project managent (procurement)

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IEM - Project Management - Santanu Mukherjee 1

Project Procurement Management


Module 06

SantanuSantanu MukherjeeMukherjee

Project Management


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Learning Objectives

Learning Objectives

On completion of the session, you should be able toexplain:Importance of Procurement Management

Procurement Planning

Procurement Solicitation

Contract Administration & Close Out


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Procurement Management Funny Side

Procurement Management Funny Side


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Project Procurement Management Overview

Formal process by which organization obtain goods and services;

In addition to contracts, outputs of procurement management

plan include;

Procurement management plan;Procurement statement of work (SOW);

Procurement documents;

Change requests, and;

Lessons learned.

In most companies there is a separate department, whichhandles and controls procurement;

Managing procurement requires legal knowledge, negotiations,

and an understanding of the procurement process.


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Make-or-buy decision;

Internal resources can do everything;

Any of the work could be outsourced.

The procurement dept gets involved for large procurementOnce the decision is made to procure from outside source, PM

facilitates to create

A plan for how the procurement process will proceed;

A description of work to be done by the seller.

Procurement department decides the type of contract to beused;

Most common procurement documents are RFP, Invitation for

bid and Request for quotation (RFQ)


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Prospective sellers review the procurement documents and

decide if they are interested to submit a bid or proposal;

Bidders conference, where prospective sellers can ask questions

relating to procurement document;

Understand all the terms and conditions, scope of the work, risks

involved etc before submitting the proposal

Organization may use different methods to select a seller;

One or more sellers are selected and a contract is signed at the

end of negotiation process;

Procurement administration involves keeping control of the

contract and making approved changes;

Once the procurement work is complete, procurement is closed;


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Project Procurement ManagementProject Procurement Management


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Project Procurement Management - PlanningProject Procurement Management - Planning

Plan Procurements

What goods and services to be purchased?

How to go about purchasing them?

Who are the potential sellers?

Involves procurement documents to send to prospective sellers

Buyers need

How to respond, and

Criteria buyer will use to select a seller


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Includes the followingactivitiesPerform a make-or-buy

analysis;

Create a procurement

management plan;

Create a procurement

statement of work;

Select a contract type;

Create procurement

documents;Determining the source

selection criteria


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Make-or-buy Analysis

Cost savings is the major criterion;

One of the major reasons to buy is to decrease risk to the

projects constraints;

It is better to make ifYou have an idle plant or workforce;

You want to retain control;

The work involves proprietary information or procedures.


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Types of procurement statements of workPerformance

Conveys, what the final product should be able to accomplish,rather than how it should be built;

Example:

I want a car that will go 0-120 km/hour in 4.5 secondsFunctional

Conveys the end purpose or result, rather than specific procedures,etc;

Design

This type conveys, what work is to be done.

Build it exactly as shown on the drawings


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Considerations for contractTypes

Contract type decided based

on the considerations:

What is being purchased

(goods or service);The completeness of the

scope;

Degree of effort and expertise

needed to manage the seller;

Whether the buyer wants to

offer incentives to seller;

The marketplace or economy;

Industry standards of the type

of contract used .


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Three broad categories of contracts are

Fixed Price (FP);

Time and Material (T&M);

Cost reimbursable (CR).


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Fixed Price Contracts

For goods and services with well

defined specifications or

requirements;

Enough competition todetermine a fair and reasonable

price;

Sellers risk is more;

Buyer has the least cost risks;

Seller is most concerned about

the specifications.


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IEM - Project Management - Santanu Mukherjee15


Time & Material (Unit Price)

Buyer pays on a per-hour or

per-item basis;

Frequently used for service

efforts in which level of effort

cannot be defined when the

contract is awarded;

Mix of fixed price and cost

reimbursable contract;

Best used for valued at small

dollar amounts and lasting for

shorter period of time.

Example:$100 per hour plus

material cost


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Cost ReimbursableUsed when exact scope of

work is uncertain, and;

Cost cannot be estimatedaccurately enough toeffectively use a fixed price

contract;

Actual cost plus fee.


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Buyers Vs Sellers Risk


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Purchase Order

A simplest type of FP contract;

Normally unilateral (signed by one party);

It is used for simple commodity procurement;

Example:

Contract to purchase 100 plastic chair at the rate of Rs. 300/chair

Purpose of a contract

To define roles and responsibilities;

To make things legally bindings;

To mitigate and allocate risk.


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Procurement Documents

Request for Proposal (RFP)

Request for a detailed proposal on how the work will be

accomplished, who will do it, resumes, company experience, price

etc

Invitation for Bid

Usually just a request for total price to do all the work;

Request for Quotation

RFQ request is a price quote per item, hour, meter or other unit of

measure.


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Source Selection CriteriaIncluded in the procurement documents to

Understand the buyers needs and;

Help the seller whether to bid or make a proposal on the work.

Receiving the sellers responses, source selection criteria become

the basis for bid or proposal evaluation;

For service, the source selection criteria become more extensive

No. of years of experience;

Understanding of need;

Price of the life cycle cost;

Technical ability;

Quality of past performance;

Ability to complete the work on time;

Project management ability.


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Nondisclosure Agreement

For many procurements, there is a great need for

confidentiality;

Buyer do not want to let others know that they are pursuing the

procurement

Seller needs to assure the confidentiality of the purchase;

An agreement between buyer and prospective sellers about the

that confidentiality and control of documents, and to ensureonly authorized people have access to confidential information.


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Terms and Conditions

Differ, based on what

you are buying

Incase of procurement of

equipments, the clauses

describing the ownership of

equipment be on conclusion

of the project to be included.

Terms and ConditionsAcceptance

Arbitration

Authority

Breach of contractChanges

Confidentiality

Force Majeure

Intellectual Property

OwnershipPayment Terms

Inspection

Warranties


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Letter of Intent (LOI)

Signing a contract is a time consuming job;

In some situations seller may need to start hiring people or

order equipments before the contract is signed in order to meet

the contract requirements;

Single Source Procurement

Contracting is done directly with the preferred seller without

going through the procurement process

Project is under extreme schedule pressure;

A seller has unique qualification;

There is only on seller who can provide the goods and services.


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Project Procurement Management - ConductingProject Procurement Management - Conducting

This Conduct Procurement process involvesSending the procurement documents to the sellers;

Answering the sellers questions;

Helping them prepare responses, and;

Reviewing the responses to select the seller.

Advertising

Qualified Seller List

Bidding Conference to make sure

All sellers questions are answered;

Pricing in the sellers response matches the work that needs tobe done;

Benefit both the buyer and seller.


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Seller Proposal or Bid

A seller response to the procurement documents;

Usually a response to the RFP;

A price quote is usually a response to RFQ (Request for Quote).


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Proposal Review Seller evaluation criteria are used

To asses the potential sellers ability

and willingness to provide the

requested product or services;

The criteria used should be measurable;

Buyer may ask sellers to make a

presentation

Buyer may narrow down the list of

sellers;

Buyer can negotiate with more than one

seller;

The buyer can use combination of

presentation and negotiation;

The choice of method depends on the

importance of procurement.


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Weighting System


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Negotiations

Fixed price contract doesnt require any negotiation lowest

bidder is selected;

PM should be involved in the negotiation process.

Objectives of NegotiationTo obtain a fair and reasonable price;

Develop a good relationship with the seller.

Main Item to Negotiate

Scope, schedule and price;

Responsibility, Authority, Project Management Process,

Payment Schedule.


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Negotiation TacticsAttack

If your organization cannot manage details of its own operations,

perhaps it should get out of business;

Personal Insult

If you dont understand what your are doing perhaps you shouldfind another job!

Good Guy/Bad guy

Dead Line

We have a flight leaving a 5.00 PM to day and we must finish

negotiations today

Missing manOnly boss can agree to that request

Delay

Lets revisit this issue next time we meet


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Project Procurement Management - AdministerProject Procurement Management - Administer

Administer Procurement ProcessReview invoices;

Complete integrated change control;

Authorize payment to the sellers;

Resolve dispute;Hole procure performance review;

Control quality according to what is required in the contract;

Review claims files by the sellers;

Perform inspection and audit;

Identify risks for future work;

Monitor and control risks.


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Project Procurement Management - ClosingProject Procurement Management - Closing

Contract TerminationContract can be terminated before the work is complete;

Contract should have provisions for termination;

The buyer may terminate the contract

For a cause or at his/her convenience;

Before work gets completed.

Close Procurement Process

Verification of all work and their acceptance;

Settlement of open claims, and outstanding payments;

ApplicableWhen a contract gets completed;

When a contract is terminated.

A procurement must be closed, irrespective of any reason of

closure.


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