Conducting Procurement Activities With Seller


conduct procurementsIn the project management activity to plan rocurements you have already figured out,

  1. which product, result or service to procure (letting someone else do it for you)
  2. the statement of work (SOW) explaining what needs to be done
  3. which type of contract to use for each of your procurement needs
  4. how to evaluate responses from potential sellers

In Conduct Procurements project management activity you,

  1. send request for proposal (RFP) to identified potential sellers
  2. evaluate their responses and select the seller(s) you want to work with, and
  3. award the contract

What’s that we need?

Some of these inputs are the outputs from Plan Procurements process that you can refer to for details.

Procurement plan

The Procurement management plan is the subsidiary plan used in this process and contains the following –

  • Seller evaluation criteria
  • Which type of contract to be used
  • Procurement documents to be used
  • Assumptions and constraints about procurement that need to be considered
  • Associated risks and budget considerations
  • Possible risk mitigation strategies
  • Information about WBS and activities related to procurement work to be supplied to sellers
  • Any pre-qualified sellers associated with the company
  • Performance measurement metrics that evaluates the quality of work performed by seller

Tip: The term “seller” and “buyer” might be confusing. Since you are contracting out the work to someone, you become “buyer” – you will be buying the product, services or result from them. The other party will be selling their product, service or result to you – hence they become the “seller”.

Procurement related documents

This primarily refers to the Request for Proposal (RFP) to be sent to potential sellers, statement of work (SOW) and any other document required by legal/regulatory authorities to be shared with sellers.

Recall that RFP is called by different names based on the industry such as Invitation for Bid (IFB), Request for Quotation (RFQ), or Request for Information (RFI).

The request for proposal can be sent to potential sellers via advertisements in trade journals, newspapers, public registries, or published on the internet as per the policy of the company.

Source selection criteria

These can depend on the industry practice and company needs and can be objective or subjective. Among others the following may be considered to shortlist/select potential sellers that can be awarded the contract –

  • Technical abilities to successfully perform the work
  • Experience with performing similar work in the past
  • Extent of risk associated with the job that seller can assume
  • Financial capability of seller to complete the work successfully
  • References from other companies about the capability and dependability of seller

Seller’s submitted proposals

These are the responses from sellers (or bidders) for the RFP request you have sent out.

Project documents

While necessary documents are considered, the most used ones are risk register (from Identify Risks process), risk related contract decisions (from Plan Risk Responses process), quality metrics and resource requirements.

Make-or-buy decisions

This refers to the list of products, services or results that you decide to get from outside and the justifications for this decision. Main factors that influence this decision are capabilities of your organization (whether the produce, service or result can be created internally), value that a potential seller can provide (can someone do this work better than your organization), and risks associated with this work (is someone else in better shape to assume risk and deliver the product than your organization).

Procurement statement of work (SOW)

When you took up project work from your customer you started off with a project statement of work, remember? Refer to Create Project Charter process. Similarly, when you contract out the work to a seller the first thing you need to give them is the statement of work you need them to deliver you.

SOW may contain work specifications, quality expectations, duration and the dates by when you need the deliverables, regulatory needs to be fulfilled and any special requirements.

How’s it done?

Bidder conferences

These are also called as contractor conferences, vendor conferences or pre-bid conferences. These are conducted after RFPs are sent out and before decision on seller is made. All the bidders (sellers) are called into a meeting to answer their questions, clarifications and concerns.

Sometimes questions and clarifications are sent to buyer by sellers separately and the buyer consolidates all questions and answers and sends to every seller individually.

These will ensure that all the sellers have common understanding of requirements of the work and everyone gets a fair chance at bidding for the contract. All the questions and responses are updated in the procurement documents in an attempt to make them as clear and unambiguous as possible. The whole idea is also to ensure that no one gets any preferential treatment.

Proposal evaluation techniques

Some contracts can be complex and involve different types of work and specialized skills. There would be several factors to be judged before finalizing the seller. The seller evaluation committee lists certain methods, techniques and procedure to ensure that best of the sellers are selected for procurement. This committee judges the responses objectively to make right choice about a seller.

Remember that once a contract is awarded to a seller, overall project schedule gets tied to that of the seller and risks amplified. The performing organization (or buyer) will have additional oversight effort and cost to ensure that seller is doing the work properly and adhering to agreed schedules. Hence having good proposal evaluation techniques is vital in ensuring project success.

Independent estimates

The seller who gives lowest estimates may have overlooked some aspects of work involved, or just plainly does not know how to carry out the work. Irrespective of who does the work you need to know what it takes to do the work. This includes what types of skills are necessary, what kind of schedule needs to be in place and what is going to be the overall estimate.

These can be prepared by you, your company, or an expert hired from outside. Once these are in place, they act as a benchmark to evaluate seller responses.

Expert judgment

Though there are evaluation-criteria in place, seller proposal must be reviewed by experts. For one, they can figure out the ability of seller by not only their bids but also by the questions they asked while seeking clarity on the bids. Two, they can assess whether proposal details are genuine, and whether seller has the ability to deliver the work successfully.

The same team that does independent estimates should ideally be part of this team. People from legal department, and other functions (such as accounts, engineering, design, sales and manufacturing) that can assess any aspect of work and proposal should be part of this team.

Advertising

This is definitely one of the ways to increase potential seller list. For certain type of contract (such as government work) or industry (such as infrastructure) advertising may be a legal requirement.

Analytical techniques

These techniques are used to gauge the readiness or ability of the potential seller to carry out procurement work to your satisfaction.

Procurement negotiations

Although the type of contract is already selected in procurement management plan along with terms, not all sellers may be ready to sign the contract straight away. Hence, negotiations will be part of this process. This might be mostly done by the legal function of your company but as a project manager, you and your top technical team’s involvement will be very much essential in making a favorable negotiation.

There may be several rounds and levels of negotiations based on complexity of the project and need of business for both seller and buyer.

Whadda we get?

Selected sellers

Out of all potential sellers you sent the request for proposal to, a subset of them may send you their proposal within stipulated time. Some sellers may decide not to bid for the project at all. Out of the bids you have received you may end up with few shortlisted sellers based on vendor evaluation exercise. Finally the executive management should go through your recommendation and award the contract.

Agreements

If your project involved building a car entertainment system and you decided to procure speaker components, you would award a contract. If your project is about building a web based eCommerce application and you decided to buy and integrate a third party User Management component, you would award a contract. If you were building a thermo-nuclear power plant and decided to outsource building construction to a third party, you would award a contract. If you are sourcing your needs from outside of your organization you will form a legal contract, and if it is internal to the company some sort of agreement (verbal, written, mail) would be sufficient.

You will be floating request for proposal (RFP), evaluating seller responses and awarding the contract (or agreement) irrespective of the nature and complexity of procurement work. It could be as simple as a purchase order or it could be a contract for complex multi-team, multi-year, multi-location project – awarding a contract is a must. And the contract is a legally binding document that holds seller to provide certain product, service or result, and holds buyer to appropriately compensate the seller. The terms and conditions mentioned in the contract are applicable and acceptable to both the buyer and seller.

Why should you exercise caution while drafting contract?
If there are claims at a later date between seller and buyer that cannot be resolved via negotiation, mediation or arbitration, the case will go to the courts and will be fought on the basis of terms and conditions drafted in the contract. Hence lot of care should be taken while drafting the contract. Your company’s legal department should be involved when you decide to buy out of make-of-buy analysis in Plan Procurements process.

Anatomy of a contract

Among other parts a contract will have the following components. Click on the image to open in new window.

components-of-contract

Figure 2: Components of a Contract

Resource calendars

If the contract is for staff augmentation project (meaning that seller’s team will come to your offices and work for you), or when some of members from seller are going to work with your team you need their competency and availability information to add to your project’s resource calendar.

Change requests

Change requests that come up during contract period are to be documented, taken through change control board for approval and implemented as per its status.

Updates to project plan documents

Most probable components of the project plan to be updated are the triple constraint baselines namely, cost, schedule and scope baselines. Procurement management plan is the other, subsidiary plan, which may get updated.

Requirements documentation (based on seller questions and clarifications there may be changes noted and updated), requirements traceability matrix (as an offshoot to the updates to requirements documentation) and risk register (can be updated based on seller evaluation, or due to risks identified based on sellers’ questions).

Summary

Conducting procurement is a critical process that may offload lot of your work, if done correctly, or may give you sleepless nights if a wrong seller is selected. Hence, this has to be done with utmost care by involving experts who can set benchmark schedule and do a good job of seller evaluation.

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