13-08-2013

Introduction
All projects require procurements.
You need materials, equipment, consultants,
training, and many other goods and services.
Project procurement management is the process
of purchasing the products necessary for meeting
the needs of the project scope.

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.
Outsourcing in Procurement?
Outsourcing is a growing practice within the
industry, and it is important to appreciate the
reasons it is adopted:
To reduce both fixed and recurrent costs.
To allow the client organization to focus on its
core business.
To access skills and technologies.
To provide flexibility.
To increase accountability.
Procurement Management Processes
Project Procurement Management includes the
following processes for acquiring goods and services
from outside the project organization:
Procurement planning: determining what to procure
and when.
Solicitation planning: documenting product
requirements and identifying potential sources.
Solicitation: obtaining quotations, bids, offers, or
proposals as appropriate.
Source selection: choosing from among potential
vendors.
Contract administration: managing the relationship
with the vendor.
Contract close-out: completion and settlement of the
contract.
Procurement Management Processes & Key
Outputs
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
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.
What to procure.
How to procure.
How much to procure.
When to procure.

It is essential to be thorough and creative when
planning procurement. Even though a company may be
viewed as a competitor, it will often be advantageous to
collaborate on some projects.
Inputs to Procurement
Planning
The inputs needed for procurement planning include:
The project scope statement.
Product description.
Market conditions.
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:
Make-or-buy analysis: determining whether a
particular product or service should be made or
performed inside the organization or purchased from
someone else. Often involves financial analysis.
Experts, both internal and external, are valuable
assets in procurement decisions.
Internal experts are particularly useful in providing
knowledge of organizational and personnel issues.
External experts can provide expert judgment,
especially with regard to vendors and technology
issues.
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:
Fixed price or Lump Sum: involve a fixed total
price for a well-defined product or service.
Cost Reimbursable: 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.
Fixed Price Contracts
Fixed price or lump sum 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.
Contract Types Versus Risk
The figure below summarises the spectrum of risk to the
buyer and seller for different types of contract. Note that a
low risk option for a buyer will be high risk for the seller,
and visa-versa.
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.
A good SOW gives bidders a better understanding of the
buyers expectations, and therefore should be as clear,
concise and as complete as possible. It should describe all
the services required, and include performance reporting
requirements. The SOW should specify the product of
the project, use industry terms, and refer to industry
standards.
Statement of Work (SOW) Template
I. Scope of Work: Describe the work to be done to detail. Specify the hardware and
software involved and the exact nature of the work.
II. Location of Work: Describe where the work must be performed. Specify the
location of hardware and software and where the people must perform the work
III. Period of Performance: Specify when the work is expected to start and end,
working hours, number of hours that can be billed per week, where the work must
be performed, and related schedule information.
IV. Deliverables Schedule: List specific deliverables, describe them in detail, and
specify when they are due.
V. Applicable Standards: Specify any company or industry-specific standards that
are relevant to performing the work.
VI. Acceptance Criteria: Describe how the buyer organization will determine if the
work is acceptable.
VII. Special Requirements: Specify any special requirements such as hardware or
software certifications, minimum degree or experience level of personnel, travel
requirements, and so on.
Solicitation Planning
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.
Outline for a Request for Proposal (RFP)
I. Purpose of RFP
II. Organizations Background
III. Basic Requirements
IV. Hardware and Software Environment
V. Description of RFP Process
VI. Statement of Work and Schedule Information
VII. Possible Appendices
A. Current System Overview
B. System Requirements
C. Volume and Size Data
D. Required Contents of Vendors Response to RFP
E. Sample Contract
Solicitation
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
buyers expectations.

Source Selection
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.
Source Selection
After developing a short list of possible sellers,
organizations will often undertake more detailed
evaluation.
The following figure lists items that might be part
of an evaluation of the top three vendors for a
large information technology project.
All of the evaluation criteria are given a certain
number of possible points (based on ranked
importance), and the project team members and
other stakeholders then evaluate each proposal
by assigning points to each criteria.
Detailed Criteria for Selecting Vendors
Contract Administration
Contract administration ensures that the
sellers 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.

You may read FIDIC Contract Documents
for better guidelines
Contract Administration
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 in the
preparation and administration of
contracts.
Contract Administration
Project members must be aware of
the legal problems they might cause
by not understanding a contract. In
particular, most projects involve
changes, and these changes must
be handled properly for items under
contract.
Change Control for Contracts
Change control is an important part of the contract
administration process. The following change control
process must be applied where there are contracts:
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
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.
Conclusion - 1
It is essential that organizations obtain good
contracts that minimize risk while ensuring
optimum results through effective contract
administration.
With the current competitive and demanding
conditions found in projects, it is very important
to prepare contracts with great care and
expert assistance.
It is equally important to initiate and follow
effective contract administration procedures.
Conclusion
The following guidelines can help can assist in
preparing proposals, contracts and administrative
procedures:
Use checklists and templates where appropriate.
Evaluate risks 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.
Appropriate pricing and/or insuring of risk
under the contract.
Periodic review, improvement and updating of
contract preparation and administration
procedures.