Individual Assignment on Procurement and Contract Administration

Prepared by: Metsihet Asteraye

January 2024
Assignment on Procurement and Contract Administration

1. Review at least two articles which related to Procurement and contract administration
and analyze the positive and negative aspects of project procurement and contract
administration as per your review. In your reading from the literature, what are the
potential differences between commercial and government project procurements and
contract administration support by practical example?

Article 1: "Procurement Strategies: A Relationship-Based Approach for Public Construction

Projects" by Smith et al.
Positive Aspects:
 The article emphasizes the importance of developing strong relationships between
project owners and contractors in public construction projects.
 It highlights the benefits of a relationship-based procurement strategy, such as
improved communication, trust, and cooperation among project stakeholders.
 The approach promotes long-term partnerships, which can lead to better project
outcomes and reduced conflicts.
Negative Aspects:
 The article acknowledges that relationship-based procurement requires a significant
initial investment of time and effort to establish trust and alignment between parties.
 It may be challenging to implement this approach in projects with strict procurement
regulations and requirements.
Article 2: "Contract Administration Issues in Construction Projects: A Review" by Lee and
Yu
Positive Aspects:
 The article provides a comprehensive review of contract administration issues in
construction projects, highlighting common challenges and suggesting possible
solutions.
 It emphasizes the importance of effective contract administration in ensuring project
success and minimizing disputes.
 The article discusses various contract administration techniques and tools that can
improve project performance and reduce risks.
Negative Aspects:
 The article recognizes that contract administration can be complex and resource-
intensive, requiring skilled personnel and robust systems.
 It highlights the potential for conflicts and disagreements between project
stakeholders during the contract administration process.

Differences between Commercial and Government Project Procurements and Contract

Administration:
Commercial Project Procurement:
  Commercial projects typically focus on maximizing profitability and achieving
specific business objectives. The procurement process aims to obtain goods and
services at competitive prices.
 Contract administration in commercial projects often involves negotiating terms and
conditions that favor the project owner's interests while ensuring compliance with
legal and regulatory requirements.

 Examples: A private company procuring construction services for a new office

building or a software development firm outsourcing a project to a third-party vendor.
Government Project Procurement:
 Government projects prioritize public interest, transparency, and accountability. The
procurement process often involves stringent regulations to ensure fairness and
competition.
 Contract administration in government projects emphasizes compliance with public
procurement laws, evaluating contractor performance, and managing risks associated
with public funds.
 Examples: Government agency procuring infrastructure development services, a
municipality outsourcing waste management services to a contractor.

2,How project procurement risks will be mitigated through contract performance metrics,
insurance, or

Contract Performance Metrics:

 Establishing clear performance metrics and key performance indicators (KPIs) in
contracts to objectively measure contractor performance.
 Regular monitoring and evaluation of contractor's compliance with performance
metrics.
 Using performance-based payment systems that link compensation to achieved
performance levels.
Insurance:
 Requiring contractors to provide appropriate insurance coverage, such as liability
insurance, to mitigate potential risks.
 Ensuring that insurance policies are in place to cover project-related risks, such as
property damage, personal injury, or professional errors.

3. How procurement and contracts are coordinated with project scope, budget, and
schedule?

Procurement and contracts need to be closely coordinated with project scope, budget, and
schedule to ensure project success:
Project Scope:
 Procurement activities should align with the project scope by clearly defining the
required goods and services.
 Contracts should include detailed specifications and deliverables that reflect the
project scope.
  Regular communication and collaboration between project managers and procurement
professionals are essential to maintain alignment.
Budget:
 Procurement activities should be planned and executed within the allocated project
budget.
 Contracts should specify the agreed-upon prices, payment terms, and any potential
cost escalation mechanisms.
 Monitoring and control mechanisms should be in place to track procurement
expenditures and manage deviations from the budget.
Schedule:
 Procurement activities, including vendor selection, contract negotiation, and delivery
timelines, should be synchronized with the project schedule.
 Contracts should include realistic delivery timelines and milestones.
 Regular monitoring and communication with contractors are necessary to address any
delays or schedule changes.

4,Describe the following with a maximum of 1 page each

a) The transaction cost approach

b) The capability approach

The Transaction Cost Approach:

The transaction cost approach is an economic theory that analyzes the costs associated with
conducting transactions or exchanges between parties. It suggests that the choice of
governance structure for a transaction should be based on minimizing transaction costs.
In this approach, transaction costs include not only the monetary price of goods or services
but also the costs of searching for suppliers, negotiating contracts, monitoring and enforcing
agreements, and resolving disputes. The theory argues that different governance structures,
such as market transactions or long-term contracts, can be chosen based on the transaction-
specific attributes and the associated transaction costs.
For example, if a company needs a specialized component for its product, it may choose to
procure it from a supplier through a long-term contract rather than relying on spot market
purchases. The long-term contract reduces transaction costs by ensuring a stable supply,
minimizing search costs, and providing incentives for supplier cooperation.

The Capability Approach:

The capability approach, developed by economist and philosopher Amartya Sen, focuses on
assessing individual well-being and social development based on people's capabilities to
function in various areas of life. It emphasizes the importance of freedom, agency, and the
ability to achieve desired outcomes.
Inthe context of procurement and contracts, the capability approach recognizes that
procurement decisions should not solely focus on cost and efficiency but also consider the
broader capabilities and development opportunities they provide.
For example, when procuring goods or services, the capability approach suggests considering
factors beyond just the immediate functional requirements. It encourages assessing how the
procurement decision can contribute to enhancing capabilities, such as promoting local
economic development, supporting small businesses, or fostering sustainable practices.
By adopting the capability approach, procurement and contract administration can go beyond
transactional considerations and incorporate social, environmental, and ethical dimensions.
This approach promotes a more holistic evaluation of the impacts and benefits of
procurement decisions, leading to more sustainable and socially responsible outcomes.
Overall, the transaction cost approach and the capability approach offer different perspectives
on procurement and contract administration. The transaction cost approach focuses on
minimizing costs and optimizing efficiency, while the capability approach emphasizes
broader social and developmental aspects. Both approaches can provide valuable insights for
decision-making in procurement and contract administration, depending on the specific
context and objectives of the project.