3.3 Procurement

Question 1

Define procurement

Answer 1

Process of obtaining goods and services to deliver the project

Includes:
- development of strategy
- preparation of contracts
- selection and acquisition of suppliers
- management of contract

Question 2

What is a procurement strategy

Answer 2

• describes how the project will go about procuring and managing services and goods
• formulated alongside business case
• component of the pmp
• forms a communication tool between project manager and stakeholders
• prevent unauthorised decisions being made
• articulate legislation that needs to be followed
• identify areas of delegated authority
• ensure budgets are not exceeded

Question 3

What is the make or buy decision

Answer 3

First decision to be made in procurement process: should goods be made in house or could we procure them elsewhere at a lower cost/better quality

consider:
1) functional and technical specification impacts
2) costs and time needed
3) specialist or technical support
4) define required quality aspirations
5) engagement with stakeholders

Question 4

Describe the 4 types of contractual relationships

Answer 4

1) Single contract: client places contract with single supplier to deliver all goodes/service directly
+ clear accountability and communication: simple structure
+ lower management for client
- supplier has significant responsibility
- failures = major impact

2) Prime (principal) contract: client contracts with main contractor who then manages and subcontracts portions of the work to others
+ simplifies client management
+ prime contractor responsible for management
- client has less visibility
- increases costs for management overhead

3) Parallel contract: client holds multiple direct contracts with several suppliers to deliver different workstreams simultaneously
+ faster delivery
+ direct control over cost and performance
- high coordination effort
- interface issues between suppliers

4) Sequential contacts: client places contracts in sequence, with each supplier completing their part before the next begins
+ client review and control progress at each stage
+ reduces early commitment
- slower delivery
- loss of continuity and efficiency between suppliers

Question 5

Describe advantages and disadvantages of:
1) single supplier
2) integrated supplier
3) multiple suppliers

Answer 5

1) Single supplier
+ preferred supplier with strong existing relationship; preferential rates/volume pricing
+ less time and cost attached to procurement
- risk of overreliance: shortages; disruption

2) Integrated supplier into project team
+ optimum service delivery: immediacy of contact; communication; transparency; understanding
- feeding back issues; maintaining confidentiality

3) Multiple suppliers
+ price competition
+ reduced risk of supply shortage/disruption
- increased cost in contract negotiations and management resource

Question 6

Describe the supplier selection process

Answer 6

1) go out to competitive tender
2) suppliers submit price for work
3) evaluate against cost/quality
4) award based on preference

• objective is to achieve best value for the price and ensure process and selection is transparent and fair

Question 7

Describe the tender process

Answer 7

1) Research the market
- identify potential suppliers
- define work packages

2) Prequalify suppliers
- reduce list against key factors e.g. capability, financial stability, technical expertise, experience

3) Issue ITT
- request detailed bid
- contain requirement; how and when response should be
- provide evaluation criteria

4) Respond to queries
- answer questions from bidders

5) Receive and evaluate bids
- evaluate against supplier selection matrix and ranking system
- leverage independent/legal support

6) Award contract to successful bidder
- negotiate to finalise deal
- both parties understand arrangements and liabilities
- agree terms and conditions
- contract signed and work starts

7) Enter contract and administration
- actively manage project
- programmes/schedules/reports

Question 8

Describe the negotiation process

Answer 8

1) Understand need for negotiation
2) Prepare: what does each party want; what are we prepared to offer; what are limits
3) Discussion/debate: what can we offer/get in return; bartering
4) Confirm views and document
5) Check actions against agreement

Question 9

Describe negotiation techniques

Answer 9

ZOPA: Zone of Potential Agreement
- overlap between 2 parties acceptable outcomes where a mutually beneficial agreement can be reach
+ bargaining range between minimum and maximum acceptable positions
- no overlap = no agreement
+ helps focus on common ground
+ encourage efficient win-win outcomes
+ avoids wasted time

BATNA: Best Alternative to Negotiated Agreement
+ best option if negotiations fail to reach agreement
+ represents fallback position
+ strengthens negotiation position: clarity over limits/alternatives
+ stronger BATNA = more power in negotiation

Question 10

Describe conditions and forms of contract

Answer 10

Conditions of contract:
- Legally binding agreement by 2 or more parties setting our obligations: there must be an offer, acceptance and consideration
- define payment, risk, performance, dispute resolution, change control

Forms of contract are standardised templates/models that can be applied to project/industry
- simplifies procurement, provides fairness and ensures consistency
e.g. Joint Contracts Tribunal (building); New Engineering Contract (civils)

Question 11

Describe supplier reimbursement terms

Answer 11

1) Fixed price: supplier delivers work for pre-agreed price
+ predictable costs; supplier efficiency
- less flexibility for change; risk premium in price
¬ low risk to customer; high risk to supplier

2) Contract target cost/price: agree target price and share savings or overruns
+ aligns incentives; promotes collaboration
- requires trust and transparency

3) Cost plus fee: supplier reimbursed for costs incurred plus fee for overhead and profit
+ flexibility in requirements
- uncertain final cost; strong monitoring required

4) Per unit quantity: supplier is paid fixed rate per unit of output/quality delivered
+ simple and flexible; client only pays for delivered
- project cost uncertain until completion; overproduction/scope inflation
¬ high risk to customer; low risk to supplier