OME 664: PROJECT PROCUREMENT AND

CONTRACTING

LECTURE 1: Introduction to Procurement

Management
 Learning Objectives
• At the end of this lecture, you will be able to:
• Identify the procurement functions
• Describe procurement objectives
• Analyse the procurement cycle
• Prepare appropriate specification

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 Introduction to the Procurement Function
• Procurement means acquiring goods and/or
services from an outside source.
• In project management, Procurement refers to
the process of purchasing, renting or contracting
with some external resource to meet the project
goal.
• The acquisition of products or services not
produced or delivered by the project team
• Project procurement may involve outsourcing or
off-shoring some of the project functions.
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 Why Outsource?
Outsourcing is a strategy by which an organization
contracts out its major functions to specialized
and efficient service providers. The reason is:
1.To reduce both fixed and recurrent costs.
2.To allow the client organization to focus on its
core business – competitive advantage
3.To access skills and technologies
4.To provide flexibility
5.To increase accountability
6.To free up resources (i.e., cash, personnel,
facilities)
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 The Procurement objectives
1. Support Operational Requirements:
• Buy products and services
– At the right price
– From the right source
– At the right specification that meets project needs
– In the right quantity
– For delivery at the right time

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 The Procurement objectives cont..
2. To Manage the Procurement Process and the Supply
Base Efficiently and Effectively by,
• Ensuring current suppliers are competitive
• Identification of new potential suppliers and develop
relationships
• Developing and maintenance of policies and processes
• Introducing and leveraging appropriate technology and
systems
• Defining procurement strategy and structure
• Developing plans and measures
• Providing procurement leadership to the organization
• Leadership of procurement for the project
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 The Procurement objectives cont..
3. Support Organizational Goals and Objectives through:
• Monitoring of supply markets and trends (e.g., material
price increases, shortages, changes in suppliers) and
interpreting the impact of these trends on the project
• Identification of critical materials and services required
to support the project in key performance areas.
• Development of supply options and contingency plans
that support project plans
• Supporting the project’s need for a diverse and globally
competitive supply base

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 Method of Procurement
1. Open Tendering (competitive bidding).
It allows companies to bid on goods in an open competition or
open solicitation manner. Open tendering requires company
to:
• Advertise locally
• Have unbiased and coherent technical specifications
• Have objective evaluation measures
• Be open to all qualified bidders
• Be granted to the least cost provider
Disadvantages:
• Complex requirements are typically not suited for this
method
• It is a prolonged process – may cause delays
• Complications in defining the exact needs of the
requirement by the procuring company
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 Method of Procurement cont..
2. Restricted Tendering
• Also sometimes referred to as selective tendering.
• Like open tendering, restricted tendering is considered a
competitive procurement method, however, the
competition is limited to agencies that are invited by the
procuring team.
• Places a limit on the amount of request for tenders that
can be sent by a supplier or service provider.
• Because of this selective process, the procuring entity
should establish a set of guidelines to use when selecting
the suppliers and service providers that will be on the
invitation list.
• This method is selective to find the best-suited and most
qualified agencies to procure goods and services from.
• It’s also a way for the procuring team to save time and
money during the selection process.
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 Method of Procurement cont..
3. Request for Proposals (RFP)
• RFP is a term that is used all across the business world. This kind of
proposal is a compelling and unique document stating why the business
is the best supplier for the type of project at and.
• Suppliers may feel they have all of the qualifications to fit the needs of
fulfilling a specific requirement of a procurement team – but they have
to prove it.
• Suppliers writing the RFP’s should submit a two-envelope proposal to
the procurement/project manager.
• The two-envelope process allows the procurers’ to review the proposal
without knowing the financial component. This eliminates any
persuasion by cost and allows an objective lens to look through when
analyzing a good fit.
• The financial proposal is sealed in the second envelope and should only
be opened after the content of the first-envelope proposal is approved
or rejected.
• The proposal with the best fit qualifications and best price will be
selected. The most qualified and appropriate proposal, regardless of
price, should be selected.

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 Method of Procurement cont..
4. Two Stage Tendering
• There are two procedures that are used under the two stage
tendering method. Each one of the procedures has a two stage
process.
• The first procedure is very similar to the RFP method. The
procurement team receives a proposal with two envelopes –
one with the proposal itself and one with the associated
financial information.
• The bidder is required to submit a technical proposal as
specified by the project.
• This proposal is scored according to the relevance of the
solution to the needs of the project.
• The highest scored proposal is invited for further discussion in
an attempt to reach an agreement.
• After the final agreement for the technical proposal is reached,
the bidder is invited to submit their financial proposal followed
by negotiations for contract
• Allows more room for discussion to meet mutual needs 11
• The second procedure is much like the above, however,
instead of the bidder submitting a fully-completed
technical proposal, a partial proposal is submitted.
• The methodology and technical specifications will be
included but not to the fullest extent. This allows room for
even more customization and discussion.
• Once the highest qualified bidder is selected, they will be
invited to submit a thorough technical proposal along with
a financial proposal.
• The technical proposal will be evaluated and only then will
the financial proposal be opened.
• The combined score of both the technical proposal and
the financial proposal are the grounds on which a bidder is
contracted.
• Time consuming
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 Method of Procurement cont..
5. Request for Quotations
• For small-valued goods or services. RFQ is by far the
least complex procurement method available.
• Ensures a fast procurement process and not a lot of
paperwork.
• There is no formal proposal drafted from either
party in this method.
• The procurement entity selects a minimum of three
suppliers or service providers that they wish to get
quotes from.
• A comparison of quotes is analyzed and the best
selection determined by requirement compliance is
chosen.
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 Method of Procurement cont..
6. Single-Source (Non competitive method)
• Single source procurement occurs when the procuring entity
intends to acquire goods or services from a sole provider.
Used under specific circumstances:
• This method should undergo a strict approval process from
management before being used. The circumstances which call
for this method are:
1. Emergencies
2. If only one supplier is available and qualified to fulfill the
requirements
3. If the advantages of using a certain supplier are abundantly clear
4. If the procurer requires a certain product or service that is only
available from one supplier
5. For the continuation of work that cannot be reproduced by
another supplier

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 The Project Procurement Mgt Cycle
• Project procurement management: Acquiring
goods and services for a project from outside the
performing organization.
Processes include:
• Planning purchases and acquisitions: Determining
what to procure, when, and how, make or buy
• Planning contracting: Describing requirements for
the products or services desired from the
procurement and identifying potential sources or
sellers (contractors, suppliers, or providers who
provide goods and services to other organizations).

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 Project Procurement Mgt Cycle (cont’d)
• Soliciting the bids (RFQ & RFP): Obtaining information,
quotes, bids, offers, or proposals from sellers, as
appropriate.
• Evaluating and Selecting the bidders - Choosing from
among potential suppliers through a process of evaluating
the bidders and negotiating the contract.
• Awarding and Administering the contract: Managing the
relationship with the selected seller.
• Complex projects require a detailed discussion of the
goals, the potential barriers to accomplishing those goals,
the project schedule and critical dates, and the processes
for resolving conflicts and improving work processes
• Closing the contract: Completing and settling each
contract, including resolving any open items.
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 Planning Purchases and Acquisitions
• Identifying which project needs can best be met
by using products or services outside the
organization.

• If there is no need to buy any products or

services from outside the organization, then
there is no need to perform any of the other
procurement management processes.

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 Tools and Techniques for Planning Purchases and
Acquisitions
1. Make-or-buy (MoB) analysis: General
management technique used to determine
whether an organization should make or
perform a particular product or service inside
the organization or buy from someone else.

• Often involves financial analysis.

• Experts, both internal and external, can provide

valuable inputs in procurement decisions.
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 Questions to answer in MoB
• How much does it cost to produce it as opposed
to buying it?
• How will this decision affect the scope of your
project?
• How will it affect the project schedule?
• Do you have time to do the work and still meet
your commitments?

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 Make-or-Buy examples

Example 1: You are considering whether to buy or

make a software product:
• If you buy, the cost is $ 80,000, and the cost of procurement and
integrating in your company is $ 1,000
• If you want to make it yourself, the product will require seven
software engineers working three months. Salary of each
engineer is $ 4,000 per month. The overhead costs apportioned
to the project will be $ 2,000.
• Which option will you choose—make or buy?
• Answer: If you buy, cost will be: $ 80,000 + $ 1,000 = $ 81,000
• If you make, cost will be: $ 4,000 x 7 x 3 + $ 2,000 = $ 86,000
• So, it is better for you to buy.

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 Make-or-Buy examples
Example 2: Assume you can lease an item you need
for a project for $800/day. To purchase the item,
the cost is $12,000 plus a daily operational cost
of $400/day.
• How long will it take for the purchase cost to be
the same as the lease cost?

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Solution:
Set up an equation so both options, purchase and
lease, are equal.
• In this example, use the following equation. Let d
be the number of days to use the item:
$12,000 + $400d = $800d
Subtracting $400d from both sides, you get:
$12,000 = $400d
Dividing both sides by $400, you get: d = 30
• If you need the item for more than 30 days, it is
more economical to purchase it.
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Class Activity:
• You are considering whether to buy or lease a
machine for your heavy engineering plant.
• If you buy, the cost is $29,000, and the one-time
cost of procurement and integrating in your
company is $ 1,000
• If you lease, you have to pay $10,000 as down
payment and $ 5,000 per month
Question: How will the duration of the project
influence your decision?
My ans is if it is more than 4 months …
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 2. Types of Contracts
• Different types of contracts are more or less appropriate
for different types of purchases. During the planning
purchases and acquisitions, project managers should
decide on the appropriate type of contract.
• A procurement 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.
• Legal implications of signing a contract
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 Types of Contracts cont..
• Different types of contracts can be used in different
situations:
– Fixed price or lump sum contracts: Involve a fixed total price
for a well-defined product or service.
– Cost reimbursable contracts: 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.
– Time and material contracts: Hybrid of both fixed price and
cost reimbursable contracts, often used by consultants.
• A single contract can actually include all four of these
categories, if it makes sense for that particular
procurement.

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 Fixed price or lump sum
• This category of contract involves a fixed total
price for a well-defined product. To the extent
that if the product is not well-defined, both the
buyer and seller are at risk—the buyer may not
receive the desired product or the seller may
need to incur additional costs in order to provide
it.
• Fixed price contracts may also include incentives
for meeting or exceeding selected project
objectives such as schedule targets.

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 Cost Reimbursable Contracts
• This category of contract involves payment
(reimbursement) to the seller for its actual costs
plus some predetermined fees. Costs are usually
classified as direct costs or indirect costs.
• Direct costs are costs incurred for the exclusive
benefit of the project (e.g., salaries of full-time
project staff).
• Indirect costs, also called overhead costs, are costs
allocated to the project by the performing
organization as a cost of doing business (e.g.,
salaries of corporate executives).
• Cost reimbursable contracts often include incentives
for meeting or exceeding selected project objectives
such as schedule targets or total cost.
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Cost Reimbursable Contracts cont..
• Cost plus incentive fee (CPIF): The buyer pays
the supplier for allowable performance costs
plus a predetermined fee and an incentive
bonus.
• Cost plus fixed fee (CPFF): The buyer pays the
supplier 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 supplier for allowable
performance costs plus a predetermined
percentage based on total costs.
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 Unit price contracts
• Unit price contracts—the seller is paid a
preset amount per unit of service (e.g., $70
per hour for professional services or $1.08 per
cubic yard of earth removed), and the total
value of the contract is a function of the
quantities needed to complete the work.

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 Time and Material Contracts
• Hybrid of both fixed price and cost
reimbursable contracts
• The procuring entity agrees to pay the
supplier/contractor based upon the time
spent by the contractor's employees and
subcontractors employees to perform the
work, and for materials used in the
construction (plus the contractor's mark up on
the materials used), regardless of the amount
of work required to complete construction.

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 Output from planning purchases
and acqusisition
1. Procurement Management Plan

• Describes how the procurement processes will

be managed, from developing documentation
for making outside purchases or acquisitions
to contract closure.

• Contents varies based on project needs.

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 Output..
2. Contract Statement of Work (SOW): A statement
of work is a description of the work required for
the procurement.
• If a SOW is used as part of a contract to describe
only the work required for that particular
contract, it is called a contract statement of
work.
• A SOW is a type of scope statement.
• A good SOW gives bidders a better understanding
of the buyer’s expectations.

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 Figure 12-2. 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.

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 Planning Contracting
• Involves preparing several documents needed for potential
sellers to prepare their responses and determining the
evaluation criteria for the contract award.
– Request for Proposals: Used to solicit proposals from
prospective sellers.
• A proposal is a document prepared by a seller when there are
different approaches for meeting buyer needs.
– Requests for Quotes: Used to solicit quotes or bids from
prospective suppliers.
• A bid, also called a tender or quote (short for quotation), is a
document prepared by sellers providing pricing for standard
items that have been clearly defined by the buyer.

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Figure 12-3. Request for Proposal (RFP)
Template
I. Purpose of RFP
II. Organization’s 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 Vendor’s Response to RFP
E. Sample Contract

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 Evaluation Criteria
• It’s important to prepare some form of evaluation
criteria, preferably before issuing a formal RFP or
RFQ.

• Beware of proposals that look good on paper; be

sure to evaluate factors, such as past
performance and management approach.

• Can require a technical presentation as part of a

proposal.

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 Soliciting the Bids
• Deciding whom to ask to do the work, sending
appropriate documentation to potential sellers, and
obtaining proposals or bids.
• 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 can help clarify the buyer’s
expectations.

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Evaluating and Selecting the bidders
• Also called source selection.

• Involves:

– Evaluating proposals or bids from sellers.

– Choosing the best one.

– Negotiating the contract.

– Awarding the contract.

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Figure 12-4. Sample Proposal
Evaluation Sheet

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 Bidders Selection Process
• Organizations often do an initial evaluation of
all proposals and bids and then develop a
short list of potential sellers for further
evaluation.

• Sellers on the short list often prepare a best

and final offer (BAFO).

• Final output is a contract signed by the buyer

and the selected seller.
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 Administering the Contract
• Ensures that the seller’s performance meets
contractual requirements.

• Contracts are legal relationships, so it is

important that legal and contracting
professionals be involved in writing and
administering contracts.

• Many project managers ignore contractual

issues, which can result in serious problems.

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 Suggestions for Change Control in
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.
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 Suggestions for Change Control in
Contracts (cont’d)
• Project managers and teams should stay closely
involved to make sure the new system will meet
business needs and work in an operational
environment.

• Have backup plans.

• Use tools and techniques, such as a contract

change control system, buyer-conducted
performance reviews, inspections and audits, and
so on.
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 Closing the Contract
• Involves completing and settling contracts and
resolving any open items.
• The project team should:
– Determine if all work was completed correctly and
satisfactorily.
– Update records to reflect final results.
– Archive information for future use.
• The contract itself should include requirements for
formal acceptance and closure.

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 Tools to Assist in Contract Closure
• Procurement audits identify lessons learned in
the procurement process.

• A records management system provides the

ability to easily organize, find, and archive
procurement-related documents.

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 Chapter Summary
• Project procurement management involves
acquiring goods and services for a project from
outside the performing organization.
• Processes include:
– Planning purchases and acquisitions
– Planning contracting
– Requesting seller responses
– Selecting sellers
– Administering contracts
– Closing contracts
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