ENGG461: Managing Engineering Projects

Week 13

Project Procurement Management

Who am I?

1. Noel Grant - BComm (Management)

2. 15 years experience in Procurement - A day in the life

3. Variety of Operational and Management roles

4. Procurement as a profession - Chartered

5. Connect with me via

6. Email : noel.grant@bluescope.com

BlueScope Overview slide

Brands

BlueScope Overview slide

Some of our well known projects

BlueScope Overview slide

Footprint

Learning Outcomes

1. Understand the role of management frameworks and processes concerning the procurement of products, services and solutions in meeting project deliverables

2. Identify and apply selected decision support tools in relation to the evaluation of potential suppliers, administering contracts and monitoring and controlling supplier performance/relationships

3. Explore the limitations of the current (selected) approaches to project procurement management and the effectiveness of decision support tools

Project Procurement?

acquisition of products, services, or results [or solutions] needed to complete a project from outside the project team [or entity]−the organizations concerned can be either

the ‘buyer’ or ‘seller’ of the products, services, or results needed for the project

−can also be treated as ‘alliance partners’ in the context of long-term arrangements

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Sourcing

Contract Mgmt.

Supplier Mgmt.

• Make or buy decisions• Selection and evaluation

• Tender Preparation• Soliciting bids/proposals• Bid/proposal evaluation• Contract administration

• Monitoring and control of supplier performance

• Supplier relationships mgmt.

Scope of Project Procurement Mgmt.

Procurement Management Process Groups (PMBOK)

Plan Procurement

Conduct Procurement

Control Procurement

Close Procurement

Plan Procurement Mgmt.

Determining whether to acquire from outside, and if so, decide what to, how to, how much of and when to acquire.− make or buy decisions− develop the overall framework: solicit and evaluate suppliers;

establish contracts; and manage relationships with suppliers

Make or Buy Decisions

Make vs. buy: − considers those project needs that can/should be met by

acquiring products, services or results from outside of the project organization, as opposed to those that can/should be delivered by the project team.

Factors to be considered:− core competencies (capabilities, resources and work routines) − economies of scale (the volume to be produced so that the

unit costs are reasonable (or competitive)− capacity and timing considerations− strategic significance of the items concerned− intellectual property considerations

1

• Problem formulation: identify the need to conduct procurement or select suppliers and exploring possible options

2• Criteria development: identifying the desired attributes of candidate

suppliers and developing the criteria for evaluating potential suppliers

3• Supplier qualification: initial screening of potential suppliers for their

fit/alignment with project requirements/priorities

4• Supplier evaluation: comprehensive evaluation of a shortlisted set of

candidate suppliers against the metrics developed in step 2 above

5• Order allocation: allocating work to preferred suppliers, considering

their capacity and suitability to carry out required work

6• Supplier management: ongoing monitoring of relationships and

supplier performance against agreed criteria/terms of contract

Procurement Process (generic)

Procurement PreparationProcurement statement of work

− procurement statement of work (SOW): deliverables, materials specifications, milestones, requirements, acceptance criteria

− derived from the project plan/scope statement− Don’t be afraid to challenge

Source selection and evaluation criteria− commodities vs. value-added needs− screening vs. evaluation− criteria used to evaluate bids and proposals

Procurement documents− RFX’s (refer next slide)− Bids (suited for commodity type procurement)− Proposals (value-added or solution-based procurement)− Conforming and Non conforming responses

RF ”x”METHOD

USE WHEN ADVANTAGES DISADVANTAGES

RFTRequest for Tender

• When a defined requirement for a good or service exists and you are seeking the most advantageous pricing to deliver it.• Specification is reasonably well defined• The product or service is available from more than one source

• Enables a like-for-like comparisonLets suppliers know that the situation will be competitive• Evaluation process is simplier

• Defined specifications may be difficult to develop. • Does not encourage innovative solutions.

RFPRequest for Proposal

• When looking for best value solution to resolve a problem/deliver a good orservice, but not sure how to achieve it.• When respondents are expected to provide innovative ideas• When looking for the best value solution to resolve a problem or to deliver a good orservice, but is not exactly sure how to achieve it.

• Allows for customised proposals suggesting different approaches to the same need• Allows for negotiations in order to obtain the best value for money• Allows factors other than price to be considered

• Evaluations are more complex and subjective• Lead times for procurement are often longer

RFI Request for Information

There is insufficient information to write specifications for any procurement method

• Provides information to prepare a complete RFT or RFP document• Allows suppliers to have input into your organisations solicitation document based on current industry practices and market factors• Informs you of any potential problems early in the process

Lengthens the procurement process

RFQ Request for Quote

• Simple requirement• Lots of competition exists• The product or service is available from more than one source• Standard requirement exists

• Accelerated and simplified process• Selection process is simpler• Selection is typically based on price and responsiveness• Fast response and evaluation

• Defined specification may be difficult to develop• Does not encourage innovative solutions

Sole Source Procurement

The requirement can only be fulfilled by a particular service provider and no reasonable alternative exists

• An absence of competition exists• An urgent requirement exists

Direct negotiations can raise perceptions of improper behaviour, can appear to avoid scrutiny, andcan be seen as involving preferential treatment and favouritism.

Procurement Portfolio Analysis – Kralijc’s Matrix

Supplier Evaluation Criteria

Contracts

A contract is a legally enforceable agreement between two or more parties – with obligations each party agrees to

− cannot be for illegal activities

− the buyer has to make an offer and the seller has to accept it

− something of value (consideration) needs to be exchanged

− preferably, executed in written form

− when a party fails to honour its contractual obligations, a breach has occurred

Strategic Considerations (procurement options)

(Source: Jacobs and Chase, 2011)

Types of Contract

https://www.youtube.com/watch?v=p6rFUCQC2hY

Financial arrangement underpinning the contract depends on a number of aspects: e.g. type of item; transaction costs, and uncertainty involved

Three major types

Fixed Price

Suitable if the extent of the work, time involved and material needed can be established with high degree of accuracy

Examples: machinery and equipment purchases; components and materials (with provision for economic adjustments)

Cost-reimbursable

Suitable when there is a high level of uncertainty in terms of what will be required to supply the product, service or solution

Examples: sub-contracted work;

Time and Materials

Suitable for situations where there is uncertainty in the nature of product, service, solution involved and the scope of work.

Examples: professional and services: legal; and architectural

The level of risk for buyer and seller in each contract type

Other Forms of Contract (or agreements)

Unilateral: situations where the buyer does not need to accept an offer from the seller; e.g. purchase orders

Unit price: goods bought in quantities at a fixed rate: discounts may apply for bulk purchases

Teaming agreements: strategic partnerships, alliances and joint ventures aimed at exploiting a business opportunity (complementarity of contributions and scale economies may be relevant considerations).

Procurement Management Process Groups (PMBOK)

Plan Procurement

Conduct Procurement

Control Procurement

Close Procurement

Conduct Procurement

Obtaining seller responses, selecting a seller, and awarding a contract − provides alignment of internal and external stakeholder

expectations through established agreements

Solicit bids or proposals

Methods used− will depend on the project type, procurement needs,

organisational policies and the type of industry − may require public notices or newspaper advertisements− vendor/bidder conference is a common form of soliciting bids

or proposals and if applicable discovery site tours

Information sought/exchanged− technical requirements and product/service specifications− organisational capabilities/capacity to meet quality, delivery

and other relevant criteria− performance credentials of seller, including liquidity status− payment terms, relationships envisaged and timing

Collect Responses

Receive bids or proposals: to apply a pre-defined criteria for selecting one or more sellers who are qualified to perform the work and acceptable as a seller

− screening/qualification: a short list of qualified sellers can be established based on a preliminary proposal to select a smaller number of strategically significant suppliers

− evaluation: a detailed evaluation is then conducted based on a more specific and comprehensive requirements received from the sellers on the short list

− may use specific templates (e.g. RFP/RFQ) for collecting/disbursing required information/evidence to be used in qualification and evaluation phases

Evaluate Bids or Proposals

Evaluation criteria− Musts vs wants − objectives of the project− type of product, service or solution concerned− sourcing strategies − qualitative and quantitative aspects

Evaluation techniques− linear weighting − mathematical programming− statistical models− total cost of ownership− artificial intelligence

Linear Weighting: Example

(Source Gido and Clements, 2011)

Establish a Contract

Letter of intent: expression of interest from buyer to conduct business with the seller…….subject to x+y+z

Negotiation: a series of revisions and counter offers before finalising a win-win agreement− point of total consumption− economic price adjustment− liquidated damages− contract change control and early termination procedure

Formal acceptance/agreement: contract signed by the authorised representatives of the buyer and seller organisations

ensures that the seller’s performance meets the contractual requirements and buyer needs.

all contracts are legally-binding relationships between seller and buyer organisations, so it is important that legal and contracting professionals be involved in writing and administering contracts

project managers and members of the team should not make comments that may be misinterpreted as redirection of the contract terms or SOW. Consult Procurement or Legal.

project managers should be aware that changes to any part of the project including contract changes need to be reviewed, approved, and documented as per contract terms

Administering a Contract

Procurement Management Process Groups (PMBOK)

Plan Procurement

Conduct Procurement

Control Procurement

Close Procurement

Control Procurement

Managing procurement relationships, monitoring contract performance, and making changes and corrections to contracts as appropriate. − ensures that both the seller's and buyer's performance meets

requirements according to the terms of the legal agreement

Control ProcurementRecords management

− evidence of transactions between seller and buyer: written evidence , including meeting minutes, logs, inspections, audits, invoices, email correspondence etc.

Payments (P2P- Procure to Pay process)− payments to be made in time, according to the contract and in

line with the accounting protocols of the buyer organisationMonitoring seller performance

− regular monitoring, evaluation and reporting of seller performance (may feed into seller registry/database)

Contract change control − introducing, reviewing and approving change requests

Claims administration− demand by one of the contract parties for adjustments

Procurement Management Process Groups (PMBOK)

Plan Procurement

Conduct Procurement

Control Procurement

Close Procurement

Close Procurement

Closing each procurement phase/contract formally− verifies if all work was completed correctly and satisfactorily− includes finalising open claims, updating records to reflect final

results, and archiving relevant information for future use− in unresolved claims may be subject to litigation after closure− the contract terms and conditions can prescribe specific

procedures for dealing with unresolved claims

Further Procurement Information

CEB

CIPS

CASMEProcurious

Procurement Leaders

Lets check Learning Outcomes

1. Understand the role of management frameworks and processes concerning the procurement of products, services and solutions in meeting project deliverables

2. Identify and apply selected decision support tools in relation to the evaluation of potential suppliers, administering contracts and monitoring and controlling supplier performance/relationships

3. Explore the limitations of the current (selected) approaches to project procurement management and the effectiveness of decision support tools

Content sourced from:

– Sherrer, J. A. (2009) Project Management Road Trip

– PMI (2008) A Guide to the Project Management Body of Knowledge.

– https://www.youtube.com/watch?v=p6rFUCQC2hY

– The New Rational Manager: 1981; KT Problem Solving and Decision Making workshop material

– Others as acknowledged