This is the tenth in a series of CVG-articles delivering simple and practical Project Management advice through the lens of Construction Project Management.
Procurement Management is the strategic approach to managing and optimizing organizational spend. It involves acquiring quality goods and services from preferred vendors within a stipulated budget, on or before the deadline. The procurement management process includes sourcing, requisitioning, ordering, expediting, inspection, and reconciliation of external resources.
Procurement Management begins by identifying a need for project delivery and, in many cases, product lifecycle. We will focus on Procurement Management as it relates to the construction industry, and PMI presents us with a useful approach outlined in the diagram below.
As with all project management initiatives, communication is key, and good relationship management of vendors will ensure that you receive highest-quality service from that vendor. Further, good procurement management is a way to more efficiently source, requisition, order, expedite, inspect, and reconcile of procurement.
However, before establishing partnerships or purchases, a project manager must answer the question: are these goods/services required from outside vendors? Once the project manager understands that and an informed decision has been made, only then can you move forward with the partnership/purchase.
When it has been determined that an outside good/service is necessary for project execution, procurement management follows four main processes.
1. Plan Procurement Management
The initial planning phase is when procurements are identified and defined. Questions to ask include:
· What needs to be procured?
· How will it be procured?
· Who is responsible for procuring it?
· Who will write the procurement documents?
· When will it be procured?
· When will the contract completion dates be?
For every external contractor, a statement of work (SOW) outlines the work being contracted and needs to be established
Prior to awarding a contract, the project manager makes a request for proposal to generate multiple bids for comparison. Once a choice is made, a statement of work (SOW) then outlines the work being contracted.
Data from the selection process is consolidated within the procurement management plan, which includes requirement documents, the risk register, activity resource requirements, the project schedule, and activity cost estimates.
The selection process can involve certain tools and techniques, such as make-or-buy analysis, which helps to determine if the activity requires an external supplier or can be sourced in-house. Consulting experts, conducting market research, and communicating with stakeholders will also guide the selection decision.
During the planning phase, the project manager relies heavily on two documents:
· The procurement management plan that defines the policies and procedures to be used in the procurement activities. Contract types and selection methods are defined and provide strategy and direction for all procurement activities.
· The statement of work (also known as terms of reference) is the technical statement of work that is required of a contractor and often becomes part of the contract.
The procurement management plan contains the strategy, processes, and any other information required to guide the project manager throughout the procurement activities. It specifies the types of contracts that the project will employ. These types of contracts include:
Fixed fee contracts (also called lump sum) require the contractor to specify a single price for one item of work. The contractor assumes all risk of project changes and prices the possibility and severity of those changes into the price.
Cost-Plus contracts have a variable component (cost) and a fixed component (plus). The variable component reimburses the contractor for costs, and the fixed component represents profit. The contractor invoices the actual, rather than bid, costs for the variable portion and receives the fixed portion regardless. Hence, the variable portion is usually paid based on time and materials, submitted with invoices, while the fixed portion is paid based on percent complete. There are several variations to the Cost-Plus model, particularly using the fixed fee as an incentive bonus/penalty to motivate the contractor to reduce the variable portion.
Time and Materials contracts are similar to Cost-Plus but do not contain a fixed portion (profit). That’s not to say there is no profit expected for the contractor, rather the contractor embeds the profit into the unit rates of the people and equipment in the project. Hence, the entire fee is variable and billed by time and materials expended. To prevent a runaway project budget, there is usually some sort of “upset limit” that cannot be exceeded without authorization.
2. Conduct Procurements
Once first-phase paperwork is complete, the conduct procurement phase begins, and procurement bids are evaluated using prioritized criteria developed by meeting with the bidders, understanding most important elements needed for the project, and securing independent estimates.
There are also analytical techniques that can be applied for evaluation. For instance, advertising is a good way to make ensure a wide net is cast for bidders. During procurement negotiations, final contracts will be tweaked to meet your needs and the contractor’s, and while the process can vary, it usually follows five main steps:
Preparation of the statement of work – The list of tasks and deliverables, as well as project descriptions are developed to ensure that the contractor is familiar with the work that needs to be done. This document should be comprehensive as the contractor may charge extra for anything not clearly defined. While there can be grey areas, reputable contractors will push for detailed clarification during the bidding process so as not to be underbid by less scrupulous contractors looking to capitalize on unforeseen charges to be added later.
Development of estimate – In many procurement situations an estimate is required prior to tendering to ensure resources are in place.
Preparation of bid documents – Additive to the statement of work/terms of reference, which state the technical work requirements, the bid documents itemize the logistical information, such as how/where to submit the bid, insurance and bonding requirements, and general specifications. These documents are often called Invitation to Tender, Request for Proposal (RFP), or Request for Quotation (RFQ).
Advertising of contract – The tender (contract prior to being awarded) is advertised how and where contractors are likely to view it. A contractor is selected based on the selection criteria identified.
Performance of work – Once the contract is in place, the work is performed. Quality and timing are inspected regularly via project updates or site inspections. Critical project components are inspected in fabrication or at some predetermined, early milestone so they can be rejected with the least impact, if necessary. Any work that is outside of the contract must be reported immediately and should not be performed until approval is granted. Such requests and approvals must be closely monitored as the work in question may delay other aspects of the project, creating large cost implications.
3. Control Procurements
Once the contracts are signed, the management of those contractors is folded into the overall management responsibilities. Contractors often have a tremendous impact on budgets and schedules, so good project management requires close contract management. Regular status updates are necessary to review contractor agreements, obtain progress updates, and review work performance to ensure contractual requirements are met. Project managers also must enforce performance reviews and manage payments, claims, and records.
Project control involves quality control inspections of the contractor’s work. The contractor has specifications and milestones that must be adhered to, which include technical specifications and milestone dates (among other items). Only direct inspection can verify that work is proceeding according to agreed-upon standards and timeline.
In the construction industry, project control is a critical undertaking involving full time inspectors at the job site. The inspectors ensure that the project is built according to the plans and that all underlying elements such as cast-in-place concrete, interior walls, etc. are satisfactory.
In professional project management, project control activities occur on a regular cycle, perhaps weekly or monthly. Each task of the project is assessed using earned value management to determine if the task (and greater project) is on time and budget. External contractor work is usually ascribed a single task and day-to-day control is managed by the contractor, so contractor updates should align with the larger project progress reporting schedule.
4. Close Procurements
Just as there is a process to being the procurement, there is one to finalize it. Completed work should be detailed in the initial agreement with the contractor to avoid confusion as to successful completion of items detailed in the scope, and most contracts require closure in the form of an acceptance certificate which communicates that the contractor’s work is under the contract is legally complete. Insurance and bonding may also require a formal release of liability to ensure there are no outstanding changes related to the value and completion date of the contract.
Procurement audits may assist in this process, and a records management system will be required to manage the substantial paperwork involved.
Further, most organizations analyze past projects to plan and estimate future projects, and external contracts should be documented for future reference, particularly the cost of the work and adherence to scope and timeline. Finally, as-built information should be generated, and final reports detail any project issues encountered and remedies to produce a lessons-learned report.
The project manager is involved with procurement, same as any other controlled aspect of the project management process. However, authority over the process may not be the same as other aspects of the project. While the project manager does have the authority to execute agreements with contractors on behalf of the company, the project manager is often not the person who administers that contract once it is in place. Regardless, the project manager should be kept abreast of contract administration actions. The project manager will have heavy influence on contractors selected due to a deep knowledge of budget and external resources required for successful project completion.
As with many aspects of project management, consistent, clear, and detailed communication and follow-up is crucial to successfully managing procurement and the ongoing contractor relationships that follow.