This area deals with processes to handle procurement of goods and services that our organization can’t deliver. The overall philosophy of procurement management is that it’s formal. This means that we are not just dealing with handshakes and a few emails back and forth; we are dealing with formal and legal contracts with our subcontractors and vendors.
There are six processes in procurement management.
Here we take a look at the project and determine which components and services of the project that we can handle internally and which ones we need to outsource. Ths is alsocalled a Make-or-Buy Analysis. Hereafter, the project manager needs to determine what kind of contracts we need to put in place.
There are several contract types that could come into play:
|Type of Contrast||Who has the risk||Explanation|
The price is fixed.
Any cost overrun can't be passed on to the buyer, thus the seller has all the risk.
|Cost plus Fixed Price||Buyer||
Seller passes all cost onto puyer and gets an additional fixed fee upon completion.
Buyer must pay all cost overruns.
|Cost plus Incentive||Both||
Seller passes all cost and gets an incentive fee for meeting some target.
Buyer bears the most risk, but the incentive fee should motivate the seller to keep the cost down.
|Time and Material||Buyer||
The buyer pays for all time and the cost of materials.
Since the buyer pays for all time and material, they obviously take all the risk for overruns.
In this process we create detailed documents such as Requests for Proposals or RFPs. The RFP explains what is expected of the seller in terms of what should be done, when it should be done by, cost, time, and quality etc.
This is the process where we distribute the RFPs and other procurement documents to potential sellers and have them respond to the RFP. We usually provide a deadline for all responses.
Sometimes we can also set up a bidder conference to allow sellers to ask questions. This is most often used when the requested services or goods are complex in nature, and instead of answering the same questions several times in separate communications, we can handle it all in one conference session.
We can also elect to advertise the bid to the public on websites or in newspapers. In some cases this could be a requirement by law, so make sure to check if this applies in each case.
Now it is time to select the sellers from the received responses. The selection can be based on price, quality, delivery time, etc. As the project manager, it is up to you to determine which sellers are best for the project and select them accordingly.
Here we review the contract and determine if the results match the contract. Were the goods and services delivered? Were they delivered on time? Were we invoiced the agreed amounts? Other contractual obligations can also be considered here.
Here we are handling completing the contracts and terminating them officially. Hopefully the seller delivered according to the contract and we paid according to the contract, but contracts can unfortunately also get closed for non-delivery, non-payment etc.
One thing is for sure. Contracts must be closed one way or the other. In order to eliminate risks to both parties, closing the contract makes certain nothing else is going to be delivered or paid under the contract.