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6 PROCUREMENT PROCESS
LEARNING OBJECTIVES
1.

Describe the components of the procurement plan.

2.

Identify the decisions made when selecting the type of contract.

3.

Describe how bidders are qualified, solicited, and chosen.

4.

Identify the methods used to manage the contracts.

The project procurement cycle reflects the procurement activities from the
decision to purchase the material or service through to the payment of bills
and closing of procurement contracts.

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P ROC UREME NT PLA N

After the decision has been made to purchase goods or outsource services,
the procurement team develops a plan that includes the following:

Selecting the appropriate relationships and contract approaches for

each type of purchased goods or outsourced service
Preparing RFQs and RFPs and evaluating partnership opportunities

Evaluating RFQs, RFPs, and partnerships

Awarding and signing contracts

Managing quality, timely performance

Managing contract changes

Closing contracts

Depending on the complexity level of the project, each of these steps can
take either hours or sometimes weeks of work to complete. Each of these
steps is also included in the project master schedule. The time involved in
the procurement cycle can influence the scheduling of critical activities,
including the decision to self-perform the work or contract the work to
others. The equipment and materials delivery dates and completion of
contracted work dates are placed on the project schedule and any
procurement activities that create a project delay or fall on the project
critical path may require special attention.
S E L E C T I N G T H E C O N T RAC T A P P R O AC H

The technical teams typically develop a description of the work that will be
outsourced. From this information, the project management team answers
the following questions:

Is the required work or materials a commodity, customized product or

service, or unique skill or relationship?

What type of relationship is needed: supplier, vendor, or partnership?

How should the supplier, vendor, or potential partner be approached:

RFQ, RFP, or personal contact?

How well known is the scope of work?

What are the risks and which party should assume which types of risk?

Does the procurement of the service or goods affect activities on the

project schedules critical path and how much float is there on those

activities?
How important is it to be sure of the cost in advance?

The procurement team uses the answers to the first three questions listed
above to determine the approach to obtaining the goods or services and the
remaining questions to determine what type of contract is most appropriate.

A key factor in selecting the contract approach is determining which party

will take the most risk. The team determines the level of risk that will be
managed by the project and what risks will be transferred to the contractor.
Typically, the project management team wants to manage the project risk,
but in some cases, contractors have more expertise or control that enable
them to better manage the risk associated with the contracted work.
SOLICITING BIDS

A solicitation is the process of requesting a price and supporting

information from bidders. The solicitation usually takes the form of either an
RFQ or an RFP. Partnerships are pursued and established on a case-by-case
basis by senior management.
QUALIFYING BIDDERS

Potential bidders are people or organizations capable of providing the

materials or performing the work required for the project. On smaller, less
complex projects, the parent company typically has a list of suppliers and
vendors that have successfully provided goods and services in the past, and
the project has access to the performance record of companies on that list.
On unique projects, where no supplier lists exist, the project team develops a
list of potential suppliers and then qualifies them to become eligible to bid on
project work. Eligible bidders are placed on the bidders list and provided with
a schedule of when work on the project will be bid.
The eligibility of a supplier is determined by the ability to perform the work in
a way that meets project requirements and demonstrates financial stability.
Ability to perform the work includes the ability to meet quality specifications
and meet the project schedule. During times when economic activity is high
in a region, many suppliers become busy and stretch their resources. The
project team investigates the potential suppliers to assure they have the
capacity and the track record of meeting deadlines before they are included
on the bidders list.
The potential supplier must also be financially stable to be included on the
bidders list. A credit check or a financial report from Dun and Bradstreet

(D&B)a well-known provider of financial information about individual

companieswill provide the project with information about the potential
bidders financial status. D&B services include the following:

D&B proprietary rankings and predictive creditworthiness scores

Public filings, including suits, liens, judgments, and UCC filings

standardized financial disclosure documents that conform to the uniform

commercial code
Comprehensive payment history, including D&Bs Paydex Scores
Company financial statements and history

REQUEST FOR QUOTE

An RFQ focuses on price. The type of materials or service is well defined and
can be obtained from several sources. The bidder that can meet the project
quality and schedule requirements usually wins the contract by quoting the
lowest price.
REQUEST FOR PROPOSAL

An RFP accounts for price but focuses on meeting the project quality or
schedule requirements. The process of developing a proposal in response to
an RFP can be very expensive for the bidder, and the project team should not
issue an RFP to a company that is not eligible to win the bid.
E VA LU AT I N G B I D S

Evaluation of bids in response to RFQs for commodity items and services is

heavily graded for price. In most cases, the lowest total price will win the
contract. The total price will include the costs of the goods or services, any
shipping or delivery costs, the value of any warranties, and any additional
service that adds value to the project.
The evaluation of bids based on RFPs is more complex. The evaluation of
proposals includes the price and also an evaluation of the technical approach
chosen by the bidder. The project team evaluating the proposal must include
people with the expertise to understand the technical aspects of the various
proposal options and the value of each proposal to the project. On more
complex projects, the administrative part of the proposal is evaluated and

scored by one team, and the technical aspect of the proposal is evaluated by
another team. The project team combines the two scores to determine the
best proposal for the project.
AWA R D I N G T H E C O N T RAC T

After the project team has selected the bidder that provides the best value to
the project, a project representative validates all conditions of the bid and
the contract with the potential contractor. Less complex awards, like
contracts for printed materials, require a reading and signing of the contract
to assure the printed materials supplier understands the contract terms and
requirements of the project schedule. More complex projects require a
detailed discussion of the goals, the potential barriers to accomplishing those
goals, the project schedule and critical dates, and the processes for resolving
conflicts and improving work processes.
PLANNING SESSION FOLLOWS CONTRACT AWARD
On a design project to create a major training for a world-wide company, the
project manager invited two critical partners to a three-day planning session
after the project contracts were awarded.
The project manager began the session by stating that the project leadership
intended to create an environment that enabled each of the partners to
exceed profit expectations on the project and that the only way to
accomplish this goal was through a mutually supportive team where
everyone contributed to improve project performance and everyone
benefited from better performance. The session then focused on developing
ways to resolve problems and increase performance. Although this may
appear to be a simple process of focusing contractors on project success, the
process took several days of lengthy discussion and conflict resolution. The
effort invested in developing alignment between the project team and
contractors can significantly improve project performance.
MA NA G I NG THE CONTRA CTS

The contract type determines the level of effort and the skills needed to
manage the contract. The manager of supplier contracts develops detailed
specifications and assures compliance to these specifications. The manager
of vendor contracts assures the contractors that bid the work have the skills
and capacity to accomplish the work according to the project schedule and
tracks the vendors performance against the project needs, supplying
support and direction when needed. The manager of partnering
arrangements develops alignment around common goals and work
processes. Each of these approaches requires different skills and various
degrees of effort.
Items that take a long time to acquirelong lead itemsreceive early
attention by the project leadership. Examples of long lead items are
equipment that is designed and built specifically for the project, curriculum
that is created for training a new workforce, and a customized bioreactor for
a biotech project. These items might require weeks, months, and sometimes
years to develop and complete. The project team identifies long lead items
early to begin the procurement activities as soon as possible because those
procured through the normal procurement cycle may cause delays in the
project.
After the contract is awarded, the project team tracks the performance of the
contractor against performance criteria in the contract and his or her
contribution to the performance of the project. Typically, the contractors
deliver the product or service that meets the quality expectations and
supports the project schedule. Typically, there are also one or two
contractors that do not perform to project expectations. Some project
managers will then pull out the contract and attempt to persuade the
contractor to improve performance or be penalized. Other project managers
will explore with the contractor creative ways to improve performance and
meet project requirements. The contract management allows for both
approaches to deal with nonperforming contractors and the project team
must assess what method is most likely to work in each situation.

Managing contractor performance on a project is as important to the overall

project outcomes as the work performed by the project team.
LO G I S T I C S A N D E X P E D I T I N G

Equipment and materials that are purchased for use on the project must be
transported, inventoried, warehoused, and often secured. This area of
expertise is called logistics. The logistics for the project can be managed by
the project team or can be included in the RFP or RFQ. On international
projects, materials may be imported, and the procurement team manages
the customs process. On smaller projects, the logistical function is often
provided by the parent company. On larger projects, these activities are
typically contracted to companies that specialize in logistical services. On
larger, more complex projects, that procurement team will include logistical
expertise.
The project work often depends on materials procured for the project. The
delivery of these materials influences the scheduling of the project, and often
some materials are needed earlier than normal procurement practices would
deliver. On long lead items, the project schedule is included in the
contracting plans and contractors must explain how they will support the
project schedule.
On large, complex projects, critical items might be scheduled for delivery
after they are needed on the project. The procurement team then explores
ideas with the contractor to expedite the manufacturing or transportation of
the equipment or materials. The contract can often place a priority on the
fabrication of the equipment and delivery of the equipment to meet the
project schedule. The project logistics team can also explore ways of
shortening the transportation time. For example, a project in Argentina flew
some critical equipment from Sweden rather than transport the equipment
by ship to save several weeks in transit. The logistics costs were higher, but
the overall value to the project was greater.
KEY TAKEAWAYS

The procurement plan includes determining the category of materials

or services, choosing the type of contractual relationship, soliciting bids,

selecting bidders, managing the work, and closing the contracts.

The decisions made when selecting the type of contract are based on
whether the materials can be provided by suppliers, vendors, or partners;
how well defined the work is; how the risk will be shared; the importance

of the task to the schedule; and the need for certainty of the cost.
Companies that bid on contracts are evaluated on past performance
and current financial status. RFQs and RFPs are sent to those companies.

RFQs are evaluated on price and RFPs are evaluated on price and method.
Long lead time items are identified and monitored. Items that are
critical to the schedule or delayed are assigned to an expediter. The
logistics of handling delivery, storage, and transportation are determined.
Work and materials are inspected for quality.