“PROJECT PROCUREMENT MANAGEMENT”

FINAL RESEARCH REPORT

UJJWAL POUDEL (38860)

20 MAY, 2019

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Topic Page #

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INTRODUCTION:

Figure 1: Project Procurement Management: Buying Project Scope

Procurement management is a concept that is familiar to just about anyone who has worked in the
business environment. Procurement Management is one of the ten knowledge areas of project
management. Procurement Management plan involves managing the process of acquiring outside
project resources to produce project deliverables. procurement comprises all activities and processes
involved in acquiring needed goods and services from external parties. This may include everything
from office supplies, furniture, and facilities to heavy equipment, consulting services, and testing and
training. Failing to plan the procurement schedule or process is one of the most-costly mistakes that
can be made because the entire project can be brought to a halt if products or materials aren’t
available when needed. Successful projects required detailed scheduling and excellent timing to
maximize efficiency. The project manager will need to oversee the procurement planning process to
ensure that a purchasing failure isn’t responsible for harming the project.

PROCUREMENT PROCESS:

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 Figure 2: Project Procurement Management: Six Distinct Processes

Project management for procurement purposes is an essential part of supply chain management.
The key steps for a successful process involve are listed below:

 Specification and planning —

Before anything, companies must put together a cohesive procurement plan and specify
what services and goods will be needed, whether internally and externally. A detailed list
should be made, which will help in establishing a budget. Staying organized from the start is
key to ensuring that the next steps go as smoothly as possible.

 Identifying and selecting suppliers —

A Next, it is necessary to investigate and identify potential suppliers. Care should be taken to
ensure that these suppliers can exactly meet the needs of your company, and comparisons
should be made to analyze specific benefits and disadvantages of the supplier. Seller
selection criteria — such as cost, delivery times, social and environmental responsibility,
security, service and support, and quality control — should all be appropriate. Next, it is
necessary to investigate and identify potential suppliers.

 Proposal Requesting, Negotiating, and Contracting —

Once potential suppliers have been narrowed down, you can begin requesting proposals and
negotiating as needed. The negotiation process can shed light on potential suppliers’
dependability and trustworthiness. Take care during this step to clearly communicate your
requirements — delivery timelines, payment details, and so on. Well-thought-out delivery
schedules should be established as well. When all terms are agreed upon, a contract can be
signed.

 Control and Delivery —

After you enter into a contract with a supplier, it’s up to your purchasing department to
properly control all deliveries and payments. Regular meetings with vendors, careful delivery
tracking, and review of all orders against established specifications and quality standards are

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 necessary for ensuring smooth procurement processes. Over time, it may become necessary
to makes changes to procurement contracts as your needs shift.

 Measurement and analysis —

Finally, the entire procurement process must be analyzed using an established system of key
performance indicators. This will help in assessing the efficacy, cost efficiency, speed, and
overall success of the whole process. Now is the time to identify any areas for improvement
and note any changes that should be made. This, of course, will help in securing the success
of future projects. Observations should be shared with management or stakeholders and key
findings should be discussed in detail.

PROJECT PROCUREMENTS TYPES

To properly manage the procured items, some firms have found it beneficial to categorize their
project procurements into broad but distinct "generic families." This helps management better focus
their attention on the unique problems and issues peculiar to each category of procurement. One
such grouping of project procurements would create three generic categories, plus two special
relationships as follows:
 Major (high risk) complexity procurements, the purchase of something which does not exist,
tailored to the project's unique specification. These would be considered critical sub-
projects.
 Minor (low risk) complexity procurements, will often represent large monetary values, but
the commodities exist and will conform to the sellers existing product specification
 Routine buys of COTS (Commercial Off-The Shelf) commodities or purchased services.
 Special procurements: done under corporate teaming arrangements.
 Special procurements: to other segments of the project's company, typically called
interdivisional work.

PROJECT MANGER IN PROCUREMENT

Project manager is involved in this procurement, same as other aspect they control in project
management process. However, this is a process they might not own with the same authority as
other parts of the project.
While the project manager does have the authority to make agreements with contractors on behalf
of the company, the project manager is often not the person who administers that contract once in
place. Regardless, it’s important that the project manager is in the loop. That implies knowing the six
procedures with the project procurement management knowledge areas as outlined in the Project
Management Body of Knowledge (PMBOK).

THE WORKING OF PROCUREMENT:

The company don’t usually buy all goods and services from outside parties. The management of the
firm needs to check if the purchase decision will be cost effective in ling run basis and prove to be
quite beneficial for the company.
It is critical to understand and figure out on the exact requirements and after that seek and consider
upon the different choices and alternate choices. There are quite many suppliers in the market
catering to the needs and requirements but there must be a clear yardstick on which one to select
based on thorough market research and understanding. There is an alternative of calling some sort of

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bidding for the goods or products requirements by the vendors in the market and use choice criteria
to select the best one from the lot.

The next step involves calling for bids and the different suppliers will provide their respective quotes.
This stage is quite like choosing projects, as the company needs to consider various and different
criteria’s, apart from just the cost, to finally select the supplier for the requirement of the goods and
products.

Aftermath the evaluation process, the company management can select and shortlist the best
supplier followed the next step of discussing the exact nature of the requirements and the related
terms and conditions such as payments, delivery timelines, and other crucial ones to avoid any sort
of discrepancies in the future.
It is important to maintain good relationship with supplier and formulate the agreement that meets
requirements and satisfaction levels of both parties. This step helps in the sustainability factor of the
businesses of both the parties involved.

PROCUREMENT METHODS
There are six procurement methods used by the procurement team in a company. The actual names
of these could vary depending on your company and industry, but the process remains the same. The
six times of procurement are open tendering, restricted tendering, request for proposal, two-stage
tendering, request for quotations and single-source procurement.
 OPEN TENDERING:
Open tendering is shorthand for competitive bidding. It allows companies to bid on goods in
an open competition or open solicitation manner. This method encourages effective
competition to good value on money.
 RESTRICTED TENDERING:
Unlike open tendering, restricted tendering only 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,
restricted tendering is also sometimes referred to as selective tendering.
 REQUEST FOR PROPOSALS (RFP):
Request for proposal is the term which is common in business world. Managers receive the
RFP from potential clients all the time when client is seeking a new position to be filled.
Similarly, in the procurement world, an RFP is a method used when suppliers or service
providers are proposing their good or service to a procurement team for review. If you’re a
supplier, understanding the ins and outs of quality service management is key to winning
your bid.
 TWO STAGE TENDERING:
Two stage tendering are done under two process. Each one of the procurements has two
stage process. The first procedure is very similar to RFP method as discussed above. The
procurement team receives a proposal with two envelopes- one with proposal itself and one
with associated financial information.
The second type of procedure is also similar but instead of the bidder submitting a fully-
completed technical proposal, a partial proposal is submitted. 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.
 REQUEST FOR QUOTATIONS:

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 This is a least complex procurement method which is used for small-valued goods or
services. There is no proposal or draft needed which makes it fast procurement process. In
this method a procurement entity chooses three minimum suppliers or service providers
they wish to get a quote from. A comparison is of quotes is analyzed and best selection is
determined.
 SINGLE -SOURCE:
Single source procurement is a non-competitive method that should only be used under
specific circumstances. This process occurs when entity intends to acquire goods or services
form a sole provider. The circumstances which call for this method are:

a) Emergencies
b) If only one supplier is available and qualified to fulfill the requirements
c) If the advantages of using a certain supplier are abundantly clear
d) If the procurer requires a certain product or service that is only available from one
supplier
e) For the continuation of work that cannot be reproduced by another supplier.

CONTRACTS
An agreement between the organization and an outside provider of a service or materials is a
contract. In the procurement contract there would always minimum two parties. One who request
for services, and the other who sell the services. To limit misunderstandings and make them more
legally binding, contracts are usually written documents that describe the obligations of both parties
and are signed by those with authority to represent the interests of the parties. The contract plan
characterizes the connection between the project and the subcontractors (supplier, merchant, or
accomplice) and furthermore characterizes a procedure for making changes in the consent to suit
changes that will happen on the project. This change management process is like the change
management process used with the project agreement with the project client.
The choice of contract type is a critical issue for both the buyer and seller. It is something which
should build on the consideration of many factors. Some of the more important issues to consider
would include the life cycle of the project, the known risks facing the project, technology challenges,
and of course, the ability of the project to describe what it wants to buy, without later changing
these requirements

The contracting plan of the project supports the procurement approach of the project. The following
are some factors to consider when selecting the type of contract:

a) The uncertainty of the scope of work needed

b) The party assuming the risk of unexpected cost increases
c) The importance of meeting the scheduled milestone dates
d) The need for predictable project costs
The project manager facilitates creating a plan for how the procurement process proceeds. Deciding
the correct type of contract is an important step in the procurement management process. There are
three categories or flavors of contracts:

a) Fixed Price (FP) (a.k.a. Firm Fixed Price (FFP)

b) Cost-reimbursable (CR)
c) Time and Material (T&M)

 FIRM FIXED PRICE OR FIXED PRICE:

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 Figure 3: Fixed Price Contracts and Characteristics

The fixed-price contract is a legal agreement between the project organization and the contractor to
provide goods or services for a price which they both agreed on. The contract usually details the
quality of the goods or services, the timing needed to support the project, and the price for
delivering goods or services. The risk is higher on the seller as the seller needs to absorb any
omissions, reworks, inflation and other external risks. The buyer has the least cost risk, because the
scope is well-defined. A clearly defined scope of work complemented by competitive bidders helps
control pricing. Sellers base their bids on the procurement statement of work (SOW).
However, there are few types of fixed price contracts that vary a little from this definition based on
the nature of the requirement of contract:

a) Firm Fixed Price (FFP):

It is a most common type of fixed price contract. In this contract type, a fixed price is set for the
seller to complete the contract scope unless there is a change in the scope where amendments
to the contract is needed.
As an example, a car manufacturer would enter into an FFP contract for a standard model car.
The manufacturer knows what it takes to complete the car and the associated cost. The
manufacturer is confident that they will be able to deliver on the predetermined firm-fixed price.

b) Fixed Price Incentive Fee (FPIF):

This contract also has a fixed price allocated but this include an incentive for completing the
work on an important milestone for the project. Often contracts have a penalty clause if the
work is not performed according to the contract. For example, if the new software is not
completed in time to support the implementation of the training, the contract might penalize the
software company a daily amount of money for every day the software is late. This type of
penalty is often used when the software is critical to the project and the delay will cost the
project significant money.

c) Fixed Price with Economic Price Adjustment (FP-EPA):

The fixed-value contract with price adjustment is used for long projects that goes long span of
years. The most common utilization of this kind of agreement is inflation-adjusted price. In
certain nations, the estimation of its nearby cash can shift significantly in a couple of months,
which influences the expense of neighborhood materials and work. In times of high swelling, the
customer expects danger of greater expenses because of expansion, and the agreement cost is
balanced dependent on an expansion record. The volatility of certain commodities can likewise
be represented in price adjustment contract. For instance, if the cost of oil essentially influences
the expenses of the task, the customer can acknowledge the oil value instability chance and
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 include a provision in the agreement that would permit the contract price adjustment based on a
change in the price of oil.

 COST REIMBURSABLE (COST PLUS):

Figure 4: Table of Contract Types and Characteristics.

In a cost-reimbursable contract, the organization agrees to pay the contractor for the cost of
performing the service or providing the goods. Cost-reimbursable contracts are also known as
cost-plus contracts. The risk is higher on the buyer as the buyer needs to bear the risk of over
budget. For example, completing the code for a new app. Although many apps have been
created before, there is not an absolute template on how long the it takes to create the correct
code.

a) Cost Plus Fixed Fee (CPFF):

In this contract type, the seller can charge the purchaser for every legitimate cost identified
with finishing the product or service. Nonetheless, the seller can also charge a fixed fee that
is a percentage of the overall contract cost. Keep in mind this fixed-fee is set toward the start
of the agreement, and regardless of whether legitimate costs increment this fixed-fee
remains as before.

b) Cost Plus Incentive Fee (CPIF):

A cost-reimbursable contract with an incentive fee is utilized to energize execution in areas
critical to the project. Frequently the agreement endeavors to inspire contractual workers to
spare or diminish projects costs. The utilization of the cost reimbursable contract with an
incentive fee is one approach to inspire cost reduction practices.

c) Cost Plus Award Fee (CPAF):

A cost-reimbursable contract with award fee reimburses the contractor for all allowable costs
plus a fee that is based on performance criteria. The fee is typically based on goals or
objectives that are more subjective. An amount of money is set aside for the contractor to
earn through excellent performance, and the decision on how much to pay the contractor is
left to the judgment of the project team. The amount is enough to motivate excellent
performance.
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  Time and Material (T&M):

Eventually in time and material contracts, the buyer pays for the seller labor cost as well as
additional cost for the material required in the project. This is a combination of fixed price
and cost reimbursable contracts. Let me explain how.
The time says that the buyer pays the seller for the cost of the labor. Meaning the buyer pays
for seller for the effort (number of hours) spent on the project.
The material part is about the all the non-manpower expenses in the project. The seller
provides invoices for these expense to the buyer to release the amount for the non-
manpower expenses. When both buyer and seller both are not have full clarity about the
scope, T&M contract will give better results.

References Used in Report:

 Six, T. (2019). Procurement Management Contract Types. [online] Ten Six Consulting.
Available at: https://tensix.com/2017/07/procurement-management-contract-types/
[Accessed 21 May 2019].
 SPONAUGLE, B. (2019). [online] Blog.udemy.com. Available at:
https://blog.udemy.com/procurement-methods/ [Accessed 21 May 2019].
 Bhasin, H. (2019). What is Procurement Management? - Stages of Procurement
Management. [online] Marketing91. Available at: https://www.marketing91.com/what-is-
procurement-management/ [Accessed 20 May 2019].
 al., e. (2019). 9.5 Selecting the Type of Contract. [online] Pm4id.org. Available at:
https://pm4id.org/chapter/9-5-selecting-the-type-of-contract/ [Accessed 22 May 2019].
 Marinelli, T. (2019). PMP Contract Types and Examples - Magoosh PMP Blog. [online]
Magoosh PMP Blog. Available at: https://magoosh.com/pmp/pmp-contract-types-examples/
[Accessed 21 May 2019].
 CHUNG, E. (2017). Project Procurement Management: Contract Types for PMP Exam -
Updated PMP, PMI-ACP & ITIL Exam Tips 2019. [online] Updated PMP, PMI-ACP & ITIL Exam
Tips 2019. Available at: https://edward-designer.com/web/project-procurement-
management-contract-types-for-pmp-exam/ [Accessed 21 May 2019].
 Scholar99.com. (2017). Types of Procurement Contracts in Project Management. [online]
Available at: https://www.scholar99.com/types-of-procurement-contracts-project-
management/ [Accessed 21 May 2019].
 Thomasnet.com. (n.d.). What Is Procurement Management? Key Steps and Importance of
Managing Procurement in an Organization. [online] Available at:
https://www.thomasnet.com/articles/other/what-is-procurement-management [Accessed
21 May 2019].

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