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:

- Resource management
- Claims and forensic analysis
- Construction and engineering

Procurement overview

ProcurementProcurement is the function of acquiring the goods and services (resources) from outside of the organization, that are necessary for project delivery.  The procurement cycle for each contract or purchase consists of:

  • Plan Procurement Management: documenting and deciding on the procurement process for each supply item
  • Conduct Procurement: seeking and receiving quotations and proposals and selecting the supplier and either entering into a contract, or issuing a purchase order (Note: a purchase order is a simple form of contract)
  • Control Procurement: administering the suppliers’ contract through the delivery and payment cycle
  • Close Procurement: completing the control process by finalizing and closing the suppliers’ contract.

The procurement planning process is typically done once, or at planned intervals for groups of supply items. Then the rest of 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 and the contracts for long lead time items. Other procurement cycles may not start until near the end, for example, the removal of decommissioned equipment.

There are two basic procurement strategies that will define and constrain the project procurement plan:

  • Organizational procurement strategy: the organization's policies, procedures, and supply agreements may constrain or direct the project team’s options
  • Project procurement strategy: The project planning processes will define the procurement objectives for the project, there is also a direct connection between the project’s operating environment and how procurement can be managed (see more on project planning).

In addition to the above, 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 labor used in any part of the supply chain (this is illegal in many countries)
  • Bribery of foreign officials by agents of the organization
  • The use of child labor
  • Environmental protection, etc.
Different organizations will have different emphasis on these and other factors that may impact purchasing decisions.


Procurement & contract administration

Plan, manage and control each 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

  • Define the product or services that has to be acquired from outside of the performing organization (what, when, and quantity required)
  • Decide how best to acquire the product or service
  • 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. Some simple requirements may simply needs may only require a couple of telephone quotations and a purchase order. Other requirements may need a sophisticated subcontract to properly control the procurement process.

Requests for Proposals (RFP).

A Request for Proposal is a procurement document that is often used used when criteria beyond cost are to be considered before making an award. RFP's are typically used in procuring highly technical systems and/or complex commodities and/or services. A well designed RFP requires that all parties involved are clear in how the award is to be made and what the end user is looking for in a quality proposal. They often include a scoring matrix to balance different facets of the various offers (see WP1062 for more on designing a scoring matrix).

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.

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
    • The work required of the buyer is a cost to the project
    • The work performed by the seller is ‘free’
    • 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 (this may require negotiation - see below for more on negotiating)
  • Enter into a contract, or issue a purchase order (both are called an 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 the project team, and the 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 that they comply with any other requirements, plus ensuring the obligations of the buyer are fulfilled correctly. There is a financial management component to contract administration that involves authorizing and monitoring payments to the seller to ensure that payment terms are met and the seller is compensated for work accomplished. Consequently, 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 (see more)
  • Monitoring and controlling project work (see more
  • Managing communications (see more)
  • Controlling Quality (see more)
  • Performing integrated change control (see more), and
  • Monitoring risks (see more).

The seller has a reciprocal requirement to manage its delivery to the project and for larger contracts will typically have a person in a similar role to the project’s contract administrator.

Negotiation during the contract administration process is normal (see below). Contracts can only be amended by mutual consent therefore agreed change control processes are essential and should be part of the contract, but agreement on the change 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 required.

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) - see below for more on dispute management.

The final element is finalizing the project procurement when the work of the supplier 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 any terminal reports required by the organization
  • Post project reviews (of the supplier)
  • Archiving the required records and documentation, and
  • Issuing the Final Certificate.

See more on Contract & Commercial Management



NegotiationNegotiation is a strategy of conferring between 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.

WP: Problem Solving. The process of solving problems effectively by generating alternatives and finding better means is at the heart of effective project management. This paper outlines the different techniques that can be applied to solve problems.

See more on negotiation.


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). This type of contract shares the risk between the buyer and seller and are usually used for relatively small value, short term contracts. The risk sharing depends on the the terms of the agreement.

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 both parties 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 is paid for its participation in the design phase focusing on buildability and value, and has the right to offer a firm price to build the project once the design is finalized. 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, 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 endeavors 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.

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.

However, our preference is to resolve problems before they become major by proactive management. See more on Mosaic's Dispute Management and Support Services.

For more on the practical aspects of contractual dispute management with a focus on construction/engineering:
See more on our Dispute Management page:
- Dealing with poor performance
- Contract & Commercial Management
- Dispute Management
   - General Concepts for Minimizing Disputes
   - Managing Contract Disputes
   - Defective Work Claims
   - Legal Dispute Processes  

Forensic time and cost analysis and the preparation of forensic reports, are vital to understanding precisely what has gone wrong with a view to either making, or defending, claims for extensions of time (EOTs) and/or delay and disruption (prolongation) costs. The techniques needed for making and defending delay and disruption claims are  Mosaic's Claims and Forensic Analysis page
- Forensic analysis and reporting
  -  Assessing Delay and Disruption
  -  Concurrent and Parallel Delays
  -  Referenced Court Judgements 
- Claims & Expert Witness


Logistics & Supply Chain Management

LogisticsLogistics 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 acquisition and transportation of the materials as well as providing an appropriate place to store them safely. Evaluating the level of supply required at the different stages of the process is necessary to make sure the needs of the project are met (ie, there are no holdups). 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.


Useful External Web-links & Resources

CIPS Chartered Institute of Procurement & Supply:


EVM Work Sheet

Work Performance Management

Stakeholder on a Page

Easy CPM

Communication Plan

Easy Stakeholder Management

Risk Register

Stakeholder Work Sheet

Risk Management Plan

Work Performance Management

Project Charter Template

Easy EVM

EVM Work Sheet

Easy CPM

Easy CPM

Communication Plan

Easy Stakeholder Management

Risk Register

Work Performance Management

Stakeholder Work Sheet

Risk Management Plan