APM Guide to Contracts and Procurement

For Project, Programme and Portfolio Managers

AP

M G

uide to C

ontracts and Procurem

ent

C M Y K

C M Y K

C M Y K

Tel. (UK) 0845 458 1944Tel. (Int.) +44 1844 271 640Email info@apm.org.ukWeb apm.org.uk

Association for Project Management Ibis House, Regent ParkSummerleys RoadPrinces RisboroughBuckinghamshire HP27 9LE

v

Contents

List of figures and tables vii

Preface ix

Acknowledgements x

1 Introduction 11.0 Who is this guide written for? 11.1 Background to this guide 21.2 How to use this guide 111.3 Key term defin i tions used in this guide 12

2 Concept and feas ib il ity 152.0 Overview 152.1 Background 162.2 Inputs 172.3 Activities 172.4 Outputs 30

3 Project procure ment strategy 333.0 Overview 333.1 Background 343.2 Inputs 373.3 Activities 373.4 Outputs 52

4 Package contract ing strategy 534.0 Overview 534.1 Background 544.2 Risk manage ment 544.3 Inputs 584.4 Activities 584.5 Outputs 88

5 Prepare the contract terms and require ments 915.0 Overview 915.1 Background 925.2 Inputs 94

vi

Contents

5.3 Activities 1005.4 Outputs 111

6 Select provider and award the contract 1136.0 Overview 1136.1 Background 1146.2 Risk manage ment 1206.3 Inputs 1216.4 Activities 1236.5 Outputs 140

7 Manage and deliver the contract 1417.0 Overview 1417.1 Background 1427.2 Inputs 1427.3 Activities 1437.4 Outputs 158

8 Contract closure, handover, oper a tion and support 1618.0 Overview 1618.1 Background 1628.2 Inputs 1648.3 Activities 1648.4 Activity 1: Assign resources 1658.5 Activity 2: Contract closure 1668.6 Activity 3: Handover 1698.7 Activity 4: Ongoing oper a tion, main ten ance and support

activ it ies 1708.8 Outputs 172

Acronyms and abbre vi ations 173

Bibliography 175

Appendix A 177

Appendix B 185

Appendix C 189

Index 193

1

1

Introduction

1.0 Who is this guide written for?

The inten ded audi ence for this guide is:

1. Project, programme and port fo lio (P3) managers and project procure ment profes sion als who require an easy to use ‘how to’ guide for procur ing extern ally sourced ‘works’.1

2. Stakeholders within organ isa tions who wish to increase their aware ness of how works can be procured e.g. finan cial officers, oper a tional profes sion als, engin eers, etc.

This guide is not aimed at those procur ing stand ard off-the-shelf manu fac tured goods or stand ard consultancy services. There is already a wealth of good infor-m a tion avail able from other sources cover ing this type of procure ment.2

The guide is applic able for those involved in both public and private sectors includ ing those projects that are subject to European Union (EU) procure ment rules.3

1 The word ‘Works’ is the term used in EU Procurement for a procure ment of a project or programme, as opposed to the purchase of goods and services (European Union, 1993). At the time of public a tion of this guide, the United Kingdom had voted to exit the European Union (‘Brexit’). Despite this event, it is import ant to note that the prevail ing EU Procurement Directives remain enshrined in law in the UK through Acts of Parliament. Consequently, even after Brexit the relev ant EU legis la tion will still apply unless and until changed by an Act of Parliament.2 For free mater ial and some you have to pay for go to the Chartered Institute of Procurement and Supply’s (CIPS) website at www.cips.org (Chartered Institute of Procurement and Supply, n.d.) and click on resources. Alternatively, a book espe cially for project managers on this topic is by Ward, G. (2008) The Project Manager’s Guide to Purchasing – Contracting for Goods and Services.3 We, however, point out that this guide should not be taken as defin it ive from a legal perspect ive and legal advice should always be taken on the respect ive legal matters. See also note 1 above.

APM Guide to Contracts and Procurement

2

1.1 Background to this guide

1.1.1 Managing procure ment in a project context

Procurement covers a wide breadth of activ it ies which may range from buying paper clips to contract ing a new IT system, or the build ing of a new shop ping centre. It is a common percep tion, however, that procure ment should be handled by a specific purchas ing resource or depart ment rather than being a central compet ency within P3 manage ment.4 In complex projects this can – and we find frequently does – lead to unfore seen issues devel op ing, leading to time cost and quality over runs due to the project manager being unaware of the pitfalls that can arise when contract ing to third parties.

In this guide, we focus on the procure ment of works in the form of ‘pack ages’. These will typic ally have a higher level of uncer tainty asso ci ated with them compared with the procure ment of basic goods and services (commod it ies) and may form a substan tial part of the main project. Indeed, the cost of such contracted-out pack ages may outweigh all other project spend. For example, each of the follow ing pack ages may account for over 90 per cent of the total project spend:

n A contract for construc tion of phys ical asset.n A contract to develop, install and manage an inform a tion tech no logy capab il ity.n A contract for the supply of complex machinery designed and manu fac tured

specific ally for an employer.

The guide is based on the procure ment life cycle stages as illus trated in Figure 1.1.

Chapter 1 of this guide provides an intro duc tion, with follow-on chapters (2–8) address ing each life cycle stage. Chapters 2–8 are struc tured to enable the reader to quickly gain the neces sary guid ance relev ant to each stage in the procure ment life cycle to include:

n Overview: Defining the chapter content to enable the reader to under stand whether the chapter addresses their imme di ate concerns

4 P3: Project, programme and port fo lio. We use the term ‘project manager’ in this guide to cover any P3 (project, programme and port fo lio) manage ment role.

3

Introduction

n Background: Providing further back ground for optional reading.n Inputs: Listing what is needed at the stage start.n Activities: Tasks to be performed based on the stage process diagram included.n Outputs: What the stage provides when completed.

Where applic able, an addi tional section summar ises the risk aspects that should be considered during the stage.

It should be noted that we define some specific terms which relate directly to contracts and procure ment (e.g. the provider, the employer). Summary defin i tions of these terms are given in section 1.3 below. The guide also includes the generic defin i tions from the APM’s Body of Knowledge series 6th edition and other prior learnt mater ial, where applic able, in text boxes to assist the reader and provide a route to further research.

In this guide, we describe a generic process which can be followed regard less of the size of the project or programme. For a small procure ment, it may mainly be a thought process. However, the larger the project or programme, the more thought should be applied with more form al ity in terms of record ing the decisions made and reasons why. Indeed, for a major procure ment exer cise, this guide could be used as the start ing point for the process of devel op ing the required contracts and an aid to seeking further detailed advice or guid ance if required.

We believe that you will find the follow ing chapters a useful intro duc tion to each of these activ it ies and it will spur you on to further develop your under-stand ing and skills in these areas.

Figure 1.1 The procure ment guide life cycle stages

33

3

Project procure ment strategy

3.0 Overview

This chapter describes how to determ ine the project procure ment strategy to be defined in the procure ment manage ment plan, which will specify:

n how the overall project is to be broken down into pack ages;n which, if any, of these pack ages may be procured extern ally; andn the high-level approach to be taken to procur ing each package or category of

pack ages.

To do this, a package break down struc ture (PaBS) is developed to cover the overall project scope, which is then divided into pack ages that can be considered for procure ment.27 The PaBS is produced via an iter at ive process that starts with a high-level version which is then refined to produce a final version that is used as

27 See the PaBS defin i tion in section 1.3.

APM Guide to Contracts and Procurement

36

defined as perform ance specific a tions, if meas ur able, or altern at ively as func tional specific a tions if func tional in nature.

Going up a level, the provider may contract on the basis of meas ures closely related to busi ness outcomes, includ ing the required bene fits which are within their control or signi fic ant influ ence, e.g. meas ur able success criteria. For instance, for a market ing campaign for a product or service the provider may be paid on the basis of increased enquir ies to the employer; or for a private finance initi at ive road project, payment may be linked to the number of jour neys along it, average vehicle speed and lane avail ab il ity. Notice that these are meas ur able outcomes.

At the project procure ment strategy stage, we consider how the project is divided into pack ages; be they specified in terms of outcomes, satis fied success criteria, new or enhanced capab il it ies, unique phys ical works or delivered stand ard goods and services. The developed procure ment strategy will define, for each package: the scope, includ ing how that will be contrac tu ally defined, the signi fic ant inter faces and inter de pend en cies, and the nature of the rela tion ship being sought. By ‘nature of the rela tion ship being sought’ we mean direc tion, at high level, on how the contrac ted package(s) will be procured in terms of contract ing strategy, selec tion criteria and selec tion method.

Once defined for all pack ages or categor ies of pack ages, the outputs can be combined or summar ised to form a procure ment manage ment plan.

Figure 3.1 The require ments hier archy expressed in a works contract

37

Project procure ment strategy

3.2 Inputs

In order to decide on the procure ment strategy, the outputs from the concept and feas ib il ity stage (see Chapter 2), as included in the FBC, are required.

n The scope state ment is crit ical in order to develop the package break down struc ture (PaBS) to an appro pri ate level of detail to define indi vidual pack ages.

n The archived SBC and project brief may also give insight into the sourcing and deliv ery options considered for the project and the indi vidual work pack ages within it. It is the start ing point for devel op ing criteria by which contract ing strategies are developed and providers are selec ted.

3.3 Activities

The key activ it ies of this phase are illus trated in Figure 3.2 and described in the following sections.

Figure 3.2 Process diagram for the project procure ment strategy stage

APM Guide to Contracts and Procurement

For Project, Programme and Portfolio Managers

AP

M G

uide to C

ontracts and Procurem

entC M Y K

C M Y K

C M Y K

Tel. (UK) 0845 458 1944Tel. (Int.) +44 1844 271 640Email info@apm.org.ukWeb apm.org.uk

Association for Project Management Ibis House, Regent ParkSummerleys RoadPrinces RisboroughBuckinghamshire HP27 9LE