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Project Procurement Management
Posted on: May 21, 2012 at 12:00 AM
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Project Procurement Management is the effective acquisition of goods and services from outside the performing organization to gain the maximum benefit for the organization in context to a project. An effective project management passes through six phases for its implementation.

Project Procurement Management is the effective acquisition of goods and services from outside the performing organization to gain the maximum benefit for the organization in context to a project. In addition to that project procurement management also helps in maintaining good buyer-seller relationship. An effective project management passes through six phases for its implementation. These are:

  • Procurement Planning: Find the requirements for what to purchase and when to purchase.
  • Solicitation Planning: This includes proper documentation of product requirements and identification of potential resources.
  • Solicitation: This is the process of obtaining the best possible quotations; bids, offers, or proposals suited to the project requirements.
  • Source Selection: Choosing the best offer and seller within the available options.
  • Contract Administration: Managing and maintaining a good relationship between the buyer and the seller.
  • Contract Close-out: Final completion and closure of the contract, with the integration of some resolutions if required for any item.

These processes run under a close interaction with each other as well as with the other knowledge areas to get the desired output. Let us discuss all the processes involved in project procurement planning in brief:

Procurement planning

Procurement planning is the process to identify the best possible options available for procuring products and services outside the organisation that meets the project needs. The questions that are to be kept while procurement planning are: whether to procure, how to procure, what to procure, how much to procure, and when to procure it. The project management team should seek the help and suggestions of the specialists whenever needed for appropriate support.

If the procurement for any product or services is performed from outside the organisation all the process from solicitation planning through contract close-out will be performed at least once for each product or service and if the procurement is not performed from outside then this would not be performed.

Inputs to Procurement Planning

Scope statement:

Scope statement defines the limitations of the project and provides the information about the various project needs and strategies that can be deployed for making an effective procurement planning.

Product description:

The product description of the product defines the specifications of the especially the technical aspects that is need to be considered while procurement planning. A product description describes the ultimate end-product of the project.

Procurement resources:

In case the organisation is not having a formal contracting group, the project management team is responsible for supply of both resources as well as expertise for the project procurement activities.

Market conditions:

The procurement planning process should include the points that what products and services are available in the marketplace and from whom, and under what terms and conditions. Other planning outputs: Other planning outputs such as preliminary cost and schedule estimates, quality management plans, cash flow projections, the work breakdown structure, identified risks, and planned staffing should be taken into consideration while making procurement planning.

Constraints:

Constraints are various factors limiting the options for the buyer. Factors such as funds availability are most common.

Assumptions:

Assumptions are points of consideration in a project that are considered true and real.

Tools and Techniques for Procurement Planning

Make-or-buy analysis:

This is a management technique that is used to decide whether a particular product or service should be procured or produced within the organization. The most cost-effective option is elected after analyzing both the direct and indirect cost incurred in both the cases.

Expert judgment:

Expert judgment is one of the most useful tools for procurement planning that involves opinions and suggestions from an expert or a group of experts who has adequate knowledge or are highly trained. These experts can be a consultant, professional or technical associations or industry groups.

Contract type selection:

Procurement on contract basis is quite an appropriate option depending upon the type and objective of the project and purchase. The types of contracts that can be used for purchase are:

  • Fixed price or lump sum contracts: This involves a fixed or well-defined price for a particular product or service. If the product is not well defined, there is a risk involved for both the buyer and the seller. The buyer may not get the desired product or service and the seller may have to add some additional cost in order to provide it.
  • Cost reimbursable contracts: In this type of contract the payment is made to the seller on the actual costs i.e. the direct and the indirect costs. Direct costs are the cost that is made for the exclusive benefit of the project such as salary of the staff. However, the indirect cost or overhead costs are the costs paid as a cost of doing business such as salary of corporate executives. This system of contract also includes incentives for meeting or exceeding the allocated targets.
  • Unit price contracts: In this contract system, the seller is paid on the basis of per unit cost on the present cost.

Outputs from Procurement Planning

Procurement management plan:

The procurement management plan defines all the process that helps in the proper execution and management of all the remaining procurement process from solicitation planning to contract close out. The following answers can be obtained form a proper management plan:

  • Which types of contracts should be used?
  • Who will prepare the evaluation criteria for individual estimates and when?
  • What could be the actions that the project management team can take if the performing organisation has a different procurement department of its own?
  • Where to find the standard procurement documents if needed?
  • How to manage the multiple suppliers?
  • How to coordinate the procurement with other aspects of the project such as scheduling and performance reporting?

Statement of work:

The statement of work (SOW) describes all the details of the purchase items to provide the sellers with adequate information to decide whether they will be able to provide the product or service as per the specifications. The statement of work may vary depending upon the nature of the project and requirements. Moreover, the statement of work may be revised and refined with the progress of the procurement process as per the requirements.

A statement of work should be very clear and complete containing all the required details of the product and services including description of any collateral services required, such as performance reporting or post-project operational support for the procured item.

Solicitation planning

Solicitation planning includes all the process needed for the preparation of documents required in support of solicitation.

Inputs to Solicitation Planning

Procurement management plan:

The procurement management plan is the complete layout of the complete procurement process, which helps in making a framework for the development of the solicitation planning.

Statement of work:

The statement of work is the complete description or specifications of the required product or services that enables the providers to decide whether they are capable to provide the same specification or not.

Other planning outputs:

Other planning outputs includes the consideration of change that may have been made as a part of procurement planning that needs to be reviewed. The solicitation planning should be coordinated closely with the project schedule.

Tools and Techniques for Solicitation Planning

Standard forms:

Standard forms include standard contracts, standard descriptions for all the purchase items and standardized versions of all or part of the needed bid Documents.

Expert judgment:

Expert judgments include the expert opinions from an individual or a group of individuals who are trained or knowledgeable on their fields. This includes a consultant, professional or technical associations or industry groups.

Outputs from Solicitation Planning

Procurement documents: Procurement documents include the petition of proposals from the respective sellers who are the prospects for the procurement. Commonly the term 'bid' or 'quotation' is used when the source is selected on the financial purpose. For the non-financial considerations, the term 'proposal' is used. Procurement document includes Invitation for Bid (IFB), Request for Proposal (RFP), Request for Quotation (RFQ), Invitation for Negotiation, and Contractor Initial Response.

A procurement document should not contain ambiguous information and should be clear and complete to get proper response from the prospective sellers. The document should contain all the relevant information defining the statement of work, a description of the desired form of the response, and any required contractual provisions such as copy of a model contract, non-disclosure provisions clearly. However, the information should be defined by regulations wherever needed.

Evaluation criteria:

A well-defined evaluation criteria is used to rate or score the efficiency of proposals. They can be objective or subjective. If there are a number of suppliers for the same item to be procured, the evaluation criteria are commonly restricted to the purchase price. However, in other cases some more criteria for evaluation can be opted. This can be the need, overall cost, management aspect, financial aspects or technical aspects.

Statement of work updates:

The statement of work describes the requirements and specifications of the product or service to be procured in detail and any modification or change in the statement of work in between the entire procurement plan should clearly be mentioned during solicitation planning.

Solicitation

Solicitation is the process of obtaining the bids or the proposal from the prospective sellers meeting the requirements of the project. In general, no cost is incurred in this process for the performing organisation as the prospective sellers expend the process.

Inputs to Solicitation

Procurement documents:

Procurement documents include solicits from the prospective suppliers who place the bid or proposal for the procurement through different means.

Qualified seller lists:

Most of the organizations maintain the records of the lists of the prospective sellers to access the instant information about them. The list contains all the relevant information about the sellers. In case, the list is not available, the project manger can take the help of other alternatives such as library directories, relevant local associations, trade catalogues, and other sources. The procurement documents can be sent to all the prospective sellers or to some selected ones.

Tools and Techniques for Solicitation

Bidder conferences (or contractor conferences, vendor conferences, and pre-bid conferences):

Bidder conferences are the formal meeting of the buyer and the sellers prior to preparation of the final proposal. This is done to make sure that all the sellers are properly aware of the requirements as well as the terms and conditions of the proposal. Some points may be amended as a response of the questions of the sellers.

Advertising:

Organisation may place some advertisement in the newspapers, magazines or other sources for increasing the number of prospective sellers.

Outputs from Solicitation

Proposals:

Proposals are produced by the seller in a well-documented form, which includes the ability and acceptance of the seller to provide the product or services as requested by the buyer.

Source selection:

Source selection involves the receipt of bids or proposals by the sellers and the application containing the evaluation criteria for the selection of a seller. The major considerations are:

Price may not be the primary criteria for the selection of the seller as if the seller will be unable to fulfill the requirement on time; this may lead to additional cost to retain the loss for the buyer.

  • A proposal is evaluated on the basis of technical aspect and commercial aspect.
  • More than one seller may be required for big projects
  • A detailed study and evaluation of the sellers is needed to select the appropriate source.

Inputs to Source Selection

Proposals:

Proposals are submitted by the prospective sellers in a documented form containing all the relevant information for the procurement.

Evaluation criteria:

Different methods are used for evaluating the efficiency of the proposal and the seller based on the price, need, understanding, financial capacity, management perspectives and technical capability.

Organizational policies:

Every organisation has some per-decided purchasing policies that can be formal or informal and can affect the evaluation of the proposals

Tools and Techniques for Source Selection

Contract negotiation: Contract negotiation all types of clarifications and mutual agreements between the buyer and the seller before signing the final contract by both the parties. The language of the final agreement should cover all the aspect of the contract including responsibilities and authorities, applicable terms and law, technical and business management approaches, contract financing, and price. In addition to that, all the issues from both sides should be settled at this stage.

Weighting system:

A weighting system is the tool used for calculating the qualitative data in order to avoid the effect of personal interest on source selection. This method involves:

  • Assigning a numerical weight to each of the evaluation criteria
  • Multiplying the weight by the rating, and
  • Totaling the resultant products to compute an overall score

Screening system:

A screening system estimates the minimum requirements of performance for any of the evaluation criteria.

Independent estimates:

Many organisations prepare their own estimates to compare with the proposed pricing of the sellers. If the difference between the estimated price and the proposed price is too high than it is understood that the proposal is not adequate or the seller has failed to understand the procurement details.

Outputs from Source Selection

Contract:

A contract is a two-way legal agreement between the buyer and the seller that obligates the seller to provide the product or services according to the specifications agreed and the buyer is liable to pay for the same on time. A contract can be simple of complex depending upon the type of the project and product. A contract can be also referred as an agreement, a subcontract, a purchase order, or a memorandum of understanding.

Contract administration

Contract administration is the process of evaluation and monitoring of the seller's performance that whether the seller is fulfilling the requirements as per the contract. Contract administration is quite important in case there are multi providers. In addition to that, it also ensures that all the members of the project team are aware of the legal aspects of the project. An effective contract administration involves the use of various project management processes and integrating the outputs with the overall management of the project. The project management processes, which are mostly applied, are:

  • Project plan execution: A detailed plan of the entire project and its proper and effective execution as per the plan to ensure the contractor's work at the appropriate time.
  • Pperformance reporting: Regular and constant reporting and monitoring of the project progress, contract cost, schedule and technical performance is done.
  • Quality control: Quality control methods are used for inspection and verification of the adequacy of the contractor's product.
  • Change control: There may be some changes in the requirements with the progress of the project and need to be integrated and coordinated properly.

Inputs to Contract Administration

Contract:

Contract is a two-way agreement between the buyer and the seller in which both the parties agree to proceed with the project under certain well-defined terms and conditions. The seller agrees to provide the product or services as per the requirements and the specifications on time to the buyer and the buyer agrees to pay the decided amount to the seller on time.

Work results:

The progress report of the seller for which deliverables has been completed and which have not. Whether the products are meeting the quality standards or not and the amount of capital invested is recorded on timely basis as part of project execution plan.

Change requests:

Change requests includes the changes and the modification to be made in between the project execution plan. The changes may be in the product specifications or in the contract. Moreover, if the seller is not able to meet the quality standards, the termination of contract will also be included in change request.

Seller invoices:

The seller has to submit all types of invoices regarding the project time to time to get the timely payment of the work performed. The invoices should be submitted with all other supporting documents.

Tools and Techniques for Contract Administration

Contract change control system:

A contract change control system involves all the processes through which the contract may be modified. These may include paperwork, tracking systems, dispute resolution procedures, and approval levels necessary for authorizing changes.

Performance reporting:

Performance reporting helps in the continuous monitoring of the effectiveness of the seller's work in order to achieve the contractual objectives

Payment system:

Payments to the seller is mostly carried out by the accounts payable system of the performing organization. However, if the project is too large and complex than a separate payment system may be integrated by the performing organisation.

Outputs from Contract Administration

Correspondence:

Written documentation of all the terms and conditions of the contract is required from both buyer and seller aspects to avoid further misunderstandings and disputes. The special emphasis is given to some points such as warnings of unsatisfactory performance and contract changes or clarifications.

Contract changes:

Any changes or modifications in the project during nay stage of the project life cycle are integrated in the project planning through proper channel and documentation.

Payment requests:

Payment request assumes that the project will use an external payment system and in case the performing organisation has its own internal payment system than the output will be simply payment.

Contract Close-out

Contract close-out is just like the administrative closure that ensures the final results or outputs of the project by proper examination and verification of the results. If all the contracts terms and conditions are being fulfilled properly than the contract close-out is done under some specific and prescribed procedures for contract close-out.

Inputs to Contract Close-out

Contract documentation:

Contract documentation includes, but is not limited to, the contract itself along with all supporting schedules, requested and approved contract changes, any seller-developed technical documentation, seller performance reports, financial documents such as invoices and payment records, and the results of any contract-related inspections.

Tools and Techniques for Contract Close-out

Procurement audits:

A procurement audit is a review of the entire procurement process starting from the procurement planning to the contract administration. This is done with an objective to identify the extent of the success or failure of the project.

Outputs from Contract Close-out

Contract file:

A contract file contains all the information and records related to the project from the initial phase of the project to the final stage

Formal acceptance and closure:

The person or organization responsible for contract administration need to provide a formal written notice to the seller ensuring that the project has been completed and the seller need to accept that.

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