Logistics & Supply Chain Business Environment

BUSINESS ENVIRONMENT FOR
LOGISTICS & SUPPLY CHAIN

Procurement Process
 Procurement is the process of finding and agreeing to
terms, and acquiring goods, services, or works from an
external source, often via a tendering or competitive
bidding process.
 Procurement generally involves making buying decisions
under conditions of scarcity.

Factors influencing procurement decisions
Questionnaire survey has been done with various construction organizations that
are handling multiple sites at different locations and factors are ranked using
SPSS statistics software tool to find the most influencing factors which are as
follows;
 Decision-making authority - Decision making in procurement at various
levels influences time and cost aspects of procurement process. Assigning
responsibility for each stage of procurement by top management or bottom
level employees accordingly brings in more accountability and control.
 Guideline on procurement-A proper guideline and procedure on the
procurement avoids delay and money wastage and ensures clarity in step by
step process.
 Project site location - Site location and the distance of it from the source of
material decide the mode of transportation. In cases of location across states
will affect the vendor selection as well as speed and time.
 Selection of vendor - Selection of vendor varies with location, requirements,
quality and cost. Certain companies depend on a single supplier for certain
materials for all their projects to ensure uniformity, uniqueness and reduce
cost.
 Inventory management - Proper inventory management is necessary to
ensure timely supply of materials, avoid obsolescence and theft, and avoid
shortage cost.

 Procurement training - Companies have admitted that training and
awareness on procurement have increased the efficiency of the
procurement process in terms of time, quality and cost.
 Transportation - Transportation of materials are mostly handled by a
third party arranged by the supplier. Mode of transportation and
handling of material while transportation affects the time, cost and
quality of procurement.
 Selection of material - Cost and quality are the basic factors
influencing selection of material. Availability of material of good
quality at low price will be the ultimate policy of the company. It is
found that demand, quality, and government policy will increase the
material cost eventually increasing the procurement cost.
 Payment interval - Several payment options are followed in the
industry such as payment at the supply of each batch, payment at
regular intervals, payment at milestone achievement, payment at the
end of the supply contract. Payment at regular intervals is found to be
the most sought after.
 Government policy - Increased tax and other duties on the elements
involved in procurement seems to increase the procurement cost.
Though occurrence probability is less, the impact will be great.

Purchasing
 Purchasing is the formal process of buying goods
and services.
 The purchasing process can vary from one
organization to another, but there are some
common key elements.
 The process usually starts with a demand or
requirements – this could be for a physical part
(inventory) or a service.
 A requisition is generated, which details the
requirements (in some cases providing a
requirements specification) which actions the
procurement department.
 A request for proposal (RFP) or request for
quotation (RFQ) is then raised.
 Suppliers send their quotations in response to the

 Purchase orders (PO) can be of various types,
including:
 Standard - a one time buy
 Planned - an agreement on a specific item at an approximate
date
 Blanket - an agreement on specific terms and conditions: date
and quantity and amount are not specified
 Purchase orders are normally accompanied by
terms and conditions which form the contractual
agreement of the transaction.
 The supplier then delivers the products or service
and the customer records the delivery (in some
cases this goes through a goods inspection
process).
 An invoice is sent by the supplier which is cross-
checked with the purchase order and documents

Types of Business Purchase
Decisions
 The types of business purchase decisions of interest
to marketers are:
1. New Purchases
2. Modified Re-buy
3. Straight Re-buy
New Purchase
 These purchases are ones the buyer has never or
rarely made before
 Also called as New Task Purchases
 It can be considered as either minor or major
depending on the total cost or overall importance of
the purchase.
 In either case, the buyer will spend considerably more
time evaluating alternatives.

 For example, if faced with a major New Task
Purchase involving a complex items, such as
computer systems, buildings, robotic assembly lines,
etc., the purchase cycle from first recognizing the
need to placement of the order may be months or
even years.
 For marketers, the goal when selling to a buyer
facing a New Task Purchase is to make sure to be
included in the set of evaluated products as
discussed in Step 2 of the business purchasing
process.
Straight Repurchases
 These business purchase decisions involve routine
ordering.
 In most cases, buyers simply reorder the same
products or services that were previously purchased.
 In fact, many larger companies have programmed

 For the supplier benefiting from the repurchase, this
situation is ideal since the purchaser is not looking to
evaluate other products.
 For competitors, who are not getting the order, it may
require extensive marketing efforts to persuade the
buyer to consider other product or service options.
Modified Re-buy
 These purchases occur when products or services
previously considered a straight re-purchase are now
under a re-evaluation process.
 There are many reasons why a product is moved to the
status of a Modified Repurchase.
 Some of these reasons include: end of purchase
contract period, change in who is involved in making
the purchase; supplier is removed from an approved
suppliers list; mandate from top level of organization to

 In this circumstance, the incumbent supplier faces
the same challenges they may have faced when they
initially convinced the buyer to make the purchase.
 For competitors, the door is now open and they must
work hard to make sure their message is heard by
those in charge of the purchase decision.

Business Case
 A business case provides justification for undertaking a
project, programme or portfolio. It evaluates the benefit,
cost and risk of alternative options and provides a rationale
for the preferred solution.
 It is becoming increasingly important for the board and
senior management to focus on investments that deliver
true business value.
 Initiatives throughout the business, including innovation;
business ventures; factory relocations; new products and
services; and IT investments, are accepted or rejected
based on the business value they deliver.
 The reasons and benefits of a project may seem perfectly
obvious to you and others who are intimately involved with
it; however, to stakeholders and other decision-makers it
may not be so obvious

 A well-prepared business case can help your project
standout amongst the competing priorities within the
organisation and maybe the key to getting approval and
finances for the project.
 The business case is a process to critically examine the
opportunities, alternatives, project stages and financial
investment in order to make a recommendation for the
best course of action that will create business value.
Why create a business case?
 Preparing the business case enables you to take a
disciplined approach to critically examine the
opportunity, the alternatives, the project stages and the
financial investment in order to make a
recommendation for the best course of action to create
the business value.
 When the time is taken to develop a solid business

 There is also a much greater likelihood of securing
support to proceed with the investment.
 A business case is required when you need to:
Demonstrate the value of a proposed product or service
would generate for your organisation;
Obtain board approval for the investment;
Decide whether to outsource a particular function;
Relocate business operations and manufacturing facilities;
Prioritise projects within your organisation that are
competing for funding and resources;
Secure the financial funding and resources to implement
the project.
 By well-documenting the business case, you be able to
proficiently present the recommendation to stakeholders
whose support is required for approval.
 The documented business case will provide confidence

 The business case sets out a justification for the
investment that would be required by a potential
investment.
 For large investments and high-risk projects, a preliminary
business is often prepared as the first step in preparing
the full business case.
 It is used to decide whether the potential project merits
being investigated in more detail.
 For example, the preliminary business case may include
cost estimates that have a 20% tolerance, whereas the
full business case would include costings with less than
10% tolerance.
 The business case should be prepared early in the project
before any decision has been made to initiate.
 It allows the organisation to explore the high-level options
for meeting business requirements.

 Experienced organisations may have in-house
expertise allowing them to prepare a business case.
However, some organisations will not have the full
range of skills required and may wish to appoint an
independent management consultant to assist them.
5 Steps to developing a solid business case
 The process of developing the business case is
important; a well-executed process enables you to
develop a solid business case that increases the
benefits and value and reduces the risks.
 This also leads to a much greater likelihood of securing
support to proceed with the investment.
 Here are the five key steps for creating the business
case.
Step 1: Confirm the opportunity
 Describe the situation and the business opportunity that
your proposal will impact.

Step 2: Analyse and develop shortlisted options
 Identify the alternative approaches and select three or four
options to analyse.
 Gather information about each alternative, analyse the
options and develop the shortlisted options.
Step 3: Evaluate the options
 Evaluate how the alternatives will deliver on the business
objectives, then select the preferred option, taking into
account the strategic and financial value created and the
risks.
Step 4: Implementation strategy
 Create the implementation plan for the preferred option,
detailing how to achieve the business objectives, who will be
accountable for each milestone, and how to mitigate the
project risks.
Step 5: Recommendation
 Confirm the recommended option.
 Create the business case documents and present the

The business case document
A business case document should explain the following:
 Key objectives;
 Outline the business need;
 Provide important background and supporting information to
put the investment into context;
 Describe how the investment aligns with the organisation
strategic business plan;
 Provide a robust estimate of the whole-of-life costs of the
investment, and its financial benefits;
 Estimate the non-financial benefits of the investment;
 Describe the approach to be used, including timelines,
resources, the procurement strategy and governance;
 Rigorously assess the inherent risks, including how they are
likely to affect the investment and outline strategies for
mitigating them;
 Convey the level of uncertainty surrounding the proposal;
 Provide options for the board and management to consider in
reaching a decision.

How to write the business case
 The business case document is used by the project
sponsor, the executive team or the board to determine if
they should invest in a specific project.
 Sometimes, it's not easy to quantify the strategic,
financial and social benefits and the risks of a project.
 The documented business case needs to provide
confidence and a level of certainty that the considered
proposal will be successful.
 the critical business case document components include:
 Executive summary
 Project definition
 Business requirements
 Evaluation of options
 Recommendation

 The strategic logic of the project
 Benefits
 Risks
 Project stages & duration
 Financial analysis
 The estimate of project team resources
 Project authorisation
Benchmarking
 Benchmarking is the practice of comparing business
processes and performance metrics to industry bests
and best practices from other companies.
 Dimensions typically measured are quality, time and
cost.
 Benchmarking is used to measure performance using a
specific indicator (cost per unit of measure, productivity
per unit of measure, cycle time of x per unit of measure

 Also referred to as "best practice benchmarking" or "process
benchmarking", this process is used in management in which
organizations evaluate various aspects of their processes in
relation to best-practice companies' processes, usually within
a peer group defined for the purposes of comparison.
 This then allows organizations to develop plans on how to
make improvements or adapt specific best practices, usually
with the aim of increasing some aspect of performance.
 Benchmarking may be a one-off event, but is often treated as
a continuous process in which organizations continually seek
to improve their practices.
 In project management benchmarking can also support the
selection, planning and del
 In the process of best practice benchmarking, management
identifies the best firms in their industry, or in another industry
where similar processes exist, and compares the results and
processes of those studied (the "targets") to one's own results

History
 The term benchmark, originates from the history of guns and
ammunition, in regards to the same aim as for the business term;
comparison and improved performance.
 The introduction of gunpowder arms replaced the bow and arrow
from the archer, the soldier who used the bow.
 The archer now had to adapt to the new situation, and learn to
handle the gun.
 The new weapon left only a mark on the target, where the arrow
used to be visible, and with the bow gone, the soldiers title changed
to marksman, the man who put the mark.
 The gun was improved already in the early beginning, with rifling of
the barrel, and the rifle was born. With the industrialization of the
weapon-industry in the mid-1800s,
 The mass production of ammunition as a cartridge replaced the
manual of loading of black-powder and bullet into the gun.
 Now, with standardized production of both the high-precision rifle, as
well as the cartridge, the marksman was now the uncertain variable,
and with different qualities and specifications on both rifle as well as
ammunition, there was a need for a method of finding the best
combination.
 The rifled weapon was fixed in a bench, making it possible to fire
several identical shots at a target to measure the spread.

 In 2008, a comprehensive survey[5] on benchmarking
was commissioned by The Global Benchmarking
Network, a network of benchmarking centres
representing 22 countries.
1. Mission and Vision Statements and Customer (Client)
Surveys are the most used (by 77% of organizations) of
20 improvement tools, followed by SWOT
analysis (strengths, weaknesses, opportunities, and
threats) (72%), and Informal Benchmarking
(68%). Performance Benchmarking was used by 49%
and Best Practice Benchmarking by 39%.
2. The tools that are likely to increase in popularity the
most over the next three years are Performance
Benchmarking, Informal Benchmarking, SWOT, and
Best Practice Benchmarking. Over 60% of organizations
that are not currently using these tools indicated they
are likely to use them in the next three years.

Procedure
 There is no single benchmarking process that has been universally
adopted.
 The wide appeal and acceptance of benchmarking has led to the
emergence of benchmarking methodologies. One seminal book is
Boxwell's Benchmarking for Competitive Advantage (1994).
 The first book on benchmarking, written and published by Kaiser
Associates, is a practical guide and offers a seven-step approach. Robert
Camp (who wrote one of the earliest books on benchmarking in 1989)
developed a 12-stage approach to benchmarking.
 The 12 stage methodology consists of:
1. Select subject
2. Define the process
3. Identify potential partners
4. Identify data sources
5. Collect data and select all partners
6. Determine the gap
7. Establish process differences
8. Target future performance
9. Communicate
10. Adjust goal
11. Implement
12. Review and recalibrate

The following is an example of a typical benchmarking methodology:
 Identify problem areas: Because benchmarking can be applied to any business
process or function, a range of research techniques may be required. They include
informal conversations with customers, employees, or suppliers; exploratory
research techniques such as focus groups; or in-depth marketing
research, quantitative research, surveys, questionnaires, re-engineering analysis,
process mapping, quality control variance reports, financial ratio analysis, or
simply reviewing cycle times or other performance indicators. Before embarking on
comparison with other organizations it is essential to know the organization's
function and processes; base lining performance provides a point against which
improvement effort can be measured.
 Identify other industries that have similar processes: For instance, if one were
interested in improving hand-offs in addiction treatment one would identify other
fields that also have hand-off challenges. These could include air traffic control,
cell phone switching between towers, transfer of patients from surgery to recovery
rooms.
 Identify organizations that are leaders in these areas: Look for the very best in
any industry and in any country. Consult customers, suppliers, financial analysts,
trade associations, and magazines to determine which companies are worthy of
study.
 Survey companies for measures and practices: Companies target specific
business processes using detailed surveys of measures and practices used to
identify business process alternatives and leading companies. Surveys are
typically masked to protect confidential data by neutral associations and
consultants.
 Visit the "best practice" companies to identify leading edge practices:
Companies typically agree to mutually exchange information beneficial to all
parties in a benchmarking group and share the results within the group.

Costs
 The three main types of costs in benchmarking are:
 Visit Costs - This includes hotel rooms, travel costs, meals, a
token gift, and lost labor time.
 Time Costs - Members of the benchmarking team will be
investing time in researching problems, finding exceptional
companies to study, visits, and implementation. This will take
them away from their regular tasks for part of each day so
additional staff might be required.
 Benchmarking Database Costs - Organizations that
institutionalize benchmarking into their daily procedures find it is
useful to create and maintain a database of best practices and
the companies associated with each best practice now.
 The cost of benchmarking can substantially be reduced
through utilizing the many internet resources that have
sprung up over the last few years.
 These aim to capture benchmarks and best practices from
organizations, business sectors and countries to make the

Technical/product benchmarking
 The technique initially used to compare existing corporate
strategies with a view to achieving the best possible
performance in new situations (see above), has recently
been extended to the comparison of technical products.
 This process is usually referred to as "technical
benchmarking" or "product benchmarking".
 Its use is well-developed within the automotive industry
("automotive benchmarking"), where it is vital to design
products that match precise user expectations, at minimal
cost, by applying the best technologies available worldwide.
 Data is obtained by fully disassembling existing cars and
their systems. Such analyses were initially carried out in-
house by car makers and their suppliers.
 However, as these analyses are expensive, they are
increasingly being outsourced to companies who specialize
in this area. Outsourcing has enabled a drastic decrease in
costs for each company (by cost sharing) and the
development of efficient tools (standards, software).

Types
Benchmarking can be internal (comparing performance
between different groups or teams within an organization)
or external (comparing performance with companies in a
specific industry or across industries).
Within these broader categories, there are three specific
types of benchmarking:
1) Process benchmarking,
2) Performance benchmarking and
3) Strategic benchmarking.
These can be further detailed as follows:

 Process benchmarking - the initiating firm focuses its observation
and investigation of business processes with a goal of identifying
and observing the best practices from one or more benchmark
firms. Activity analysis will be required where the objective is to
benchmark cost and efficiency; increasingly applied to back-office
processes where outsourcing may be a consideration.
Benchmarking is appropriate in nearly every case where process
redesign or improvement is to be undertaking so long as the cost of
the study does not exceed the expected benefit.
 Financial benchmarking - performing a financial analysis and
comparing the results in an effort to assess your overall
competitiveness and productivity.
 Benchmarking from an investor perspective- extending the
benchmarking universe to also compare to peer companies that
can be considered alternative investment opportunities from the
perspective of an investor.
 Benchmarking in the public sector - functions as a tool for
improvement and innovation in public administration, where state
organizations invest efforts and resources to achieve quality,
efficiency and effectiveness of the services they provide.
 Performance benchmarking - allows the initiator firm to assess

 Product benchmarking - the process of designing new products
or upgrades to current ones. This process can sometimes involve
reverse engineering which is taking apart competitors products to
find strengths and weaknesses.
 Strategic benchmarking - involves observing how others
compete. This type is usually not industry specific, meaning it is
best to look at other industries, i.e. Strategic Benchmarking with the
help of PIMS (Profit impact of marketing strategy).
 Functional benchmarking - a company will focus its
benchmarking on a single function to improve the operation of that
particular function. Complex functions such as Human Resources,
Finance and Accounting and Information and Communication
Technology are unlikely to be directly comparable in cost and
efficiency terms and may need to be disaggregated into processes
to make valid comparison.
 Best-in-class benchmarking - involves studying the leading
competitor or the company that best carries out a specific function.
 Operational benchmarking embraces everything from staffing and
productivity to office flow and analysis of procedures performed.
 Energy benchmarking - process of collecting, analysing and
relating energy performance data of comparable activities with the
purpose of evaluating and comparing performance between or
within entities. Entities can include processes, buildings or
companies. Benchmarking may be internal between entities within

UNIT – II
FUNDAMENTALS OF
PROCUREMENT CONTRACTS

Procurement Specification
Specification:
 A precise description of the physical characteristics,
quality, or desired outcomes of a commodity to be
procured, which a supplier must be able to produce or
deliver to be considered for award of a contract.
 Specifications define precise requirements of
commodities (i.e., goods and services) sought through
a solicitation process.
 The commodity will be used and with clear knowledge
of statutes, regulations, policies, market availability,
budget, and the strategic plan of the entity,
procurement professionals collaborate with end users
to translate a particular need into detailed
requirements
 There are two types of specifications,

Specifications should be written using attributes of
design and performance, as required by the
procurement.
 A design specification details physical characteristics,
materials, and product features, as well as details of the
manufacturing methodology for the commodity.
 A performance specification describes the desired end
result or outcome for the commodity.
 A specification may incorporate features of both design
and performance.
 Specifications may be viewed on a continuum with pure
performance on one end and pure design on the other.
 Each requirement in a specification falls somewhere on
this continuum.

Design specification
 A design specification establishes the characteristics a
commodity must possess, including details of how the
commodity will be manufactured; engineering plans,
drawings, or blueprints may be included.
 The design specification states in prescriptive terms
what the potential offeror must provide to the buyer.
 The objective of a design specification is to meet a
custom or unique requirement.
 A design specification is complete and limits the options
of the contractor or manufacturer, placing high risk on
the buying entity for design errors or omissions within
the specification.
 For example, if the desired outcomes from a solicitation
are not achieved, the supplier may argue that any poor
performance is due to the design that was specified
and not the supplier’s assembly

 Design specifications may include any or all of the
following:
Drawings (e.g., engineering plans, blueprints)
Dimensions that allow for tolerance levels and ranges
Definition of terms
Description of materials for cost determination, process of
construction, delivery, and implementation of requirements
by supplier
Minimum requirements
Detailed test, sample, and inspection methods to ensure
compliance with the specification
Industry standards
Alternatives that may be considered
 Technical specifications are a subset of design
specifications, often used when precise shapes,
dimensions, close tolerances, and a high degree of

Advantages of design specifications
 Provide the end user with increased certainty about the
commodity
 Allow for objective evaluation of offers
 Award is based on compliance with the specification and
made to the lowest responsive offer and responsible
offeror
Disadvantage of design specifications
 Prescriptive, may limit competition
 Increased risk to entity
 Loss of innovation
 Expensive and time consuming to prepare, may require
the services of engineers, architects, and other technical
resources, as well as multiple levels of review and
approval
 Implementation may be expensive and time consuming.

Performance specification
 A performance specification describes the desired outcome
or intended use of a commodity and how the commodity will
perform (e.g., number of items, distance to travel, time
required). Performance metrics
 1 are essential to define acceptance testing and successful
achievement of outcomes.
 The metrics may be linked to incentives or disincentives.
Performance specifications
 Allow offerors to use their expertise, creativity, and innovation
to provide a solution. The offeror chooses the method of
achieving the outcome.
 Are used when the method and means of achieving the
outcome are unknown.
 Place a higher degree of risk on the awarded supplier, who is
responsible for achievement of the outcome and will be
evaluated based on defined criteria.
 May describe a commodity that will be integrated into existing

Advantages of performance specifications
 Provide opportunity for innovation; allow offerors to put
forth unique solutions to defined needs
 Allow end user to benefit from the latest products and
technologies
 Corrective action may be applied if service levels are not
achieved
Disadvantages of performance specifications
 Well-defined performance metrics are needed to ensure
that the specified performance will achieve the desired
outcome
 Require reliable, practical, economical tests of
performance
 Evaluations are subjective and require additional time
and effort to complete

Functional descriptions
 A performance specification may utilize a functional
description to define the task or desired result of the
commodity.
 Functional descriptions are commonly used for
technology-related commodities, and focus on
observations or experiences during system usage (e.g.,
the program, computer peripherals, or other computers).
 Example: Upon landing on the website home page, the
user is prompted to enter their password and confirm
their status using Captcha
Advantages of functional descriptions
 Well suited for information technology products
 Well suited when the options available in the
marketplace are unknown

Disadvantages of functional descriptions
 May result in a wide range of offers that are not
necessarily comparable
 Take more time and effort to develop and to evaluate
Brand name description
 A brand name description is a title, term, symbol, design,
or any combination thereof used to describe a product
by a unique identifier and its producer.
 Performance specifications may use brand names to
describe the desired output and quality levels of a
commodity.
Advantages of brand name descriptions
 Allow for agency standardization (e.g., fleet
standardization for purposes of training and
maintenance)
 Meet the expectations of the end user by providing the
exact commodity needed

Disadvantages of brand name descriptions
 Very restrictive; limit competition
 Potentially equivalent products are not considered for award; alternative
brands would be excluded from consideration
 May result in increased price
 May lead to a sole source procurement and create dependency on a
specific supplier
 Requires significant justification (e.g., maintenance, compatibility of
parts)
Brand name or equivalent descriptions (also referred to as
“brand name or equal”)
 A brand name or equivalent description provides one or more
manufacturers’ brand names with identifying model numbers.
 In a performance specification, a brand name or equivalent
description states the standards of quality, performance, and
characteristics needed to meet the requirements of the end user.
 To meet the standard of performance of “or equivalent,” the
commodity must be functionally equivalent to the brand name
product but not necessarily the same in every detail.
 A checklist may be included for suppliers to identify how their
commodity meets or could be modified to meet the specification
requirements.

Example: Comparable pickup trucks might be the Ford
F150, Chevrolet Silverado, Ram 1500, or Toyota Tundra.
Advantages of brand name or equivalent descriptions
 Aid in communicating the desired quality and
performance levels to potential offerors
 Reduce the time required to develop the specifications
Disadvantages of brand name or equivalent
descriptions
 Considered to be restrictive
 Require justification
 May deter competition, which may increase price
 Must define criteria to determine responsiveness to “or
equivalent”
 Risk of litigation by brand name manufacturer

When procuring commodities, procurement
professionals must provide the needed context to
achieve the expected and desired outcomes of the end
user.
Context refers to how the commodity will be used and
conform to an existing environment. Providing context
should result in:
 Specification requirements that will accurately define,
represent, and fully expressend user needs.
 Potential offerors who can provide responsive solutions.
 Full and open competition, which allows for unbiased
decision-making.
 The ability of the purchasing entity to monitor the
procurement and achievethe desired end results.

Specifications should be written clearly, concisely,
consistently, and precisely, using plain language.
 Well-written specifications allow potential suppliers to easily
read and understand the requirements.
 Well-written specifications encourage suppliers to make
offers, thereby maximizing competition and increasing the
likelihood of receiving a commodity that achieves the
objectives of the procurement.
 Use language that is consistent, concise, plain, and precise.
 Avoid ambiguous language
 Choose simple words over complex ones
 Avoid use of acronyms and clichés
 Use proper grammar and punctuation.
 Use consistent style and formatting.
 Categorize or group similar items for ease of readability.
 Organize specification content with a consistent numbering
system.
 Maximize full and open competition.
 Provide allowable variation in measurement or other characteristics of
the commodity

 Ensure specifications are current and relevant.
 Identify physical, functional, environmental, and quality
characteristics of the commodity (e.g., design, size,
weight, power capacity, output, grade).
 Identify minimum requirements.
 State the required/optional outcomes.
 Clearly convey to potential offerors and other relevant
stakeholders the application or intended use of the
commodity.
 Identify acceptable commercial standards (e.g.,
Underwriters Laboratory (UL), Military Specifications
(MILSPEC), National Electrical Manufacturers
Association (NEMA), International Organization for
Standardization (ISO), British Pharmacopoeia (BPUK),
United States Pharmacopoeia (USP)).
 Include acceptance criteria.
 Detail how the commodity will be tested or evaluated for

 Provide reproducible test methods.
 Include performance metrics for assessing the achievement
of performance outcomes.
 Include a mechanism allowing for specification revision
during the course of the contract.
 If using a brand name or equivalent, cite the specific brand
name of the manufacturer to establish the standards of
quality and required performance.
 Include details on how the comparison of an “equivalent” or
better is to be manufactured
 When possible, specify at least two acceptable brand name
products
Poorly written specifications may result In:
 Less competition; potential offerors may choose not to submit
offers.
 A commodity that does not meet expectations.
 Additional costs due to subsequent changes made to the
specification.
 Poor relationships with the supplier, end user, and others
involved.

Avoid the following when writing specifications:
 Conjunctions (e.g., and, or, also, with)
 Escape clauses (e.g., if, when, but, except, unless, although)
 Mixing different types of requirements (e.g., combining
system, business, and design requirements in the same
section of a specification)
 Run-on sentences
 Speculative language (e.g., usually, generally, often, normally,
and typically)
 Unverifiable or vague terms (e.g., flexible, proper, suitable,
reasonable, appropriately, userfriendly, approximately, as
possible)
 Absolute terminology (e.g., 100% safe, totally reliable, runs on
all platforms, functioning 100% of time, fully compatible)
 Ambiguous punctuation (e.g., use of slash “/”)
 Assumptions n Over or understating the desired quality,

Steps for developing specifications
1. Meet with end users, clients, other stakeholders, and the
evaluation committee to understand needs.
2. Seek external assistance, when needed, to provide expertise to
clearly and correctly state what is required in terms of capability
and capacity.
3. Conduct thorough research of market and trends.
4. Understand the capability and capacity of the supply chain, as
well as potential influences (e.g., energy availability, storage for
contaminated material).
5. Choose the type of specification based on the identified needs.
6. Conduct analyses (e.g. life cycle cost (LCC), value analysis,
value engineering, best value).
7. Clearly identify the supplier’s obligations (e.g., risk and
responsibility) according to the type of specification chosen.
8. Explain, clarify, and define all compliance obligations.
9. Include essential characteristics and a clear statement of
intended use.
10. Include a clear and consistent methodology for determining if all
the requirements have been met by offerors.
11. Ensure there is an internal review process by members of the

Specification Checklist
Consider the following list when developing specifications, only including the items that are
applicable and relevant to the commodity being procured, as well as the chosen specification
type.
1. Intended use/purpose
2. Detailed good/service requirements
3. Performance requirements
4. Traceability n Inspections - Acceptance
5. Compliance (e.g., safety, environmental, industry standards)
6. Any restrictions that a local agency might impose
7. Delivery locations
8. Installation
9. Available facilities and utilities
10. Entity-provided items or services
11. Guarantees/Warranty
12. Training requirements
13. Delivery/Completion
14. Quantity
15. Key deliverables
16. Responsibilities
17. Packaging
18. Quality control
19. Contract transition
20. Services provided by third parties

Output or Outcome based Specifications
 Output-based specifications define the client's functional
requirements for the proposed development.
 The output-based specification is particularly important on public
projects as the government preferred procurement routes (design
and build, prime contract and private finance initiative) all involve
appointing an integrated supply team (including designers,
contractors and suppliers) under a single contract to design and
construct (and sometimes to finance, operate and maintain) the
development.
 The integrated supply team is appointed with no design
information, but with just the output-based specification to set out
the client's requirements.
 Once the integrated supply team has been appointed, the client
may find that changing their requirements can prove expensive.
 See Government Construction Strategy for more information.
 The output-based specification may be a development of the
project brief, but it is separate from it as it defines only the outputs
that are required from the project (that is, what it will enable the
client to do), it does not attempt to address how those outputs
might be achieved.
 It is considered by government that this will get best value from the

 For example, an output based specification might require the
provision of a classroom for 30 primary pupils, but it would not
specify the nature of the classroom, the types of doors and
windows etc.
 The standard of the classroom to be created might be defined
by reference to existing guidelines.
 As many of the building types procured as publicly-funded
projects are of a standard type (schools, hospitals, prisons
etc.) there are a great number of standards and guidelines
setting out performance requirements.
 The Common Minimum Standards (CMS) set out some very
broad standards to which built environments procured by
government departments need to comply. Adoption of the
Common Minimum Standards is mandatory in central
government departments in England.
 Output-based specifications must be well developed and
concise otherwise the quality and performance of the

 An output-based specification might include:
1. Introduction (purpose of the document).
2. Background.
3. Business objectives.
4. Business functions and processes.
5. The functions the development is required to perform.
6. The scope of services to be provided.
7. The number and type of users the development will serve.
8. A description of stakeholders.
9. An organisational structure showing the relationship between client
functions.
10. Indicative equipment schedules.
11. Constraints on the nature of the development, such as limitations of
the site, interaction with other organisations etc.
12. Sustainable performance objectives.
13. Specific services requirements such as information technology
requirements.
14. Access requirements.
15. Environmental requirements.
16. Existing policies.
17. Quality standards.
18. Risks.

Key Performance Indicators
 A Key Performance Indicator (KPI) is a measurable value that
demonstrates how effectively a company is achieving key business
objectives.
 A performance indicator or key performance indicator (KPI) is a
type of performance measurement.
 KPIs evaluate the success of an organization or of a particular
activity (such as projects, programs, products and other initiatives)
in which it engages.
 Key performance indicators (KPIs) refer to a set of quantifiable
measurements used to gauge a company’s overall long-term
performance.
 KPIs specifically help determine a company's strategic, financial,
and operational achievements, especially compared to those of
other businesses within the same sector.
 Key performance indicators (KPIs) measure a company's success
versus a set of targets, objectives, or industry peers.
 KPIs can be financial, including net profit (or the bottom line, gross
profit margin), revenues minus certain expenses, or the current
ratio (liquidity and cash availability).

 Many organizations are working with the wrong measures,
many of which are incorrectly termed key performance
indicators (KPIs).
 I believe it is a myth to consider all performance measures to
be KPIs.
 From my research over the past 25 years I have come to the
conclusion that there are four types of performance
measures.
 These four measures are in two groups: result indicators and
performance indicators.
 I use the term result indicators to reflect the fact that many
measures are a summation of more than one team’s input.
 These measures are useful in looking at the combined
teamwork but, unfortunately, do not help management fix a
problem as it is difficult to pinpoint which teams were
responsible for the performance or nonperformance.
 Performance indicators, on the other hand, are measures
that can be tied to a team or a clustser of teams working

 Performance focuses on measuring a particular element of
an activity.
 An activity can have four elements: input, output, control, and
mechanism.
 At a minimum, an activity is required to have at least an input
and an output. Something goes into the activity as an input;
the activity transforms the input by making a change to
its state; and the activity produces an output.
 An activity can also have to enable mechanisms that are
typically separated into human and system mechanisms.
 It can also be constrained in some way by a control.
 Lastly, its actions can have a temporal construct of time.
 Input indicates the inputs required of an activity to produce an
output.
 Output captures the outcome or results of an activity or group
of activities.
 Activity indicates the transformation produced by an activity
(i.e., some form of work).
 Mechanism is something that enables an activity to work (a
performer), either human or system.

 With both these measures some are more important so
we use the extra word “key.” Thus we now have two
measures for each measure type:
1. Key result indicators (KRIs) give the board an overall
summary of how the organization is performing.
2. Result indicators (RIs) tell management how teams are
combining to produce results.
3. Performance indicators (PIs) tell management what teams
are delivering.
4. Key performance indicators (KPIs) tell management how
the organization is performing in their critical success
factors and, by monitoring them, management is able to
increase performance dramatically.
 Many performance measures used by organizations are,
therefore, an inappropriate mix of these four types. First I
describe each type of measure.

Seven Characteristics of KPIs
1. Non Financial
2. Timely
3. CEO focus
4. Simple
5. Team based
6. Significant impact
7. Limited dark side
Non Financial:
 When you put a dollar sign on a measure, you have
already converted it into a result indicator (e.g., daily sales
are a result of activities that have taken place to create the
sales).
 The KPI lies deeper down. It may be the number of visits to
contacts with the key customers who make up most of the
profitable business.
 It is a myth of performance measurement that KPIs can be
financial and nonfinancial indicators.

Timely:
 KPIs should be monitored 24/7, daily, or perhaps weekly for some.
 It is a myth that monitoring monthly performance measures will
improve performance.
 A monthly, quarterly, or annual measure cannot be a KPI, as it
cannot be key to your business if you are monitoring it well after
the horse has bolted.
CEO focus:
 All KPIs make a difference; they have the CEO’s constant
attention due to daily calls to the relevant staff.
 Having a career-limiting discussion with the CEO is not something
staff members want to repeat, and in the airline example
innovative and productive processes were put in place to prevent
a recurrence.
Simple:
 A KPI should tell you what action needs to be taken.
 The British Airways late-planes KPI communicated immediately to
everyone that there needed to be a focus on recovering the lost
time.
 Cleaners, caterers, baggage handlers, flight attendants, and front
desk staff would all work some magic to save a minute here and a

Team based:
 A KPI is deep enough in the organization that it can be tied to a team.
 In other words, the CEO can call someone and ask, “Why?” Return on
capital employed has never been a KPI, because it cannot be tied to a
manager—it is a result of many activities under different managers.
 Can you imagine the reaction if a GM was told one morning by the British
Airways official “Pat, I want you to increase the return on capital employed
today.”
Significant impact:
 A KPI will affect one or more of the critical success factors and more than
one balanced-scorecard perspective.
 In other words, when the CEO, management, and staff focus on the KPI,
the organization scores goals in many directions.
 In the airline example, the late-planes KPI affected all six balanced-
scorecard perspectives.
 Again, it is a myth to believe that a measure fits neatly into one balanced-
scorecard perspective
Limited dark side:
 Before becoming a KPI, a performance measure needs to be tested to
ensure that it creates the desired behavioral outcome (e.g., helping teams
to align their behavior in a coherent way to the benefit of the
organization).
 There are many examples where performance measures have led to

Measures of KPI
 These are the four categories under which you should
be thinking about your project management KPIs.
 We have listed the categories and a simple definition
below:
1. Timeliness: This is making sure your project is done on
time—and if it’s not, tracking where it’s off-target is
important so you can always have an estimated
completion date.
2. Budget: Are you going to stay under the budget you’ve
allocated, or is the project exceeding costs?
3. Quality: How well has the project progressed? Are those
working on it or benefitting from it satisfied?
4. Effectiveness: Are you spending your time and money
appropriately, or could you be managing the project more
effectively?

The 25 Most Important Project Management KPIs

Timeliness KPIs
 Cycle Time: The time needed to complete a certain task or activity. This is
helpful for repeated tasks in a project.
 On-Time Completion Percentage: Whether or not an assignment or task
is completed by a given deadline.
 Time Spent: The amount of time that is spent on the project by all team
members—or, if you like, by each team member individually.
 Number Of Adjustments To The Schedule: How many times your team
has made adjustments to the completion date of the project as a whole.
 FTE Days Vs. Calendar Days: How much time your team is spending on
a project by calendar days, hours, and/or full-time equivalent work days.
 Planned Hours Vs. Time Spent: How much time you estimated a project
would take versus actual hours. If the time spent differs from the amount of
time anticipated, it’s a flag that you underestimated the resource allocation
or budget, and your timeline may be affected.
 Resource Capacity: The number of individuals working on a project
multiplied by the percent of time they have available to work on it. This
project KPI helps to properly allocate resources (and determine any hiring
needs) and set an accurate project completion timeline.
 Resource Conflict YOY: Comparing the number of projects with resource
conflicts year over year (YOY). Not having the resources to complete
projects or having employees assigned to several projects at a time can
lower efficacy. KPIs that compare these conflicts will show whether the
situation is a persistent problem or one-off situation that needs to be
addressed.

Budget KPIs
 Budget Variance: How much the actual budget varies from the
projected budget. To track this KPI, measure how close the
baseline amount of expenses or revenue is to the expected value.
 Budget Creation (Or Revision) Cycle Time: The time needed to
formulate an organization’s budget. This includes the total duration
of research, planning, and coming to a final agreement.
 Line Items In Budget: Line items helps owners and managers
keep track of individual expenditures—and provide a more detailed
way to see how the budget was spent.
 Number Of Budget Iterations: The number of budget versions
produced before its final approval. A higher number of budget
iterations means more time is being spent planning and finalizing a
budget.
 Planned Value: The value of what’s left to complete in a project—
in other words, the planned cost of what still needs to be done. For
example, if you have a $20K budget and 30 percent of the project
remaining, the planned value of the remaining work is $6K. Use this
project KPI to compare against the actual cost and adjust the
budget if needed.
 Cost Performance Index: Compares the budgeted cost of the
work you’ve accomplished so far to the actual amount spent. This is

Quality KPIs
 Customer Satisfaction/Loyalty: Whether or not someone is
satisfied and would come back again. This can be measured
effectively by a survey. This comes more into play when the
project deals directly with a client or customer.
 Net Promoter Score: Similar to customer satisfaction and
loyalty, NPS (or Net Promoter Score) is a user satisfaction
KPI measured by a one-question survey whose purpose is to
gauge brand loyalty.
 Number Of Errors: How often things need to be redone
during the project. This is the number of times you have to
redo and rework something, which affects budget revisions
and calendar revisions as well.
 Customer Complaints: Keep in mind that the “customer” of a
project could be someone internal—does someone from your
organization complain because someone else isn’t getting
things done?
 Employee Churn Rate: The number or percentage of team
members who have left the company. If your project teams
have high turnover, it might indicate the need to improve
management and the work environment. Churn ultimately

Effectiveness KPIs
 Number Of Project Milestones Completed On Time With Sign
Off: There are different parts within a project—are they being
completed in a timely manner? Additionally, were the milestones
completed and approved by the owner or buyer?
 Number Of Returns: If you have a capital project that requires
many parts, you may track the return rate of those parts; this helps
you see if you did a good job planning or adjusting to the project
during implementation.
 Training/Research Needed For Project: You may track this in
hours, number of courses, or something similar. If you need to do a
lot of this, your project might get started later than you hope.
Another way of looking at this is asking, “What percent of resources
did you have at the beginning of the project that were qualified to
immediately begin working on the project?”
 Number Of Cancelled Projects: Tracking how many projects have
been paused or eliminated. A high number of cancelled projects
could indicate a lack of planning, lack of goal alignment, or an
inability to take on new projects.
 Number Of Change Requests: The number and frequency of
changes requested by a client to an established scope of work. Too
many changes can negatively affect budgets, resources, timelines,
and overall quality.

Bonus Project Management KPI
 Return On Investment (ROI): Encompassing all of the previous four
KPI categories, ROI calculations measure the financial worth of a
project in relation to its cost. Will the project result in a positive
payback for the company or client? What is its financial potential or
value? Are there other projects or investments that would yield a
higher ROI? This KPI is often used when determining whether to
initiate a project, or to compare the value of two different projects.
What makes a good KPI?
 Choosing which project management KPIs to track and measure is
only the first step. Next, you have to define your KPIs in a manner
that gives them clarity and focus.
 There are project management KPI templates you can use to help,
but it’s most important to remember to be S.M.A.R.T. With this
acronym as your guide, you’ll be able to create effective project
measures that are:
1. Specific
2. Measurable
3. Attainable
4. Realistic
5. Time-Bound
Your KPIs should be agreed upon by all involved parties before
initiating a project, and then measured and monitored as a tool for

Sources of Contractual Terms
 There are two principal sources of contractual terms: express terms and
implied terms.
 Express terms are the terms which are agreed specifically by the
contracting parties and implied terms are those terms which are not
specifically agreed by the contracting parties but which are implied into
the contract by the courts or by Parliament.
 We shall deal with implied terms at 9.8. Here we shall focus our
attention on express terms.
 Express terms may be agreed orally or in writing.
 Where the contract is made orally the ascertainment of the contractual
terms may involve difficult questions of fact, but the task of a judge is
simply to decide exactly what was said by each of the parties.
 More particular difficulties arise in the case of written contracts.
 Three such difficulties will be dealt with here.
 The first and fundamental issue is whether the court can go beyond the
written agreement in an attempt to discover the existence of additional
terms to the contract (9.2).
 The second is whether a person is necessarily bound by the terms of a
contract which he has signed (9.3).
 The third and final issue is whether written terms can be incorporated
into a contract, either by notice (9.4) or by a course of dealing (9.5).

 Express terms are the terms of the agreement which are
expressly agreed between the parties.
 Ideally, they will be written down in a contract between the
parties but where the contract is agreed verbally, they will be
the terms discussed and agreed between the parties.
 An implied contract, as the term itself suggests, is
a contract that is inferred by the parties' conduct and
behavior.
 Words are not used, either written or spoken. Such
a contract comes into force after the parties to
the contract have decided their purpose.
 A Quasi-Contract will be an example of an implied contract.
Quasi-contracts are “those relationships that mimic those
created by contract.” It is based on the maximum equity that
no individual can receive unequal benefits at the expense of
the other, regardless of whether or not there is a contract.
Features of the Doctrine of Implied Contract:
1. The offer by one party and the acceptance by the other;
2. The consideration, in particular something of interest provided
by each party; and
3. The mutuality of intent — in particular, a meeting of minds on

Modern Form Contract
NEC Engineering and Construction Contract
 The New Engineering Contract (NEC), or NEC Engineering and
Construction Contract, is a formalised system created by the UK
Institution of Civil Engineers that guides the drafting of documents
on civil engineering and construction projects for the purpose of
obtaining tenders, awarding and administering contracts.
 As such they legally define the responsibilities and duties of
Employers (who commission work) and Contractors (who carry
out work) in the Works Information.
 The contract consists of two key parts the Contract Data part one
(Data provided by the Employer) and Contract Data part two (Data
provided by the Contractor). Several approaches are included
making it a family of options. It is used in the UK and
internationally in countries including New Zealand, Australia, Hong
Kong and South Africa.
 There have been four editions, the first in 1993, the second in
1995, the third in 2005 and the most recent in 2017.
 The NEC3 was launched in 2005 and it was amended in April
2013.
 NEC4 was announced in March 2017 and has been available
since June 2017. This new edition reflects procurement and
project management developments and emerging best practice,

Characteristics
 The NEC is a family of standard contracts, each of which
has these characteristics:
1. Its use stimulates good management of the relationship
between the two parties to the contract and, hence, of the
work included in the contract.
2. It can be used in a wide variety of commercial situations,
for a wide variety of types of work and in any location.
3. It is a clear and simple document - using language and a
structure which are straightforward and easily understood.
 The NEC3 complies fully with the Achieving Excellence
in Construction (AEC) principles.
 The Efficiency & Reform Group of The UK Cabinet Office
recommends the use of NEC3 by public sector
construction procurers on their construction projects.

Options
 The NEC contracts now form a suite of contracts, with NEC being the
brand name for the "umbrella" of contracts.
 When it was first launched in 1993, it was simply the "New Engineering
Contract".
 This specific contract has been renamed the "Engineering and
Construction Contract" which is the main contract used for any
construction based project.
 It now sits alongside a number of other contracts that together should
mean that the NEC suite is suitable for what ever stage of a lifecycle the
project is at and for any party within a project.
 The contracts available within the suite are:
Engineering and Construction Contract (ECC):
 Suitable for any construction based contract between an Employer and a
Contractor.
 It is intended to be suitable for any sector of the industry, including civil,
building, nuclear, oil & gas, etc.
 Within the ECC contract there are six family level options of which the
Employer will choose what she/he deems to be the most suitable and give
her/him the best option/value for money on that project:
 Option A: Priced contract with activity schedule
 Option B: Priced contract with bill of quantities
 Option C: Target contract with activity schedule

 These options offer a framework for tender and contract
clauses that differ primarily in regard to the mechanisms by
which the contractor is paid and how risk is
allocated/motivated to control costs.
 The core clauses (of the main option listed above) are used in
conjunction with the secondary options and the additional
conditions of contract.
 The Efficiency and Reform group of The Cabinet Office in the
UK (formerly the OGC) has published generic public sector Z-
clauses for the use with NEC3 contracts.
 The clauses of these options have been be adapted for
simpler less risky work (short contracts), for use as
subcontracts, and for professional services such as design as
below.
The Engineering and Construction Subcontract (ECS)
 Very similar in detail and complexity of contractual
requirements to the ECC contract above, but allows the
contractor to sub-let the project to a subcontractor imposing
most of the clauses that she/he has within her/his headline
contract.
 There is very little difference between the ECC and the ECS,

The Engineering and Construction Short Contract (ECSC)
 This is an abbreviated version of the ECC contract and most
suitable when the contract is considered "low risk" (not necessarily
low value) on a project with little change expected.
 This contract is still between the employer and contractor but does
not use all of the processes of the ECC making it simpler and
easier to manage and administer.
The Engineering and Construction Short Subcontract (ECSS)
 Allows the contractor to sub-let a simpler lower risk contract down
the line to a subcontractor.
 It is back-to-back with the ECSC but is frequently used as
subcontract when the main contract is under the ECS.
The Professional Services Contract (PSC)
 This contract is for anyone providing a service, rather than doing
any physical construction works.
 Designers are the most obvious party that fit into this category.
Whilst they are producing a design for an employer or contractor,
they would sign up and follow the clauses within the PSC.
 Most of the clauses within this contract are the same or similar to
those in the main ECC contract, so that all contractors, designers
and subcontractors have pretty much the same obligations and
processes to follow as each other.

The Professional Services Short Contract (PSSC)
 This was added to the family in April 2013 and was co-developed with the
Association for Project Management.
 It is for simpler less complex assignments than the PSC, such as the
appointment of small team for managing an ECC contract on the
Employer's behalf. E.g. the Project Manager and Supervisor.
 It is frequently used as a subcontract to the PSC for design work.
Framework Contract (FC)
 Parties enter into a "framework" of which work packages will then be let
during the life of that framework.
 Any individual projects will then be awarded using one of the other
contracts within the suite, meaning that the parties follow the headline
clauses within the framework contract (which is a fairly slim contract) and
then the individual clauses within the chosen contract for that package.
Different work packages can be let using different contracts during the life
of the framework.
Term Service Contract (TSC)
 For parties on a project that is operational or maintenance based, e.g.
maintaining highway signage, where the contract is to ensure that a
certain standard is maintained.
 This contract is not generally used for constructing new works, but can
include some amount of betterment.
 There is also a "Term Service Short Contract" where the project is a
relatively low risk project and/or the work is primarily re-active. It is an

Supply Contract/Short Supply Contract (SC/SSC)
 These contracts were launched in 2010.
 This is for a supplier of supplies or goods to a project, and puts
extra contractual requirements on them during their
procurement/manufacture period.
 The Supply Contract is for big bespoke items i.e. designed and
manufactured specifically for that contract, with the Short Supply
Contract potentially being for more run of the mill / commoditised
items on a project.
 Neither of these contracts cover working on a Site. I.e. as written
they are not 'supply and install' contracts.
Dispute Resolution Services Contract (DRSC) - previously
Adjudicator's Contract
 If there is a dispute between the parties on a project then the
Adjudicator will follow the clauses within this contract in order to
come to a decision.
Design Build and Operate (DBO) Contract
 The NEC4 Design, Build and Operate Contract (DBO) allows the
procurement of a more integrated whole-life delivery solution.
 It combines responsibility for design, construction, operation and/or
maintenance, procured from a single supplier.
 It can include a range of different services to be provided before,

Alliance Contract (ALC)
 The NEC4 Alliance Contract (ALC) will be published
initially in a consultation form.
 It was created to support Clients who wish to take a step
forward by fully integrating the delivery team for large
complex projects.
 The ALC should be used to engage in a single
collaborative contract with a number of participants in
order to deliver a project or programme of work.
 The basis of the contract will be that all parties work
together in achieving Client objectives, and share in the
risks and benefits of doing so.

FIDIC (Fédération Internationale Des Ingénieurs-Conseils)
 The NBS Contracts and Law Survey indicates that one of the areas that
participants found difficult in international projects was the use of unfamiliar
contract forms.
 This article by Koko Udom, former Head of Contacts and Law at NBS, briefly
introduces the FIDIC contracts which are reputed as the leading contracts in
international engineering and construction projects.
 FIDIC is a French language acronym for Fédération Internationale Des Ingénieurs-
Conseils, which means the international federation of consulting engineers. It was
started in 1913 by the trio of France, Belgium and Switzerland.
 The United Kingdom joined the Federation in 1949. FIDIC is headquartered in
Switzerland and now boasts of membership from over 60 different countries.
 Over the years, FIDIC has become famous for its secondary activity of producing
standard form contracts for the construction and engineering industry.
 FIDIC published its first contract, titled The Form of contract for works of Civil
Engineering construction, in 1957.
 As the title indicated, this first contract was aimed at the Civil Engineering sector
and it soon became known for the colour of its cover, and thus, The Red Book.
 It has become the tradition that FIDIC contracts are known in popular parlance by
the colour of their cover.
 This first contract by FIDIC was undertaken jointly with the International federation
of Building and Public works.
 FIDIC’s concerted effort at achieving broad consultation and acceptance of its
contract forms has seen subsequent editions of its contracts being ratified by the
International Federation of Asian and Western Pacific Contractors Association,
Associated General Contractors of America and the Inter-American Federation of

FIDIC contract forms
 Over the years FIDIC has consistently improved on its contracts.
 The organisation has added new forms of contract, replaced previous ones and updated
important terms.
 The table below gives a brief overview of FIDIC contracts to date:
FIDIC contract Year released Notes
The (old) Red Book First published in 1957, the fourth and final
edition was published in 1987, with a
supplement added in 1996.
These contracts were aimed at the civil
engineering sector, as differentiated from the
mechanical/electrical engineering sector.
The (old) Yellow Book First published in 1967 with the third and last
edition in 1987.
These contracts were aimed at the
mechanical/electrical engineering sector.
The Orange Book The first and only edition of this contract was
released in 1995.
This was the first design and build contract
released by FIDIC.
The (new) Red Book Released in 1999. The Red Book is suitable for contracts that the
majority of design rests with the Employer.
The (new) Yellow Book Released in 1999. The Yellow Book is suitable for contracts that
the contractor has the majority of the design
responsibility.
The Silver Book Released in 1999. The Silver Book is for turnkey projects. This
contract places significant risks on the
contractor. The contractor is also responsible
for the majority of the design.
The Pink Book First published 2005 – an amended version was
published 2006, with a further edition in June
2010.
This is an adaptation of The Red Book created
to fit the purposes of Multilateral Development
Banks.
The Gold Book Released in 2008. This is FIDIC’s first Design-build and operate
contract.

 Other contracts in the FIDIC family include the FIDIC sub-contract, The Blue Book, which is
concerned with dredging and reclamation works, and The White Book, which is for the
engagement of consultants by Employers
General features of FIDIC contracts
 Although the FIDIC family covers a wide range of contracts, there are some common
features:
Presentation
 FIDIC is usually divided in two parts: Part I consisting of the general conditions and Part II
concerning the conditions of particular application (including guidelines for the
preparation of Part II clauses).
 Part I contains the general terms of the contract, such issues as rights and obligations of
each party, procedure for payment, variation, certification and dispute resolution.
 Part II of the contract is the conditions of particular application and is to be used to introduce
project specific clauses, such as language of the contract, choice of law, the name of the
person or firm appointed to act as Engineer or Employers representative for the project
among other terms. The Appendix usually contains sample of documents to be used for the
procurement process.
 In most FIDIC forms there is a default hierarchy for the documents forming the contract. The
order of priority is as stated below and in the event of inconsistency the first on the list takes
precedence:
 The Contract Agreement
 The Letter of Acceptance (this is the formal acceptance of the contractor's tender and marks the
formation of the contract)
 The Letter of Tender
 Part II – the conditions of particular application
 Part I – general conditions of contract
 The Specification and Drawings (Red Book), The Employer’s Requirements (Yellow Book), the
Schedules (Red and Yellow Books)
 Further documents (if any), listed in the Contract Agreement or in the Letter of Acceptance.
 The parties are allowed to rearrange the priority of documents or stipulate that no priority or

Dispute resolution
 FIDIC contracts adopt a multi-tier dispute resolution process. The
emphasis in recent years has been on the amicable settlement of
disputes.
 The process usually provides as a first step, for disputes to be
submitted for adjudication before an Engineer or a Dispute Board.
If one (or both) of the parties is dissatisfied, a period is allowed for
amicable settlement.
 If the parties are not able to settle the dispute during the ‘amicable
settlement’ period, the final stage is to proceed to arbitration.
 FIDIC contracts provide as a default position that the arbitration
rules of the International Chambers of Commerce should apply in
the arbitration of disputes arising from the contract.
Bias for English law
 The first sets of FIDIC contracts were based on English law
principles. This bias was so strong, that in commenting on the
FIDIC Red Book, first edition, Ian Duncan Wallace QC put it lightly
thus:
 “As a general comment, it is difficult to escape the conclusion that
at least one primary object in preparing the present international
contract was to depart as little as humanly possible from the
English conditions. ”Since 1957, future FIDIC contracts have

Main Terms
Indemnities:
 Indemnity is a comprehensive form of insurance
compensation for damages or loss. When the term
indemnity is used in the legal sense, it may also refer to
an exemption from liability for damages.
 Indemnity is a contractual agreement between two
parties. In this arrangement, one party agrees to pay for
potential losses or damages caused by another party.
 Example is an insurance contract, in which the
insurer or the indemnitor agrees to compensate the
other (the insured or the indemnitee) for any damages or
losses in return for premiums paid by the insured to the
insurer. With indemnity, the insurer indemnifies the
policyholder—that is, promises to make whole the
individual or business for any covered loss.

Liabilities
 A liability is something a person or company owes, usually a
sum of money.
 Liabilities are settled over time through the transfer of
economic benefits including money, goods, or services.
 Recorded on the right side of the balance sheet, liabilities
include loans, accounts payable, mortgages, deferred
revenues, bonds, warranties, and accrued
expenses.
Subcontracting
 Subcontracting is the practice of assigning, or outsourcing,
part of the obligations and tasks under a contract to another
party known as a subcontractor.
 Subcontracting is especially prevalent in areas where
complex projects are the norm, such as construction and
information technology.
 Subcontractors are hired by the project's general contractor,
who continues to have overall responsibility for project

Insurance
 Insurance is a means of protection from financial loss. It
is a form of risk management, primarily used to hedge
against the risk of a contingent or uncertain loss.
 An entity which provides insurance is known as an
insurer, insurance company, insurance carrier or
underwriter.
 A person or entity who buys insurance is known as an
insured or as a policyholder.
Guarantee
 Guarantee is a legal term more comprehensive and of
higher import than either warranty or "security".
 It most commonly designates a private transaction by
means of which one person, to obtain some trust,
confidence or credit for another, engages to be
answerable for him.
 It may also designate a treaty through which claims,

Liquidated damages
 Liquidated damages are an amount of money, agreed
upon by the parties at the time of the contract signing,
that establishes the damages that can be recovered in
the event a party breaches the contract.
 The amount is supposed to reflect the best estimate of
actual damages when the parties sign the contract.
 These usually apply to a specific type of breach, and in
construction, it is frequently the failure to complete work
on time.

UNIIT – IV
COST & PRICING OF
PROCUREMENT

Estimation of Cost
 A cost estimate is the approximation of the cost of a program, project, or operation.
The cost estimate is the product of the cost estimating process. The cost estimate
has a single total value and may have identifiable component values.
 A problem with a cost overrun can be avoided with a credible, reliable, and
accurate cost estimate. A cost estimator is the professional who prepares cost
estimates.
 There are different types of cost estimators, whose title may be preceded by a
modifier, such as building estimator, or electrical estimator, or chief estimator.
 Other professionals such as quantity surveyors and cost engineers may also
prepare cost estimates or contribute to cost estimates. In the US, according to the
Bureau of Labor Statistics, there were 185,400 cost estimators in 2010. There are
around 75,000 professional quantity surveyors working in the UK.
 Various projects and operations have distinct types of cost estimating, which vary
in their composition and preparation methods. Some of the major areas include:
1. Construction cost
I. detailed construction estimate
II. abstract construction estimate
2. Manufacturing cost
3. Total delivery cost
4. Software development cost
5. Aerospace mission cost
6. Resource exploration cost
7. Facility operation cost
8. Facility maintenance and repair cost
9. Facility rehabilitation and renewal cost
10. Facility retirement cost

Marketing Data
 Marketing data is information that can be used to improve product
development, promotion, sales, pricing, distribution and related
strategies such as branding. The following are common types of
marketing data.
1. Customer Data
Information about your customers such as contact details.
2. Market Research
Information about target markets such as customer needs and preferences.
3. Competitive Intelligence
Data about your competitors and industry in areas such as products, services, business capabilities
and pricing.
4. Sales
Sales data such as leads, opportunities, quotes and proposals.
5. Transactions
Records of commercial transactions such as purchases.
6. Interactions
Interactions with the customer such as visits to a website or customer support inquiry.
7. Voice of the Customer
Feedback from the customer such as customer interviews, surveys, ratings and rankings.
8. Preferences & Interests
Information about customer preferences and interests such as how often they travel or what
communication channel they prefer.
9. Marketing Metrics
Standard measures used to benchmark against the competition and evaluate marketing results.

Direct Cost
 A direct cost is a price that can be directly tied to the production
of specific goods or services.
 A direct cost can be traced to the cost object, which can be a
service, product, or department.
 Direct and indirect costs are the two major types of expenses or
costs that companies can incur.
 Direct costs are often variable costs, meaning they fluctuate
with production levels such as inventory. However, some costs,
such as indirect costs are more difficult to assign to a specific
product.
 Examples of indirect costs include depreciation and
administrative expenses.
 Any cost that's involved in producing a good, even if it's only a
portion of the cost that's allocated to the production facility, are
included as direct costs.
 Some examples of direct costs are listed below:
 Direct labor
 Direct materials
 Manufacturing supplies
 Wages for the production staff
 Fuel or power consumption

Indirect Cost
 Indirect costs are, but not necessarily, not directly attributable to a cost
object. It should be financially infeasible to do so.
 Indirect costs are typically allocated to a cost object on some basis. In
construction, all costs which are required for completion of the
installation, but are not directly attributable to the cost object are indirect,
such as overhead. In manufacturing, costs not directly assignable to the
end product or process are indirect.
 These may be costs for management, insurance, taxes, or maintenance,
for example.
 Indirect costs are those for activities or services that benefit more than
one project. Their precise benefits to a specific project are often difficult
or impossible to trace.
 For example, it may be difficult to determine precisely how the activities
of the director of an organization benefit a specific project. Indirect costs
do not vary substantially within certain production volumes or other
indicators of activity, and so they may sometimes be considered to be
fixed costs
 Costs usually allocated indirectly
 Indirect costs related to transport
 Administration cost
 Selling & distribution cost
 Office cost
 Security cost
 Shipping and Postage

Estimating:
 Estimating is the technique of calculating or Computing the various quantities and the expected Expenditure to be
incurred on a particular work or project.
Procedure of Estimating
Estimating involves the following operations
1. Preparing detailed Estimate.
2. Calculating the rate of each unit of work
3. Preparing abstract of estimate
Data required to prepare an estimate:
1. Drawings i.e.plans, elevations, sections etc.
2. Specifications.
3. Rates
DRAWINGS
 If the drawings are not clear and without complete dimensions the preparation of estimation become very difficult.
 So, It is very essential before preparing an estimate.
SPECIFICATIONS
 General Specifications: This gives the nature, quality, class and work and materials in general terms to be used
in various parts of work. It helps to form a general idea of building.
 Detailed Specifications: These gives the detailed description of the various items of work laying down the
Quantities and qualities of materials, their proportions, the method of preparation workmanship and execution of
work.
RATES:
 For preparing the estimate the unit rates of each item of work are required.
1. For arriving at the unit rates of each item.
2. The rates of various materials to be used in the construction.
3. The cost of transport materials.

Complete Estimate:
 Most of people think that the estimate of a structure
includes cost of land, cost of materials and labour, But
many other direct and indirect costs included and is
shown below.
The Complete Estimate

Preparation of Detailed Estimates
 Based on the methods used for the preparation of detailed estimates in different countries, in
general the principal parts of the detailed estimates consist of the following:
General abstract of cost
 This includes the name of the project, the date of preparation and the cost of different main
sub-headings, including engineering cost of civil works, cost of equipment and land, etc. as
well as contingencies.
 The detailed cost of each sub-heading is not shown in the general abstract of cost.
Abstract of cost
 The estimated cost of each and every individual item of work is calculated by multiplying the
quantity by the specified rate in tabular form known as "Abstract form' as shown below, then
adding all together to get the actual estimated cost of work.
 A percentage (1.5 to 2.5 percent) of the above estimate is usually added for a work charge
along with an amount (usually 0.5 percent) for tools and plant, to calculate the grand total of
the estimated cost.

 In order to ensure that the detailed estimates can be easily
surveyed, sub-headings are usually required. In this case,
each sub-heading of the estimate is grouped for similar items
of work. For an aquaculture project, the sub-headings should
be as follows:
1. Site clearing and preparation
2. Earthwork - this includes excavation, filling, dressing,
dewatering, etc.
3. Concrete work - this includes plain and reinforced concrete
works, prefabricated concrete works, formwork for concrete
structures, etc.
4. Brickwork - this includes brickwork in foundation and plinth,
brickwork in superstructures, etc.
5. Stonework - this includes stone work for bed or wave protection
and in structures, etc.
6. Woodwork
7. Steelwork
8. Roofing
9. Water supply and sanitary works
10. Miscellaneous
11. Finishing
 The abstract of cost should contain the different sub-headings

Analysis of rates
 In order to provide a correct and reasonable rate per unit for a particular item, a detailed surveyed called
an "Analysis of rate" should be conducted on costs of materials, labour and equipment as required for the
unit following its specification. The rate per unit of an item consists of the following:
(a) Quantity of materials and their cost
 The quantities of various materials required per unit rate for an item are determined by the
specifications.
 The cost of materials should be the cost on site. To calculate this, an analysis of rates of materials
should be calculated separately.
 This includes the market cost of the materials, including loading and unloading costs, 10 percent profit,
and transportation costs.
(b) Labour cost
 This includes the number of labourers, skilled and unskilled, and their respective wages multiplied by the
hours required to complete per unit.
(c) Cost of equipment, tools or plant
 Wherever possible, the cost of equipment should be allocated to a specific item of rate, i.e. the cost of
operating a concrete mixer should be spread over those items for which it is used.
 For certain tools and plant it is difficult to allocate their use to an individual item of rate, and it is therefore
suggested that this expenditure be included in overheads, i.e. establishment charges.
(d) Overhead or establishment charges
 These include such items as office rent and depreciation of equipment, salaries of office staff, postage,
lighting, travel, telephone charges, plans and specifications, etc.
 They are usually 2 /2% of the net cost of a unit of rate, and may increase to 5 percent.
(e) Profit
 In general, a profit of 10 percent is calculated for ordinary contracts after allocating all charges for
equipment, establishment, etc.

Quantity estimates
 As mentioned previously, quantity estimates of items of
various works should be prepared to provide an
accurate cost estimate for the implementation of a
project.
 Quantity estimates should be prepared separately for
both the structures and the earthworks.
(i) Quantity estimates for structures and buildings
 Measurement of all structures and buildings should be
taken as per the standard specification, or as per the
schedule of rate, or as per current practice.
(ii) Quantity estimates of earthworks
 The quantity estimates of earthworks, using the plans of
cross and longitudinal sections, as well as contour plans
if needed, should be prepared. Measurements for
earthwork shall be calculated from the relevant
drawings.

Budget Preparation
 Budget preparation is a process with designated
organizations and individuals having defined
responsibilities that must be carried out within a given
timetable. This process is normally established and
controlled by a legal and regulatory framework.
Types of Budget
 There are two types of Budget .
1. Non-Development Budget
2. Development Budget .
 Non – Development Budget: It includes Salaries and
Non- Salaries estimates of expenditures for the period of
a Financial Year .
 Development Budget: It includes approved
Development Schemes to be completed in the coming

Forms used in the preparation of Non – Development
Budget
 Form BDO 3: Schedule of Establishment. It is used for
the calculation of Pay of Officers/Other Staff . (FY 20 -- -
-- )
 Form BDO 4: Schedule of Establishment. It is used for
the calculation of Allowances. .(FY 20 -- - -- )
 These forms are not be submitted with the Budget.
Budget Forms Submitted to the Head Office for
Consolation of Budget
 FORM BDC 2 :Establishment Strength By Function
prepared by each DDO and submitted to the Head Office
for consolidation .
 FORM BDC 3: Establishment Budget by Function and
Designation .
 FORM BDC 6: Estimation of Demand for Grants (Current
Expenditure.

Development Budget Project Proposal Form BDD 4
 Project Proposal Form BDD 4 includes the following
information;
I. Name of Project.
II. Implementation Arrangement for the project.
III. Proposed Project profile.
IV. Project Activities.
A (Input/Outputs/Work Plan),
B Project Beneficiaries.
C Other Benefits.
D Interaction with Other Agencies
V. Community Participation Component in the project
VI. Project Management .
VII. Financial Summary of Project.
VIII. Detail Costs of The Project .
IX. Estimated Revenue of the Project (if any) .
X. Proposed Progress Reporting Schedule .
XI. Indicate the risk involved in the project.
XII. Project Preparation/Approval .

Budget Management Forms (To be filled by each DDO and
submitted to the Head Office)
 FORM BM 1:Monthly Statement of Current Expenditures .
 FORM BM 2:Monthly Reconciliation of Current Expenditures .
 FORM BM 3:Monthly Statement of Receipts .
 FORM BM 4:Monthly Reconciliation of Receipts .
 FORM BM 5:Monthly Progress Report of Development
Programme – Government Projects and Citizen Community
Boards (CCBS)
 FORM BM 6:Monthly Reconciliation of Development
Expenditure .
 FORM BM 7:Monthly Report of Operationalization of
Schemes .
 FORM BM 8:Service Delivery Targets .
 FORM BM 9:Service Delivery Facilities Status .
 FORM BM10:Establishment Status by Designations
 FORM BM 11:Monthly Statement of Re- Appropriation of

Budget Variance
 A budget variance is the difference between the budgeted or baseline amount of
expense or revenue, and the actual amount.
 The budget variance is favorable when the actual revenue is higher than the
budget or when the actual expense is less than the budget.
 In rare cases, the budget variance can also refer to the difference between actual
and budgeted assets and liabilities.
 A budget variance is frequently caused by bad assumptions or improper budgeting
(such as using politics to derive an unusually easy budget target), so that the
baseline against which actual results are measured is not reasonable.
 Those budget variances that are controllable are usually expenses, though a
large portion of expenses may be committed expenses that cannot be altered in
the short term. Truly controllable expenses are discretionary expenses, which can
be eliminated without an immediate adverse impact on profits.
 Those budget variances that are uncontrollable usually originate in the
marketplace, when customers do not buy the company's products in the quantities
or at the price points anticipated in the budget. The result is actual revenues that
may vary substantially from expectations.
 Some budget variances can be eliminated through the simple aggregation of line
items in the budget. For example, if there is a negative electricity budget variance
of $2,000 and a positive telephone expense budget variance of $3,000, the two
line items could be combined for reporting purposes into a utilities line item that
has a net positive variance of $1,000.
 BC Company had budgeted $400,000 of selling and administrative expenses, and
actual expenses are $420,000. Thus, there is an unfavorable budget variance of
$20,000. However, the budget used as the baseline for this calculation did not
include a scheduled rent increase of $25,000, so a flaw in the budget caused the

Outsourcing Vs other source of procurement
 The strategic decisions of insourcing and outsourcing are a
constantly active process which
 significantly determines the productivity and competitiveness of a
company.
 The management view on the insourcing/outsourcing issue has
changed significantly over the years due to various factors:
increased competition, pressures aimed at price reductions,
company downsizing, as well as focusing on basic company
business (Quélin and Duhamel, 2003).
 Generally, the tendency is to outsource the majority of those
business activities which do not form a basic pool of core
competences.
 Traditionally, the option to insource a certain activity or to perform it
by itself in a greater extent, was generally more present within big
organizations which led to their forward/backward vertical
integration, the ownership over a vast extent of production and a
great number of subsidiaries.
 Greater outsourced procurement was mostly connected with
resources which were then processed internally.
 On the other hand, the organization of modern companies is aimed
at flexibility and has the focus on corporate strengths, partner

Make-or-Buy Decision
 A make-or-buy decision refers to an act of using cost-benefit to make a
strategic choice between manufacturing a product in-house or purchasing
from an external supplier.
 It arises when a producing company faces a diminishing capacity,
experiences problems with the current suppliers, or sees changing demand.
 The make-or-buy decision compares the costs and benefits that accrue by
producing a good or service internally against the costs and benefits that result
from subcontracting. For an accurate comparison of costs and benefits, managers
need to evaluate the benefits of purchasing expertise against the benefits of

Understanding Make-or-Buy Decisions
 Managers must incorporate in-house production costs when
considering in-house production.
 It includes all the transaction costs involved in creating the product
or service.
 It can also include extra labor needed for production, monitoring
costs, storage requirements costs, and waste product disposal
costs resulting from the production process.
 Similarly, businesses must focus on both the production and
transaction costs when considering outsourcing from outside
suppliers.
 For example, the product’s price, sales tax charges, and shipping
costs must be factored in. Companies must also include inventory
holding costs, which comprise warehousing and handling costs, as
well as risk and ordering costs.
 The make-or-buy decision is sometimes treated as a financial or
accounting decision.
 While it is important to conduct an accounting assessment and
settle for the low-cost approach, it is more crucial to understand the
basis of the decision.
 Thus, companies must consider the strategic dimension of make-
or-buy choices because they determine the profitability of the
company and play an important role in its financial health.

Benefits of a Make-or-Buy Decision
 A make-or-buy decision framework relates to autonomy, and a
company selects from the many advanced options to account
for various factors associated with outsourcing.
1. Lower costs and higher capital investments
 One of the most notable advantages that a company enjoys
when embracing a make-or-buy decision approach is that it can
lower costs and increase capital investments, regardless of
whether it decides to make materials in-house or
subcontract from an external vendor.
2. Source of competitive advantage
 A rigorous make-or-buy analysis can also act as a source of
competitive advantage.
 For example, a company can increase the value it delivers to
customers and shareholders from its core service and skills. It
can also stay flexible by adopting a make-or-buy decision
approach.
 Such a company is better placed to weather the storm of
a market downturn.
 To realize the benefits, companies must consider the internal and
external environment in which they operate. In particular, the
culture in which such decisions are reached, and the agenda of

Types of pricing arrangements
1. Cost plus fixed fee.
 Cost plus fixed fee: costs are covered in full; and the extra fixed fee is
based on a pre-determined fixed amount on successful completion of the
contract.
 The costs are unknown, although they can be capped; but the fixed fee
remains constant. This pricing arrangement may be used in particular
where the supplier's costs cannot easily be estimated e.g. for some
Research and Development contracts; but there is no incentive on the
supplier to reduce their costs with this arrangement, which may make it less
attractive to the buyer.
2. Cost plus incentive fee.
 Cost plus incentive fee: costs are covered as for ‘fixed fee’; but then an
additional incentive fee is offered if the supplier should meet or exceed
predetermined KPIs, perhaps especially those aimed at making cost
reductions or achieving high measurable performance levels.
 Both parties may then share the cost savings. This pricing arrangement
may be used particularly where there is plenty of scope for cost reductions
and performance improvements by the supplier
3. Cost plus award fee
 Cost plus award fee: costs are covered as for ‘fixed fee’; but then an
additional incentive award fee is offered if the supplier should meet, or
exceed, some predetermined aspects of contractual performance that are
not easy to measure quantitatively.
 The award fee may be paid to the supplier in recognition of qualitative
assessment of the supplier's application of effort to meet the buyer’s needs,
probably on a subjective evaluation.

Types of pricing schedules
1. Linear Pricing Schedule
 A pricing schedule in which there is a fixed price per unit,
such that where total price paid is represented by T(q),
quantity is represented by q and price per unit is
represented by a constant p,
T(q) = pq
2. Nonlinear Pricing Schedule -
 Nonlinear pricing is a pricing schedule in which quantity
and total price are not mapped to each other in a strictly
linear fashion
3. Affine Pricing
 An affine pricing schedule consists of both a fixed cost and
a cost per unit. Using the same notation as above,
T(q) = k + pq, where k is a constant cost

Core and Non-Core Work or services
 Core Work: “Core” activities are generally defined as
strategic tasks that improve customer value and drive
profits.
 Non-Core Work: “Non-core” activities are generally
defined as day-to-day routine tasks that add little value
and are not a profit center
Outsourcing in procurement
 Procurement outsourcing is the transfer of specified key
procurement activities relating to sourcing and supplier
management to a third party.
 Businesses will sometimes do this to reduce costs or,
often in the case of procurement, to add specialist skill
sets to their procurement department.
 Typically the most common outsourced activities are

Logistics & Supply Chain Business Environment

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