seller needs unhindered space to explore creativity, iterate, and increment on successful outcomes. Imposing a price ceiling will stifle this evolutionary process, potentially preventing the best outcomes from being achieved. In a fixed price contract, the seller is bound to complete the contract within the agreed cost limit. Evidence of cost overruns may lead the seller to eliminate necessary technical work that wasn't specified in the contract. The seller might also reassign their best personnel to more profitable ventures, reducing the quality of work. Therefore, it's crucial to use a cost reimbursable contract when appropriate. A good, uncompromised procurement process protects both the buyer and the seller. In a procurement situation with integrity, the seller makes project expenditures in good faith, ensuring there’s no cause for alarm. This approach ensures that the seller can deliver the best possible outcomes without being constrained by a fixed budget. Just like fixed price contracts, there are different types of cost reimbursable contracts, which are slight variations of the primary contract type. 9|Page A Cost Plus Fixed Fee (CPFF) Contract is a type of cost reimbursable contract where the buyer reimburses the seller for all legitimate project costs incurred and pays a fixed fee as profit – mostly as a percentage of an initial cost projection. This fee remains constant regardless of cost changes. The CPFF contract is suitable for projects with uncertain scopes and evolving requirements. The fixed fee motivates the seller to manage costs efficiently without sacrificing quality, as their profit is not dependent on cost overruns. In the infamous now obsolete Cost Plus Percentage of Cost (CPPC) contract, the seller’s price is dynamic, increasing in proportion to the project costs. As costs rise, so does the seller's service charge, providing no incentive for the seller to control or minimize expenses. This lack of cost control can lead to inflated project costs, making CPPC contracts less desirable for buyers in the modern era. In a Cost Plus Incentive Fee (CPIF) Contract, the seller is reimbursed for all allowable costs incurred plus an incentive fee, adjusted based on a predetermined formula. If the contractor completes the work under budget, they receive a higher fee; if they exceed the budget, their fee is reduced. The incentive fee is based on measurable, objective criteria, such as cost savings or meeting specific performance metrics. In a Cost Plus Award Fee (CPAF) Contract, the seller is reimbursed for all allowable costs incurred plus an award fee. This award fee is determined by the client's subjective evaluation of the contractor’s performance, considering aspects like quality, timeliness, technical ingenuity, or customer satisfaction. The award fee is not linked to a fixed formula but is based on the overall assessment of the contractor’s performance by the client or a designated review board.  Time and Material Contracts  A Time and Material (T&M) Contract is a hybrid contract type that combines elements of both fixed-price and cost-reimbursable contracts. Under a T&M contract, the buyer agrees to pay the seller an agreed-upon hourly or daily rates for labour and cost rates for materials used in the project. This type of contract is often used when the project scope is not well-defined or is expected to change frequently. It provides flexibility to accommodate changes in requirements while ensuring that the buyer is protected with 10 | P a g e a fixed fee. They also typically include a "not-to-exceed" limit to control costs and prevent budget overruns. T&M Contracts are the fastest, least legalistic type of contract mostly used on small scope of work. When the work needs to be done quickly without long stretch of legal protocols, T&M Contract becomes the most suitable.  Procurement Performance  There are two main parties in a procurement relationship: the buyer and the seller. During planning, the project team conducts a make-or-buy analysis to determine which components to outsource. Once a contract is awarded, a new relationship begins where the team becomes the buyer, and the vendor becomes the seller. While the outsourced work may be a significant deliverable for the buyer, it represents an entire project for the vendor. The vendor treats their subset as a project and undergoes a full project cycle. Procurement strategies specify how contract works will be obtained and performed, optimizing the supply chain and minimizing risks. The vendor’s project manager oversees procurement work and reports to the buyer on performance. Procurement performance is measured against the procurement management plan, which includes statements of work, contract documents, and terms and conditions. The purpose of procurement management is to meet procurement objectives that align with the project's goals. The vendor manages performance according to the baseline and agreement terms, reporting to the buyer. The buyer compares actual performance reports from the seller against planned performance to determine the need for corrective actions. The contract terms and procurement relationships facilitate procurement performance.  Dispute Resolution  Every relationship has the potential for conflict, disagreement, or dispute. Typically, during the contract signing, procedures for addressing conflicts are outlined. The primary method for resolving disputes between buyer and seller is through negotiation, 11 | P a g e aiming for an amicable settlement. If negotiation fails, the next option is mediation, a third-party alternative dispute resolution (ADR) approach. This ADR method is usually identified when the contract is drafted, with both parties agreeing to be bound by the mediator's verdict. The least desirable option is to settle the dispute in a court of law.  Procurement Audits  Procurement audits are carried out to ensure compliance of procurement works to required standards and to gather lessons learned for future procurement.  Change Management on Procurement  The seller manages changes to their baselines within their defined tolerance levels, similar to how the buyer manages changes. When a change to procurement works exceeds the vendor’s tolerance level and requires a baseline revision, the change is escalated to the buyer. If the change is within the buyer’s tolerance level, the project manager approves it. If it impacts the project’s baselines, the request is escalated to the change control board, and both the project manager and the vendor must await the board’s decision. Any stakeholder, including the vendor, can request changes.  Procurement Closure  Procurement is closed when contract work is completed and the relationship is formally concluded. Sometimes, even after contract work is finished, there may be outstanding issues or disputes between the parties. These unresolved matters prevent the relationship from being closed. In such cases, procurement is considered completed but not closed. All outstanding issues or disputes must be resolved before procurement can be officially closed. 12 | P a g e