Procurement

The process of purchasing important resources is crucial to the success of any given project. Given the temporary and budget-constrained nature of projects, project procurement management requires a more cautious approach to the selection of suppliers, the method of supplier reimbursement, and the appropriate contractual relationship. This is important to ensure that critical supplies, services, and goods are readily available for ensuring the success of the project.

Project Procurement Management

Projects require the right goods, services, and / or supplies necessary for the completion of the different tasks inherent in the project activities. Managing the different steps in the obtaining of such resources is critical to ensure that the project deliverables are accomplished within the pre-determined time frame and budget.

Procurement Strategy in Project Management

The principal aim of a project procurement strategy is to optimise resources by making sure that only the best possible resources will be used in the completion of project deliverables on time. In general, a project procurement strategy should always include the following components.

• Buy, Lease, or Make

The organisation must decide whether to purchase the resources it needs for the project, lease them, or will it be more effective for them to produce the resources themselves. There is a good chance that the organisation can provide for some of the resources. Other resources can then be sourced or purchased from outside the organisation. They may also decide to lease some of the resources.

• Contractual Relationship

Contractual arrangements in projects come in different types. The right type of contractual relationship reflects an organisation’s level of management and ability to take and manage project risks.

• Method of Reimbursement

The organisation needs to decide on how it intends to pay for the services and goods that partner vendors are going to provide for the project. In general, organisations consider the project risks in deciding on the best possible type of reimbursement method.

• Supplier Selection

The right supplier can deliver the right resources necessary for project completion. The supplier should be able to meet all the specifications of the required project resources and must abide by the rules and guidelines that the organisation has devised for the project.

• Contract Administration

It is the duty of the project manager to ensure that all parties to the contract conform and undertake their respective duties.

Supplier Selection Process

Selecting a supplier requires several critical activities. These are as follows.

• Preparation of a comprehensive project procurement plan that details the specific requirements for each task of the project.
• Strategic thinking in the selection of suppliers to help derive benefits from the contractual relationship.
• Defining the supplier attributes that the organisation deems indispensable in the completion of the project. These attributes can include reliability, quality of resources, financial security, partnership approach, clear communication, verifiable service record, and overall value.
• Determining potential suppliers, utilising a variety of sources. Potential suppliers can come from recommendations, exhibitions, directories, business advisors, trade associations, and the trade press.
• Create a shortlist of potential suppliers based on the criteria set in the project procurement plan.
• Requesting for a quotation from each of the shortlisted suppliers.
• Comparing the different quotations and deciding on which of the potential suppliers are best suited for the project.
• Scheduling a meeting with potential suppliers, including the possibility of a visit to their operations.
• Negotiating the contract’s terms and conditions prior to its finalisation.

Methods of Supplier Reimbursement

Supplier reimbursement methods are categorised according to the degree of risks that an organisation is willing to assume or prefer to transfer to its suppliers. The following methods are the most common in project procurement management.

• Firm Fixed Price Contract

This is perfect for organisations that do not want to take risks. It is the supplier who will have to manage the risks. The advantage of this for the organisation is peace of mind. However, such a contract tends to be more expensive.

• Target Cost Contract

The client and the contractor negotiate on the overall cost of the services or goods that the project needs. Both parties will share in any deviation of the target cost. If the actual cost is lower than the target cost, then both parties can split the savings. If the actual cost is higher than the target cost, both parties will also have to pay the extra.

• Target Price Contract

This contract requires the client to pay for the actual costs incurred by the contractor in the delivery of the agreed upon resources. It is almost like a target cost contract.

• Cost Plus Fixed Fee Contract

In this type of contract, the organisation pays a contractor two different amounts. One reflects the expenses incurred by the contractor during the performance of his obligations. The amount is often based on prevailing market values. The other payment accounts for the services of the contractor. This ‘fixed fee’ is dependent on the negotiated amount between the client and the contractor.

• Cost Reimbursement Contract

This type of contract is disadvantageous to the client because he does not know the exact cost prior to the signing of the contract. He reimburses or pays the contractor whatever expenses the latter was able to incur for the project.

• Cost Plus Incentive Fee Contract

This is like a cost plus fixed fee contract, except that the negotiated fee is open to adjustments. The adjustments to the negotiated fee are a function of the relationship between target costs and allowable costs.

Types of Contractual Relationships

Organisations can enter any of the following contractual relationships with their chosen suppliers or contractors.

• Partnering

The focus of both parties is to work cooperatively and closely. The level of commitment is strong in a partnering relationship.

• Alliances

This is almost like partnering. Both parties also work cooperatively. They also share both the reward and the risks inherent in the endeavour. They always work within a predetermined set of performance indicators.

• Turnkey Contracts

The client in this contract provides a general idea on what the project will be. It is the contractor’s responsibility to plan, develop, and complete the project within a given time frame and working at a predetermined price. The project must be ready-to-use or are fully functional upon completion.

The role of project managers in project procurement management is to ensure that only the best possible suppliers get the right contract for the success of the project.