Project Procurement - Explained
What is Project Procurement?
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Table of ContentsWhat is Project Procurement?Sources of Procurement?What is Procurement Management?What is the Procurement Management Plan? What is the Contracting Plan?How to Select a Contracting Approach?What is a Make-or-Buy Analysis?How to Determine Item Requirements?How Does Project Bidding and Acceptance Work?What is Request for Quote?What is a Request for Proposal?How to Select Suppliers?Using a Distributor or Sourcing Agent? What are the Types of Contract Used in Procurement? What is the Purchase Order Process?How to Manage Project Contracts? What is Logistics?What are Progress Payments? Changes in the Vendor or Supplier Scope of Work?Closeout Procurement ContractsWhat are Punch Lists? Final Payment on a Procurement Contract?
What is Project Procurement?
Procurement concerns the planning, specifications, acquisition, and delivery of the materials, equipment, and supplies needed by the project.
Procurement may be carried out by the project team or by functional departments of the sponsor (host organization).
Sources of Procurement?
Procurement is carried out through any number or combination of methods.
- Commodities - Commodities are common products that are purchased based on the lowest bid. Commodities include items like concrete for building projects, office supplies, or even lab equipment for a research project.
- Customer Products - These are products that are specified for the project. Vendors often bid to produce these items. The awarding of a contract can include price, ability to meet the project schedule, the fit for purpose of the product, and other considerations important to the project.
- Partners - A partner contributes to and is integrated into the execution plan.
What is Procurement Management?
Procurement management, as the name indicates, is the process of managing the planning, identification, acquisition, and delivery of whatever is procured.
The steps generally include:
- Identify what you need from outside the organization
- Plan the source or method for acquiring these needs
- Send out contract requirements to sellers
- Assign the contract to a seller
- Monitor to make certain the terms of the contract are followed
- Once delivered, make payment and close out the contract.
What is the Procurement Management Plan?
A procurement management plan outlines and documents the purchasing requirements to meet the needs of the project. The plan should include plan objectives and specific protocols for method of procurement.
The project procurement cycle reflects the procurement activities from the decision to purchase the material or service through to the payment of bills and closing of procurement contracts.
The procurement plan will include the following:
- Identifying a contracting approach
- Identifying Partnership or Preparing requests for quotes (RFQs) and requests for proposals (RFPs)
- Awarding and signing contracts
- Managing quality and timely performance
- Managing contract changes
- Closing contracts
Depending on the complexity level of the project, each of these steps can take either hours or sometimes weeks of work to complete. Each of these steps is also included in the project master schedule. The time involved in the procurement cycle can influence the scheduling of critical activities, including the decision to self-perform the work or contract the work to others. The delivery dates for equipment and materials and the work completion dates for contracted works are placed on the project schedule. Any procurement activities that create a project delay or fall on the project critical path may require special attention.
The project procurement cycle reflects the procurement activities from the decision to purchase the material or service through the payment of the bills and closing of procurement contracts.
What is the Contracting Plan?
Contract Planning, or purchasing plan, is a part of the procurement management plan, is where you plan out each individual contract for the project work. This involves planning how to manage the contract, the metrics you need for success, picking a vendor, and how to manage the contract throughout. It includes the following information:
- The types of contracts you plan to use
- The metrics that will be used to measure the contractors’ performance
- The planned delivery dates for the work or products you are contracting
- The company’s standard documents you will use
- The number of vendors or contractors involved and how they will be managed
- How purchasing may impact the constraints and assumptions of the project plan
- The coordination of purchasing lead times with the development of the project schedule
- The identification of prequalified sellers (if known)
The purchasing plan, like all other management plans, becomes a subsidiary of the project management plan.
The following are some factors to consider when selecting the type of contract:
- The uncertainty of the scope of work needed
- The party assuming the risk of unexpected cost increases
- The importance of meeting the scheduled milestone dates
- The need for predictable project costs
The purchasing plan outlines the method of purchasing products or services. One way to organize the procurement plan is by the type of relationship with the providers of the outsourced goods or services.
How to Select a Contracting Approach?
The project management team must answer the following questions about the work to be performed to select an approach to contracting:
- Is the required work or materials a commodity, customized product or service, or unique skill or relationship?
- What type of relationship is needed: supplier, vendor, or partnership?
- How should the supplier, vendor, or potential partner be approached: RFQ, RFP, or personal contact?
- How well known is the scope of work?
- What are the risks and which party should assume which types of risk?
- Does the procurement of the service or goods affect activities on the project schedule’s critical path and how much float is there on those activities?
- How important is it to be sure of the cost in advance?
Another key factor in selecting the contract approach is determining which party will take the most risk. The team determines the level of risk that will be managed by the project and what risks will be transferred to the contractor.
Typically, the project management team wants to manage the project risk, but in some cases, contractors have more expertise or control that enable them to be better positioned to manage the risk associated with the contracted work.
What is a Make-or-Buy Analysis?
A make or buy analysis is a calculation used to determine whether it is best to contract for a good or service or for the project team or sponsor to make or internally produce the required good or service.
This decision is primarily influenced by the following:
- Cost (budget)
The following factors also influence outsourcing decisions:
How to Determine Item Requirements?
Gather information about all materials required by the project. Include all pertinent information about each item: size, quantity, technical requirements and specs, any information that ensures purchase of the correct tool or material for the job.
Along with the item specifics, include the reason or justification for the purchase. Set a purchasing timeline. Your purchasing plan should include a “need by” date for each item.
Finally, list the people authorized to request each item.
How Does Project Bidding and Acceptance Work?
The Project Manager or procurement department will issue a Request for Quote (RoQ), request for proposal (RFP) detailing the project needs.
Suppliers respond to the RFP with proposals or bids, providing information such as cost, delivery time, and scheduling considerations.
What is Request for Quote?
A request for quote focuses on price. The type of materials or service is well defined and can be obtained from several sources. The bidder that can meet the project quality and schedule requirements usually wins the contract by quoting the lowest price.
What is a Request for Proposal?
A request for a proposal accounts for price but focuses on meeting the project quality or schedule requirements. The process of developing a proposal in response to an RFP can be very expensive for the bidder, and the project team should not issue an RFP to a company that is not eligible to win the bid.
How to Select Suppliers?
Generally, suppliers are selected because of an existing relationship or agreement with the sponsor or pursuant to a bidding process.
The eligibility of a supplier is determined by the ability to perform the work in a way that meets project requirements and demonstrates financial stability.
Ability to perform the work includes the ability to meet quality specifications and meet the project schedule.
The vendor must also be financially stable. A credit check or a financial report from Dun and Bradstreet (D&B) will provide the project with information about the potential bidder’s financial status. D
If bidding is used, outline the specifics of the bidding process, including the minimum number of bids, the terms that must be met before a bid is considered ,and whether bidding is open or drawn from a list of preferred vendors.
The general criteria for selecting a supplier are as follows:
- Supplier capability to deliver materials on time
- Delivery schedule
- Cost comparison of outsourcing vs in-sourcing
- Vendor history with company
Using a Distributor or Sourcing Agent?
A distributor purchases products wholesale, and will sell you the product at a marked-up price.
A sourcing agent reaches out to a variety of suppliers and/or manufacturers, sources the product you need, and makes a commission out of the sale.
The factors to consider before using one of these agents include:
- Product Range - Distributors are limited in what they offer. Sourcing agents have more flexibility to find a supplier, but hey may be limited based upon their connections to potential suppliers.
- Customization of Products - Distributors sell ready-made products with less ability for customization. Sourcing agents generally are ill-equipped to provide product customization requirements to suppliers, so they end up dealing in products with only limited potential for customization.
- Varying Costs - Distributors set the price of purchase without disclosing the mark up from their purchase price. A sourcing agent gets a specific percentage of the purchase price charged by the manufacturer.
- Time - Distributors tend to have product available. Sourcing agents generally have to find a manufacturer, which takes longer to get the product.
- Quality - Using a third party always entails a risk of quality conformity. Distributors deal in a ready-made product, for which quality can easily be identified. A sourcing agent has the ability to compare product offerings to identify the products that meet quality standards.
What are the Types of Contract Used in Procurement?
Below is a sample list of the types of contracts that will be used in the procurement process.
- Purchase Order (PO) - Used to purchase goods and materials.
Fixed Price: no matter how much time or effort goes into them, the client always pay the same. Fixed price contracts require the availability of at least two or more suppliers that have the qualifications and performance histories that assure the needs of the project can be met. The other requirement is a scope of work that is most likely not going to change.
- Firm-fixed price – Negotiated prices for goods or contracted services.
- Fixed Unit Price - If the service or materials can be measured in standard units, but the amount needed is not known accurately, the price per unit can be fixed—a fixed unit price contract.
- Fixed price plus incentive – Negotiated price with built-in performance based incentives for faster delivery or completion.
- Fixed-Price with Economic Price Adjustment Contracts – The most common use of this type of contract is the inflation-adjusted price. This is used for long term contracts where the price of materials can be adjusted for inflation.
- Time and materials (T&M) – the client pays a rate for the time spent working on the project and also pays for all the materials used to do the work. Includes subcontractor rates for installation and materials cost. Time is usually contracted on an hourly rate basis and the contractor usually submits time sheets and receipts for items purchased on the project. The project reimburses the contractor for the time spent based on an agreed-on rate and the actual cost of the materials. The fee is typically a percent of the total cost.
Cost-reimbursable contract (Cost Plus) – The seller charges you for the cost of doing the work plus some fee or rate. Since the cost of the project is reimbursable, the contractor has much less risk associated with cost increases.
- Cost Reimbursable Contract with Fixed Fee - A cost reimbursable contract with a fixed fee provides the contractor with a fee or profit amount that is determined at the beginning of the contract and does not change.
- Cost Reimbursable Contract with Percentage Fee - A cost reimbursable contract with a percentage fee pays the contractor for costs plus a percentage of the costs, such as 5 percent of total allowable costs. The contractor is reimbursed for allowable costs and is paid a fee.
- Cost Reimbursable Contract with an Incentive Fee - A cost reimbursable contract with an incentive fee is used to encourage performance in areas critical to the project.
- Cost plus Contract with Award Fee - A cost plus contract with award fee reimburses the contractor for all allowable costs plus a fee that is based on performance criteria. The fee is typically based on goals or objectives that are more subjective.
What is the Purchase Order Process?
List the steps for purchase orders and procurement policy. For example, using three-way matching authentication:
- The purchasing department sends a purchase order (PO) to authorize a purchase.
- An invoice is returned the vendor to the purchaser, referencing the PO.
- The goods arrive with a packing slip, which is verified against the PO and the invoice to make sure everything arrived as ordered.
All three documents are reconciled and logged. Digital purchase ordering systems compare the data and flag any anomalies.
How to Manage Project Contracts?
The manager of supplier contracts develops detailed specifications and assures compliance to these specifications.
The manager of vendor contracts assures the contractors that bid the work have the skills and capacity to accomplish the work according to the project schedule and tracks the vendor’s performance against the project needs, supplying support and direction when needed.
The manager of partnering arrangements develops alignment around common goals and work processes. Each of these approaches requires different skills and various degrees of effort.
After the contract is awarded, the project team tracks the performance of the contractor against performance criteria in the contract and his contribution to the performance of the project.
Managing contractor performance on a project is as important to the overall project outcomes as the work performed by the project team.
What is Logistics?
Equipment and materials that are purchased for use on the project must be transported, inventoried, warehoused, and often secured. This area of expertise is called logistics.
The logistics for the project can be managed by the project team or can be included in the RFP or RFQ.
On international projects, materials may be imported, and the procurement team manages the customs process.
On smaller projects, the logistical function is often provided by the parent company. On larger projects, these activities are typically contracted to companies that specialize in logistical services.
On larger, more complex projects, that procurement team will include logistical expertise.
The delivery of these materials influences the scheduling of the project, and often some materials are needed earlier than normal procurement practices would deliver. On long lead items, the project schedule is included in the contracting plans and contractors must explain how they will support the project schedule.
What are Progress Payments?
Payments made before the end of the project and based on the progress of the work are called progress payments.
Contractors generally require payments throughout the contract. The project manager will create a schedule of payments that is connected to the completion of a defined amount of work or project milestones.
Changes in the Vendor or Supplier Scope of Work?
A vendor scope of work outlines the goods or services that they supply to the project.
Often changes occur on the project that require changes in the contractor’s scope of work.
The project manager must document what changed, how the change impacted the contract, and developing a change order (a change to the contract).
Closeout Procurement Contracts
The last stage of the project procurement cycle includes the payment of the bills and closing of procurement contracts.
Suppliers provide commodities that should meet standards of quality. The project team must check the records of deliveries made and determine that they were acceptable quality.
If any items were rejected for poor quality or not delivered, the final payment is adjusted accordingly.
What are Punch Lists?
Before the contract is closed, any minor items that need to be repaired or completed are placed on a punch list, which is a list of all the items found by the owner that still remain to be done.
The project team will then work on all of the items on the list, building a small schedule to complete the remaining work.
If the number of items on the punch list is too large or the amount of work is significant, the project team continues to work the project.
Once the punch list becomes smaller, the project manager begins closing down the project, maintaining only enough staff and equipment to support the team that is working the punch list.
Once complete, the deliverables are transferred to the project sponsor.
Final Payment on a Procurement Contract?
If the supplier has met all the contractual obligations, including fixing problems and making repairs as noted on a punch list, the project team signs off on the contract and submits it to the accounting department for final payment.
The supplier is notified that the last payment is final and completes the contractual agreement between the supplier and the project.
Completing the project might involve fixing the most difficult problems that are disproportionately expensive to solve, so the final payment should be large enough to motivate the vendor to give the project a high priority so that the project can be completed on time.