In this article, we are going to discuss about the Procurement process in detail.
What is a Procurement Management Process?
A Procurement Management Process, or Procurement Process, is a method by which items are purchased from external suppliers. The procurement management process involves managing the ordering, receipt, review and approval of items from suppliers. A procurement process also specifies how the supplier relationships will be managed, to ensure a high level of service is received. This is a critical task in Procurement Management.
When do I use a Procurement Management Process?
You need to implement a Procurement Process any time you want to buy items from external suppliers. By using this Procurement Management Process, you can ensure that the items provided meet your need. The Process will enable you to:
- Identify supplier contract milestones
- Review supplier performance against contract
- Identify and resolve supplier performance issues
- Communicate the status to management
Procuring goods and services from external suppliers can be a critical path for many projects. Often, the performance of the supplier will reflect on the performance of the overall project team. It’s therefore crucial that you manage your suppliers performance carefully, to ensure that they produce deliverable which meet your expectations.
This Procurement Management Process will help you do this to get the most out of your external supplier relationships.
The Four Key Stages:
There are four key stages to the procurement process, and these are:
- Getting started
- Evaluation and
1. Getting Started
During this stage you will need to:
- Identify and define your requirements.
- Find out whether the services are available in-house or are subject to existing contracts or arrangements, or whether the goods/services could be purchased through an existing corporate contract, in which case these arrangements should be used.
- Define your procurement route – using the procurement strategy report pro-forma.
- Obtain authority to do what you want to do.
- Draft a specification, which sets out what you want to achieve from the process.
During this stage you will need to:
- Identify and assess the marketplace
- Define precisely your requirements
- Take your requirement to the marketplace.
During this stage you will need to:
- Look in detail at the bids or quotes submitted
- Evaluate the bids or quotes against pre-determined criteria.
- Select the offer that is the most economically advantageous.
If you need to put a contract in place rather than just issuing a purchase order then during this stage you will need to:
- Finalize the content of the appropriate City Council form of contract, i.e. who will do what, when, where, and to what standards including the form of payment.
- The type of order that is placed or contract that is awarded will depend on the form of procurement and the extent of goods and/or services to be provided.
According to PMBOK-4th edition, Procurement process categorized in 4 key processes.
The Process of documenting project purchasing decisions, specifying the approach, and identifying the potential sellers.
The Process of obtaining seller responses, selecting a seller, and awarding a contract.
The Process of managing procurement relationships, monitoring contract performance, and making changes and corrections as needed.
The Process of completing each project Procurement.
These processes interact with each other and with the processes in the other knowledge areas. Each process can involve effort from a group or person, based on the requirements of the project.
Two ways in which a contract can originate: unilaterally or bilaterally
- Common form for contract is a relatively simple type of document called a purchase order.
- A purchase order is used when routine, standard cost items are needed.
- A purchase order is legally binding and should be specific.
Procurement documents are used to solicit proposals from prospective sellers. The procurement document then becomes the basis for the seller’s proposal.
The following are examples of procurement documents:
1. Request for quotation (RFQ) from different suppliers:
- Items are of relatively low dollar value such as supplies and materials
- A survey of potential suppliers is completed.
- The quotation request informing suppliers of the goods or services needed is sent to a scaled-down number of possible suppliers.
2. Request for proposal (RFP):
- Items or services are usually high dollar and non-standard.
- Examples: construction project, a research and development project; a made-to-order, highly complex piece of machinery.
- Blueprints, drawings, specifications, and other appropriate data should be included with proposal.
3. Invitation for bid (IFB):
- Appropriate for high dollar, standard items.
- A prerequisite to this process is a clear and accurate description of the supplies, equipment, and services required.
- Includes specifications, drawings, industry standards, performance requirements, etc.
- Must ensure fair competition among all bidders.
- Provisions should be stated in such a manner to avoid misinterpretation.
- Formal bids are submitted to the contracting department in sealed envelopes. All bids are opened at a specific time.
- In most cases, the contract award goes to the lowest responsible bidder. If not awarded to the lowest bidder, must document reasons, carefully.
- Type of contract is open to fraud, collusion, and other dishonest conduct. Hence, PM and contracting personnel must practice defined ethical business procedures.
The Risk shared between the buyer and seller is determined by the contract type.
- Time and Materials
- An award pool is created. The level of award is determined by an award committee.
- Buyers have more flexibility than CPIF. Subjective judgments can be used to determine rewards (such as a contractor’s attitude).
- Type of contract is gaining with popularity.
- Downside: administrative cost is high due to award committee.
The following contracts are ordered in increasing risk to the seller and decreasing risk to the buyer.
Cost-Plus-Percentage of Cost (CPPC):
- Seller is reimbursed for allowable costs of performing the contract and receives as profit an agreed upon percentage of the costs.
- No limit on the seller’s profit. If the seller’s cost increases, so does the profit.
- Most undesirable type of contract from buyer’s standpoint.
- Prohibited for federal government use. Used in private industry, particularly construction projects.
- Susceptible to abuse. No motivation for seller to decrease costs.
- The buyer bears 100% of the risk.
- The buyer project manager must pay particular attention to the control of the labor and material costs so that the seller does not purposely increase these costs.
- Bottom line: no limit on seller’s profit!
Cost-Plus-Fixed Fee (CPFF):
- Seller is reimbursed for allowable costs of performing the contract and receives as profit a fixed fee payment based on the percentage of the estimated costs.
- The fixed fee does not vary with actual costs unless the scope of work changes.
- Susceptible to abuse in that there is a ceiling on profit, but no motivation to decrease costs.
- Primarily used in research projects where the effort required to achieve success is uncertain until well after the contract is signed.
- Bottom line: limit on profit but no incentive to control costs.
Cost-Plus-Incentive Fee (CPIF):
- Seller is paid for allowable performance costs along with a predetermined fee and an incentive bonus.
- If the final costs are less than the expected costs, both the buyer and seller benefit by the cost savings based on a pre-negotiated sharing formula.
- The sharing formula reflects the degree of uncertainty faced by each party.
- Primarily used when contracts involve a long performance period with a substantial amount of hardware development and test requirements.
- Risk is shared by both buyer and seller.
- Bottom line: provides incentive to seller to reduce costs by increasing profit potential.
Fixed Price-Plus-Incentive Fee (FPI):
- Most complex type of contract.
- Consists of target cost, target profit, target price, ceiling price, and share ratio.
- For every dollar the seller can reduce costs below the target cost, the savings will be shared by the seller and buyer based on the share ratio.
- The share ratio is a negotiated formula which reflects the degree of uncertainty faced by each party.
- If the costs exceed the ceiling price, the seller receives no profit. Regardless of the actual costs, the buyer pays no more than the ceiling price.
- Risk is shared by both buyer and seller, but risk is usually higher for seller.
- Usually used when contracts are for a substantial sum and involve a long production time.
- Bottom line: provides incentive to decrease costs which in turn increases profits. If costs exceed a ceiling, then contractor is penalized.
Firm-Fixed Price (FFP):
- Seller agrees to perform a service or furnish supplies at the established contract price.
- Will also be called lump sum.
- Seller bears the greatest degree of risk.
- Seller is motivated to decrease costs by producing efficiently.
- Best specifications are available and costs are relatively certain.
- Common type of contract.
- Simple purchase order
- Fixed price per unit of goods or service
We can discuss further in upcoming related article.