APMP (APM PMQ) Procurement 

 September 23, 2020

By  Dave Litten

APMP (APM PMQ) Procurement

Of the topic of procurement covers the following areas:

  • Procurement in project management
  • The purpose and content of a procurement strategy
  • Processes for supplier selection
  • Different methods of supplier reimbursement, such as firm fixed price contract, contract target cost, contract target price, cost plus fixed fee contract, cost reimbursement type of contract and cost plus incentive fee contracts
  • Types of contractual relationships such as partnering, allowancing and turnkey contract

APMP procurement definition

Procurement is the process by which an organisation requires goods and services.  It includes the development of a procurement strategy, preparation of contracts, selection and acquisition of suppliers and management of the contract.

Procurement is a process that is followed and most organisations will already have a significant amount of material and systems associated with it.

The project would need to make sure that has a clear interaction with the business components and this needs to be properly documented in a procurement strategy.

The procurement strategy is a project document that describes the mechanics of how the project would go about procuring and subsequently managing services and goods.

The procurement strategy defines how the project procurement will take place and as such needs to be considered when the project is being formulated alongside the business case.

There will be numerous procurement implications for the project manager throughout the life of the project, may also be a component of the project management plan.  There are a number of key sections that it should contain:

The make or buy decision

This describes whether the goods should be made in house or be procured elsewhere at a lower cost or better quality.  To do this we will need a well-defined understanding of the  specification, because in order to derive a solid price, we will need to be specific about what it is we want.

Choice of contractual relationship

This considers whether we should buy from one supplier or many.  There are many types of different contractual arrangements that we can end up with.  The following types of contractual arrangement might be considered when drafting the procurement strategy:

Single contracts.  These are aware a single client purchases from a single supplier with a single contract between them.  This is the simplest form of arrangement.

Parallel contracts.  These are an arrangement where we have a number of single contracts with a number of suppliers in doing the same work.  We may have a number of house builders or building houses on the same site to the same design.

Sequential contracts.  These are where we have one supplier doing an element of the work for example design, and another doing the next four example build.

Prime and subcontracts.  These are where we allocate one single contract four main supplier who then subcontracts that work to others.

Turnkey contracts.  These are where a single supplier undertakes to provide everything needed to meet the requirements.  Is called turnkey because the principle is that the client merely turns the key and it works.

Partnering.  This is where two or bought organizations agree to work together to achieve the project.  They both have separate skills and areas of expertise, however in isolation, they are unable to deliver the finished product, but collectively within a partnering contract.

Reimbursement methods

This is where the project and the sponsoring organization will need to decide on the mechanism it would prefer to use to pay for the goods procured under the contract.  These are referred to as payment terms and as mentioned are different from the contract type.

There are a number of factors to be taken into account when deciding which type to use.  Often the decision is based on risk.

If the client is unsure about exactly what is to be purchased, they would probably not be in a position to demand a fixed price from the supplier.  If there are new innovative techniques involved, the client may not wish to have a fixed price and may pay the supplier to innovate, which needs a more flexible payment regime.

Different types of payment terms

A unit price or Time &Materials contract

This is where prices agreed for a unit of cost for example a person day, or a tonne of concrete, and the client pays per unit.  The problem with this approach of course, is that if the job is estimated to take 20 days and then takes 30, the client will pay for 30.

Thus the risk of a overrun lies with the client.  These can be useful however, when the client genuinely does not have a fixed if you about the costs and the specification is vague.  The project management here would normally have to be a shared responsibility or rest with the client.

Fixed price contract

This is where a fixed price is agreed for a fixed scope of work to be carried out by the supplier.  If the job is contracted the 20 days and actually takes 30, the client still only place to 20.

Fixed price may be appropriate if you know exactly what is required and there is a precise requirement.  Fixed price contracts tend to cost more is the supplier will normally look for some form of reimbursement for carrying the risk of overrun.

Cost plus contracts

This type of payment is where the supplier is reimbursed their costs, not the price, and the client agrees to pay a certain amount over the costs to cover the suppliers profit.

These arrangements can include cost plus fixed fee or cost plus percentage.  Both of these will have a slightly different impact on the way the supplier delivers, because cost plus fixed fee would only allow the same fixed fee regardless of actual cost, whereas the percentage fee rises at the same percentage with the cost, thus protecting the contractor’s margin.

Target cost/price contract

This is where the target price or cost is agreed upfront and the supplier and clients agree to work to try and achieve it.  It has a big impact on the way the contract is managed as usually any over or under performance is shared between the parties and they agreed to share it at an agreed rate.

There are necessary demands placed on both, in order to work together to achieve a mutually beneficial outcome.

Supplier selection

A key consideration for the procurement strategy is how to go about engaging the right contractor.  There are usually a number of steps to go through and most organisations will already have some roles and guidelines to help the project on its way.

These procedures would almost certainly involved most of the following key stages:

  1. Define the requirements and make sure that there is a suitable level of definition for the scope of work.  Documented as part of the project documentation and record it inappropriate systems for later reference.
  2. Issue an invitation to tender which may follow and advertising process to determine who the likely suppliers might be.  The invitation to tender usually has a response.  And should include enough information for the potential bidders to respond.
  3. It should also include the criteria on which the responses will be judged, perhaps some form of compliance matrix.  Invitation to tender are sometimes referred to as invitation to bid all requests for quotation.
  4. Answer the bid is queries they have raised.  It is normal to make sure list one bidder are so question than all the bid is C the answer.  Sometimes a bidders conference can be held where there is an interactive opportunity to ask questions and seek clarification.
  5. Receive and evaluate bids and review against the compliance matrix.  The bidders may well provide a lot of extras over and above the specification and these can be considered but straightforward compliance to the invitation to tender is the minimum.
  6. Award a contract to the successful bidders making sure that the scope is as per the tender, bind in whatever documents are relevant and make sure that you and a fully understand the nature of the arrangement and their respective liabilities.

Contract structure

There are a number of key components of a contract:

Offer – the client offers to buy

Acceptance – the supplier agrees to sell

Consideration – money or some form of value needs to change hands

Form – generally contracts do not need to be in writing, but this practices dictate that they are in case they need to be referenced

Intent – both parties need to be intent on being bound

Legal entity – both parties need to be able to undertake a contract

Capacity – both parties must be in a position to fulfil the bargain

Other areas that need to be considered are duration, termination, intellectual property rights, warranties, indemnities and guarantees.

The advice generally is to seek advice from a qualified person before entering into any legally binding arrangements.  Warranties need to be considered as to the terms of penalty if either side breaker they’re part of the bargain and therefore breach the contract.

Contract administration should be carried out following the contract award to make sure that both parties are conforming and discharging their duties accordingly.

Any recalls to enforcement of the contract will need to be supported by evidence that both parties were engaged and trying to make the agreement work as planned.

Feedback and review, a key ingredient for any strategy, is a lessons learned and feedback process to understand what has gone well and what is not gone so well.

Procurement departments are usually only too happy to become engaged in feedback from the coal face so that processes can be improved for the next time

Dave Litten

David spent 25 years as a senior project manager for USA multinationals, and has deep experience in project management. He now develops a wide range of Project Management Masterclasses, under the Projex Academy brand name. In addition, David runs project management training seminars across the world, and is a prolific writer on the many topics of project management.

The Projex Academy

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