Understand Project Procurement - Explain the Purpose, Typical Content and Importance of a Procurement Strategy

Question 1

What is Procurement?

Answer 1

• Process by which products and services are acquired from an external provider for incorporation into the project, programme or portfolio
• The way procurement is to be managed is set out in the resource management plan. This describes how the food and services are to be acquired and includes the development of a procurement strategy

Question 2

Procurement Strategy

Answer 2

• Part of the PMP is the Procurement Strategy
• It sets out how to acquire and manage the goods and services needed by the project
• It considers the following factors:

o Make or buy decision

o One integrated supplier vs. multiple discrete suppliers

o Supplier selection and sources

o Conditions and form of contract

o Intellectual Property Rights

o Methods of reimbursement

Question 3

Contracts and Terms

Answer 3

• Different contractual arrangements can be made:

o One comprehensive contract
o A sequence of contracts
o Parallel contracts
o Sub-contracts

• Conditions must be agreed including:

o Dispute resolution
o Termination
o Confidentiality
o Intellectual property rights
o Contract payment methods

Question 4

Differentiate between different methods of supplier reimbursement - Cost Plus Percentage of Cost (Cost Reimbursable)

Answer 4

• Seller is reimbursed for all costs, both direct and indirect
• Agreed-upon percentage of the cost as profit
• Seller is obligated only to make best effort to fulfil the contract within the estimated amount
• If the seller fails to do this the buyer funds all overruns
• The agreed upon %age infers an “open book” approach

Question 5

Cost Plus Percentage of Cost (Time & Materials)

Answer 5

• When “open book” does not apply it is usually referred to as Time & Materials
• In Cost Plus, work is usually carried out by the Contractor
• In T&M, the Contractor usually just supplies labour and the Client supervises the work
• Thus T&M can be less risky for the client because of the closer control

Question 6

Cost Plus Fee

Answer 6

• Reimbursed as before bust instead of adding a %age mark up, there is a fixed fee that is paid in instalments as the contract progresses
• Although there is a ceiling on the seller’s profit, there is no great motivation to control costs, so most risk remains with the buyer
• This can also be an unsatisfactory contract for the seller as an overrun will reduce the margin %age even though the £margin is fixed

Question 7

Cost Plus Incentive Fee/Target Cost

Answer 7

• Contract costs are reimbursed as before but rather than adding a %age mark-up there is an incentive fee that is linked to a target
• If the project comes in on target, the incentive fee is paid
• As a variation the incentive fee may vary depending on over or underachievement of the target according to an agreed formula
• There is now a motivation on the seller to control costs, so that risk to the buyer is reduced/shared

Question 8

Firm Price

Answer 8

• With a firm contract the seller furnishes goods or services at a price regardless as to how much it costs to provide them. Thus the seller bears all the risk
• For such contracts the seller will normally build in cost contingencies and include a risk premium
• If risks are well controlled there is a greater profit potential than for cost reimbursable projects
• This approach is best suited for situations where the specifications are well defined and costs are predictable
• For less predictable situations a wise seller will increase his risk premium

Question 9

Fixed Price

Answer 9

• With a fixed price contract, the seller furnishes goods or services at a price that is fixed to a variable such as exchange rates, commodity rates, inflation etc.
• Thus the buyer bears these risks

Question 10

Unit Pricing

Answer 10

• Each unit is charged at a rate, normally fixed or firm pricing
• Examples would be materials and licences