PROCUREMENT & CONTRACT MANAGEMENT Introduction

1. PROCUREMENT & CONTRACT MANAGEMENTIntroduction Procurement means acquiring goods and/or services from an outside source. Procurement is the term generally used by government, while business uses the term purchasing and outsourcing is commonly used by the information technology industry. It is estimated that in the year 2003 the worldwide information technology outsourcing market has grown to over US$110 billion.

2. PROCUREMENT & CONTRACT MANAGEMENTWhy Outsource? Outsourcing is a growing practice within the IT industry, and it is important to appreciate the reasons it is adopted: • To reduce both fixed and recurrent costs. • To allow the client organization to focus on its core business. • To access skills and technologies. • To provide flexibility. • To increase accountability.

3. PROCUREMENT & CONTRACT MANAGEMENTProcurement Management Processes Project procurement management includes the following processes for acquiring goods and services from outside the project organisation: • Procurement planning: determining what to procure and when. • Solicitation planning: documenting product requirements and identifying potential sources. • Solicitation: obtaining quotations, bids, offers, or proposals as appropriate. • Source selection: choosing from among potential vendors. • Contract administration: managing the relationship with the vendor. • Contract close-out: completion and settlement of the contract.

4. PROCUREMENT & CONTRACT MANAGEMENTProcurement Management Processes & Key Outputs The figure below summarises the major processes involved in procurement management, and identifies important milestones associated with each stage. For example, after procurement planning the key milestone is the “make or buy decision”. This will determine if further procurement management processes are required.

5. PROCUREMENT & CONTRACT MANAGEMENTProcurement Planning Procurement planning involves identifying which project needs can be best met by using products or services outside the organization. It includes deciding: • Whether to procure. • How to procure. • What to procure. • How much to procure. • When to procure. It is essential to be thorough and creative when planning procurement. Even though a company may be viewed as a competitor, it will often be advantageous to collaborate on some projects.

6. PROCUREMENT & CONTRACT MANAGEMENTInputs to Procurement Planning The inputs needed for procurement planning include: • The project scope statement. • Product description. • Market conditions. • Constraints and assumptions. It is important to define the scope of the project, the products, market conditions, and constraints and assumptions. However, it is also essential to know exactly why you want to procure goods or services.

7. PROCUREMENT & CONTRACT MANAGEMENTTools and Techniques Procurement management will often incorporate the following: • Make-or-buy analysis: determining whether a particular product or service should be made or performed inside the organization or purchased from someone else. Often involves financial analysis. • Experts, both internal and external, are valuable assets in procurement decisions. • Internal experts are particularly useful in providing knowledge of organisational and personnel issues. • External experts can provide expert judgement, especially with regard to vendors and technology issues.

8. PROCUREMENT & CONTRACT MANAGEMENTTypes of Contracts A contract is a mutually and legally binding agreement that obligates the seller to provide specified products or services, and obligates the buyer to pay for them. Different types of contracts are suited to particular circumstances, there are three broad categories: • Fixed price or lump sum: involve a fixed total price for a well-defined product or service. • Cost reimbursable: involve payment to the seller for direct and indirect costs. • Unit price contracts: require the buyer to pay the seller a predetermined amount per unit of service.

9. PROCUREMENT & CONTRACT MANAGEMENTFixed Price Contracts Fixed price or lump sum contracts involve a fixed total price for a well-defined product or service. These contracts are particularly suited where supplies or services can be clearly specified before tenders are invited. The buyer incurs little risk in this situation. Fixed price contracts may also include incentives for meeting or exceeding project objectives. They may also include safeguards in the form of penalty clauses, however these may be difficult to apply before the consequences of delay are felt. An important consideration is that any changes to resource requirements due to project revision (change) is likely to lead to additional claims by, and extra payment to the contractor.

10. PROCUREMENT & CONTRACT MANAGEMENTCost Reimbursable Contracts Cost reimbursable or cost-plus contracts involve payment to the seller for direct and indirect actual costs. These contracts are often used for projects that include the provision of goods and services associated with new technologies. The buyer absorbs more risk with the type of contract, which has three forms: • Cost plus incentive fee (CPIF): the buyer pays the seller for allowable performance costs plus a predetermined fee and an incentive bonus. • Cost plus fixed fee (CPFF): the buyer pays the seller for allowable performance costs plus a fixed fee payment usually based on a percentage of estimated costs. • Cost plus percentage of costs (CPPC): the buyer pays the seller for allowable performance costs plus a predetermined percentage based on total costs.

11. PROCUREMENT & CONTRACT MANAGEMENTUnit Price Contracts Unit price contracts require the buyer to pay the seller a predetermined amount per unit of service, and the total value of the contract is a function of the quantities needed to complete the work. Unit price contracts are also called a time and materials contract, and may incorporate volume discounts. This type of contract is often used for services that are needed when the work cannot be clearly specified and total costs cannot be estimated in a contract. Many contract programmers and consultants prefer to use unit price contracts.

12. PROCUREMENT & CONTRACT MANAGEMENT Contract Types Versus Risk The figure below summarises the spectrum of risk to the buyer and seller for different types of contract. Note that a low risk option for a buyer will be high risk for the seller, and visa-versa.

13. PROCUREMENT & CONTRACT MANAGEMENT Statement of Work (SOW) Many contracts include a statement of work (SOW). A statement of work is a description of the work required for the procurement. The SOW describes the work in sufficient detail to allow prospective sellers to determine if they are capable of providing the goods and services required, and to allow them to determine an appropriate price. A good SOW gives bidders a better understanding of the buyer’s expectations, and therefore should be as clear, concise and as complete as possible. It should describe all the services required, and include performance reporting requirements. The SOW should specify the product of the project, use industry terms, and refer to industry standards.

14. PROCUREMENT & CONTRACT MANAGEMENTStatement of Work (SOW) Template

15. PROCUREMENT & CONTRACT MANAGEMENTSolicitation Planning Solicitation planning involves preparing of the documents needed for requesting bids (solicitation), and determining the evaluation criteria for the award of a contract. Common documents used in this process are: • Request for Proposals: used to solicit proposals from prospective sellers where there are several ways to meet the sellers’ needs. • Requests for Quotes: used to solicit quotes for well-defined procurements. • Invitations for bid or negotiation and initial contractor responses are also part of solicitation planning.

16. PROCUREMENT & CONTRACT MANAGEMENTOutline for a Request for Proposal (RFP)

17. PROCUREMENT & CONTRACT MANAGEMENTSolicitation Solicitation (or tendering) involves obtaining proposals, tenders or bids from prospective sellers. Prospective sellers do most the work in this process, usually at no cost to the buyer or the project. The buying organisation is responsible for advertising the “request to tender” (the solicitation). Organizations can advertise to procure goods and services in several ways: • Approaching the preferred vendor. • Approaching several potential vendors. • Advertising to anyone interested. A bidders’ conference or similar meeting between the buyer and the prospective sellers can help clarify the buyer’s expectations.

18. HIT241 - PROCUREMENT & CONTRACT MANAGEMENTSource Selection Once buyers receive proposals, they must select a vendor or decide to cancel the procurement.Source selection involves: • Evaluating bidders’ proposals. • Choosing the best one. • Negotiating the contract. • Awarding the contract. It is highly recommended that buyers use formal evaluation procedures for selecting vendors. Buyers often create a “short list”.

19. HIT241 - PROCUREMENT & CONTRACT MANAGEMENTSample Proposal Evaluation Sheet The following template could be used by a project team to help create a short list of the best three proposals.

20. PROCUREMENT & CONTRACT MANAGEMENTSource Selection After developing a short list of possible sellers, organisations will often undertake more detailed evaluation. The following figure lists items that might be part of an evaluation of the top three vendors for a large information technology project. All of the evaluation criteria are given a certain number of possible points (based on ranked importance), and the project team members and other stakeholders then evaluate each proposal by assigning points to each criteria.

21. PROCUREMENT & CONTRACT MANAGEMENTDetailed Criteria for Selecting Vendors

22. PROCUREMENT & CONTRACT MANAGEMENTContract Administration Contract administration ensures that the seller’s performance meets contractual requirements. Contracts are legal relationships, and are subject to the contract law in the country where the project is conducted, and in the case of international projects, the country of supply.

23. PROCUREMENT & CONTRACT MANAGEMENTContract Administration However, due to their complexity, many project managers ignore contractual issues. This can result in serious problems. Ideally, the project manager and the project team should be actively involved with contract law experts in the preparation and administration of contracts.

24. PROCUREMENT & CONTRACT MANAGEMENTContract Administration Project members must be aware of the legal problems they might cause by not understanding a contract. In particular, most projects involve changes, and these changes must be handled properly for items under contract.

25. PROCUREMENT & CONTRACT MANAGEMENTChange Control for Contracts Change control is an important part of the contract administration process. The following change control process must be applied where there are contracts: • Changes to any part of the project need to be reviewed, approved, and documented by the same people in the same way that the original part of the plan was approved. • Evaluation of any change should include an impact analysis. How will the change affect the scope, time, cost, and quality of the goods or services being provided? • Changes must be documented in writing. Project team members should also document all important meetings and telephone phone calls.

26. PROCUREMENT & CONTRACT MANAGEMENTContract Close-out Contract close-out is the final project procurement management process. It includes: • Product verification to determine if all work was completed correctly and satisfactorily. • Administrative activities to update records to reflect final results. • Archiving information for future use. Procurement audits are often undertaken during contract close-out to identify lessons learned in the procurement process.

27. PROCUREMENT & CONTRACT MANAGEMENTConclusion - 1 It is essential that organisations obtain good contracts that minimise risk while ensuring optimum results through effective contract administration. With the current competitive and demanding conditions found in information technology projects, it is very important to prepare contracts with great care and expert assistance. It is equally important to initiate and follow effective contract administration procedures.

28. PROCUREMENT & CONTRACT MANAGEMENTConclusion - 2 The following guidelines can help can assist in preparing proposals, contracts and administrative procedures: • Use checklists and templates where appropriate. • Evaluate risks by reference to suggested contract provisions where appropriate. • All major proposals and contracts, and contracts with questionable provisions, should be reviewed by a contract law expert. • Appropriate pricing and/or insuring of risk under the contract. • Periodic review, improvement and updating of contract preparation and administration procedures.