Transcript Introduction

Importance of project procurement
management
By
MCA-SEM
IV
project procurement management
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Procurement means acquiring goods & /or services from an outside source.
The term procurement is widely used in govt.
Many private companies used the term purchasing & information technology
professional used the term outsourcing.
Organizations or individuals who provide procurement services are referred to
as suppliers, venders, contractors, subcontractors, or sellers, with suppliers being
most widely used term.
Many information technology projects involve the use of goods & services from
outside the organization.
Most organization do use same form of outsourcing to meet their information
technology needs.
Because outsourcing is growing area, it is important for project manager to
understand project procurement management.
MANY ORGANIZATION ARE TURNING TO
OUTSOURCING TO :
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Companies can use outsourcing to reduce labors costs on projects by avoiding
the cost of hiring, firing, and reassigning people to projects or paying their
salaries when they are between projects.
By outsourcing many information technology functions, employees can focus on
jobs that are critical to the success of the organization.
Access skills and technologies: Organization can gain access to specific skills
and technologies when they are required by using outside resources.
Provide Flexibility: Outsourcing to provide extra staff during period of peak
workloads can be much more economical than trying to staff entire projects with
internal resource.
MANY ORGANIZATION ARE TURNING TO OUTSOURCING TO :
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Increase accountability: A well-written contract can clarify responsibilities and
sharpen focus on key deliverables of project. Because contracts are legally binding,
there is more accountability for delivering the work as stated in the contract.
The success of many IT projects that use outside resource is often due to good
project procurement management.
Project procurement management includes the e processes required to acquire good
and services for a project from outside the performing organization.
Organization can be either the buyer or the seller of products or services under a
contract.
six main processes of project procurement:
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Planning purchases and acquisition.
Planning contracting.
Requesting seller Responses.
Selecting Sellers
Administrating the contracts.
Closing the contract.
six main processes of project procurement:
Planning purchases & Acquisitions:
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It involves determining what to procure, when & how.
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In procurement planning, one must decide what to outsource, determine the type of
contract & describe work for potential sellers.
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Output:-Outputs of this process include a procurement management plan, contract
statement of work, make-or-buy decisions, & requested charges to the project that
might result from this process.
Planning contracting:
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It involves describing requirements for the product or services desired from the
procurement & identifying potential sources or sellers.
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Output:-Outputs include procurement documents such as a Request for proposal
(RPF), evaluation criteria, and updates to the contract statement of work.
six main processes of project procurement:
Requesting seller responses:
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It involves obtaining information, quotes, bids, offers, or proposals from sellers, as appropriate.
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Output:-The main outputs of this process include a qualified,
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Seller list
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A procurement document package.
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& proposals.
Selecting sellers:
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It involves choosing from among potential suppliers through a process of evaluating potential
sellers & negotiating the contract.
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Output:-Outputs include-Selected sellers,
Contracts
A contracts management plan
Resource availability information,
Updates to the procurement management plan
& Requested changes.
six main processes of project procurement:
Administrating the contract:
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It involves managing the relationship with the selected seller.
Output: Outputs include
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Contract documentation
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Requested changes
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Recommended corrective actions
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Updates to organizational process assets and project management plan
Closing the contract:
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Closing the contract involves completion and settlement of each contract.
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Output: Outputs of these processes include closed contracts.
1. Planning purchases and acquisitions:
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It involves identifying which project needs can best to be met by using products or
service outside the organization.
Involves deciding whether to procure, how to procure, how much to procure and
when to procure.
An important output of planning purchases and acquisitions is the make-or-buy
decision.
A make-or-buy decision is one in which an organization decides if it is in its best
interest to make certain products or perform certain services inside the organization.
Or if it is better to buy them from an outside 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.
Input needed for planning purchases and acquisition include project scope statement,
WBS, PMP, information on enterprise environmental factors.
Planning purchases and acquisitions:
Tools and techniques for planning purchases and acquisitions:
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There are several tools and techniques to help project managers and their teams
in planning purchases and acquisitions which includes:
 Make-or-buy analysis
 Expert Judgment
 Contract Types
Make-Or-Buy Analysis:
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Make-or-buy analysis is a 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.
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This form of analysis involves estimating the internal cost of providing a
product or service and comparing that estimate to the cost of outsourcing.
Expert Judgment:
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Expert inside an organization and outside an organization could provide excellent
advice in planning purchase and acquisitions.
Project teams often need to consult experts within their organization as part of good
business practice.
Experts in the company might also know that most of their competitors outsource
different types of work and know who the qualified outside suppliers are.
It is also important to consult legal experts since contracts for outsourced work are
legal agreements.
Experts outside the company including potential suppliers themselves can also
provide expert judgment.
E.g.: Suppliers might suggest an option for sales people to purchase the laptops
themselves at a reduced cost.
Expert judgment, both internal & external, is an asset in making many procurement
decisions.
Types of Contracts:
Different types of contracts can be used in different situations.
 Three broad categories of contracts are:
Fixed price or lump-sum contracts.
Cost reimbursable contracts.
Time and material contracts.
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1.Fixed price or lump-sum contracts
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Fixed price or lump-sum contracts involve a fixed total price for a well
defined product or service.
The seller often paid their estimate somewhat to reduce their risk, realizing
their price must still be competitive.
E.g.: The Company could award a fixed price contract to purchase 100 laser
printers with a certain print resolution and print speed to be delivered to one
location within two months.
In e.g. Product and delivery date are well defined. Several sellers could
create fixed price estimates for completing the job.
The fixed price contract has the least amount of risk for the buyer.
2. Cost reimbursable contracts:
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Cost reimbursable contracts involve payment to the supplier for direct and indirect
actual cost.
E.g.: The salaries for people working directly on a project and hardware and
software purchased for a specific project are direct costs, while the cost of providing
a workspace with electricity, a cafeteria and so on, and are indirect costs.
Cost reimbursable contracts often include fees such as profit percentage or
incentives for meeting and exceeding selected project objectives.
These contracts are often used for projects that include providing goods and services
that involve new technologies.
The buyer absorbs more of the risk with cost reimbursable contracts than they do
with fixed price contracts.
3. Time and material contracts:
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Time and material contracts are hybrid of both fixed price and cost-reimbursable
contracts.
This type of contract is often used for services that are needed when the work can’t
be clearly specified and total cost can’t be estimated in a contract.
Time and material contracts can be high or low risk depending on the nature of the
project and other contract clauses.
E.g.: If an organization is unclear on what work needs to be done, it can’t expect a
supplier to sign a firm-fixed price contract.
However, the buyer could find a consultant or group of consultants to work on
specific tasks based on a pre-determined hourly rate.
Buying organization could evaluate the work produced every day or week to decide
if it wants to continue using consultants.
In this case, contract would include termination clause which allows the buyer or
supplier to end the contract.
Procurement Management Plan
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The procurement management plan is a document that describes how the procurement
processes will manage from developing documentation for making outside purchases to
contract closures.
Like other project plans, contents of the procurement management plan will vary with
project needs.
Following are few topics that can be included in the procurement management plan:
 Guidelines on types of contracts to be used in different situations.
 Standard procurement documents or template to be used if applicable.
 Roles x responsibilities of the project teams and related departments such as the
purchasing or legal department.
 Suggestions on managing multiple providers.
 Guidelines for identifying pre-qualified sellers and organizational list of preferred
sellers.
 Risk mitigation strategies for purchase and acquisitions such as insurance contracts
and bonds.
Contract Statement of Work:
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The statement of work (SOW) is a description of the work required for the procurement.
Basic outline or template for SOW is as below:
STATEMENT OF WORK (SOW)
Scope of Work: Describes the work to be done in detail. Specify H/W and S/W involved and exact nature
of work.
Location of Work: Describes where the work must be performed. Specify location of hardware and
software and where the people must perform the work.
Period of Performance: Specify when the work is expected to start and end, working hours, where the
work must be performed.
Deliverables Schedule: List specific deliverables, describe them in detail and specify when they are due.
Applicable Standards: Specify any company or industry specific standards that are relevant to performing
the work.
Acceptance Criteria: Describes how the buyer organization will determine if the work is acceptable.
Special Requirements: Specify any special requirements such as h/w and s/w certifications, minimum
degree or experience level of personnel, travel requirements and so on.
2. Planning Contracting:
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Planning contracting involves preparing the documents needed for potential sellers to prepare
their responses and determining the evaluation criteria for the contract award.
 The procurement management plans, contract statement of work, make-or-buy decisions, are all important
inputs for this process.
The project team often uses the standard form and expert judgment as tools top help them create relevant
procurement documents and evaluation criteria.
Two common examples of procurement documents include:
Request for Proposal (RFP)
Request for Quote (RFQ)
Request for Proposal (RFP)
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RFP is a document used to solicit proposals from prospective suppliers.
A proposal is a document prepared by a seller when there are different approaches
for meeting buyer needs.
Example: If an organization wants to automate its work practices or find a solution
to business problem, it can write and issue an RFP, so suppliers can respond with
proposals.
Suppliers might propose various hardware, software and networking solutions to
meet the organizations need.
Request for Quote (RFQ)
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It is a document used to solicit quotes or bids from perspective suppliers.
A bid, also called tender or quote (quotation) is a document prepared by seller providing
pricing for standard items that have been clearly defined by the buyer.
Example: If a company wanted to purchase 100 personal computers with specific
features, it might issue an RFQ to potential suppliers.
Selections are often made based on the lowest price bid.
Basic outline or template for an RFP:
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The main sections of an RFP usually include
a statement of the purpose of the RFP.
Background information on the organization issuing the RFP.
Basic requirements for the products/services being proposed.
The hardware software environment (usually for IT related proposals)
A description of the RFP process, software and schedule information, and possible
appendices.
Request for Proposal template
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Purpose of RFP
Organization’s background
Basic Requirement
Hardware and Software Requirements
Description of RFP Process
Statement of work and schedule information.
Possible Appendices
 Current System Overview
 System Requirements
 Volume and size data
 Required contents of vendor’s response to RFP
 Sample Contract
Requesting Seller Responses:
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After planning for contracting, the next procurement management process
involves:
deciding whom to ask to do the work
sending appropriate documentation to the potential sellers
Obtaining proposals or bids.
The buying organization is responsible for advertising the work, and for large
procurements, they often hold some sort of builders conference to answer
questions about the job.
The main outputs of this process are procurement document package,
qualified seller list
The proposals or bids received by potential sellers.
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Prospective sellers do most of the work in this process, normally at no cost to the
buyer or the project.
Organizations can advertise to procure outside goals and services in many different
ways.
Example :-two cases
CASE 1
 sometimes a specific supplier that might be the number one choice for
the buyer.
 In this case, the buyer gives procurement information to just that
company
 If the preferred supplier responds favorably both organizations
proceed to work together.
 Many organizations have formed good working relationships with
certain suppliers, so they want to continue with them.
CASE 2
 In many cases, however their may be more than one supplier
qualified to provide the goods and services.
 Providing information and receiving bids from multiple sources
often takes advantage of the competitive business environment.
 A bidder’s conference, also called a supplier conference or pre-bid
conference, is a meeting with prospective sellers prior to
preparation of their proposals or bids.
 It helps ensure that everyone has a clear, common understanding
of the buyer’s desired products or services.
Selecting Sellers
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Once buyers receive proposals or bids, they can select a supplier or decide to
cancel the procurement.
Selecting suppliers or sellers, often called source selection, involves evaluating
proposals or bids from sellers, choosing the best one , negotiating the contract,
and awarding the contract.
Several stakeholders in the procurement process should be involved in selecting
the best supplier for the project.
Often, teams of people are responsible for evaluating various sections of the
proposals.
There might be a technical team, a management team, and a cost team to focus
on each of those major areas.
Often, buyers develop a short list of the top three to five suppliers to reduce the
work involved in selecting a source.
The main outputs of this process are the selected sellers, a contract, contract
management plan, resource availability information, and updates to the
procurement management plan.
Selecting Sellers
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Experts in source selection highly recommend that buyers use formal proposal
evaluation sheets during source selection.
Fig. below provides a sample proposal evaluation object that the project team
might use to help create a short list of the best three to five proposals.
The proposals with the highest weighted scores should be involved in the short list
of possible sellers.
The project might be cost much more than expected or take longer to complete
because the source selection team focused only on technical aspects of proposal.
Paying too much attention to technical aspects is especially likely to occur on IT
project.
However, it is often the supplier’s management tam not the technical team that
makes procurement successful.
Selecting Sellers
Criteria
Weight
Technical Approach
30%
Management Approach
30%
Past Performance
20%
Price
20%
Total
100%
Proposal 1
Proposal 2
Proposal 3 etc
Rating score
Rating score
Rating score
Administering the contract:
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It involves managing the relationships with the selected sellers.
Administering the contract or contract administration, ensures that the seller’s
performance meets contractual requirements.
The contractual relationship is a legal relationship and as such is subject to
contract laws.
It is very important that appropriate legal and contracting professionals be
involved in writing and administering contracts.
Project team members must be aware of potential legal problems they might cause
by not understanding a contract.
E.g. : Most projects involve changes, and these changes must be handled properly
for items under contract.
Without understanding the provisions of the contract, a PM may not realize
authorizing the contractor to do additional work at additional cost.
Therefore, change control is important part of the contract administration process
Closing the contract:
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The final process in project procurement management is closing the contract, or contract
closure.
Contract closure involves completion & settlement of contracts.
The project team should determine if all work required in each contract was completed
correctly and satisfactory
They should also update records to reflect final results and achieve information for future use.
Tools to assist in contract closure include,
Procurements Audit: are often done during contract closure to identify lessons learnt in the
entire procurement process
Records Management System: It provides the ability to easily organized, find and archive
procurement related documents.
It is often an automated system, since there can be a large amount of information related to
project procurement.
The buying organization often provides the seller with formal written notice that the contract
has been completed.
Using software to assist in project
procurement management:
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Now a day, organizations have used various types of productivity software to assist
in project procurement management.
E.g.: Most organizations use word processing software to write proposals or
contacts, spreadsheets software to create proposal evaluation worksheets.
Databases to track suppliers and presentation software to prevent procurement
related information.
Many different websites and software tools are now in various procurement
functions.
E.g. : Websites to purchase books, airline tickets etc.
Organizations can also take advantage of information available on the web, or in
various discussion groups offering advice on selecting suppliers.
As outsourcing for IT projects increases, it is important for all project managers to
have fundamental understanding of all procurement related knowledge areas.
Thanks