Procurement Management Overview

Procurement management covers obtaining goods or services from outside an organization. It includes planning purchases, evaluating suppliers, managing agreements, and checking delivery.

What is Procurement Management?

Procurement Management is used to obtain goods, services or scope from outside the organization. For project managers, procurement can be tricky because many project managers do not have training in procurement or may work in a company where procurement is completely handled by a designated department. Before we go any deeper in procurement, it is critical to distinguish the procurement roles of buyer and seller. Buyer is purchasing the goods or services. Seller is providing or delivering the goods or services to the buyer.

In a project, you figure out what kinds of contracts make sense for your project, and you try to define all the parts of the project that will be contracted out. A contract is created when parties enter into a formal and legally binding agreement. There are different types of contract, but we will review a few of them.

A fixed-price contract establishes a price for defined work. Depending on the contract, it may include incentives or agreed price adjustments. The seller generally bears the risk of its costs exceeding the agreed price, while both parties still have responsibilities under the agreement. Changes to scope or other contract terms can affect what is payable.

Our next type of contract is Cost Reimbursable Contracts where the buyer agrees to pay the seller for actual costs plus fees. That fee is the seller’s profit. Cost-reimbursable contracts are commonly used when the scope of work or the costs for performing the work are not entirely defined. The project uses a cost-reimbursable contract to pay the seller for allowable expenses related to the work. With this type of contract, the seller has much less risk associated with cost increases. The cost-reimbursable contract reduces the amount of money the seller puts aside for potential cost increases. However, the seller is not highly motivated to search for cost savings measures unless there is an incentive to do so.

Common cost-reimbursement structures include cost-plus-fixed-fee, cost-plus-incentive-fee, and cost-plus-award-fee arrangements. A fixed fee is agreed separately from reimbursement of allowable costs. Incentive fees use defined performance criteria, while award fees may involve an evaluation of performance. The agreement determines which costs are allowable and how fees are calculated.

In a time and materials contract, usually for smaller activities where the uncertainty runs high, the seller might charge an hourly rate for labor, plus the cost of materials, plus a percentage of the total costs. This type of contract is called time and materials (T&M). Work is usually performed on an hourly basis.

Now it is time to review the Procurement Plan. Once it has been determined which components or services will be made, performed internally or outsourced, a Procurement Plan should be put into place. Depending on the complexity of the project, the plan may take a few hours or weeks to complete. The plan should include details such as vendor relationships, awarding and signing contracts, evaluation of partnerships, Request for Proposals, managing changes
in the contract etc. If your organization does have a procurement department, more than likely you will work hand in hand with them to create this plan. They may even have templates that can be used. It is key that the requirements are captured to define the parties' obligations and reduce misunderstandings or later changes that may affect cost.

There are many considerations that are considered when selecting a seller. You may go for the least cost. This can be used when quality is not in question. For example, if there is a governing body that has set standards the product must comply with, you should still verify that the proposed product meets project requirements and evaluate quality risks. The organization may select based on qualifications. Normally they are looking for a specific criterion and will compile a short list of sellers that match their criterion. An organization will select a seller based on quality, the seller with the highest quality ranking will be selected. In some instances, you do not have a selection, there is only one vendor. Even with a single supplier, the team still needs to assess terms, cost, performance, and risks. Another option is a fixed budget, where the buyer discloses the budget to the seller and the parties then proceed to negotiate. There are various ways to conduct procurement. Typically, a prospective seller will provide a proposal to perform the work. There may be times, where you feel you are not getting the response you expect. A way to widen the pool, it can be advertised in trade publications, online sources, etc. It is essential that throughout the project, it is reviewed that goods and services are being delivered, are invoices being reviewed and paid in a timely manner, are the terms and conditions of the contract being met. There are times where disagreements occur and must be dealt with, this is known as claims administration. How a claim should be handled should already be defined in the procurement plan.