Procurement Management

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Location:  PMKI > PMBoK Knowledge Areas > Procurement Management. 
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This subject covers the processes involved in acquiring goods and services from outside of the performing organization including the art of negotiation and an overview of contract law.

Topics included in Procurement Management:

- Procurement overview
- Procurement & contract administration
- Negotiation
- Basic contract law
   -  Common forms of contract 
   -  The Law of Contract 
   -  Dispute management
- Logistics & Supply Chain Management
- Useful External Web-links & Resources.

Other related sections of the PMKI:

- Claims and forensic analysis
- Construction and engineering


Procurement overview

ProcurementProcurement is the function of acquiring the goods and services (resources) from outside the organization necessary for project delivery.  The procurement cycle consists of:

  • Plan Procurement Management: documenting and deciding on the procurement process for each supply item
  • Conduct Procurements: seeking and receiving quotations and proposals and selecting the supplier and entering into a contract
  • Control Procurements: administering the suppliers’ contracts throch their delivery cycle
  • Close Procurements: completing the control process by finalizing and closing the suppliers’ contracts.

The cycle occurs for each supply item and should be scheduled to meet the needs of the project. Some procurement cycles will start very early in the project, for example, the supply of design services. Other procurement cycles may not start until near the end, for example, the removal of decommissioned equipment. The procurement planning process is typically done once or at planned intervals for groups of supply items, the other processes are undertaken/repeated for each separate supply item.

There are two basic procurement strategies:

  • Corporate procurement strategy: the connection between procurement actions and corporate strategy – this constrains the project team’s options
  • Project procurement strategy: there is a direct connection between procurement actions and the project’s operating environment.

For both strategies, procurement processes and actions for your project must be considered within the macro environment that affects the organization as well as the micro environment that affects the project. All project procurement decisions must be consistent with the corporate strategy of the organization and its governance objectives. Many aspects of project procurement can affect the organization’s reputation and legal standing. Legal and moral obligations may include:

  • Anti-slavery and forced labour used in any part of the supply chain
  • Bribery of foreign officials by agents of the organization
  • The use of child labour
  • Environmental protection, etc.
Different organizations will have different emphasis on these and other factors that may impact purchasing decisions.


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Procurement & contract administration

Plan, manage and control the procurement processes through to contract close. Including the management of project documentation from a procurement and contract perspective.

Plan procurement.

The planning process has to

  • Identify project needs that can best be met by procuring products from outside of the performing organization
  • Decide whether to procure a product; how, what, when and how much
  • Decide on the appropriate levels of complexity and sophistication needed in the procurement processes to achieve a satisfactory outcome
  • Prepare the procurement (tender) documentation.

Potential suppliers, their likely availability and the general market should be considered as a part of procurement planning.

WP: Statement of Work (SoW). A SOW is a formal document that captures and defines the work activities, deliverables and timeline a vendor will execute against in performance of specified work for a client.

Prs: Stakeholder Relationship Management in the Supply Chain. This paper outlines the critical role stakeholders play in the operation of an effective supply chain and suggests a range of techniques to enhance stakeholder relationship management capabilities.


Requests for Proposals (RFP).

A Request for Proposal is a procurement document that includes a scoring matrix. Requests for Proposals are used when criteria beyond cost are to be weighed and scored in making an award. RFP's are typically used in procuring highly technical systems and commodities as well as services. An RFP requires that all parties involved are clear in how the award is to be made/scored and what the end user is looking for in a quality proposal.


Conduct procurement

This process is focused on obtaining bids and proposals (information) from prospective sellers in response to the procurement documents developed by the buyer. It is performed for every procurement and needs to be tailored to the goods or services being acquired. The work-flow for each procurement item is:

  • Prepare the documents needed to obtain bids (quotations) and proposals as part of the procurement planning process
  • Select the most cost effective approach for obtaining competitive prices o The work required of the buyer is a cost to the project o The work performed by the seller is ‘free’ o But an alternative proposal from a seller could save the project substantial money
  • Receive the bids or proposals
  • Apply the selection criteria
  • Select a provider (seller)
  • Agree the terms of the contract (negotiation)
  • Enter into a contract (agreement).

Art: There are no free steak knives! The way offers are framed can be designed to distort buying decisions - beware of 'free offers'. 

Control and close each procurement (contract)

ProcurementProcurement / contract management is the process of managing procurement relationships and interactions between various sellers (service providers / subcontractors) working for the project. It focuses on ensuring the procured goods and services are supplied when needed, to the correct specification and other requirements and on ensuring the obligations of the buyer are fulfilled correctly. Therefore, the project team needs to be aware of the legal consequences of any actions undertaken during the management of each contractual relationship.

The process needs to be fully integrated with the overall management of the project including work authorizations, performance measurement, quality control, and change control. The contract administration role is an administrative function, other members of the project team are likely to be responsible for processes such as:

  • Directing and managing the project work
  • Monitoring and controlling project work (4.4)
  • Managing communications
  • Controlling Quality
  • Performing integrated change control, and
  • Monitoring risks.

The seller has a reciprocal requirement to manage its delivery to the project and will typically have a person in a similar role to the project’s contract administrator. There is a financial management component to contract administration that involves monitoring payments to the seller to ensure that payment terms are met and the seller is compensated for work accomplished.

Negotiation during the contract administration process is normal. Contracts can only be amended by mutual consent therefore agreed change control processes are essential and should be part of the contract, but agreement is still needed. Ideally the negotiations will still focus on Win-Win outcomes that allow the work to be successfully completed. However, it is not uncommon for more robust negotiations to be needed. Where the buyer and seller cannot agree on compensation for change, or sometimes even that a change has occurred: claims, disputes or appeals may arise. If no agreement can be reached using processes defined in the contract, the claim may have to go to mediation, arbitration, litigation or some other agreed means of ‘Alternative Dispute Resolution’ (ADR).

The final element is finalizing the project procurement when the work is finished, this process is NOT dependent on phase or project completion. It involves completing the administration of the contract and updating all of the project and organization’s systems. Procedures undertaken during closeout may include:

  • Providing the seller with a formal notice in writing that the deliverables are accepted or rejected
  • Determining the date of completion and issuing the certificate of completion
  • Preparing any defects and omission lists (items which do not impact on completion)
  • The reduction of any securities or retention monies held by the organization
  • Notifying the commencement of the various defects liability and warranty periods
  • Instructing the time-frame for rectifying minor omissions and minor defects
  • Confirming the suitability of any documentation required under the contract
  • Completing the required terminal reports
  • Post project reviews (of the supplier project)
  • Archiving the required records and documentation, and
  • Issuing the Final Certificate.

WP: Dispute Management in Contracts. Regardless of the issue resolution process adopted for a particular project, the underlying principles of effective issue resolution can be reduced to 6 key points.


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Negotiation

NegotiationNegotiation is a strategy of conferring with parties of shared, or opposed, interests with a view towards compromise or reaching an agreement. It is, or should be, a process designed to achieve a mutually acceptable outcome because there are always two parts to any negotiation:

  1. Reaching an agreement on the problem or issue ‘in the room’ (the easiest part), and
  2. Implementing the agreement after the negotiation is concluded (which usually requires both parties to do things).

Effective negotiations are a collaboration, not a competition. The parties should:

  • Focus on interests not positions
  • Seek to understand what each side really wants
  • Look for win/win outcomes
  • DO NOT attempt to trick the other side
  • Employ we/us discussions to solve problems.

While ideally everyone is focused on achieving a good outcome, different people adopt different negotiating styles. Effective negotiators are aware of these approaches and may choose to their style to meet the needs of particular situations before trying to steer the negotiation towards the style that has the potential to deliver the best outcome all round.

WP: Negotiating and Mediating. Negotiating is, or should be, a process designed to achieve a mutually acceptable outcome, mediation is a facilitated negotiation.

WP: Win-Win Negotiations. A win-win approach to negotiation should be based on a risk/reward standpoint.

 

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Basic contract law

Included in this sub-section
Common forms of contract
The law of contract
(a very basic overview)
Dispute management
 


Common forms of contract.

Contracts seek to balance the risks (and sources of conflict) between the buyer and seller. There are three basic types of contract:

  • Fixed price or lump sum contracts (price risk is with seller). These are the best form of contract if the requirements are clearly defined and understood by both parties. Cost based incentive fees may be used, typically these reward the seller if the project work is delivered for less than an agreed target and penalizes the seller if this price is exceeded. The point of total assumption is the point above which the seller (contractor) bears all the loss of a cost overrun.
  • Cost reimbursable (price risk is with buyer). These are the best form of contract if the requirements are not well defined when the contract is being let, and are essential for work performed in an ‘agile’ development. In a CR contract, the buyer pays most of the costs of the work and assumes most (or all) of the risk associated with changes in cost. The advantage of this type of contract is the buyer controls the cost and is free to request changes.
  • Time & materials (price risk is split between the buyer & seller). These contracts share risk between the buyer and seller and are usually used for relatively small value, short term contracts. The risk sharing depends on the arrangements.

When considering these options, remember risk includes opportunities as well as threats. If the project work is accomplished for a lower than expected cost, the seller benefits in a fixed price contract, the buyer in a cost reimbursable contract. There are a wide range of variations in the way organizations enter into contracts with various names used depending on location and industry, some common options include:

  • EPC = Engineering-Procurement-Construction contract (USA term, common for complex engineering projects such as major oil and gas development), the seller is responsible for the design and construction of the project including integrating complex systems from other suppliers and subcontractors. May be fixed price or cost reimbursable.
  • D&C = Design and construct, similar to EPC but more common in the UK and Australian building industries. May be fixed price or cost reimbursable.
  • PPP = Public Private Partnership, a common Australian & UK term where private enterprise delivers government services (eg, a new road) in collaboration with the government, in return for a long-term income from the asset or government (eg, the road tolls for a 50 year period). May be fixed price or cost reimbursable.
  • Alliances = the buyer and seller enter into a formal agreement to work together to deliver the project and share the ‘pain or the gain’. Typically a form of cost reimbursable contract but with the buyer actively working to maximize the value for the alliance.
  • Partnerships = two or more organizations share the risks and rewards:
    • Supply partnerships: the buyer has a long term relationship with the seller
    • Delivery partnerships: various seller organizations work together to deliver a complex (or large) project to a common customer.
  • ECI = Early Contractor Involvement. The contractor participates in the design phase focusing on buildability and value, and has the right to offer a firm price to build the project. The client may choose to accept the price or may choose to pay the contractor for its services and go to the open market for competitive tenders.
  • Schedule of rates contracts. The seller receives an agreed price per unit of work.

WP: The Point of Total Assumption. Calculating the point above which the seller effectively bears all the costs of a cost overrun on a fixed price ‘incentive fee’ (FPIF or FPI) contract.



The Law of Contract

ContractsA contract is: A mutually binding agreement that obligates the seller to provide the specified products, services or results and obligates the buyer to provide monetary or other valuable consideration. The legally binding nature of a contract means that it must be reviewed and approved to ensure that the contract language describes the products, services or results that are required to deliver the project as defined. All of the contract requirements are constraints on all the parties.

Major projects generally need to manage multiple contracts or subcontracts. However, in organizations that undertake this type of work, there are usually procurement specialists that will either lead the purchasing and contracting processes or at least provide specialist support to the project manager. Appropriate management of the contract life cycle can help to mitigate or avoid some risks, by clearly allocating responsibility for managing the risks between the buyer and the seller.

Creating a contract.

Contracts can be complex bespoke documents, pre-printed documents from industry associations, a letter, a purchase order faxed to the other party, an exchange of emails, or a simple verbal agreement, although the precise contents of a verbal agreement may be very hard to prove. The elements of a contract are:

  • The offer: “We will do XX for $$”. Once made, an offer cannot be withdrawn unless it contains an expiry date: “This offer is valid for 30 days”
  • Acceptance of the offer ‘as is’, a qualified acceptance: “We will accept your offer if you reduce the price by 10%” is NOT an acceptance, it is a counter offer, the acceptance comes when the seller says “OK”
  • Consideration: The party receiving something as a result of the contract must give something of value in return. This is usually money but can be anything of value such as free advertising, free use of equipment. A contract cannot be enforced if the other party gets nothing at all in return for their performance
  • Performance: Both parties must do something to make the contract happen. If one party is not doing anything, the other party must make reasonable endeavours to get the non-performing party to perform or the contract becomes unenforceable
  • Legal capacity: The parties must be legally capable of entering into the contract, ie, separate, competent legal entities:
    • A company cannot contract with itself
    • No one can enter into a contract with an under-age minor
    • An unincorporated ‘joint venture’ may have no legal standing and consequently be unable to enter into a contact.
  • Legal purpose: You cannot enforce a contract to perform an illegal action.

To create a contract there needs to be an discernible intent to be contractually bound, plus generally you need 3 out of the 4 out of the first four elements of a contract in place to be able to enforce it, offer, acceptance and then either some initial performance or an initial payment.

In the event either party fails to meet a contractual obligation, the first thing is to write formally advising of the breach of contract requesting rectification. This is not as bad as it sounds - a breach of contract simply means something has not occurred and the rectification should be reasonable and negotiated. If this fails, then it's time to escalate to your legal / contract administration people as appropriate.

Purchase Orders (PO) will create a contract, but simply sending a PO only gets you started. Generally advertised prices are simply an ‘offer to treat’, an old word meaning to trade with you (this may be modified by consumer law to an extent), so without additional action the advertisement is not an 'offer'. For the 'contractual' offer and acceptance to occur you usually need some form of action from the seller, a quote, or an acknowledgement, or notice of acceptance, then you need either your payment (which demands performance) or performance by the seller (which demands payment).

 


Dispute management

Many projects end up in various forms of dispute over time, money quality and/or scope. Mosaic, our associates and consultants have extensive experience in the preparation, analysis and defending of contract claims. However, our preference is to resolve problems before they become major by proactive management. See more on Mosaic's Dispute Management and Support Services.

Forensic time analysis, cost analysis, and reporting are vital to understanding precisely what has gone wrong. See more on forensic analysis  and reporting.

WP: Dispute Management in Contracts. Regardless of the issue resolution process adopted for a particular project, the underlying principles of effective issue resolution can be reduced to 6 key points.


 

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Logistics & Supply Chain Management

Logistics management is a detailed process that involves the planning, procuring and coordinating of materials which are needed at a certain time at a particular place for the production of a task. This includes transportation of the materials as well as a place to store them. Additionally, evaluating the level of supply at the different stages of the process is required to make sure the needs of the customer are met, for example delivering materials to a construction site or parts for a manufacturing plant. A practical and simple way to look at logistics, as quoted from The Handbook of Technology Management, “is as having the right item in the right quantity at the right time at the right place for the right price in the right condition to the right customer”.

Logistics management is a subset of the larger supply chain management. Supply chain management plans, implements and controls the efficient flow of storage, goods, services and related information from the point of origin to the point of consumption.The various links and points of distribution in a supply chain may include the following:

  • Factories that manufacture products
  • Warehouses that store products
  • Distribution centers to receive and return items for clients
  • Transport to deliver product, and
  • Retail locations, from small to larger stores to sell product.

Supply chain management in business has two focus: inbound logistics for internal functions and outbound logistics for the external flow from the point of origin to the point of consumption. Logisticians are the specialists that focus on inventory management, purchasing, transportation, warehousing, consultation and the organization and mapping of these processes.

   

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Useful External Web-links & Resources

TBA

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Self-paced EVM Training

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Self-paced PMI-SP Training

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Stakeholder management tools


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Risk management template