Contracts and Procurement

In working out your responses to the Discussion Question, you should choose examples from your own experience or find appropriate cases on the Web that you can discuss. Credit will be given for references you make to relevant examples from real companies. Please make sure that you cite and reference all your outside sources properly, as per the Harvard Referencing System.

Discuss the process you would follow to generate and review requirements and specifications for procurement. What information would you gather as part of a procurement specification?

A very important development in project management during the past decade is the manner in which logistics and concern for supply chain functions affect the way projects are developed. This week you examine the components of a project procurement management plan with an emphasis on the importance of well-defined requirements and specifications. You analyse the complex organisational framework in which project managers must participate to ensure the procurement needs of the project will be addressed.
In all strategic projects, senior stakeholders will find considerable advantage in developing their policy and strategic thinking through business-to-business engagement of their potential suppliers—developing a stronger understanding of the art of the possible and preparing to better manage uncertainty (Office of Government Commerce 1 HM Treasury, 2009, p. 5).
Specifying requirements for procurement
Textbook reading (Sollish, Semanik, Morris & Pinto: Section 13.1)
Online reading (Cavinato, Flynn, & Kauffman: pp. 121–127)
The project manager’s analysis of a project’s procurement requirements takes place within the larger organisational context where supply-planning and supply-management strategies stem from the long-term needs of the organisation as the organisation responds to external factors such as procurement trends and supply issues affecting goods or material required by the organisation. The Office of Government Commerce (OGC) suggests that defining procurement requirements in terms of outputs and outcomes not only allows for innovative proposals, but also accommodates the possibility of change (OGC, 2010, p. 3). The OGC’s approach to requirements definition focusses on what needs to be produced or acquired—not on how the delivery will take place.
Flynn (in Cavinato, Flynn, & Kauffman, 2007, p. 121) defines ‘sourcing’ as ‘the process of identifying potential sources that could provide needed products or services’. The author’s definition of ‘knowledge-based supply management’ emphasises the complex requirements that must be understood for an organisation’s procurement processes to be successful. Flynn describes knowledge-based supply management as a process that is driven by knowledge about customers, organisational strategy, the economy, the supply base, and other factors that influence the ability of supply and suppliers to contribute to the organisation’s long-term success.
According to Flynn, supply is uniquely positioned to synthesise the information and input from three distinct sources: internal business partners, the supply base, and the customer base. Flynn compares a spend-driven sourcing model to a risk-driven
sourcing model in their approaches to accomplish the operational goal of delivering the right goods or services at the right time, at the right service level in the right quantity, at the right price from the right source (pp. 122–124). The commitment to total quality management is a key component of both models.
Where a procurement department exists, that department’s objectives are linked to the organisation’s strategic goals and also must be taken into account by the project manager. Examples of procurement department objectives might include the following (Sollish, Semanik, Morris & Pinto, 2011):
? Reduce the average cost of materials.
? Hold quarterly business review with the main suppliers on the approved supplier list.
? Develop a training programme to qualify members of the staff as certified procurement professionals.
It is within this organisational framework that project managers lead project teams through the creation of procurement management plans and the determination of the procurement requirements unique to their projects.
Developing a project procurement management plan
In the context of the organisation’s procurement framework of policies and procedures, the project manager leads the project team through the creation of a project procurement management plan. According to A Guide to the Project Management Body of Knowledge (PMBOK; 2008), the project’s procurement management plan should describe how the procurement process will be managed from developing procurement documents through contract closure. The procurement management plan can be formal or informal, highly detailed or broadly framed, and it is based on the needs of each project.
Planning the project’s procurement process is an integral part of the overall planning phase of the project. The project manager, with the support of the project team, will utilise the project’s requirements documentation, scope statement, and work breakdown structure (WBS) as inputs to the procurement management plan. Complying with regulatory obligations (health, safety, environmental, permits) may also impact options for procurement. The project’s procurement management plan must also comply with organisational procurement policies and procedures and answer questions such as: Is the project manager authorised to contact potential vendors directly? Does the organisation maintain an approved vendor database? Many interdependencies and constraints impact the development and execution of the procurement management plan.
Depending on the size and complexity of the project, the procurement management plan can do the following (adapted from the PMBOK, 2008, pp. 324–325):
? Specify make-or-buy decisions.
? Identify types of contracts or agreements that will be used.
Assess risk management issues and strategies. The UK OGC emphasises that risk is an intrinsic element of complex procurement. Any approach to engage suppliers to support the delivery of complex projects should be based on a clear understanding of the risks involved, as well as how and by whom they might be managed and owned. The OGC recommends early engagement with potential suppliers to provide the opportunity to explore their understanding of possible risks and their ability to manage them (OGC, 2009, p. 7).
? Design standardised procurement documents that will be created throughout the project, including the use of specific forms and templates required by the organisation.
? Determine how procurement activities will be coordinated with the other project aspects.
? Define roles and responsibilities of the project team and of the organisation’s contracting and purchasing department. This portion of the procurement plan defines which process is owned by whom. For example, a project involving the renovation of the City of Cambridge involved tendering for rebuilding a wrought-iron bridge on the river Cam as one of the procured items. The procurement management plan for that renovation project specifically designated individuals who owned the process for developing requirements and who owned the bidding process.
? Establish the form and format to be used for the procurement/contract statements of work, including procurement metrics used to manage contracts and to evaluate suppliers. A procurement plan identifies templates that should be used for procurement documents. This includes templates for requirements, specifications, bids, and requests for information (RFI), requests for proposal (RFP), and requests for quote (RFQ) documents. Identification of these templates is especially useful for large and complex projects.
A procurement management plan, like the majority of the project planning documents, is a document which needs to be updated throughout the project’s life cycle by utilising the project’s change management process. Increasingly, organisations use online tools to develop and maintain the plans and continuously update the information contained therein. Project managers need to make sure that the initial procurement management plan and its components are appropriately communicated to relevant stakeholders and that any modifications to it are shared in a timely manner and follow the agreed-upon approval process.
In the management of projects, documents undergo modifications and take different forms during their life cycles. The life cycle of a document may broadly be categorised into the following phases: development, base-lining, change management, storage, and archival. The procurement process generates a large number of documents. Most of these documents are legally binding, and many of them have stringent management and retention requirements by law. Project managers ensure that documents created during the project life cycle are maintained and archived appropriately.
Different countries/regions have diverse documentation management and retention requirements. For example, the Sarbanes-Oxley Act in the US and the Data Protection Act in the EU govern retention requirements for legal and financial documents. As more and more documents are now generated in the electronic form, requirements for retention of electronic records and for enabling their e-discovery have been defined in these acts.
Project managers should be aware of documentation management requirements for different procurement documents. Electronic documentation management systems are often used to maintain not only e-documents but also scanned paper documents.
Selecting and assessing suppliers
Textbook reading (Sollish, Semanik, Morris & Pinto: Section 1.13)
Online reading (Cavinato, Flynn, & Kauffman: pp. 127–141)
According to Flynn (in Cavinato, Flynn, & Kauffman, 2006, p. 127) the sourcing process includes the generation of a possible list of suppliers and the analysis of which suppliers should be included and excluded from the candidates under consideration. The author notes that research on decision-making suggests that a failure to generate a wide range of alternatives often results in a suboptimal decision. The author concludes that because of this effect on the outcome, sourcing is a critical juncture in the acquisition process. As a result, Flynn recommends treating sourcing as a two-stage process:
1. Identify a broad range of suppliers that might be worthy of consideration; and
2. Narrow the list to a reasonable number for more in-depth analysis and selection.
When procurement plays a major role in a project, the project manager should actively participate in the buying team’s discussion of the following strategic questions, which are discussed in detail in Cavinato, Flynn, & Kauffman (pp. 128–132):
? Existing or new supplier: Is the existing supplier performing adequately, or should the sourcing team consider other sources?
? Number of suppliers: Can the risks be minimised and the opportunities maximised best through a single source or through multiple sources? Supply-based rationalisation means determining the optimal number of suppliers for any given requirement. In some cases this may mean adding, not eliminating, suppliers.
? Size of supplier: Will the short- and long-term needs of the organisation, and ultimately those of the final customer, be met best by a small, medium, or large supplier?
? Location and proximity: Will a local, national, or global supplier best serve the needs of the buying organisation? Does proximity matter? If so, how close does the supplier or one of its facilities need to be in relation to the buying organisation or one of its facilities?
? Type of relationship: What type of buyer-supplier relationship should be developed? Is an alliance or partnership warranted? Is the purchase of strategic or operational importance?
? Contract length: Is the contract (relationship) designed to be short-, medium-, or long-term? The UK OGC indicates that a longer contract allows for the potential of a greater investment and more innovation, but may also be restrictive and not suitable where there is a high uncertainty or instability and potential of change (OGC, 2010, p. 3).
? Type of supplier: Can the need be met best by a manufacturer, wholesaler, reseller, contract manufacturer or other outsourced third party?
? Social, political, and environmental considerations: Are there any social, political, or environmental concerns that might heavily influence the loss of potential sources?
? Financial stability: Are the potential sources financially viable?
Week 3 summary
An organisation’s procurement processes have a significant impact on the project manager’s roles and responsibilities in planning and executing any project with a need for outside products or services. Specifying project-specific procurement requirements is based on the project manager’s understanding and application of the organisational supply planning and supply management strategies and procedures. Within this context, the project manager is responsible for leading the project team through the development and approval of the project’s procurement management plan.
The project manager coordinates the development, storage, and archival of the documentation associated with the project. Documentation management requirements and regulations vary by organisation, industry, and regions, so it is the project manager’s responsibility to be aware of those requirements and to ensure that documentation is completed accurately and in a timely manner.
The project manager documents the description of the items, the schedule, budget, terms and conditions, and any other constraints placed on the procurable item by
specific project needs.
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