Project Procurement Management

Procurement management. sometimes called the source-to-settle process, handles contractual agreements and supplier relations. It has a larger general role though since procurement deals with acquiring (procuring) the products, materials, goods and services needed for efficient business operations as well as managing the process of purchasing and sourcing. Purcasing and procurement are more operational in nature and sourcing is more strategic. There are three general processes within procurement management which are to plan procurements, conduct procurements, and control procurements.

• Procurement Planning – Determining what to procure and when
• Solicitation Planning – Documenting product requirement and identifying potential sources.
• Solicitation – Obtaining quotations, bids offers and proposals, as appropriate.
• Source Selection – Choosing from among potential sellers
• Contract Administration – Managing the relationship with the seller.
• Contract Closeout – Completion and settlement of the contract, including resolution of any open items.
• The three processes within procurement management are:
  1. Plan procurement management
  2. Conduct procurements
  3. Control procurements

If you are a company that performs projects for other external companies, or if your company is planning to using an external source for a project, you will likely have to generate a some type of contact or procurement documentation. A contract is a legally binding agreement between two or more parties. Procurement has to do with procuring - obtaining or acquiring. It is important to make it clear that a contract is an agreement where both parties must agree that they will do the things set forth in the contract. Generally a contracting process includes a requirements stage, request (requisition), solicitation, award, and closeout stages.

A contract may also be referred to as: a contract, an agreement, a subcontract, a purchase order, or a memorandum of understanding.

Types of Contracts

There are two general types of contracts, a fixed price contract or a cost plus contract.

Fixed Price Contract

With a fixed price contract the project or assignment must be completed as specified for a fixed amount of money. "The seller agrees to sell something to the buyer for a price that has been agreed upon beforehand. The seller agrees to provide the buyer with something that meets the specifications as agreed, and the buyer agrees to give the seller a fixed amount of money in return." (Newell, 2002, p. 186) With this type of contract the supplier has a higher risk if the specifications are not clearly set in the beginning. This may also be referred to as a lump sum contract.

Cost Plus Contract

With a cost plus contract, also known as a cost disbursable contract or a cost-reimbursable contract, the cost is disbursable -- the buyer agrees to reimburse the supplier for the work done and money spent., and then pay a fixed fee (smaller than in the fixed price contract) when the work is completed. "Cost reimbursable contracts are usual when there is a great deal of risk and uncertainty in the project or a significant amount of investment must be made before the final results of the project can be reached...In a cost plus type of contract the buyer is actually taking the responsibility for the risk. If problems develop in the project, the buyer will have to pay for the corrective action that is necessary." (Newell, 2002, p. 189)

Costs are usually classified as direct costs or indirect costs Direct costs are incurred for the exclusive benefit of the project. Indirect costs (overhead costs) are costs allocated to the project by the performing organization as a cost of doing business (usually calculated as a percentage of direct costs)

Solicitation

Solicitation is the obtaining of quotations, bids, offers, or proposals as appropriate. During the solicitation phase ou would document product requirements and identify potential sources. Commonly you will request RFP's as described below and will then select a source (choose from potential sellers).

Contract negotiation - involves clarification and mutual agreemtn on the structure and requirements of the contract prior to the signing of the conract.

Screening system - involves establishing minimum requirements of performance for one or more of the evaluation criteria.

Request for Proposal (RFP)

Generally speaking, a Request for Proposal is a type of bid document used to solicit proposals from prospective sellers of products or services. It is also sometimes called a Request for Quotation, Invitation for Bid, or Invitation for Negotiation.

Some things that are good rules of thumb:

• Advertise the RFP if thats what it takes to get good estimates and quality vendors
• Offer detailed specifications in your RFP
• Fully explain, demonstrate, and document your requirements in the RFP
• Include delivery mandates in the description of your needs.
• Make sure vendors know that acceptance clauses will be inserted in the final order as applicable
• Ask for a desription of their current workload
• Ask for and check references.

Request for Proposal Sample

More RFP Samples can be found at:

• http://www.axia-consulting.co.uk/html/rfp_rfi.html 
• http://office.microsoft.com/en-us/results.aspx?Scope=TC&Query=bid
• http://www.werc.org/assets/1/assetmanager/rfpwritingguide.pdf 
• http://name-aam.org/uploads/downloadables/RFP_Template.pdf 
• http://www.mrsc.org/rfps/rfps.aspx 

Blanket Orders

Blanket orders allow the buyer to order larger quantities at one time (usually with a discount) but then not acquire the materials until they are actually needed. The seller benefits because the buyer agrees to only buy that item from them, and has some degree of guaranteed future sales.

References

Newell, M. W. (2002). Preparing for the Project Management Professional (PMP) Certification Exam. New York, NY: American Management Association.