PROJECT

PROCUREMENT
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Project Procurement Process

Plan Conduct Administer Close

Procurement Procurement Contract Procurements

1. Plan: Documenting project purchasing decisions, specifying

approach, identifying potential sellers

2. Conduct: Obtaining seller responses, selecting a seller, and

awarding the contract

3. Manage: Managing procurement relationships, monitoring

contract performance, making changes

4. Close: Completing each project procurement

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Procurement Planning
• Identifies those needs which can best be, or must be, met
by acquiring products, services, or results outside of the
organization, versus those needs which can be
accomplished by the organization
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Procurement Planning Process

• Market Conditions
• In-house Experience/Capacity
• Performance requirements
Make/Buy • Risk Management

• Contract type
• Optimal delivery time
• Procurement method
Procure • Segmentation
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Life Cycle Consideration

Fast track or Concurrent Engineering

Design

Construct Time Saved

Sequential

Design

Construct

Time is reduced – What happens to Risk?

PROCUREMENT
METHODS
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Open Competitive Bidding

• Is the bidder capable of delivering?

• Ways of restricting participation

• Prequalification
• Understanding of need
• Overall or life-cycle cost
• Technical capability
• Management approach
• Financial capacity of seller
• Production capacity and interest
• Business size and type
• References
• Intellectual property rights
• Proprietary rights
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Procurement Methods
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Contract
• A contract is a mutually binding agreement which:
• obligates the seller to provide the specified products, services, or
results, and
• obligates the buyer to provide monetary or other valuable
consideration.

Level of Risk Transfer

Determined by the Type of
Contract used
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Contract and Risk

• Risk transfer is seeking to shift the consequence of a risk
to a third party together with ownership of the response
• It does not eliminate the risk, it just transfers responsibility
for the risk

Transfer
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Fixed Price Contracts

• Fixed total price for a well-defined product
• If the product is not well-defined, both the buyer and seller
are at risk
• Fixed price contracts may include incentives for early
delivery, cost savings, or technical performance
• Buyers must precisely specify the product or service to be
procured
• Example of a fixed price contract is a purchase order

Risk
?
Buyer Seller
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Cost Plus Contracts

• Payment (reimbursement) to the seller for actual costs
• Costs are classified as direct costs or indirect costs
• Direct costs are costs incurred for the exclusive benefit of the
project
• Indirect costs (overhead costs) are costs allocated to the project by
the performing organization
• Fee (% of direct cost) represents the seller’s profit
• May include incentives for meeting or exceeding selected
project objectives

Risk
?
Buyer Seller
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Time and Material (T&M) Contracts

• Hybrid type with aspects of both cost-reimbursable and
of fixed-price contracts
• Use for outside support when a precise statement of work
is not readily available
• Cost-reimbursable because the contract is open ended
• Fixed-price because unit rates are preset (ex. senior
engineer is $85/hour)

Risk
?
Buyer Seller
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Allocation of Risk Through Contract Type

LOW HIGH
Fixed Price
- Firm Fixed Price (FFP)
- Fixed Price Incentive Fee (FPIF)
- Fixed Price with Economic Adjustment (FP-

Seller Risk
Buyer Risk

EPA)

Cost Reimbursable
- Cost Plus Incentive Fee (CPIF)
- Cost Plus Fixed Fee(CPFF)
- Cost Plus Award Fee (CPAF)
HIGH LOW
Time and Materials (T&M)