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Transcript of Procurement Management
Procurement Management Process
Includes the following processes for acquiring goods and services from outside the project organisation:
determining what to procure and when.
documenting product requirements and identifying potential sources.
obtaining quotations, bids, offers, or proposals as appropriate.
choosing from among potential vendors.
managing the relationship with the vendor.
completion and settlement of the contract.
Types of contracts
A contract is a mutually and legally binding agreement that obligates the seller to provide specified products or services, and obligates the buyer to pay for them. Different types of contracts are suited to particular circumstances, there are three broad categories:
or lump sum: involve a fixed total price
for a well-defined product or service.
: involve payment to the seller
for direct and indirect costs.
Unit price contracts
: require the buyer to pay the
seller a predetermined amount per unit of service.
Statement of Work (SOW)
Many contracts include a statement of work (SOW). A statement of work is a description of the work required for the procurement. The SOW describes the work in sufficient detail to allow prospective sellers to determine if they are capable of providing the goods and services required, and to allow them to determine an appropriate price.
Procurement means acquiring goods and/or services from an outside source. Procurement is the term generally used by government, while business uses the term purchasing and outsourcing is commonly used by the information technology industry.
Two key themes:
delivering efficiencies and quality
socially responsible procurement, engaging with local and regional suppliers
Social responsible Procurement
Aims and Tasks of procurement
Favorable Purchase Price
low costs of Freight
Low cost of storage
Alternative procurement concepts
Multiple or Single
Purchase of components instead
A lot of or only one supplier
The figure below summarises the major processes involved in procurement management, and identifies important milestones associated with each stage.
For example, after procurement planning the key milestone is the
“make or buy decision”.
This will determine if further procurement management processes are required.
Procurement planning involves
identifying which project needs can be
best met by using products or services
outside the organization. It includes deciding:
Whether to procure.
How to procure.
What to procure.
How much to procure.
When to procure.
Inputs to procurement
The inputs needed for procurement
The project scope statement.
Constraints and assumptions.
It is important to define the scope of the
project, the products, market conditions, and constraints and assumptions. However, it is
also essential to know exactly why you
want to procure goods or services.
Tools and Techniques
Procurement management will
often incorporate the following:
determining whether a particular product or service should be made or performed inside th
organization or purchased from someone else. Often involves financial analysis.
Experts, both internal and external
, are valuable assets in procurement decisions.
a) Internal experts are particularly useful in providing knowledge of organisational and
b) External experts can provide expert
judgement, especially with regard to
vendors and technology issues.
Fixed Price Contracts
Involve a fixed total price for a well-defined product or service. These contracts are particularly suited where supplies or services can be clearly specified before tenders are invited. The buyer incurs little risk in this situation.
Fixed price contracts may also include incentives for meeting or exceeding project objectives. They may also include safeguards in the form of penalty clauses, however these may be difficult to apply before the consequences of delay are felt.
An important consideration is that any changes to resource requirements due to project revision (change) is likely to lead to additional claims by, and extra payment to the contractor.
Cost Reimbursable Contracts
Cost reimbursable or cost-plus contracts involve payment to the seller for direct and indirect actual costs. These contracts are often used for projects that include the provision of goods and services associated with new technologies. The buyer absorbs more risk with the type of contract, which has three forms:
Cost plus incentive fee (CPIF)
: the buyer pays the seller for allowable performance costs plus a predetermined fee and an incentive bonus.
Cost plus fixed fee (CPFF):
the buyer pays the seller for allowable performance costs plus a fixed fee payment usually based on a percentage of estimated costs.
Cost plus percentage of costs (CPPC):
the buyer pays the seller for allowable performance costs plus a predetermined percentage based on total costs.
Unit Price Contracts
Unit price contracts require the buyer to pay the seller a predetermined amount per unit of service, and the total value of the contract is a function of the quantities needed to complete the work.
Unit price contracts are also called a time and materials contract, and may incorporate volume discounts.
This type of contract is often used for services that are needed when the work cannot be clearly specified and total costs cannot be estimated in a contract. Many contract programmers and consultants prefer to use unit price contracts.
The SOW should specify the product of the project, use industry terms, and refer to industry standards.
Solicitation planning involves preparing of the documents needed for requesting bids (solicitation), and determining the evaluation criteria for the award of a contract. Common documents used in this process are:
Request for Proposals: used to solicit proposals from prospective sellers where there are several ways to meet the sellers’ needs.
Requests for Quotes: used to solicit quotes for well-defined procurements.
Invitations for bid or negotiation and initial contractor responses are also part of solicitation planning.
Once buyers receive proposals, they must select a vendor or decide to cancel the procurement. Source selection involves:
-Evaluating bidders’ proposals.
-Choosing the best one.
-Negotiating the contract.
-Awarding the contract.
It is highly recommended that buyers use formal evaluation
procedures for selecting vendors.
Buyers often create a “short list”.
ensures that the seller’s performance meets contractual requirements.
Contracts are legal relationships,
and are subject to the contract law in the country where the project is conducted, and in the case of international projects, the country of supply.
However, due to their complexity, many project managers
ignore contractual issues. This can result in serious
problems. Ideally, the project manager and the project
team should be actively involved with contract law experts
preparation and administration of contracts.
Solicitation (or tendering) involves obtaining proposals, tenders or bids from prospective sellers. Prospective sellers do most the work in this process, usually at no cost to the buyer or the project. The buying organization is responsible for advertising the “request to tender” (the solicitation).
Organizations can advertise to procure goods and services in several ways:
-Approaching the preferred vendor.
-Approaching several potential vendors.
-Advertising to anyone interested.
A bidders’ conference or similar meeting between the buyer and the prospective sellers can help clarify the buyer’s expectations.
Change Controls for Contracts
Change control is an important part of the contract administration process.
Changes to any part of the project need to be reviewed, approved, and documented by the same people in the same way that the original part of the plan was approved.
Evaluation of any change should include an impact analysis. How will the change affect the scope, time, cost, and quality of the goods or services being provided?
Changes must be documented in writing. Project team members should also document all important meetings and telephone phone calls.
Contract close-out is the final project procurement management process. It includes:
-Product verification to determine if all work was completed correctly and satisfactorily.
-Administrative activities to update records to reflect final results.
-Archiving information for future use.
Procurement audits are often undertaken during contract close-out to identify lessons learned in the procurement process.
It is essential that organizations obtain
good contracts that minimize risk while
ensuring optimum results through effective
With the current competitive and demanding conditions found in information technology
it is very important to prepare contracts
with great care and expert assistance
. It is
equally important to
initiate and follow
effective contract administration
The following guidelines can help can assist in preparing proposals, contracts and administrative procedures:
by reference to suggested contract provisions where appropriate.
All major proposals and contracts, and contracts with questionable provisions, should be
reviewed by a contract law expert.
insuring of risk
under the contract.
Periodic review, improvement and updating
contract preparation and administration
Sample Proposal Evaluation Sheet
The following template could be used by a project team to help create a short list of the best three proposals.
Detailed Criteria for selection Vendors
Coordination of the Production control System with the Assembly Control Systems
Timely delivery of parts "as soon as possible"
No or (at most) small Buffers
Small Lots, high Delivery frequency.
Just-in-Time flow information