Procurement is a key aspect of a project. Every project needs some goods, services, equipment, etc. to accomplish its goals. Managing the acquisition of goods and services to fulfil the project objectives is called the project procurement management. Sometimes it is not only limited to acquisition of goods and services but also extends to supplier relationship management also. Project Procurement Management is among one of the ten knowledge areas as described in the ‘Project Management Body of Knowledge (PMBOK)’ published by ‘Project Management Institute (PMI)’. In this article, we will learn about the project procurement management and its processes as defined in PMBOK. Before moving further, let us first understand what is contract and how many types of contracts are there.
A contract is a legally enforceable agreement between two parties, i.e., the buyer and seller, which obligates the seller to provide some specific goods or services and obligates the buyer to give the seller monitory or other valuable consideration in return. The contract may be in the form of agreement, purchase order, understanding, undertaking, etc. The important thing is that it is an agreement which is legally binding upon the parties.
Types of Contracts
The contracts are basically of three types:
Cost Reimbursable of Cost Plus Contract
In this type of contract, the seller is paid the actual expanses plus a fixed fee or incentive. These contracts can be classified as following:
- Cost Plus Fee (CPF) of Cost Plus Fixed Fee (CPFF)
- Cost Plus Percentage of Cost (CPPC)
- Cost Plus Incentive Fee (CPIF)
- Cost Plus Award Fee (CPAF)
Time & Material (T and M) or Unit Price Contract
In these contracts, the contractor is paid on the basis of per unit work performed by the contractor. Per unit rate is fixed in these type of contracts and the payment is done on the basis of that only. These type of contracts are generally used for small projects.
Fixed Price of Lump Sum Contract
These contracts are used in the situations where the scope of work is clear and pre-defined. These contracts can be classified as follows:
- Fixed Price Incentive Fee (FPIF)
- Fixed Price- Economic Price Adjusted (FP-EPA)
- Firm Fixed Price (FFP)
Advantages and Disadvantages of Different Forms of Contracts
Key Terms Used in the Procurement Management
let us understand some key terms used in the procurement management.
Request for Information (RFI)
Request is information is used to gather the information regarding the potential sellers or suppliers to access their capacity.
Request for Proposal (RFP)
Request for proposal is used to get the proposals from the suppliers for the supply of particular goods or services.
Request for Quotation (RFQ)
Request for quotation is used to receive the quotations from the potential sellers or suppliers for the supply of standard goods or services.
Request for Bid (RFB)
Request for bid is used to get the bids from the shortlisted suppliers.
Purchase Order (PO)
Purchase order is the simplest form of commercial contract. It is issued to the supplier to purchase the small products.
Statement of Work (SOW)
Statement of work is the statement which defines the scope of work or the scope of deliverable as per the contract.
A quotation is the submission by the supplier in response to a request by the buyer.
Non- disclosure Agreement (NDA)
By signing the non- disclosure agreement, the parties into the contract agrees to maintain the confidentiality of the information of each other and will not disclose the information to any of the competitor.
Letter of Intent (LOI)
The letter of intent (LOI) is issued by the buyer to inform the seller that he/she is interested to work with the seller.
Terms and Conditions (T&C)
The purchase agreement includes the ‘terms and conditions’, which specifies the things or obligations, the seller has to perform.
Force majeure is a clause in the contract which exempts both the parties to fulfil their obligations, in case of the events which are beyond the control of both the parties into the contract.
Project Procurement Processes as Per PMBOK
Project Management Body of Knowledge (PMBOK) defines three processes of procurement management which are given below:
Plan Procurement Management
The first step in procurement management is to plan procurement management. This process involves creating a procurement management plan that outlines how the procurement activities will be managed, from identifying potential suppliers to managing contracts. This plan should also include details on the procurement process, such as the type of contract that will be used and the procurement schedule. This process belongs to the B.
The second process in procurement management is to conduct procurements. This process involves obtaining quotes, bids, or proposals from potential suppliers. Once the proposals have been received, they are evaluated based on a set of criteria, and a supplier is selected. The selected supplier is then awarded the contract. This process belongs to the ‘Executing process group’.
The third process in procurement management is to control procurements. This process involves monitoring the performance of the supplier and ensuring that they are delivering the goods, services, or works as agreed upon in the contract. This process also includes managing any changes to the contract, such as modifications to the scope of work or changes in the delivery schedule. This process is a part of ‘Monitoring & Control process group’.
In addition to the PMBOK processes, there are several other key aspects of procurement management that project managers need to consider. In this article, we will explore these aspects in more detail.
Other Key Aspects of Procurement Management
Make or Buy Analysis
Before starting the procurement process, project managers should consider whether it is better to make or buy the required goods, services, or works. This decision will depend on several factors, such as the project’s budget, timeline, and available resources. If the project team has the expertise and resources to complete the work in-house, it may be more cost-effective to do so. However, if the required work is outside the project team’s expertise, it may be more efficient to outsource the work to a vendor.
During the procurement process, project managers need to create several procurement documents. These documents include a request for proposal (RFP), a request for information (RFI), and a request for quotation (RFQ). These documents help to communicate the project’s requirements to potential vendors and provide a basis for selecting the best vendor for the job.
Once a vendor has been selected, project managers need to manage the contract to ensure that the vendor delivers the goods, services, or works as agreed upon. This involves monitoring the vendor’s performance, ensuring that all deliverables are received on time and within budget, and resolving any issues that may arise during the project.
Procurement management also involves risk management. Project managers need to identify potential risks associated with the procurement process, such as the risk of selecting an unreliable vendor or the risk of cost overruns. Once identified, project managers need to develop a plan to mitigate these risks.
Finally, project managers need to consider ethical considerations when procuring goods, services, or works. This includes ensuring that the procurement process is fair and transparent, that all vendors are given equal opportunities to bid on the project, and that there are no conflicts of interest.
Project Procurement Management is a complex process that requires careful planning and execution. In addition to the PMBOK processes, project managers need to consider several other aspects of procurement management, such as make or buy analysis, procurement documents, contract management, risk management, and ethical considerations. By taking a comprehensive approach to procurement management, project managers can ensure that their projects are completed on time, within budget, and to the satisfaction of stakeholders.