Lecture 11 Procurement

Project
Management
Lecture 11‐ Procurement and
Contracts
Andre Samuel
Previous Lecture
• Project Organization
• Team roles
• Communication
In this Lecture
• Procurement Process
• Selection and Evaluation Methods
• Contracts
In this Lecture
• Procurement Phases
• What is a contract?
• Types of Contracts
Procurement
• Procurement planning is determining what
project deliverables to buy in and when
• Contracts are required when goods/services
are bought in
• The organization supplying these goods are
called ‘contractors’ and ‘suppliers’
• The organization paying for them is called the
‘sponsor’, ‘owner’, ‘client’ or ‘customer’
The 5 R’s
• The Rights:
1. Place
2. Price
3. Quality
4. Quantity
5. Time
The Procurement Cycle
CTB (2008)
Simple Steps of Procurement
• Requirements Planning
• Solicitation
• Awarding
• Contract Administration
Requirements Planning Phase
• Involves the definition of the content and
boundary of the procurement
• Clearly detailed in the Project Charter or
Project Definition Report
• Development of:
– Statement of Work (SOW)
– Specifications
• Design, Performance and Functional
– Work Breakdown Structures
Solicitation Phase
• The process of identifying a supplier
• The process depends on the value of the
purchase and the nature of the requirement.
– when the sponsor knows what it wants done and
how, it is simply a case of looking for the best
price.
– When the sponsor knows what it wants but not
how to go about doing it. It will seek proposals on
methods, performance and price. Then it can
negotiate.
Types of Bid Solicitations
• Request for Quotation (RFQ):
– The sponsor send a one page documents that
provide a description of the required goods and
list the terms and conditions
– The supplier responds with a quotation document
indicating price and delivery information
– RFQ’s are often take place by fax or telephone
– Considered a more informal method of tendering
– Survey market without legal obligations to get the
best price
• Request for Proposal (RFP):
– RFP describes in detail the project to be
completed, the intended results and criteria for
choosing the successful bid
– It allows for numerous methods by which the a
project result can be achieved
– An RFP is a negotiated contract‐ there will be
discussions and the bidder may get the
opportunity to change the bid price, technical
requirements and so on
– Price is not the primary factor in evaluation
• Invitation to tender: (ITT)
– More formal method
– Used for higher value purchases
– Tenders describe in significant detail through
specification what is expected to be supplied
– ITT is sent out to any interested party who may
then submit a formal tender bid
– Tenders are opened publicly
The Bid Package
• Usually contains:
– Invitation to Tender
– General Information to Bidders
– Terms of Reference or Specifications
– Forms for Bill of Quantities where needed
– Terms and Conditions of the Contract
The Procurement Method
• Public Tendering
• Selective Tendering
• Sole Tendering
• Three Quote System
Single Stage vs Two Stage
• Single Stage‐ one shot, all information is
available, realistic price is estimated, ITT
issued, evaluated, contract negotiated and
awarded
• Two Stage‐ 2 steps:
1. Early appointment of supplier prior to final
design specification. Allows work to start early,
limited contract.
2. When specifications are finalized, fixed priced
agreed/negotiated, Full contract issued.
Evaluation of proposals
• Evaluation Criteria are used to rate or score
bids
• Evaluation criteria may be limited to purchase
price or include other selection criteria:
– Discuss in groups what are the other selection
criteria that can be used?
Source Selection Criteria PMI (2013)
Example Evaluation Criteria and Weighting
• Essentially a bid comparison is needed
• The information received from bidders is
tabulated on a summary form which allows
direct comparison of :
– Quoted price
– Promised delivery times
– Discounts etc
• Technical evaluation must be done in
collaboration with the client’s own engineers
or experts, project manager or IT manager
Evaluation Methods
– Screening of tenders
– Bid Comparison‐ Weighted Evaluation Matrix
– Demonstrations
Example of Weighted Evaluation Matrix‐ ITIl (2012)
https://blog.itil.org/2012/07/six‐steps‐for‐a‐successful‐vendor‐selection/
Award Phase
• It’s about final contractor selection
• Results in a signed contract
• The objective is to negotiate a contract type,
payment method and price that will result in
reasonable contractor risk and provide the
contractor with the greatest incentive for
performance
Contract Administration Phase
• Contract Change Control‐ defines the process by which
the contract may be modified.
• Performance Reporting‐ provides information about how
effectively the seller/contractor is achieving the
contractual objectives
• Produces correspondence on contract terms and
conditions
• Negotiation of contract changes
• Payment requests
• Warranties
• Waivers
• Contract breaches, delays, dispute resolution, arbitration
• Force majeure
Contracts Terminology
• Target cost or estimated cost‐ the level of cost
the contractor will most likely attain
• Target or Expected Profit‐ is the profit value
negotiated for in the contract
• Profit Ceiling‐ maximum and minimum values
respective of profit
• Price Ceiling‐ Maximum price
• Maximum and Minimum Fee‐ are percentages of
the target cost
• Sharing Arrangement‐ cost responsibility to
client and contractor (85/15)
• Point of total assumption‐ is the cost or price
where the contractor assumes all liability for
additional costs
Distinction Between Price and Cost
• Price refers to the total amount paid, including
profit
• Cost on the other hand refers to the expenses
of the contractor which when added to a
profit(also called fee), comprise the total price
Types of Contract
Fixed Price Cost Reimbursement
• Firm Fixed Price • Cost Plus Fixed fee (as a
• Fixed price with economic Percentage)
price adjustment • Cost Plus Incentive fee
• Fixed Price Incentive Fee (predetermined)
• Cost Plus Award Fee (based
on the satisfaction)
Time and Material Contracts (T&M).

• Time and material contracts are a hybrid type of contractual arrangement
that contain aspects of both cost-reimbursable and fixed-price contracts.
Fixed‐Price or Lump‐Sum Contracts
• The contractor must carefully estimate the
target cost
• The contractor is required to perform the
work at the negotiated contract value
• The contractor is expected to earn a profit,
but it is not guaranteed
• Even If a loss is incurred, the contractor is
required to perform the contract
• Thus, contractor assumes a large risk, but
customer is constrained from asserting control
• Any change in requirements may result in
equitable adjustments to the price
Cost Plus Fixed Fee (CPFF)
• Employed when accurate pricing cannot be
achieved
• Two elements:
– An estimated cost
– A fixed fee
• The contractor is reimbursed its costs of
performance and paid a fee in addition to the
reimbursed cost
• The cost may vary but the fee remains the same
• It requires the contractor books to be audited
• CPFF contracts are used where the risks of
performance is high and customer requires high
level of control
Cost Plus Percentage Fee
• The contractor’s fee is expressed as a
percentage of the total costs expended
• The fee grows with expenditure
• It does not provide financial assurance of
ultimate cost
Cost Plus Incentive Fee (CPIF)
• Same as the cost plus contracts except that
there is a provision for adjustment of the fee
as determined by a formula that compares the
total cost to the target cost.
• The fee paid depends on how well the
contract satisfies certain performance
objectives
• The fee can include a fixed fee component,
with the incentive portion being an additional
amount
• There is usually a limit on the maximum fee
that can be earned
Example CPIF Contract
• Target Cost‐ 10,000.00 • TOTAL COST=
• Target Fee (profit)‐ Actual cost + Total Fee
750.00 =Actual Cost + Target profit +
• Maximum fee‐ 1350.00 incentive Fee
• Minimum fee‐ 300.00 • = 9000 + 750 + (1000 *0.15)
• Sharing Formula‐ 85/15 • =9000 + 750 + 150
• Actual cost‐ 9,000.00 • = 9,900.00
Time and Materials and Labour Hours
• The contractor is paid for hours of service
without regard to whether the desired task is
accomplished
• Specific hourly rate is used for payment
• The time and material form also includes
reimbursement for cost of materials plus a %
fee for profit
• This type of contract is more expensive to the
customer and having the least risk on the
contractor

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