Project Procurement and Contract

Administration
Chapter 1:
Overview of Project
Procurement
 Chapter Contents
1.1. What is Project Logistics

1.2. What is Procurement

1.3 What is Project Procurement Management

1.4. Goals of Project Procurement

1.5. Establishing Standard Procurement

Procedures & Policies

1.6. A Generic Project Procurement Process

 Procurement
Procurement Involves sourcing
items;
 At the right prices
 Delivered at the right time
 Of the right quality
 Of the right quantity
 From the right source
 1.1: What is Project
Logistics
The Council of Supply Chain Management Professionals (CSCMP, 2016)
defines logistics management is that part of supply chain management
that

 Plans, Implements, And Controls the efficient forward and reverses

flow and storage of Goods, Services and Related Information
between the point of origin and the point of consumption to meet
customers’ requirements.

 Logistics is defined as the integrated planning, organization,

management, processing and control of the entire flow of
materials and goods as well as the associated information flows.

 Supply chain management encompasses the planning and

management of all activities involved in sourcing and
procurement, conversion, and all logistics management activities
 Cont’d
From the two definitions, we see that logistics
management is a subset of supply chain
management.

Considering the discipline of project management

for a moment, we see that this overlaps onto supply
chain management, insofar as construction of a new
facility is concerned: materials and services need to
be available when needed by the construction crew.
Cont’d
 The above figure shows the overlap of project
management with supply chain management.

 The overlap gives rise to the terms ‘project supply

chain management’ and ‘project logistics
management’.

 Project logistics is a subset of logistics and project

supply chain management is a subset of supply
chain management.
 Cont’d
 Logistics is the management of the flow of things
between the point of origin and the point of
consumption to meet the requirements of customers
or corporations.

 The resources managed in logistics may include

tangible goods such as materials, equipment, and
supplies, as well as food and other consumable items.
Characteristics of project
logistics
 Projects logistics already commences in the feasibility
study stage of a project.

 Accessibility to the site, in terms of transport routes, rail

carrying capacities and bridge widths, can dictate the
design approach to be followed.

 In the situation where very long lead-times for equipment

apply, it may have to be ordered before completion of the
final design.

 It is this early involvement of supply chain professionals in

a project which guides us away from the term ‘construction
logistics’ and is why we rather use ‘project logistics’.
 Logistics activities
• Inbound logistics is one of the primary processes
of logistics concentrating on purchasing and
arranging the inbound movement of materials, parts,
or unfinished inventory from suppliers to
manufacturing or assembly plants, warehouses, or
retail stores.

• Outbound logistics is the process related to the

storage and movement of the final product and the
related information flows from the end of the
production line to the end-user.
 1.2. Project
Procurement
1.2 What is Project Procurement
 Project Procurement is about the process by
which goods and services are evaluated and
purchased, or procured, for your project at the
right prices, delivered at the right time, of the right
quality, of the right quantity and from the right
source

 Procurement is the act of obtaining goods,

supplies, and/or services. Therefore, project
procurement is obtaining all of the materials and
services that are required for the project.
Special features of Project procurement

 Non-repetitive,

 Temporarily established organization

 Short-term cooperation

 Mostly low-volume quantity

 Usually customized product or service

Project procurement
categories
 Materials or products

 Equipment or tools

 Labors

 Professional services

 Entirely engineered system

 1.3 what is PROJECT PROCUREMENT MANAGEMENT

• Project Procurement Management:

includes the processes necessary to purchase
or acquire products, services, or results
needed from outside the project team.
• Project Procurement Management:
includes the management and control
processes required to develop and
administer agreements such as contracts, or
purchase orders.
 1.4 A GENERIC PROJECT
PROCUREMENT MANAGEMENT
PROCESSES
 Project procurement management
includes four primary processes.
These are:

1. Plan procurements

2. Conduct procurements

3. Administer (or control)

procurements
 1. PLAN
PROCUREMENTS
The first step in successful project procurement management is
making a plan. This includes planning for the following:

 What are all the materials and services you will require for
the project? This includes all specifications of the materials
and services, such as minimum quality requirements.

 What can be provided by your company, and what should you

purchase elsewhere? This is called the make vs. buy decision.
Even when your company can do something in-house, there
may be a benefit of choosing to outsource such as cost
savings, faster delivery, etc.

 What are your contract requirements for outside purchases?

 Do you have required delivery dates?

 Cont’d
 Do you want a fixed price contract or cost-
reimbursable?
 Are there key milestones to be included?
 What about legal terms and conditions that must
be met?
 How will you search for suppliers of the materials
or services you need?
 Will you release a request for proposal (RFP)?
 Do you have a preferred supplier?
 What are the criteria for who will win the work?
 Will it be based on price if all contract
requirements are met?
 Is there another way to evaluate bidders?
Content of Project Procurement
Plan
 Scope of procurement
 Procurement responsibilities of project team
members
 Procedure of procurement
 Source selection and solicitation
 Evaluation method or criteria
 Types of contracts or agreements
 Monitoring and managing of procurement
contract
 Closeout of contract
 Cont’d
In Short, Procurement Planning Includes

Deciding;

 Whether To Procure or buy

 How To Procure

 What To Procure

 How Much To Procure


 2. CONDUCT
PROCUREMENTS
2. Conduct procurements
 This is the execution phase of project procurement
management.
 It’s when the Request for Proposals (RFPs) are
released, bids are gathers, and selections are made.
 Any vendor negotiations will occur during this phase,
and then the agreed-upon contracts are signed.
 Conducting procurements also includes the actual
receipt of and payment for goods and services.
 Administer procurements
1. The control or administer procurements process
is focused on monitoring and controlling project
procurements to ensure all requirements are
met.
2. Quality checks of products or services delivered
 3. CONTROL
PROCUREMENTS
 3. Control Procurements
 Control Procurements is the process of
 managing procurement relationships;
 monitoring contract performance, and
 making changes and corrections as
appropriate; and
 closing out contracts.
 The key benefit of this process is that it
ensures that both the seller’s and buyer’s
performance meet the project’s requirements
according to the terms of the legal agreement.
 This process is performed throughout the
project as needed.
 4. CLOSE
PROCUREMENTS
 4. Close Procurements
 Close procurement is the process of completing the project
procurement to support the project or a specific phase process.
 The advantage of close procurement is that it documents all
documentations and agreements as future references.
 It involves different administrative tasks like finalization of
open claims, updating of records as well as archiving for future
use.
 Work that must be performed during Close Procurement
phase:
I. Product verification: Involves checking to see if all the
work is done correctly and satisfactorily.
II. Negotiated settlement: Final settlement of all claims,
invoices and other issues.
III. Financial closure: Involves making final payments and
completing cost records.
IV. Procurement audit: Structured review of the procurements
process.

V. Updates to records: Making sure all of the records of the

project are complete & are accessible in the records management
system.

VI. Final contract performance reporting: Creating a final

report

VII. Lessons learned: Lessons learned from everyone including

the seller are documented for the project.

VIII. Procurement file: The file includes contract, changes,

submittals from the seller, financial information, inspection results,
lessons learnt.
1.5 Goals of Project
Procurement
 The purpose of project
procurement management is to establish and
maintain relationships with vendors of goods and
services during the project life cycle.
 Project procurement allows the organization to
utilize specialized skills from other organizations or
professionals as needed to complete a project.
 The outsourced help to have technology that is not
practical for the original organization to own, but
which is necessary to complete a special project.
 1.6 Standard Procurement
Procedures & Policies
Policy Overview
 The term policy includes all the directives (explicit
and implied) that designate the aims and ends of an
organization and the appropriate means used in
their accomplishment.
 Policy refers to the set of purpose, principles and
rules of actions that guide and organization
 Usually documented in writing
 Rules of actions – Standard Operating Procedures
along with rules and regulations
What makes an Effective Policy?

1. Action Oriented Guidelines – involving practical

action to deal with a problem or situation

2. Relevant - suitable for a particular purpose

3. Concise - short and clear

4. Unambiguous - expressed in a way which makes it

completely clear what is meant

5. Timely and Current

Purchasing Policies
 To provide guidance and support to the
professional purchasing and support
staff.
 General outlines clarifying purchasing
management on a subject
 The role of purchasing
 The conduct of purchasing personnel
 Buyer-seller relationships
 Operational Issues
The Purchasing policy needs
to answer the following:
 Who has purchasing authority? What items can
that person (or people) purchase? Who has the
authority to award contracts?
 What, if any, spending limitations are there? Are
the limits different for each department?
 What are the requirements for adequate supplier
competition?
 What evaluation criteria should be used to
choose potential suppliers?
 What types of contracts can the business enter
with vendors and successful bids?
 What types of information is considered
confidential?
 Cont’d
 What is the procedure for addressing legal questions?
 Other questions to consider answering in your
procurement policy include:
 Under what circumstances, if any, is competitive
bidding required?
 Under what circumstances, if any, can the competitive
bidding requirement be waived?
 At which spending limit is prior approval required?
 How, where, and for how long should procurement
records be kept?
 When a contract has been established with a supplier,
under what, if any, circumstances can purchases be
made from a competitor?
 How does a supplier’s diversity status factor into the
decision to use that supplier?
 What processes are used to make different types of
purchases?
Objectives of the Purchasing Function
 To select suppliers that meet purchase and
performance requirements
 To purchase material and service that comply with
engineering and quality standards
 To promote buyer-seller relations and to encourage
supplier contribution
 To treat all suppliers fairly and ethically
 To work closely with other departments
 To support all corporate objectives and policies
 To maintain a qualified purchasing staff and to
develop the professional capabilities of the staff
Purchasing Office Responsibilities
 Developing and publishing functional
purchasing and material policies and
procedures to support efficient and effective
purchasing operations at all levels
 Coordinating strategy development of
purchasing departments or centers to
maximize purchasing leverage of critical
commodities.
 Evaluating the effectiveness of purchasing
operations
 Providing expert support to purchasing
department
 Policies Defining the Conduct of
Purchasing Personnel
 Outline management’s commitment to ethical behaviour
 Guidance on ethical and questionable business practices
 Ethics Policy is a document that defines the essentials of
how people within an organization will interact with one
another, as well as how they will interact with any
customers or clients they serve.
Behaviours to avoid:
 A buyer gives preference to suppliers who purchase from the
buyer’s organization
 A buyer expects suppliers to purchase the buying company’s
products as a condition for securing a purchase contract
 A buyer looks favorably on competitive bids from suppliers who
purchase the buyer’s products.
Contacts and Visits to
Suppliers
 Controlling unauthorized or excessive contacts or
visits
 Unauthorized suppliers visit or contacts by non-
purchasing personnel undermine purchasing’s
legitimate authority as the principal commercial
contact with suppliers.
Former Employees Representing Suppliers
Unfair advantage over other suppliers
 To address this issue is to establish a policy
prohibiting business transactions with suppliers
who employ former employees known to have
inside or confidential information
 Prohibiting employee to competitor for a specified
time.
 Policies Defining Social & Minority
Business Objectives

 Includes supporting and developing local sources of

supply
 Awarding business to qualified minority suppliers
Supporting Minority Business Suppliers
 One of their objectives is to hire and train people with
multicultural backgrounds.
 Promote relationships with suppliers and customers
from diverse backgrounds.
Steps to Achieve Policy Objectives
 Setting forth management's commitment on
this subject.
 Evaluating the performance potential of
small or disadvantaged suppliers to identify
those qualifying for suppliers assistance.
 Inviting Small and disadvantaged suppliers to
bid on purchase contracts.
 Establishing a minimum percentage of
business to award to qualified small and
disadvantaged suppliers.
 Outlining a training program to educate
buyers regarding the needs of small and
disadvantaged suppliers.
Environmental Issues
 The use of recycled materials
 Strict compliance with local, state and federal
regulations
 Proper disposal of waste material, most
especially hazardous waste.
 Understanding and assessing the
environmental risk associated with the
particular chemical being produced
Policies Defining Buyer-Seller
Relationships.
 Supplier relations- The principles that guide
relations with suppliers are often contained in
a policy stating that buyer-seller relationships
are essential for economic success.
Principles that support positive
relationships
 Treating suppliers fairly and with integrity.
 Supporting and developing those suppliers
who work to improve quality, delivery, cost,
or other performance criteria.
 Providing prompt payment to suppliers.
 Encouraging suppliers to submit innovative
ideas with joint sharing of benefits.
 Developing open communication channels.
 Informing suppliers as to why they did not
receive a purchase contract.
 Establishing a fair process to award
purchase contracts
Policies Defining Operational Issues
Hazardous materials
 Purchasers must take an active role controlling
hazardous waste.
 Requirement for an organization to be
International Organization for
Standardization/ISO 14000 certified to engage in
global business transactions.
 Establishing an Environmental Management
System (EMS)
**ISO 14000
 standards exist to help organizations minimize
how their operations processes etc. that
negatively affect the environment (i.e. cause
adverse changes to air, water, or land) and
comply with applicable laws, regulations, and
Environmental Management
System (EMS) Requirements
 Create an environmental policy
 Set appropriate objectives and targets
 Help design and implement a program
aimed at achieving these objectives
 Monitor and measure the effectiveness of
these programs
 Monitor and measure the effectiveness of
general environmental management
activities within the firm.
 REQUIREMENTS FOR DISPOSAL
 Evidence of valid permits and licenses
 Specification of the types of disposal services the
contractor is licensed to provide
 Evidence of safeguards to prevent accidents along
with contingency plans and preparations if
hazardous spill occurs
 Detail of the specific process used to control
hazardous material once it exits a buyer's facilities.
 Evidence of adequate liability insurance on the part
of the contractor.
 Evidence that the waste transporter uses properly
certified disposal sites.
Supplier Responsibility for Defective Material

 This policy outlines a supplier responsibility

for defective material shipments or other
types of non-performance.
 A single defective shipment in a just-in-time
production environment can shut down an
entire production process.