The management of processes of purchasing or acquiring the products, services, or results needed from outside the project team to perform the work is defined as project procurement management.

·         Plan Purchases and Acquisitions

·         Plan Contracting

·         Request Seller Responses

·         Contract Administration

·         Contract Closure

The purpose of the plan purchases and acquisitions process is to identify which project needs can best be met by purchasing and acquiring products, services, or results outside the project organization. This process involves consideration of whether, how, what, how much, and when to acquire. When the project obtains products, services, and results required for project performance from outside the performing organization, the processes from plan purchases and acquisitions through contract closure are performed for each item to be purchased or acquired.

The plan purchases and acquisitions process encompasses the consideration of potential vendors, particularly if the buyer likes to exercise some degree of influence or control over contracting decisions. Emphasis should also be given to who is responsible for obtaining or holding any relevant permits and professional licenses that may be required by legislation, regulation, or organizational policy in executing the project.

The project schedule is a key input to create plan purchases and acquisitions process. Decisions made in developing the procurement management plan can also influence the project schedule and are integrated with schedule development, activity resource estimating and make or buy decisions.

Existing formal and informal procurement-related policies, procedures, guidelines, and management systems that are considered in developing the procurement management plan and selecting the contract types to be used are provided by organizational process assets. In some application areas, organizations also have established a multi-tier supplier system of selected and pre-qualified sellers to reduce the number of direct sellers to the organization and establish an extended supply-chain.

Project Scope Statement

Project boundaries, requirements, constraints and assumptions related to the project scope are described in the project scope statement. Constraints are specific factors that can limit both the buyers and sellers options. One of the most common constraints for many projects is availability of resources. Other constraints can involve required delivery dates, available skilled resources and organizational policies. Assumptions are factors that will be considered to be true and which can include health, safety, security, performance, environmental, insurance, intellectual property rights, equal employment opportunity, licenses and permits.

 

The project scope statement provides the list of deliverables and acceptance criteria for the project and its products, services and results. Consideration is give to all such factors that may need to be included in the procurement documentation and flowed down within a contract to vendors.

Important information about any technical issues or concerns related to the products, services, and results of the project that are considered during the plan purchases and acquisitions process is provided by the product scope description component of the project scope statement, where as the structured and detailed plan for the projects scope is provided by the work breakdown structure (WBS) and WBS dictionary components of the project scope statement.

Work Breakdown Structure

The WBS establishes the relationship among all the components of the project and the project deliverables.

WBS Dictionary

It provides detailed statements of work that provide an identification of the deliverables and a description of the work within each WBS component required to produce each deliverable.

Project Management Plan

The overall plan for managing the project is provided in the project management plan. It includes subsidiary plans such as a scope management plan. Procurement management plan, quality management plan, and contract management plans provide guidance and direction for procurement management planning. To the extent that other planning outputs are available, those other planning outputs are considered during the plan purchases and acquisition process.

Risk Management

It contains risk-related information such as the identified risks, risk owners and risk responses mitigations strategies and contingency plans.

Risk-related Contractual Agreements

It includes agreements for insurance, services and other items as appropriate that are prepared to specify each party’s responsibility for specific risks should they occur.

Contract Types

There are various types of contracts for different types of purchases. The type pf contract used and specific contract terms and conditions set the degree of risk being assumed by both the buyer and seller. Contracts generally fall into one of three broad categories.

Fixed Price or lump-sum contracts

Fixed price or lump-sum contracts involve a fixed price for a well defined product. It can also include incentives for meeting or exceeding selected project objectivities such as scheduled targets. The simplest form of a fixed price contract is a purchase order for a specified item to be delivered by a specified data for a specified price.

Cost-reimbursable contracts

Cost-reimbursable contract involves payment (reimbursement) to the seller’s actual costs plus a fee typically representing seller profit. Costs are usually classified as direct costs or indirect costs. Direct costs are costs incurred for the exclusive benefit of the project (salaries of full time project staff, etc.). Indirect costs are usually calculated as a percentage of direct costs. Cost-reimbursable contracts often include incentive clauses where if the seller meets or exceeds selected projects objectives, such as schedule targets or total cost, then the seller receives an incentive or bonus payment. Three common types of cost-reimbursable contracts are CPF, CPFF and CPIF.

Cost-Plus-Fee (CPF) or Cost-Plus-Percentage of cost (CPPC)

Sellers receives a fee that varies with the actual cost, calculated as an agreed-upon percentage of the costs and also reimbursed for allowable costs for performing the contract work.

Cost-Plus-Incentive-Fee (CPIF)

The seller receives a predetermined fee and incentive bonus based upon achieving certain performance objective levels set in the contract and is reimbursed for allowable costs for performing the contract work. In some CPIF contracts, if the final costs are less than the expected costs, then both the buyer and seller benefit from the cost savings based upon a pre-negotiated sharing formula.

Time and Material (T&M) contracts

Time and material contracts are a hybrid type of contractual arrangement that contains aspects of both cost-reimbursable and fixed-price type arrangements. These types of contracts resemble cost reimbursable type arrangements in that they are open ended. Buyer does not define the full value of the agreement and the exact quantity of items to be delivered at the time of the contract award. Thus, time and material contracts can grow in contract value as if they were cost-reimbursable type arrangements. Conversely, time and material arrangements can also resemble fixed-price arrangements. For example, the buyer and seller can preset unit rates when both parties agree on the rates for a specific resource category. The requirements (standard or custom product version, performance reporting and cost data submittals) that a buyer imposes on a seller, along with other planning considerations, such as the degree of market competition and degree of risk, will also determine which type of contract will be used. In addition, the seller can consider some of those specific requirements as items that have additional costs. Another consideration relates to the future potential of the product or service being acquired by the project team. Where such potential can be significant, sellers may be inclined or induced to charge prices that are less than would be the case without such future sale potential. While this can reduce the costs to the project, there are legal ramifications if the buyer promises such potential and is not, in fact, realized.

Plan Contracting

This process prepares the documents needed to support the request seller responses process and select seller’s processes.

Project Management Plan

It provides other planning output documents which may need to be reviewed again or which may have been modified as part of the procurement documentation development. In particular, development of procurement documentation is closely aligned with scheduled delivery dates in the project schedule.

Risk Register

All risk-related information such as the identified risks, root causes of risks, risk owners, risk analyses results, risk prioritization, risk categorization, and risk responses generated by the risk management processes are documented in risk register.

Standard Forms

Standard contracts, standard descriptions of procurement items, non-disclosure agreements, proposal evaluation criteria checklists, or standardized versions of all parts of the needed bid documents are included in standard forms. Organizations that perform substantial amounts of procurement can have many of these documents standardized. Buyer and seller organizations performing intellectual property transactions ensure that non-disclosure agreements are approved and accepted before disclosing any project specific intellectual property information to other party.

Procurement Documents

These documents are used to seek proposals from perspective sellers. A term such as proposal is generally used when other considerations, such as technical skills or technical approach, are paramount and terms such as bid, tender, or quotation is generally used when the seller selection decision will be based on price (as when buying commercial or standard items). However, the terms are often used interchangeably and care is taken not to make unwarranted assumptions about the implications of the term used. Common names for different types of procurement documents include invitation for bid, request for proposal, request for quotation, tender notice, invitation for negotiation, and contractor initial response.

Bidder Conferences

Also called as contractor conferences, vendor conferences and pre-bid conferences are meetings with perspective sellers prior to preparation of a bid or proposal and to ensure that all prospective sellers have a clear, common understanding of the technical and contract requirements. Responses to questions can be incorporated into the procurement documents as amendments. All potential sellers are given equal standing during this initial buyer and seller interaction to produce the best bid.

Advertising

Sellers can often be expanded by placing advertisements in general circulation publications such as newspapers or in specialty publications such as professional journals. Some government jurisdictions require public advertising of pending government contracts.

Develop Qualified Sellers List

If information is readily available in the organizational assets qualified or approved sellers' lists can be developed from there also. The project team can also develop its own sources whether or not that data is available. General information is widely available through internet, library directions, relevant local associations, trade catalogs, and similar sources. Detailed information on specific sources requires more extensive effort, such as site visits or contact with previous customers. Procurement documents can also be sent to determine if some or all the prospective sellers have an interest in becoming a qualified potential seller.

Select Sellers

Bids or proposals are received evaluation criteria, as applicable, to select one or more sellers who are both qualified and acceptable as a seller are applied under select sellers process. Many factors can be evaluated in the seller selection decision process.

Primary determinant for an off-the-shelf item can be the price or cost. But if the seller proves unable to deliver the products, services or results in a timely manner, the lowest proposed price may not be the lowest cost.

Proposals are often separated into technical and commercial sections with each evaluated separately. Sometimes management sections are required as part of the proposal and also have to be evaluated.

 

Critical products services and results to mitigate risks that can be associated with issues such as delivery schedules and quality requirements could require multiple sources. The potentially higher cost associated with such multiple sellers, including any loss of possible quantity discounts and replacement and maintenance issues are considered.

The overall process of requesting responses for sellers and evaluating sellers' responses can be repeated on major procurement items. A short list of qualified sellers can be established based on a preliminary proposal. A more detailed evaluation can then be conducted based on a more detailed and comprehensive proposal that is requested from the sellers on the short list.

Select Sellers: Tools and Techniques

Weighting systems

The method for qualifying qualitative data to minimize the effect of personal prejudice on the seller section is called a weighing system. Most such systems involve assigning a numerical weight to each of the evaluation criteria, rating the prospective sellers on each criterion, multiplying the weight by the rating and totaling the resultant products to compute an overall score.

Independent Estimates  

The independent estimate is sometimes referred to as a should-cost estimate which the procuring organization can either prepare on its own or have an independent estimate of the costs as a check on proposed pricing for many procurement items. Significant differences from these cost estimates can be an indication that the contract statement of work was not adequate that the prospective seller either misunderstood or failed to respond fully to the contract statement of work or that the marketplace changed.

Screening System

Establishing minimum requirements of performance for one of the evaluation criteria are involved in the screening system that can employ a weighting system and independent estimates. For example, a prospective seller might be required to propose a project manager who had specific qualifications before the remainder of the proposal would be considered. These screening systems are used to provide a weighted ranking from best to worst for all sellers who submitted a proposal.

Contract Negotiation

In order to reach to a mutual agreement prior to signing the contract, structure and requirements of the contract are clarified in contract negotiation. Final contract language reflects all agreements reached. Subjects covered include responsibilities and authorities, applicable terms and law, technical and business management approaches, proprietary rights, contract financing, technical solution, overall schedule payments and price. Contract negotiations conclude with a document that can be signed by both buyer and seller or the contract can be a revised offer by the seller or a counter offer by the buyer. For complex procurement items contract negotiation can be independent process with inputs (e.g. an issues or open items list) and outputs (e.g. documented decisions) of its own. For simple procurement items, the terms and conditions of the contract can be fixed and non-negotiable and only need to be accepted by the seller.

Even though the project manager and other members of the project management team may be present during negotiations to provide, if needed, any clarification of the project’s  technical quality and management requirements, the project manager may not be the lead negotiator on the contract.

Seller Rating Systems

The seller performance evaluation documentation generated during the contract administration process for previous sellers is one source of relevant information. Seller rating systems are developed by many organizations and use information such as the seller’s past performance, quality ratings, delivery performance and contractual compliance. These rating systems are used in addition to the proposal evaluations screening system to select sellers.

Expert Judgment

Expert judgment is used in evaluating seller proposals. A multi-discipline review team accomplishes the evaluation of proposals with expertise in each of the areas covered by procurement documents and proposed contract. This can include expertise from functional disciplines such as contracts, legal, finance, accounting, engineering, design, research, development, sales and manufacturing.

Proposal Evaluation Techniques

Based on some expert judgment and some form of evaluation criteria, many different techniques can be used to rate and score proposals. Evaluation criteria can involve both objective and subjective components. Evaluation criteria are usually assigned predefined weighting with respect to each other when used for a formalized proposal evaluation. The proposal evaluation then uses inputs from multiple reviews that are obtained during the select sellers' process and any significant differences in scoring are resolved. Using a weighting system that determines the total weighted score for each proposal, an overall assessment and comparison of all proposals can then be developed. These proposal evaluation techniques also can employ a screening system and use data from a seller rating system.

A contract is a legal relationship subject to remedy in the courts that is awarded to each selected seller. It can be in the form of a complex document or a simple purchase order. Regardless of the documents complexity, a contract is a mutually binding legal agreement that obligates the seller to provide the specified products, services, or results and obligates the buyer to pay seller.

The major components in a contract document generally include section headings, statement of work, schedule period of performance bonds, subcontractor approval, change request handling and a termination and disputes mechanism.

Contract Management Plan

Each contract management plan is a subset of the project management plan. A plan to administer the contract for significant purchases or acquisitions is prepared based upon the specific buyer, specified items within the contract, such as documentation and delivery, and performance requirements that the buyers and sellers must meet. The plan covers the contract administration activities throughout the life of the contact.

Resource Availability

The quantity and availability of resources and those dates on which each specific resource can be active or idle are documented.

Procurement Management Plan

It is updated to reflect any approved change requests that are procurement management.

Contract change control system

Buyer-conducted performance review

Inspections and audits

Performance reporting

Payment system

Claims administration

Records management system

Information technology

Contract addresses each contact applicable to the project or a project phase. It supports the close project process as it involves verification that all work and deliverables were acceptable. The contract closure process also involves administrative activities such as updating records to reflect final results and archiving such information for future use. In multi-phase projects the team of a contract may only be applicable to that phase of the project. Unresolved claims may be subject to litigation after contract closure.

Early termination of a contract can result from a mutual agreement of the parties or from the default of one of the parties. The rights and responsibilities of the parties in the event of an early termination are contained in a terminations clause of the contract based upon those contracts or a portion of the project for clause or convenience at any time.

The buyer may have to compensate the seller for seller’s preparations and for any completed and accepted work related to the terminated part of the contract as per those contract terms and conditions.        

I have discussed at length the importance and criticality of procurement management. I have delved into details of the Project Plan, Sellers, types of Contracts, Risks involved, Documentation required and the requirement of proper planning in procurement. These have been drawn from my personal experiences in the different aspects of procurement and hopefully even a first time reader will get an idea of procurement management and its importance in today’s world.