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Project Procurement Management
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
Project Procurement Management
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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Project Procurement Management
Project Procurement Management
Project Procurement Management Overview
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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Project Procurement Management
Project Procurement Management
Project Procurement Management Overview
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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Project Procurement Management - PlanningProject Procurement Management - Planning
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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Project Procurement Management - PlanningProject Procurement Management - Planning
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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Project Procurement Management - PlanningProject Procurement Management - Planning
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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Project Procurement Management - PlanningProject Procurement Management - Planning
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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Project Procurement Management - PlanningProject Procurement Management - Planning
Three broad categories of contracts are
Fixed Price (FP);
Time and Material (T&M);
Cost reimbursable (CR).
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Project Procurement Management - PlanningProject Procurement Management - Planning
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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Project Procurement Management - PlanningProject Procurement Management - Planning
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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Project Procurement Management - PlanningProject Procurement Management - Planning
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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Project Procurement Management - PlanningProject Procurement Management - Planning
Buyers Vs Sellers Risk
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Project Procurement Management - PlanningProject Procurement Management - Planning
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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Project Procurement Management - PlanningProject Procurement Management - Planning
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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Project Procurement Management - PlanningProject Procurement Management - Planning
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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Project Procurement Management - PlanningProject Procurement Management - Planning
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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Project Procurement Management - PlanningProject Procurement Management - Planning
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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Project Procurement Management - PlanningProject Procurement Management - Planning
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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Project Procurement Management - ConductingProject Procurement Management - Conducting
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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Project Procurement Management - ConductingProject Procurement Management - Conducting
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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Project Procurement Management - ConductingProject Procurement Management - Conducting
Weighting System
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Project Procurement Management - ConductingProject Procurement Management - Conducting
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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Project Procurement Management - ConductingProject Procurement Management - Conducting
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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End of PackEnd of Pack
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