Part Three - The Role of Strategy in PPM - 2022.pptx

The Role of Strategy
in
Project Procurement
Management
PART THREE

Contents
3.1. Project Procurement Process
3.2. Contract Risks
3.3. Contract Types
3.4. Procurement Strategy
Mata M. August 2022 2

3.1.Project Procurement Process
(Inputs, Tools & Techniques, and Outputs)
 Project Procurement Process includes the steps
required to purchase or acquire the products,
services, or results needed from outside the project
team to perform the project work
 It is assumed that the Buyer is the project
performing organization and the seller is external to
the performing organization.
 Mostly all projects will need to acquire some
resources from outside. Thus, not understanding the
procurement process and different ways to contract
could result in unnecessary risk for the project
3
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 Mostly, the process is common and is equally
applicable to formal agreements entered into
with other units of the performing organization.
When informal agreements are involved, the
processes can be considered as casual.
 In this process, the steps interact with each
other. Although the processes are presented
hereunder as discrete elements with well-
defined interfaces, in practice they may overlap
and interact in ways not detailed here.
Project Procurement Process…
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Timely Determination
of Requirements
(Goods/Works/
Services)
Finalization of Technical
Specification &
Commercial Conditions
Plan Mode of Bidding
-Open Tendering
-Limited Tendering
-Nomination
Plan Type of Bidding
-Single Stage Single Envelope
-Single Stage Two Envelope
-Two Stage
Bid announcement/
Submission/Receipt
-e-bids
-paper bids
Bid Evaluation
-General Compliance to Bid Conditions
-Qualification of Bidder
-Technical & Commercial Compliance
-Capacity & Capability of Bidder
-Price
-Award to Lowest /contract
Evaluated Responsive Bidder
-Contract Signing
- Performance Guarantee
Submission
Contract Monitoring/
Follow up
Availability of Funds and
Land & Statutory
Clearances wherever
required
Acceptance of
Goods/works/services
Invoice Verification
Payment
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Public Project
Procurement
Mgt
Processes
(Cycle)

How Do We Manage Procurement?
Project Procurement Mgt Processes
 Four processes
1. Plan Procurements
2. Conduct Procurements
3. Administer Procurements
4. Close Procurements
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Close
Procurements
Administer
Procurements
Conduct
Procurements
Plan
Procurements

A. Procurement Planning
Procurement planning involves identifying which
project needs can be best met by using products or
services outside the organization. It includes
deciding:
 whether to procure
 how to procure
 what to procure
 how much to procure
 when to procure
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Plan Procurements
 Scope statement
 Product
description/Requirements
 Procurement resources
 Activity Resource
Requirements
 Project Schedule
 Risk Register
 Activity Cost Estimates
 Environmental
Factors/market conditions
 Organizational
considerations
 Make or Buy
Analysis
 Expert
Judgment
 Contract Types
Inputs Outputs
Tools & Techniques
 Procurement
Management
Plan
 Procurement
Statements of
Work
 Procurement
Documents and
Selection
Criteria
 Make or Buy
Decisions
8
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I.Inputs to Procurement Planning
1. Scope statement-describes the current project
boundaries/activities
2. Product description- describes the ultimate end-
product of the project
3. Procurement resources /activities resources
requirement – explains availability and
requirement of resources.
4. Market conditions- available in the marketplace,
from whom, and under what terms and
conditions.
5. Project duration and Schedule-the time required
and plan
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Plan Procurements…

II. Tools/Techniques for
Procurement Planning
 Make-or-buy analysis: it is indirect as well as
direct cost- benefit analysis to determine whether
a particular product or service should be made
inside or purchased from someone else. Often
involves financial analysis
 Expert Judgment: individuals with specialized
knowledge or training
 Contract type selection: Different types of
contracts are more or less appropriate for
different types of purchases
10
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III.Outputs from Procurement
Planning
 Procurement Management Plan-describe how the
remaining procurement processes will be managed
 Statement(s) of work-describes the work required
from sellers and the procurement items in sufficient
detail to allow prospective sellers to determine if
they are capable of providing the item
 Prepare the Procurement Documents and
Selection Criteria that are important be well guided
 Make or Buy Decisions 11
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B. Conducting Procurements
 Deciding whom to ask to do the work - it may
identify potential sources
 Sending appropriate documentation to
potential Prospective sellers
 Obtaining quotations, bids, offers, or proposals
as appropriate
 Source Selection - choosing from among
potential sellers.
 Awarding a contract
12
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Conduct Procurements
 Procurement
Management Plan
 Procurement
Documents
 Source Selection
Criteria
 Qualified Sellers List
 Project Documents
 Make-or-Buy
Decisions
 Procurement
Statement of Work
 Organizational
Process Assets
 Bidder Conference
 Proposal Evaluation
Techniques
 Independent Estimates
 Expert Judgment
 Advertising
 Internet Search
 Procurement
Negotiations
Inputs
Outputs
Tools & Techniques
 Proposal and
Selected Seller
 Procurement
Contract Award
 Resource
Calendars
 Change Requests
 Project
Management
Plan Updates
 Project
Document
Updates
13
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I. Inputs to Conducting Procurements
 Procurement Management Plan - Provides the required
input in how the procurement process will be managed,
how procurement documentation through contract closure
 Procurement/project documents (example - Risk
register)
 Source selection criteria - Criteria can include
information on the supplier's required capabilities,
capacity, delivery dates, product cost, life-cycle cost,
technical expertise, and the approach to the contract
 Procurement Statement of Work - like Specifications -
Quantity desired - Quality levels 14
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Conduct Procurements…

II.Tools/Techniques for Conduct
Procurements
 Bidder conferences - meetings with prospective
sellers prior to preparation of a proposal to have a
clear, common understanding of the procurement.
 Contract negotiation - clarification and mutual
agreement on the structure and requirements of the
contract prior to the signing of the contract
 Independent estimates - the procuring organization
may prepare its own estimates as a check on
proposed pricing
 Expert Judgment, Advertising, Internet Search
15
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III.Outputs from Conduct Procurements
 Proposals - seller-prepared documents that describe
the seller’s ability and willingness to provide the
requested product
 Select and Contract award - a mutually binding
agreement which obligates the seller to provide the
specified product and obligates the buyer to pay for
it
 Change Requests, Plan and Document Updates -
Changes to any part of the project need to be
reviewed, approved, and documented; and
evaluation of any change should include an impact
analysis and modification
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C. Contract Administration
 A contract is a mutually binding agreement that obligates the seller to
provide the specified products or services and obligates the buyer to
pay for them.
 Contracts can clarify responsibilities and sharpen focus on key
deliverables of a project.
 Because contracts are legally binding, there is more accountability for
delivering the work as stated in the contract
 Ensures that the seller’s performance meets contractual requirements
 Contracts are legal relationships, so it is important that legal and
contracting professionals be involved in writing and administering
contracts
 includes application of appropriate contractual relationship(s) and
integration
 Many project managers ignore contractual issues, which can result in
serious problems
 It is critical to watch for constructive change orders
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Administer Procurements
 Procurement
Documents
 Project
Management Plan
 Contract
 Performance
Reports
 Approved Change
Requests
 Work Performance
Information
 Contract change
control system
 Procurement
performance review
 Inspections and audits
 Performance reporting
 Payment systems
 Claims administration
 Records management
system
Inputs Outputs
Tools & Techniques
 Procurement
Documentation
 Correspondence
 Contract changes
 Payment requests
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I. Inputs to Contract Administration
 Performance report and information- the
seller’s work results—which deliverables have
been completed and which have not, to what
extent are quality standards being met
 Seller invoices. The seller must submit invoices
from time to time to request payment for work
performed.
 Procurement Documents
 Contract, change request 19
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Administer Procurements…

II. Tools/Techniques for Contract Admin.
 Contract change control system - defines the process by
which the contract may be modified. It includes the
paperwork, tracking systems, dispute resolution
procedures
 Performance reporting - provides information about how
effectively the seller is achieving the contractual
objectives.
 Payment system - include appropriate reviews and
approvals by the project management team
 Inspections and audits
 Claims administration
 Records management system
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III. Outputs from Contract Administration
 Correspondence - certain aspects of
buyer/seller communications, such as warnings
of unsatisfactory performance
 Contract changes - the project plan or other
relevant documentation is updated as
appropriate.
 Payment requests - Requesting payment for
well performed works
 Procurement Documentation
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D. Closing Procurements
The project team should do the followings:
 product verification to determine if all work was
completed correctly and satisfactorily
 administrative activities to update records to
reflect final results
 Archive/record information for future use
 The contract itself should include requirements for
formal acceptance and closure
 Contract close-out includes
Procurement audits identify lessons learned in the
procurement process
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Contract Closure
 Project
procurement
Management Plan
 Procurement
Documentation
 Procurement audits
 Negotiated
Settlements
 Records management
system
Inputs Outputs
Tools & Techniques
 Closed
Procurements
 Organizational
Process Assets
Updates
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I.Inputs to Contract Close-out
 Contract documentation- any contract - related
inspections,
 Correspondence, Contract changes, Payment requests
II. Tools and Techniques for Contract
Close-out
 Procurement audits-a structured review of the process,
Implementation, output, and product/services
 Records management system
24
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Contract Closure…

III. Outputs from Contract Close-out
 Contract file - A complete set of indexed
records should be prepared for inclusion with
the final project records
 Formal acceptance and closure - The person or
organization responsible for contract
administration should provide the seller with
formal written notice that the contract has been
completed. Requirements for formal acceptance
and closure are usually defined in the contract.
25
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Contract Closure…

Project Procurement Management Processes

Contract Management - Introduction
World Bank regards contract management as:
 CM - is a systematic and efficient planning,
execution, monitoring, and evaluation of
contracts
 an approach to optimize performance
 an integral part of managing risks
 a method ensure that both parties fulfill their
contractual obligations
 a process to deliver the ultimate goal of achieving
Value for Money (VfM)
 a key driver to achieving results on the ground
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Contract Management – Introduction…
 Successful contract management covers the period from
the beginning of a procurement until after a contract
ends.
 The receipt of goods and services at the right price,
quality, and on time as well as proper compensation of
the contractor is the goal of a successful procurement.
 However, poor contract management often results in
end-user frustration, reluctance to use new vendors,
agency acceptance of poor quality service or goods,
increased costs due to lack of quality or overpayment to
contractors, lack of contractor accountability, and
generally poor contractor performance. 28
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 A contract is a mutually binding agreement that obligates
the seller to provide the specified products or services and
obligates the buyer to pay for them
 A good contract is a means to an end. Simply enforcing the
contract, however, does not necessarily result in a successful
relationship with the contractor. Success should instead be
measured by the effectiveness of the program that the
contract supports.
 A procurement contract includes terms and conditions, and
may incorporate other items that the buyer specifies as to
what the seller is to perform or provide.
 Sellers also called vendors, suppliers, or contractors, are
external companies that enter into a contractual agreement to
provide components or services necessary for the project.
Contract Management – Introduction…

Developing Specifications-Specify the Need
 Design Specifications:
 A good contract describes: (a) The Design Specifications
of goods such as dimensions, physical requirements,
materials, etc; and the Price, times to deliver etc. It
determines exactly what the contractor must provide; (b)
The Performance Specifications of goods that is oriented to
results and function.
 A good contract requires an ability to interpret the Scope
of the Work that can determines the contract’s
performance.
 Specifications or the description of physical or functional
characteristics of tangible goods must provide a detailed
description of the requirements. 30
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Specifications may be stated as one or a combination of the
following:
1) Functional
 Concentrates on what a product is to do and is less interested
in materials and dimensions. Example: dry erase markers for
use on porcelain and dry erase boards, glass, unpainted metal,
and glazed ceramics.
2) Performance
 Describes what is to be achieved rather than providing a fixed
description of how it should be done. To ensure the quality, a
reference to the concerned product standards (e.g. ISO) and
environmental requirements (e.g. Energy Star), should be
made. Example: fine tip dry erase markers; durable tip will not
soften or spread; quick-drying inc; wipes off easily; certified
non-toxic by marker industry (AP) standards.
Specification…

Specification…
3) Technical
 Defines exact design and details of a good (i.e. the physical
attributes, material to be used, power input and output, the
manufacturing process required, or in the case of a service,
the working methods to be used).
 Due to its uniqueness, design specifications may limit
competition because of differences in engineering practices.
 All three specification types can be combined.
 It is better, whenever possible; to use performance and
functional specifications rather than technical specifications
as this allows suppliers to offer alternative and innovative
ideas and solutions to problems, which often results in a more
cost effective use of the resources.

 A risk is an uncertain event or condition that, if it occurs,
can have a positive or negative effect on one or more
objectives. It is a negative deviation from our expectation.
 Project teams endeavor to identify and evaluate known
and emergent risks, both internal and external to the
project, throughout the life cycle.
 Project teams seek to maximize positive risks
(opportunities) and decrease exposure to negative risks
(threats).
 Threats may result in issues such as delay, cost overrun,
technical failure, performance shortfall, or loss of
reputation. Opportunities can lead to benefits such as
reduced time and cost, improved performance, increased
market share, or enhanced reputation.
3.2. Contract Risks

Contract Risks…
What are Contract Risks?
1. Proposal Risk
 How well is the good/service described? Do the terms
and conditions adequately and understandably
described Make sure that ambiguous language is
avoided.
2. Surety/Liability Risk
 Requirements of contractor (licensing, certification,
etc.), bonds, insurance, data privacy, warranties, etc.
3. Schedule Risk
 Is timely delivery ensured?
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What are Contract Risks?...
4. Contractual Risk
Are procedures for dispute, break and change
order/modification procedures clearly outlined?
5. Performance Risk
Is the definition of agency acceptance clearly
defined?
6. Price Risk
Do payment terms fit the contract and minimize
risk? (progress or milestone payments as
applicable, etc.)
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Contract Risks…

3.3. Types of Contracts
 All legal contractual relationships generally fall into
various types of contracts depending up on conditions.
 Lump Sum Contracts
 Lump Sum or Fixed Sum Contracts refer to
contracts where the price is determined at the
onset and remains unchanged during
implementation.
 It is suitable if the scope and schedule of the
project are sufficiently defined to allow the
estimating of project costs to a high degree of
accuracy.
36
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 Cost Plus Contracts
 With Cost Plus Contracts, the Employer agrees to pay
the cost of all labor and materials plus an agreed
amount to the Contractor to cover overheads and profit.
 This type of contract is favored where the scope of the
work is indeterminate or highly uncertain and the kinds
of labor, materials and equipment needed are also
uncertain.
 Usually, the contract types include the following:
1. Fixed price contracts or Lump sum contracts
2. Cost reimbursable contracts
3. Time and material contracts
4. Unit price contracts
Types of Contracts…

1. Fixed-price contracts
 This category of contracts involves setting a fixed total price for
a defined product, service, or result to be provided.
 These contracts should be used when the requirements are well
defined and no significant changes to the scope are expected.
Fixed price or Lump sum
 involve a fixed total price for a well-defined product or service
 Contractor performs the work for negotiated value.
 If estimated target cost is low, profit for seller may be low or
even nil.
 Lowest risk to the buyer, highest risk to the seller
 Usually requires a long period for preparation of bids; also
buyers include many contingency provisions to protect their
interests

Types of fixed-price contract include:
a) Firm fixed price (FFP)
 The most commonly used contract type is the FFP.
 It is favored by most buying organizations because the
price for goods is set at the outset and not subject to
change unless the scope of work changes.
b) Fixed price incentive fee (FPIF)
 This fixed-price arrangement gives the buyer and seller
some flexibility in that it allows for deviation from
performance, with financial incentives tied to achieving
agreed-upon metrics.
 Typically, such financial incentives are related to cost,
schedule, or technical performance of the seller.

Types of fixed-price contract include…
Fixed price incentive fee (FPIF)…
 Under FPIF contracts, a price ceiling is set, and all costs
above the price ceiling are the responsibility of the seller.
 It allows for adjustment of the total profit depends on the
final total cost at the completion of the duties.
 There is an incentive to the seller to decrease costs.
c) Fixed price with economic price adjustments (FPEPA)
 This type is used whenever the seller’s performance period
spans a considerable period of years, or if the payments
are made in a different currency.
 It is a fixed-price contract, but with a special provision
allowing for predefined final adjustments to the contract
price due to changed conditions, such as inflation changes
or cost increases (or decreases) for specific commodities.

2.Cost Reimbursable Contracts
 They involve payment to the seller for direct and
indirect costs. Thus, it require that the seller’s books
be audited.
 This category of contract involves payments (cost
reimbursements) to the seller for all legitimate
actual costs incurred for completed work, plus a fee
representing seller profit.
 This type of contract should be used if the scope of
work is expected to change significantly during the
execution of the contract.
41
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The followings are types of Cost Reimbursable Contracts
a) Cost plus incentive fee (CPIF)
 The seller is reimbursed for all allowable costs for
performing the contract work, and receives an incentive
fee based upon achieving certain performance
objectives as set forth in the contract.
 The Same as cost plus fixed fee, except that these have
provision for adjustment of the fee.
b) Cost plus fixed fee (CPFF)
 The buyer pays the seller for allowable performance
costs plus a fixed fee payment.
 Here, the Cost may vary, but the fee remains the same;
it provides incentive to the contractor for early
completion of the job.

c) Cost plus award fee (CPAF)
 The seller is reimbursed for all legitimate costs, but the
majority of the fee is earned based on the satisfaction of
certain broad subjective performance criteria that are defined
and incorporated into the contract.
 The determination of fee is based solely on the subjective
determination of seller performance by the buyer and is
generally not subject to appeals.
d) Cost plus percentage of costs (CPPC)
 The buyer pays the seller for allowable performance costs
plus a predetermined percentage based on total costs.
 Not preferred, because there is no effort by the seller to
control costs. It Is illegal in several companies and countries.

3. Time and material contracts
 Hybrid of both fixed price and cost reimbursable,
often used by consultants and used to staff
augmentation, acquisition of experts, and any outside
support when a precise statement of work cannot be
quickly prescribed.
 They also called time and means and are a hybrid type
of contractual arrangement with aspects of both cost-
reimbursable and fixed-price contracts.
 They are often used for staff augmentation,
acquisition of experts, and any outside support when a
precise statement of work cannot be quickly
prescribed.

Time-based Contracts
 Under time-based contracts, the payment is made on
the basis of agreed rates and time spent, plus
reasonable incurred reimbursable expenses.
 These types of contractual arrangements may be used
for: (a) Emergency Situations, and repairs and
maintenance Works; and (b) Consulting Services, when
it is difficult to define or fix the scope and duration of
the services (e.g., complex studies, supervision of
construction, advisory services).
 This type of contract is not appropriate for Goods or
Plant.

4. Unit price contracts
 Require the buyer to pay the seller a predetermined amount
per unit of service
 Contract based on Unit Prices is based on estimated
quantities of items and contractual unit prices for each of
these items, and is paid on the actual quantities and
contractual unit prices.
 This type of contract is appropriate for Works, when the
nature of the work is well defined, but the quantities
cannot be determined with reasonable accuracy in advance
of construction, as in roads or dams.
 For Goods and Non-consulting Services, this type of contract
is appropriate when the required quantities are known and
unit prices are sought from Bidders.

Fixed price Contracts Versus Risk
47
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3.4. Procurement Strategy
 Procurement strategy (PS) - refers to the process used to
take a project from its early planning phases to completion
and occupation by the users. It is the approach by the
buyer to determine the project delivery method and the
type of legally binding agreement(s) that should be used to
deliver the desired results. It is a policy document.
 The PS describes how the project procurement activities
support the development objectives of the project
 The scope and details of the PS take into account, and are
proportional to, the relevant market, scale, risk, value, and
country circumstances
 The Procurement Plan is based on the PS and sets out the
selection methods to be followed by the Beneficiary.
48
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What is the PS?...
 Procurement strategy is a structured analytical
approach designed to support procurement planning
 Procurement Strategy is the approach by the buyer
to determine the project delivery method and the
type of legally binding agreement(s) that should be
used to deliver the desired results.
 A framework to research and analyze information and
data to make decisions on what constitutes a fit for
purpose procurement approach.
 The right choices in the Procurement Strategy and
Plan will lead to Value for Money and Fitness for
Purpose.
49
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Outcome Analysis in PS
The outcome of the analysis in the PS is:
a. Requirements(Specifications);
b. Contract Strategy;
c. Selection Methods; and
d. Evaluation Methods.
50
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A. Operating Environment
B. Beneficiary capacity and track record
C. Market
Assessments
A. Type of requirements
B. Market Approach
C. Selection Method
D.Contract Type
E. Evaluation Criteria
F. Contract Management Plan
Procurement Approach
Contents of the PS
51
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A.Beneficiary capability
 What are the Beneficiary’s capabilities for
procurement and contract management and how can
they strengthened
 From Previous experience/track record in
implementing similar projects / procurement
B. Operating environment
 What is the operating environment –Governance,
Economic, Sustainability, Technological, etc.
C. Market assessment
 What is the nature of the market and how will the
best suppliers be motivated to bid
 How do other buyers achieve value for money
52
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Assessments

A.Types of Requirements
 Conformance requirements
 Performance requirements
B. Market Approach
 Local or international
 Open, restricted or direct sourcing
C. Contract Type
 Fixed price or lump sum
 Cost reimbursable
 Time and material contracts
 Unit price contracts
D. Contract Management
 Contract management plan
 Risk management, monitoring of costs, key
performance indicators
 milestone/objectives and deliverables
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Procurement Approach

The Procurement Strategy covers the
following areas
 Identification of the specific project needs
 Assessment of the operating context and its potential
impact on the procurement
 Assessment of the implementing capacity, resources and
previous experience in procuring these types of activities
 Assessment of the adequacy, behavior and capabilities of
the market to respond to the procurement
 Justification of the proposed procurement arrangements
based on market analysis, risk and operating context and
the project’s circumstances
54
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