Project procurement becomes necessary when your project is so large that you don’t have skills or capacity within your team to do things yourselves in a cost-effective way. At this point, you need someone else to provide the goods or services that will supplement your team’s capabilities and resources.
But how do you ensure your supplier delivers what you need, and you get good value?
The answer is Project Procurement Management.
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What is Project Procurement?
Project Procurement is the process used to acquire goods and services from a third-party provider, outside of the project.
Projects typically procure:
- Goods and materials for the execution of the project
- Parts and components for the project deliverables
- Assets the project needs to carry out its work – these can be procured for outright ownership or on lease or hire terms
- Services to conduct some elements of the project work
- Contracted staff
- Consultancy or other professional advice
Public Sector Project Procurement
While the rules of public and private sector projects may differ, the fundamentals are the same. The differences tend to reflect the amount of transparency the process demands.
The public sector in many countries is bound by national or supranational regulation. These regulations impose obligations regarding openness to bidders, fair competition, reasonable timescales, and disclosure of certain information. Almost certainly, if you are working on a project that requires procurement from within the public sector, you’ll need to access the legislation, regulation, and guidance to which you are subject… And follow it scrupulously.
The private sector is freer to buy from whomever they choose, and to let contracts following any process they wish. However, many of the best commercial organizations choose to apply procurement processes that are every bit as rigorous as those of their corresponding public sector colleagues.
Internal and External Providers
Projects may procure goods and services from either within their own organization, or from an external provider.
For external providers, the procurement team will need to enter into a legal contract. Depending on the parties, it may be either the commissioner (project) or the provider who prepares the contract.
Where the provider is a part of the same organization, provision is often governed by a service-level agreement (SLA). These can be anything from a short memorandum, to a highly detailed document that is every bit as complex and rigorous as a contract.
Procurement Contract Types
There are many different types of contracts you may use to govern the goods and services, and how you pay for them. Let’s survey the main types and their primary features.
Fixed Price Contract
Here, most of the risk lies with the supplier. For the project, the risks are in specifying the needs accurately. The other disadvantage is the added cost of the supplier’s risk premium. A supplier will price in a contingency sum, because they carry the risk of over-run or quality defects.
A variation to this form can allow price adjustments based on certain triggering contingencies, or as a result of the parties agreeing that changes are appropriate. These are sometimes known as FP-EPA contracts, or Fixed Price with Economic Price Adjustment.
Fixed Price Contract with Incentive (or Penalty)
This contract is much like the one above. But, in addition, it has a positive (bonus) or negative (penalty) incentive for the supplier to deliver within or ahead of schedule. Note that in some jurisdictions, penalty clauses are not legal.
Unit Cost Contract
This works well where you know precisely what you need and its specifications. But, you don’t know quantities accurately. It’s how we typically buy off-the-shelf components or services, although if you are buying in volume, you may negotiate a favorable discount on the unit price.
Also, you may come across the acronym ‘COTS‘, which stands for Commercial Off the Shelf.
Target Cost Contract
This contract shares the risks between the project and the supplier. The contract sets a fixed maximum price (the target). If the supplier can deliver at less than that price, the parties share the difference. This requires transparency of the supplier’s costs and accounting.
Cost Plus Contract
This contract form throws all the risk on the project. But it ensures the supplier is able to charge its base rates, with no premium for risk, because it knows it can recover all of its costs.
Consequently, this also requires full accounting transparency, because the project will pay the supplier’s costs, plus an amount for the supplier’s fee. This fee can be:
- a simple additional fixed sum,
- a margin on some or all costs, or
- some form of bonus or incentive that you tie to an element of the supplier’s performance.
Time and Materials (T&M) Contract
This type of contract also places all of the cost risk on the project, but it reduces administrative overhead. The supplier charges for its services, based on a schedule of rates that the parties agree in the contract. It is the equivalent of a Unit Cost Contract, for services.
The materials refer to any costs the supplier incurs in the course of its work, which are acknowledged as chargeable in the contract. As well as literal materials, it can include:
- License fees
- Subsistence expenses
- Travel costs
- Training fees
Four Project Procurement Processes
There are four main processes or stages to project procurement:
If you are studying for your PMP or CAPM, this stage is equivalent to ‘2.1 Plan Procurement Management’ in the PMBoK. Your Project Procurement activities need to follow a procurement plan, which you develop to meet your project’s goal, objectives, and scope. So, your task is to create a Project Procurement Plan.
Project Procurement Plan
Your project procurement plan will typically cover:
- What you need to procure
- The types of procurement you will use
- Your procurement process
- Any formal requirements (legislation, policies, procedures) you need to follow
- The forms of contract or SLA you will use
- The source of legal advice
- Preferred pricing mechanisms
- Quality standards that you will apply to the products or services you will procure
- Key performance indicators (KPIs) that you will apply to the services you will procure
- The team responsible for procurements
- Procurement timing to coordinate with other aspects of your project schedule
- Cost estimates for each of the procurements
- The governance process that will guide and oversee project procurement
- Bid evaluation process
- Authorities – which person or group has the authority to approve each procurement?
- Preferences between making, hiring, leasing, or buying assets outright
- Use of already-preferred, shortlisted or framework suppliers
- How many vendors to involve in the process? You may have multiple suppliers, a small number, or a single prime contractor that offers an integrated service. They may do everything themselves or, for larger projects, they may sub-contract elements to bridge resource or capability gaps, or manage their own risk.
- Use of partnership and alliances
- Ethical requirements (for example sourcing, modern-day slavery, energy usage). Some of these will be legally mandated in your jurisdiction.
- Create sample procurement documents, and pro-forma templates to use for the purchasing process.
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A valuable component of your procurement plan will be your work or product breakdown structure (WBS or PBS). This will identify the work to be done or the products to be created. They will therefore be your starting place in determining what elements of work you need to outsource, what products you need to procure, and what components you will need for products you propose to make.
Make or Buy Analysis
You will also need to determine how you can deliver a particular piece of work most cost-effectively. This may be by doing it within the project team (‘make’) or by buying it from an external source (‘buy’). In making your Make-or-Buy decision, you will have regard to:
- Resource capabilities and expertise
- Resource capacity
- Intellectual property
- Quality standards
- Schedule requirements
- Risks and opportunities
This is the equivalent of the PMBOK process 12.2 ‘Conduct Procurements’. There are two stages:
Stage 1: Specify your Requirements
First, you need to gather your requirements and document them precisely. This also means setting out:
- Quality standards for products
- Performance standards and Key Performance Indicators (KPIs) for services
- Applicable legislation and regulation
- Delivery times
Stage 2: Market Testing
The next step is to find the most appropriate supplier. This is sometimes referred to as ‘Market Testing’.
The process for this may be set down in your organization’s policies and procedures. And you may also need to engage your Procurement Department.
If you are working within a public sector or publicly funded non-governmental organization, there’s more. It is also likely that you will need to comply with national or supranational legislation and regulations.
The basic process includes:
[Also: Vendors’ Conference, Contractors’ Conference, Pre-tender Conference, etc]
This is a live, webcast, video, or phone conference that allows you to:
- present your requirements to interested potential bidders, and to
- conduct a Question and Answer (Q&A) session
Seeking a Formal Response
Following this, there are different ways to request a response from potential vendors. This stage is full of three-letter acronyms and jargon:
- RfI (Request for Information)
To gather information prior to inviting bids or tenders.
- PQQ (Pre-Qualification Questionnaire)
To determine which potential bidders may be qualified to offer compliant bids.
- RfQ (Request for Quotation)
Invites a price quotation against a specified requirement.
- RfP (Request for Proposal)
Invites a formal statement of what the bidder can offer and the commercial terms and conditions.
- ITT (Invitation to Tender)
Alternative name for a Request for Proposal – usually used in more formal, regulated process.
If a bidder is interested, you may ask them for a formal EOI (Expression of Interest).
Determine your Evaluation Criteria
Before you receive any responses, you must determine the basis for your selection of your preferred bidder. If you select your evaluation criteria after you’ve received some or all of the bids, you run the risk of being accused of selecting evaluation criteria to advantage an already-preferred supplier. This would be a form of corrupt practice.
Your evaluation criteria – and the weights you apply to each of them – may include these factors:
- Technical Performance
- Service Levels
- Financial capacity and stability
- Resource base
- Reputation, past performance, and references
- Proprietary knowledge, methods, tools, and intellectual property
- Management procedures and risk management
- Cost (full-life cost)
It’s all about trading cost, quality and price to achieve best value. When you have agreed the criteria and your Sponsor or Project Board has signed them off, the next step is to develop a marking or scoring scheme. Typically, there will be some compliance factors. For these, a bid that fails to satisfy these factors will be excluded. You can then go on to score and evaluate all of the bids that are compliant.
[Note: the PMBOK refers to the bid documents above as outputs of the 12.1 Plan Procurement Management process.]
It seems like there isn’t much to say here. One thing is especially relevant, however. In a formal procurement process, you need to set a deadline for receipt of bids from prospective suppliers. If a response arrives after the deadline; formally, you should contact the supplier and ask them to collect their bid. Your team should not open it and must certainly not read and consider it.
This can be a straightforward or an involved process. You need to conduct a robust evaluation against the criteria you have created. Following evaluation, you will make a formal determination of preferred bidder. You need then to take this recommendation to the person, people, or body that has the authority to sign-off this recommendation.
The final step in the market test is to enter into any final negotiations with your preferred bidder. If these go well, your legal team can draft a final contract that reflects the terms of the supplier’s bid. You can then award the contract formally, and both parties will then sign and properly endorse the contract according to legal procedures in your jurisdiction.
The Final Contract
Your procurement contract may contain:
- Statement of work or goods to be supplied
- Timescales and schedules
- Quality obligations
- Product support and maintenance
- Change control or variation procedures
- Performance measures and KPIs
- Inspection and evaluation regime
- Payment terms
- Payment schedule
- Penalties (not legal in some jurisdictions) and bonuses
- Reporting processes
- Principle roles and responsibilities
- Intellectual Property rights (IPR)
- Data protection obligations
- Limitations on liabilities
- Insurances and performance bonds
- Dispute resolution
- Governing jurisdiction
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Monitoring and Controlling
This process corresponds to the PMBOK process 12.3, ‘Control Procurements’. It is a real mix of formal and informal activities.
- Managing your relationships with your suppliers.
- Administering the contract, ensuring both parties fulfil its terms.
- Monitoring contract performance against quality standards and performance standards that the contract documents.
- As well as ongoing supplier management you may also want to carry out formal ‘Procurement Performance Reviews’.
For these, you may call in senior executives, and scrutinise doumentaton and sample goods or deliverables.
- Going one step further, you may also conduct a ‘Procurement Audit’.
This reviews the procurement process you have applied, and the legal and contractual structure you have created. While the Procurement Reviews assess what you are procuring, the Procurement Audit evaluates how you procured your goods and services. This could instead be a part of your Closing stage.
- Addressing deviations from quality standards or performance requirements.
- Making payment against delivery or contract milestones.
- Applying your change control or contract variation process
- Updates to your project plan and documentation
The PMBOK considers this an output of 12.3 Control Procurements. However, there are a set of tasks for this, and it is helpful to understand it as a specific part of your project work breakdown, and a stage of your overall project procurement process in itself.
So, the basic closing tasks for your procurement process are:
- Ensure that your suppliers have met all of the contract acceptance criteria
- Conduct formal handovers and acceptance sign-offs
- Document and address outstanding issues, snagging, claims, and payments
- Ensure you have all necessary documentation for the use, maintenance, and end-of-life decommissioning of any assets you have bought
- Finalize all payments and invoices
- Attend to final contract closure, documentation, and archiving
- Conduct a lessons learned review
What are Your Experiences of Project Procurement?
…and what questions do you have?
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