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Procurement Management Slides

The document discusses different types of contracts used in project procurement. It defines a contract as a legally binding agreement between two parties that outlines responsibilities and deliverables. The key types of contracts covered are fixed price, where the buyer pays a set amount; time and materials, where the buyer pays per unit of time or materials used; and cost reimbursable, where the buyer pays the seller's actual costs plus an additional fee. The document also discusses important elements of contracts like offer and acceptance, intent, consideration, and factors that can impact a contract's validity.

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114 views

Procurement Management Slides

The document discusses different types of contracts used in project procurement. It defines a contract as a legally binding agreement between two parties that outlines responsibilities and deliverables. The key types of contracts covered are fixed price, where the buyer pays a set amount; time and materials, where the buyer pays per unit of time or materials used; and cost reimbursable, where the buyer pays the seller's actual costs plus an additional fee. The document also discusses important elements of contracts like offer and acceptance, intent, consideration, and factors that can impact a contract's validity.

Uploaded by

Aryaan Revs
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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[Lecture 3]

 A contract is a mutually binding agreement


that obligates the seller to provide the
specified products or services and obligates
the buyer to pay for them
 Contracts can clarify responsibilities and sharpen
focus on key deliverables of a project
 Because contracts are legally binding, there is
more accountability for delivering the work as
stated in the contract
2
 Offer and Acceptance
 A contract is formed when an offer by one party is accepted by the other party.

 Intention To Create Legal Relation


 The intent of the parties to the agreement must intend to enter into a legally binding agreement.
 E.g. Offering a free ride, or offering a paid ride

 Consideration
 The price paid to the other party
 Must have some value, though not necessarily be money

 Legal Capacity
 The capacity, authorized by law, to enter into a contract.
 Mentally impaired, minors, bankrupts, prisoners etc. may not get into a contract

 Free Consent
 The elements of free will and proper understanding of what each of the parties is doing. The consent of each of the parties to a
contract must be genuine.
 Free will may be affected by: mistake, duress, undue influence,

[Ref: PMBoK 6th Edition (C) Project Management Institute, USA] 3


 Lawful Objective/Legality of Purpose
 The purpose of the contract must be legal. Contracts for illegal purposes are void
 E.g. Purchase of 1 kg of cocaine

 Certainty of Meaning.
 Agreement the meaning of which is not Certain or capable of being made certain are void.

 Possibility of Performance.
 If the act is impossible in itself, physically or legally, if cannot be enforced at law.
 E.g. Mr. A agrees with B to discover treasure by magic

 Other reasons
 Not all contracts are enforced by law e.g.
 E.g. a contract to commit a crime, sexually immoral, prejudice public safety, relations with other
countries

[Ref: PMBoK 6th Edition (C) Project Management Institute, USA] 4


 More than most other project management processes, there can be significant legal obligations and penalties
tied to the procurement process.

 The legally binding nature of a contract means it will be subjected to a more extensive approval process, often
involving the legal department.

 Primary focus of the review and approval process is to ensure that the contract:
 Adequately describes the products, services, or results agreed by the seller
 Complies with applicable laws and regulations
 Compliance with organization’s procurement process

 The project manager does not have to be a trained expert in procurement management laws and regulations
but should be familiar enough with the procurement process to make intelligent decisions regarding contracts
and contractual relationships.

[Ref: PMBoK 6th Edition (C) Project Management Institute, USA] 5


 When working internationally, project managers should keep in mind the effect that culture and local law have upon
contracts and their enforceability, no matter how clearly a contract is written

 It is the project management team’s responsibility to make certain that all procurements meet the specific needs of the
project while working with the procurement office/department to ensure organizational procurement policies are followed.
Anything not in the contract cannot be legally enforced.

 Most organizations document policies and procedures specifically defining procurement rules and specifying who has
authority to sign and administer such agreements on behalf of the organization.

 The project manager is typically not authorized to sign legal agreements binding
the organization; this is reserved for those who have the authority to do so

 In international contracting, the legal jurisdictions under which the contracts will be administered are clearly spelled out in
the contract.

[Ref: PMBoK 6th Edition (C) Project Management Institute, USA] 6


 Contract: A written or spoken agreement, that is intended to be enforceable by law e.g. employment, sales, tenancy,
provision of services, or other business transactions

 A very important document as it governs the relationship between two business parties

 E.g. a Buyer intends to purchase material from a Supplier, for use on a project. Both parties get into a contract under which
the Supplier is bound to deliver the goods at the agreed-upon time, and the Buyer is bound to make payments as agreed.

 Procurement Manager select the contract type, most suitable for each procurement, based on:
 What is being purchased (goods, or services)
 Completeness of statement of work
 Level of effort and expertise required to manage the seller
 Incentives for supplier based on meeting certain criteria (e.g. early completion, or meeting quality standards etc.)
 Marketplace or economy
 Industry standard for the type of contract used

[Ref: PMBoK 6th Edition (C) Project Management Institute, USA] 7


Contract Type Unit Price/Item Total Quantity Example

Fixed Price Known Known 1 Diesel Generator x PKR 10


Million

Time & Material Known Unknown PKR 10,000 per visit for
generator repair (how many
visits i.e. qty is unknown)

Cost Reimbursable Unknown Unknown Any spare parts (which


parts will need
replacement, and their
price, are both unknown)

[Ref: PMBoK 6th Edition (C) Project Management Institute, USA] 8


 Fixed Price (FP, Lump Sum, Firm Fixed Price)
 Buyer pays a fixed amount to Seller
 Used for acquiring goods, products, or services with well-defined specifications or
requirements

 Time & Material (T&M)


 Buyer pays on a per-hour or per-item basis
 Typically used for service efforts in which the level of effort cannot be defined when the
contract is awarded.

 Cost-Reimursable (CR)
 Buyer pays on a per-item basis
 Typically used when the exact scope of work is uncertain and, therefore, costs cannot be
estimated accurately enough when the contract is awarded

[Ref: PMBoK 6th Edition (C) Project Management Institute, USA] 9


 Fixed-price contracts  Cost-reimbursable contracts
 Firm Fixed Price Contracts (FFP).  Cost Plus Fixed Fee Contracts
 Fixed Price Incentive Fee Contracts (CPFF).
(FPIF).  Cost Plus Incentive Fee Contracts
 Fixed Price Award Fee Contract (CPIF).
(FPAF)  Cost Plus Award Fee Contracts
 Fixed Price with Economic Price (CPAF).
Adjustment Contracts (FP-EPA).
 Time and Material Contracts
(T&M).

[Ref: PMBoK 6th Edition (C) Project Management Institute, USA] 10

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