Running head: PROJECT PROCUREMENT 1

Project Procurement

BUS 612 – Advanced Project Procurement

06/25/2012
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ABSTACT

Project management has proven to be an effective tool to use with various projects in many
different organizations. In this paper several topics are covered to include; procurement and
contract management are and the importance to the business world, what RFP selection tools are
and how to improve the assessment of proposals, procurement planning and the various
strategies necessary for project success, how to select the most qualified vendor in a proposal,
evaluation of a contract and the legal aspects of procurement in a project, and comparisons of the
critical elements of a contract to include the relationships between the client, supplier, and
completion and payment terms. By using project procurement techniques an organization is able
to purchase high quality supplies or services at a low cost, along with ensuring just-in-time
inventory which reduces the need for large inventories. It will also ensure that projects are being
completed on time, on budget, and within the scope defined.
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Project Procurement

The focus of this paper will be to discuss the diverse elements of project procurement.

Topics covered will include what procurement and contract management are and the importance

to the business world, what RFP selection tools are and how to improve the assessment of

proposals, procurement planning and the various strategies necessary for project success, how to

select the most qualified vendor in a proposal, evaluation of a contract and the legal aspects of

procurement in a project, and comparisons of the critical elements of a contract to include the

relationships between the client, supplier, and completion and payment terms. Examples will be

included to show real life examples of project management being used to its full advantage.

To begin, it was in the 1950’s that the project management era had begun. Prior to this,

many projects were managed on an adhoc basis and used mainly Gantt charts and informal

techniques and tools. It was then that two mathematical project scheduling models were created;

the program evaluation and review technique (PERT) and the critical path method. This was also

the time that technology for project cost estimating, cost management, and engineering

economics began to evolve. It was then in 1969 that the Project Management Institute (PMI) was

developed and it was shown that the tools and techniques of project management are able to be

used among a variety of different projects, including purchasing and supply management. (civil

engineer, 2012). Project management is “the process of the application of knowledge, skills,

tools, and techniques to project activities to meet project requirements. In other words, it is an

interrelated group of processes that enables the project team to achieve a successful project.”

(PMI, 2004, p 37).

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Procurement and Contract Management

“Project procurement consists of procedures, guidelines and tools that a company uses to

ensure timely completion of project activities.” (Codija, 2012, p 1). Procurement manager’s duty

is to ensure they are looking for the best possible deal for the organization by ensuring they are

receiving only the highest quality items at the lowest possible price. (Consador, n.d.).

Procurement management can be a single entity or a little more complex when there is a need for

a long term partnership with another organization, which requires a contract. There are several

steps to this process which include planning purchases and acquisitions, planning contracting,

requesting seller responses, selecting seller, administering the contract, and closing the contract.

That is where contract management comes in. There are many important factors to using

procurement in the business world. Some of the reasons procurement has proven to be important

is because it is what will help businesses become more efficient because all of the good and

services ordered be the right quality, quantity, price, and be delivered ‘just in time (JIT)’. All of

these items can ensure the company is increasing their profits. (Anon, 2012).

Even though different from procurement management, contract management can be involved

in this process. Contract management “relates to techniques that a firm applies to monitor

contract performance and ensure that parties to a contract conform to guidelines. (Codija, 2012, p

1). Contract management is a process that is continued throughout a project until all contractual

obligations are met and the project is closed. Contract management is very important to the

business world, for it allows organizations to lower their business costs, build long lasting
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relationships or strategic alliances, and gain competitive advantage by limiting the amount of

economic resources in the business environment. (Vitez, 2011).

RFP Selection Tools

“A request for proposal (RFP) is a document that an organization posts to elicit bids from

potential vendors for a product or service.” (Rouse, 2007, p 1). An effective RFP will usually

promote the strategy as well as the short and long term business objectives of the company. An

RFP will usually have the following information; specifics on statement of purpose, background

information, scope of work, outcome and performance standards, deliverables, terms of contract,

payments, incentives and penalties, contractual terms and conditions, requirements for proposal

preparation, evaluation and award process, process schedule, and points of contact. (Rouse,

2007).

How to Improve the Assessment of Proposals

To improve the assessment of proposals there are a few items to conduct to meet this

expectation. To begin, a source selection plan could be conducted. A source selection plan “is a

key document which specifies how the source selection activities will be organized, initiated, and

conducted. It serves as the guide for conducting the evaluation and analysis of proposals, and the

selection of source(s) for the acquisition. It can best be described as a blueprint for conducting

the source selection.” (NAWC, 2009, pg 1). This tool is effective for ensuring that each proposal

received is evaluated fairly. It sets a standard for how the proposals are evaluated. However,

another way to improve the assessment of proposals is have technical board review the RFP
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before it is sent out. By doing this, it will ensure that all vendors understand the specifications

and in return, the proposals will meet the needs of the RFP more specifically. Procurement

Planning

“A procurement plan defines that products and services that you will obtain from external

suppliers. A good procurement plan will go one step further by describing the process you will

go through to appoint those suppliers contractually.” (Karkhanis, 2009, p 1). The first step in

procurement planning is to define what items are actually needed in your organization. Next is to

define the process needed to obtain those items, followed by a timeframes for scheduling

delivery of those items. To ensure a proper plan is built, there are a few areas in which should be

identified.

Strategies Necessary for Project Success

A risk procurement analysis is “an iterative process consisting of well-defined steps,

which support a better decision making by contributing a greater insight into risks and

their impacts. It is the systematic application of management policies, procedures and practices

to the tasks of identifying, analyzing, treating and monitoring those risks, which impact on

organizations objectives.” (ASOSAI, 2009, p 2). During this analysis, the risks will be measured,

assessed, and then will have strategies developed to manage the risk. The risk can either be

minimized or avoided by taking the corrective actions chosen. (ASOSAI, 2009).

Another tool that is used to ensure project success is a critical path method. “The critical

path method is a robust logical system for planning and scheduling using bar charts. It is a
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graphical representation of the interrelationships of the various project activities.” (Benton, 2010,

p 416) The critical path method establishes “the quantity of work for each activity, the start-up

and sequence or order in which the work or the activity is to be done, and the rate at which the

work will be performed to reach completion.” (Benton, 2010, p 416). This method ensures that

the project manager and the resources are aware of the critical tasks and the timeframe in which

they need to be completed.

An additional strategy to a successful project is that of strategic alliances. “Critical to the

implementation of purchasing and supply management techniques is the development of supply

chain partnerships. Also termed a strategic alliance, a supply chain partnership is a relationship

formed between two independent entities in supply channels to achieve specific objectives and

benefits, and it is these partnerships that form the essential building blocks of supply chain

management.” (Benton, 2010, p 231). Having this alliance with the supply chain partners has a

strong correlation with just-in-time inventory purchasing and cost saving just-in-time inventory.

Companies like Wal-Mart, Proctor & Gamble, Dell Computers and Home Depot have proved

powerful alliances with their suppliers. Other areas that are beneficial with a strategic alliance

are “management of supply channel conflict, on-time product delivery, prompt response to

complaints, greater consistency in parts/supplies, detailed agreement as to handling of product

problems and customer complaints, improved supply chain productivity, specific volume

commitments, key contacts that are dedicated to your account, improved supplier loyalty, prompt

response to quote requests and price problems, and confidentiality of shared business strategy.”

(Rigsbee, 2007, p 1). Without these alliances a trusting, professional, and beneficial business

may not be accomplished. This is also an important item for a project manager. I say this because
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when a project manager is determining tasks and the resources associated; the project manager

will have confidence that the tasks will be completed effectively and efficiently because of the

strong alliance. They will be able to have trust and confidence that their tasks will be completed

within the given time frame and on budget.

How to select the most qualified vendor in a proposal

There are a total of three general types of supplier evaluation systems used today:

categorical method, cost-ratio method, and linear averaging method. The categorical method

“involves categorizing each supplier’s performance in specific areas as defined by a list of

relevant performance variables.” (Benton, 2010, p 164). To begin this method, the buyer creates

a listing of performance factors that will be used for all the suppliers. The buyer will then keep

track by assigning a rating or grade to each of the suppliers in each of the performance factors

generated. The rating/grade will be simple; good, neutral, or unsatisfactory and be told to the

supplier during the recurrent meeting held between the buyer and supplier. (Benton, 2010).

The cost-ratio method “evaluates supplier performance by using standard cost analysis.

The total cost of each purchase is calculated as its selling price plus the buyer’s internal

operating costs associated with the quality, delivery, and service elements of the purchase.”

(Benton, 2010, p 164). There are four steps to this method. First, the internal cost connected to

quality, delivery, and service. Second, a cost ratio is translated from each to show the cost as a

percentage of the value of purchase. Third, an overall cost ratio is determined by adding each

individual cost ratio. The fourth and final step is to compare the overall cost ratio to the suppliers

quoted unit price, which gives the net adjusted cost figures. (Benton, 2010).
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With the linear averaging method, “specific quantitative performance factors are used to

evaluate supplier performance.” (Benton, 2010, p 166). There are four steps to this method as

well. First, weights are assigned to each of the chosen performance factors which together add up

to one hundred. Next, the determinations of the individual performance factor ratings are made.

This is accomplished by adding the scores for each factor. Third, each performance factor rating

is multiplied by its weight as a percentage. Last, a numerical rating is given to each supplier

based on the results from step three.

Evaluation of the contract and the legal aspects of procurement in a project

The evaluation of the contract is very important, so the supplier and buyer are both in

agreeance to the terms and conditions of the contract. The evaluations of terms of the contract

are very important and there are several to evaluate. The fixed quantity of sale must be present

and understood, because if the contract does not specifically show the quantity it is

unenforceable. Next, the quality should be specified, however it should not be over or under

specified. If not included, it could also be unenforceable. Due to the fact that the purchasing

agent is to get the best value for the firm, the price and credit terms will need to be defined and

understood. For it to be an enforceable contract, the pricing must be present and should be

determined during the offer acceptance. The negotiated credit terms should be present as well.

The next item to be evaluated is the delivery terms, which is related to the pricing terms. It is the

delivery terms which formalize the responsibilities of the buying and selling firm for delivery.

Leasing is also sometimes a term for evaluation. If leasing equipment, terms may need to be
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addressed from seller. All of these items are important to evaluate to ensure all parties

understand the agreement and therefore avoiding any legal actions or broken alliance.

Critical Elements of a Contract

For a contract to be valid there are several critical elements of a contract that must be

present. If for any reason, any of these elements are absent, there is a possibility that the contract

could be null and void. The elements are agreement, consideration, intent, form, capacity,

consent, and legality. (Gordon, 2012).

Agreement: In this element it is critical that an agreement is made between two parties.

One of the parties will provide either a good or service to the other and in return the other party

will adhere to the terms and conditions of the contract, i.e. payment. The relationship between

the client and supplier is very important to the agreement, for they must both be on the same

page and be in concurrence with one another. The completion terms and payment terms also

prove to be a direct relationship because an agreement would be made that if the work is not

completed as agreed upon, there would be no need for payment until proper completion.

(Gordon, 2012)

Consideration: This is where each party involved in the contract must present something

of value that encourages the other to enter into the agreement. This does not always have to be a

monetary contribution, but rather a promise to perform an act that is not legally required to do or

a promise not to do something that they are legally able to do. A promise to do either of these

thereby makes it a legal action and can influence the relationship and contract between the two

parties. (Gordon, 2012)

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Intent: This element is critical and is required. The meaning behind this is that all parties

must have intended to enter into a contract. This again may be written or spoken, but each party

must have a clear understand and must not have been mislead into a contract. The client and

supplier must both have true terms and conditions and must not have different assumptions of the

contract. A contract is not valid if one or both parties had no real intent of entering into a

contract. The completion terms and payment terms would be null and void as well. (Gordon,

2012).

Form: There are some cases where a contract can be written or spoken, but there are other

cases in which they must be written and a witness must be present as well. When there is a strong

client and supplier relationship, an oral contract may be sufficient. However, if a new

relationship or difficult past is present, the parties may decide that a written contract is necessary.

The completion terms and payment terms would be identified in this form. (Gordon, 2012)

Capacity: This is important, for each party must be able to follow through with their end

of the bargain. The supplier must have the e capacity to supply the promised goods or services

and the client must have the capacity to follow through with the payment for the merchandise.

(Gordon, 2012)

Consent: Both the client and supplier must enter into the contract freely. Neither party is

allowed to be forced into the contract, it must be by freewill. If one of the parties is forced into

the contract, it will be null and void. The contract can be cancelled if this scenario would occur.

(Gordon, 2011)
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Legality: Everything within the contract must be legal. If all aspects of the contract are

not legal, the law will not enforce. Even if both parties are aware of illegality in the contract, it

still does not make it ok. “Illegally formed contracts are generally void and unenforceable by

either party at common law. Therefore, property or money transferred cannot be recovered.”

(Field, n.d.. p 4).

Conclusion

This paper has focused on the diverse elements of project procurement. The topics

covered included what procurement and contract management are along with the importance to

the business world, what RFP selection tools are and how to improve the assessment of

proposals, procurement planning and the various strategies necessary for project success, how to

select the most qualified vendor in a proposal, evaluation of a contract and the legal aspects of

procurement in a project, and comparisons of the critical elements of a contract to include the

relationships between the client, supplier, and completion and payment terms.
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References:

Anonymous. (2012). Could procurement be the most important aspect of your business. Value

Stream Guru. Retrieved on June 21, 2012 from

http://www.valuestreamguru.com/?p=195

ASOSAI. (2009). Managing risk in the procurement process. INTOSAI. Retrieved on June 25,

2012 from http://www.scribd.com/doc/27036222/Managing-Risks-in-the-

Procurement-Process

Benton, W.C. Jr. (2010). Purchasing and supply chain management (2nd ed.). New York, NY:

McGraw-Hill Irwin.

Civil Engineer. (2012). History of project management. Civil Engineer Link. Retrieved on June

20, 2012 from http://civilengineerlink.com/history-project-management-2/

Codjia, M. (2012). Project procurement & contract management. eHow.com. Retrieved on June

20, 2012 from http://www.ehow.com/print/facts_6852593_project-procurement-

contract-management.html

Consador, K. (n.d.). Procurement Manager Definition. eHow.com. Retrieved on June 20, 2012

from http://www.ehow.com/facts_6781763_procurement-manager-definition.html

Field, C. (n.d.). Elements of a contract. The Law Handbook. Retrieved on June 22, 2012 from

http://www.lawhandbook.org.au/handbook/ch12s01s02.php
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Karkhanis, S. (2009). Procurement Plan. Santosh Karkhanis. Retrieved on June 22, 2012 from

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NAWC. (2009). Source selection plan. Naval Air Warfare Center Training System Division.

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http://nawctsd.navair.navy.mil/Resources/Library/Acqguide/ssp.htm

Project Management Institute. (2004). A Guide to the Project Management Body of Knowledge:

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Institute

Rigsbee, E. (2007). Strategic alliances for supply chain success. Ezine Articles. Retrieved on

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Success&id=433478

Rouse, M. (2007). Request for proposal (RFP). IT Channel Resources. Retrieved on June 21,

2012 from http://searchitchannel.techtarget.com/definition/request-for-proposal

Vitez, O. (2011). The advantages of contract management. eHowMoney. Retrieved on June 20,

2012from http://www.ehow.com/list_6824840_advantages-contract-management.html