Procurement

Question 1

what is the definition of procurement

Answer 1

Procurement is the process by which products and services are acquired from an external provider for incorporation into the project, programme or portfolio.

Question 2

what is the definition of an external provider

Answer 2

An external provider represents anyone outside the project, such as suppliers or contractors, or it may also be another department or division within the host organisation.

Question 3

what 3 things does procurement typically cover the acquisition of

Answer 3

1. standard ‘off the shelf’ goods and services
2. goods or services that are designed and provided specifically for the purchaser
3. professional advice or consultancy.

Question 4

what aspects of procurement are included in the resource management plan

Answer 4

the resource management plan describes how the goods and services are to be acquired and includes the development of a procurement strategy.

Question 5

what is addressed within a procurement strategy

Answer 5

A procurement strategy addresses the needs of the project whilst respecting any organisational constraints and/or strategic objectives that may be relevant.

The strategy reflects a structured approach to securing the necessary resources for carrying out the work of the project.

Question 6

what 6 factors of procurement are included in the resource management plan

Answer 6

1. ‘make’ or ‘buy’ decision
2. use of single, integrated or multiple providers
3. required provider relationships
4. provider selection
5. conditions and forms of contract
6. types of pricing and methods of reimbursement.

Question 7

what 7 factors need to be considered when deciding whether to outsource

Answer 7

1. cost
2. availability of skilled resource
3. capacity
4. control (including quality and schedule)
5. control of intellectual property
6. reliability of supply
7. core competence (strategic objectives).

Question 8

Once a decision has been made to outsource, what does the strategy needs to consider

Answer 8

the strategy needs to consider:

• what form of contractual relationship is most appropriate
• how the supplier will be reimbursed (payment terms). - the organisation’s procurement policy and quality assurance arrangements will also have a bearing on the agreed procurement strategy. These arrangements may include the requirement to adopt ethical procurement procedures.

Question 9

what 2 objectives are included in the (OJEU – Official Journal of the European Union)

Answer 9

1. a more transparent and objective procurement process whilst encouraging competition amongst bidders
2. Public Procurement Directives that are intended to ensure fair and non-discriminatory international competition for contracts greater than defined threshold values (different contract thresholds are defined for products and services)

Question 10

what 6 factors need to be considered when selecting a reimbursement method

Answer 10

1. the ability and/or requirement to start work as soon as possible
2. how well defined do requirements need to be before a contract is agreed
3. who owns the risk(s)
4. what level of supplier management is required (effort/knowledge)
5. how easy is it to manage/implement scope changes
6. how might quality be impacted by specific payment terms

Question 11

what are the 3 main types of supplier reimbursement

Answer 11

• fixed price
• cost plus
• per unit

Question 12

what are the 3 different types of fixed price supplier reimbursement

Answer 12

Firm Fixed Price (FFP) - Price set at project start and not subject to change unless scope changes. Very common.

Fixed Price + Economic Price Adjustment
(FP-EPA) - Price set but may be adjusted if economic conditions change (e.g. inflation)

Fixed Price + Incentive Fee (FPIF) Fee - may be adjusted if supplier meets agreed performance metrics.

Question 13

what are the 3 different types of cost plus supplier reimbursement

Answer 13

Cost Plus Award Fee
(CPAF) - Supplier is reimbursed for all allowable costs but the majority if the fee is only earned based on the satisfaction of certain broad subjective performance criteria.

Cost Plus Fixed Fee (CPFF) - Supplier is reimbursed for all allowable costs plus an agreed fixed fee payment.

Cost Plus Incentive Fee
(CPIF) - Supplier is reimbursed for all allowable costs plus a predetermined incentive fee for achieving certain targets (typically financial). For example, cost savings may be shared between the supplier and the customer.

Question 14

what are the 2 different types of unit supplier reimbursement

Answer 14

Time and Materials (T&M) -Supplier is reimbursed for provision of services (e.g. daily labour rate)

Unit Rate - Supplier is reimbursed for provision of agreed deliverables (e.g. desktop PC installation)

Question 15

what is the target cost supplier reimbursement method

Answer 15

Target cost (A form of CPIF) - Target Price Contracts are based on a cost reimbursable mechanism in which the contractor is reimbursed his costs (on an actual cost basis) subject to the application at the end of the project of a formula which allows the contractor to share any savings made and to contribute towards overspend.

The target cost will be made up of three elements, of which two are “visible”. These are, first, the base cost which will largely be made up of subcontractor costs as well as necessary items such as plant hire and utility bills.

Secondly, the target cost will also include the contractor’s overheads, profits and other head office elements which are referred to as his “Fee”.

The Fee may be a percentage of the actual cost or target cost or, in some cases, a fixed sum. The third element will be the contractor’s price for his risk, but this will be subsumed in the Fee

Question 16

what are the advantages of Fixed Price supplier reimbursement

Total price for a well-defined product or service

Answer 16

• Financial commitment is known up-front
• Requires minimum administration from a buyer’s perspective
• Cost risk and project control is the responsibility with the supplier

Question 17

what are the disadvantages of Fixed Price supplier reimbursement

Total price for a well-defined product or service

Answer 17

• Contract profit is not visible to customer
• Must specify exact requirements before project starts
• Requires detailed scope definition
• Bid process can take time
  Where cost is fixed, quality may suffer

Question 18

what are the advantages of Cost Reimbursable supplier reimbursement

Supplier is reimbursed for the costs they incur in performing the work plus a lump sum or percentage fee

Answer 18

• Can appoint supplier earlier than on Fixed Price contracts
• Supplier profit is visible (not necessarily true on Time and Materials)
• Easier for customer to influence project direction
• Easier to manage if time or quality is main objective
• Most flexibility to customer (e.g. inclusion of scope variation)

Question 19

what are the disadvantages of Cost Reimbursable supplier reimbursement

Supplier is reimbursed for the costs they incur in performing the work plus a lump sum or percentage fee

Answer 19

• No incentive for supplier to minimise costs
• Significant administration of contract required
• Less mature approach to project management may exist on supplier side

Question 20

what are the advantages of incentive terms supplier reimbursement

Pre-defined incentive fee is paid depending on achievement of key objectives (e.g. time / cost targets)
(Pain-Share / Gain Share)
Term commonly used when describing incentive payment terms but can take various forms, including a partnership agreement between customer and supplier

Answer 20

• Can work well whatever the relative priority of quality, cost and time objectives
• Both parties share risks and benefits
• Contract profit is visible to both parties
• All parties work towards success

Question 21

what are the disadvantages of incentive terms supplier reimbursement

Pre-defined incentive fee is paid depending on achievement of key objectives (e.g. time / cost targets)
(Pain-Share / Gain Share)
Term commonly used when describing incentive payment terms but can take various forms, including a partnership agreement between customer and supplier

Answer 21

• Incentives do not always drive the appropriate behaviours (e.g. time-based incentives)
• Needs a big investment initially to build a stable and trusting relationship
• Not suitable unless a long term relationship is envisaged - based on realisation of mutual benefits
• Relies on clear roles and responsibilities between both organisations to manage issues like cost control

Question 22

In addition to the payment terms described above, what 3 stipulations may contracts be subject to other than supplier performance.

Answer 22

1. Retention: Retention money provides the customer with a limited fund to pay for the correction of identified defects in the project deliverables.
2. Liquidated Damages: This is a stipulation in a contract of a monetary amount that must be paid by the contractor if the contractor fails to deliver supplies or perform services as specified in the contract or any subsequent modification. Payments are in lieu of a demonstrably genuine pre-estimate of the damages related to the failure.
3. Variations: Where external change has an impact on the project objectives, variations might be agreed to account for time, budget and performance considerations. If not managed correctly, variations can be a major threat to project success and/or the customer-supplier relationship.