Project Procurement Planning Overview
Procurement represents the processes needed to purchase or acquire products, services or results from outside the project team. Sometimes this involves just a few items or it might include outsourcing the entire project and have the project be planned and executed by the seller. Contract management and change control processes are needed to administer contracts or purchase orders issued by authorized team members. If there is no need to buy any products or services, then there is no need to perform the procurement management processes.
It is important to identify project needs that can be best met by an outside organization early in the planning process. Procurement should be considered when an organization lacks sufficient skilled resources in-house to perform the work or when you can decrease the risk of a project by having the work done by an outside source. Organizations may have their critical in-house resources tied up on other priority activities or the in-house resources may lack specific technical or management skills to successfully execute the project.
When outside resources are determined to be used for a project, the following project procurement management processes are needed:
• Planning purchases and acquisitions, including determining what to procure, when and how
• Planning contracting, including describing requirements for the products/services desired from the procurement and identifying potential sources or sellers (contractors, suppliers or providers)
• Requesting seller responses, including obtaining information quotes, bids, offers or proposals from sellers, as appropriate
• Selecting sellers by choosing from among potential suppliers through the process of evaluating potential sellers and negotiating the contract
• Administering the contract and relationship with the seller
• Closing the contract when the activity is complete, including resolving any open issues
When large procurement activities are required, the procurement process may become a project itself. It is the project manager’s responsibility to ensure procurements meet project needs, while adhering to organizational procurement policies. Many organizations rely upon their procurement department to handle all procurements, even those related to a project. Sometimes, however, organizations delegate the management of project procurements to the project manager, with the procurement organization just providing a few support resources. It is important for the project manager to understand what the management expectations are regarding procurement their project.
Buyers and sellers have different perspectives on some aspects of the process, yet share common goals in other areas:
Buyers
Sellers
Reasonable cost
Profitable engagement
Low risk
Low risk
Reliable outcome
Good references
Happy Executives
Follow-on work
On-time/on-budget
On-time/on-budget
Happy customers
Happy customers
No bad press
No bad press
Some general principles of procurement include the following:
• Get away from an adversarial relationship with suppliers. The relationship should be strategic and benefit both buyer and seller in the long run
• Move from price consideration to total cost of ownership. You can’t just buy cheap things and then pay huge amounts on maintenance and support
• Have a minimum number of suppliers
• Move from short-term to long-term focus
Key components of effective vendor management include the following:
• Clearly stated and understood obligations of each team member
• Understanding what each party expects to receive from the engagement, including understanding different perspectives
• Clear understanding of the contractual clauses relevant to each team member’s area of responsibility
• Effective maintenance of contract records
• Adequate supervision of the vendor
• Culture of respect and open communication. Avoid surprises!
Contract Types and Statements of Work
A Statement of Work (SOW) describes the work that is to be completed on a project. The project manager must indicate which portions of the project SOW will include procurements. The subset of activities required to be performed by each vendor must be defined in a separate contract SOW, and an SOW should be included with each contract that is specific to the work of that seller. The SOW should contain sufficient detail so that the seller can determine if they are capable of providing the products, services or results. It becomes a legal document (a part of the contract) when used for procurement. The SOW should describe all support needed for the product after completion of the project.
A contractual SOW defines the following, at a minimum:
• Scope: detailed description of the work to be performed, including specifications, quantity, quality levels and performance
• Location: where work will be done
• Period: start and end dates
• Standards: industry-specific
• Acceptance criteria: what will satisfy the buyer
• Any special requirements
The text provides a lot of detail about various types of contracts and the application of those contracts to different types of projects. This is important to understand. The Project Manager should work closely with the Contracts or Purchasing department to ensure that the work being requested matches the type of contract selected. The Project Manager needs to also ensure that reporting requirements for vendors/sellers is consistent with reporting requirements for the project. For example, if management is expecting a written status report on the first day of every month, vendors should be reporting status and providing invoices in a timeframe that fits into the reporting requirements.
It is the responsibility of the Project Manager to make sure there is a logical relationship between the project SOW and each contractual SOW being performed as part of the project. The Project Manager should also ensure that each seller is responsible for a complete package of work and is not dependent upon tasks being performed by another seller or by the buyer, to the maximum extent possible. An organization's Purchasing and Contracts departments are important resources for a Project Manager. Make sure you build proper working relationships with these organizations to properly plan for successful project execution.
Source Selection
Source selection is the process of deciding which vendor to select for a product or service. The selection should use a systematic method for evaluation and should involve multiple stakeholders. 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). The key output of the source selection process is a contract. Often times a technical presentation is included as part of a proposal process.
It is important to prepare some form of evaluation criteria to support source selection. Ideally this criteria is defined before issuing the formal Request for Proposal or Quote. Weighting and scoring are evaluation tools that are typically used. Independent estimates may also be prepared by buyers as a way to check and evaluate expected costs. An evaluation team should be defined as part of the procurement process. For major purchases, particularly outsourcing of services, it is critical to include the proper stakeholders in the evaluation process.
When evaluating, it is important to beware of proposals that look good on paper but are “too good to be true”. Evaluation criteria includes:
• Understanding the need
• Technical capability
• Technical approach
• Risk
• Management approach
• Capacity and interest of the seller
• Past performance
• References
• Price
• Overall or life cycle cost
• Warranty
• Intellectual Property rights
Price analysis is the process of examining and evaluating a proposed price to determine if it is fair and reasonable, without evaluating its separate cost elements and proposed profit. It always involves some form of comparison with other prices that were bid.
Cost analysis is used to evaluate the reasonableness of individual cost elements. When cost analysis is performed, a price analysis is also performed to verify that the overall price offered is fair and reasonable. Effective cost analysis provides insight into what it will cost the firm to complete the contract using the methods identified. However, cost analysis does not necessarily provide a picture of what the market is willing to pay for the product involved.
It is important when evaluating vendors that cost not be the only criteria for selection. The vendor will be a partner in the project and it will be important that the vendor be able to deliver according to the project schedule and that there be a fit with the project team -- particularly if vendor staff will be part of the project.