Project Procurement Management Ir. AGUNG NUGROHO, M.Kom Teknik Elektro FT UNDIP

Contents 1 2 3 4 5 6 Plan Purchase & Acquisition Plan Contracting Request Seller Response 3 Select Sellers 4 Contract Administration 5 Contract Closure 6

To become a new and innovative energy company PT Rekayasa Industri

Purchasing Participation in the development of requirements and their specifications; managing value analysis activities; conducting supply market research; managing supplier negotiations; conducting traditional buying activities; administering purchase contracts; managing supplier quality; buying inbound transportation. (Dobler (1990)) is the process by which a company (or other organisation) contracts with third parties to obtain goods and services required to fulfil its business objectives in the most timely and cost-effective manner. (Steele (1985))

Project Procurement Management Process required to acquire goods and services from outside the performing organization Is discussed from the perspective of of the buyer Role PM in Procurement Identify risk and incorporate mitigation into the contract Fit the schedule for completion into the schedule of the project Involve during contract negotiation Protect the integrity of the project Protect relationship with the seller

Procurement strategy Corporate: the relationship of specific procurement actions to corporate strategy Project: the relation of specific procurement actions to the operating environment of the project

Plan purchase & acquisition The process of identifying which project needs can be best met by procuring products or services outside the project organization. It involves consideration of whether to procure how to procure what to procure how much to procure when to procure

Procurement Management Step/process Main activity Deliverable 1. Plan Purcchase & Acquisition Make or Buy Make or buy, 2. Plan Contracting Procurement Documents e.G RFP Created RFP ready 3. Request Seller Responses Q & A Proposal Received 4. Select Seller Pick One Contract Signed 5. Contract Administration Admin Substantially complete, payment 6. Contract Closure Finish done

Procurement The acquisition of good and services from outside the performing organization (PMBOK 2000) the obtaining by various means (e.g. loan, transfer, hire purchase) of supplies and serves with or without consideration (Compton and Jessop (1995)) all activities required in order to obtain the product from the supplier and get it to the place where it is actually used. It encompasses the purchasing function, store, traffic and transportation, incoming inspection, and quality control and assurance. Some firms also include salvage and management of environmental issues (as they are related to materials) in procurement (Van der Weele and Rozemeijer (1996))

Contract Contract vs Procurement Each procurement needs contract For long term project, contract is mostly used as procurement document (Purchase Order) For short time and repetitive projects, contract is made in general basis, while the purchase order will work in detail item (material and services) A contract need: An offer Acceptance Consideration: value not only money Legal capacity: competent parties Legal purpose: not for illegal goods

Centralized/Decentralized Contract Centralized: separate contracting office handles all contract Decentralized: contract administrator is assigned to each project Centralized Decentralized Advantages Increase expertise in contracting Standardize practices Clearly defined career path Easier access to contracting expertise More loyaly to the project Disadvantages Difficult to gain access to contracting expertise One contracts person may work on many projects No home after project close Difficult to maintain high level of ocntracting expertise Duplication of expertise and inefficient use of resources Little standardization of contracting process

12.1 Plan Purchase and Acquisitions Determining what to purchase or acquire and determining when and how

Make or Buy Analysis Purpose: Determine whether a particular product can be produced cost effectively by the performing organization An evaluation of the benefits & drawback of doing the work within your organization or using an external resource Influence by: Expertise, capacity, cost, core, competence, trade secret etc Big influenced from organization broader goals and project’s immediate needs Security consideration also needed to define the method. (e.g. choose make when data is very confidential)

Contract Type Fixed Price A fixed total price for a well defined product Ex. Building a house at a fixed price Cost Reimbursable Payment to the seller for its actual cost Ex. Building a house at cost reimbursable price Time and Material Hybrid type of contractual arrangement that containts aspect of cost reimbursable and fixed price Ex. In drilling operation, seller will charge at US$ __/hour. In case there is a delay. Than the seller still charge the buyer for how long delay*hour rate

Fixed Price Risk on seller since any cost overruns may not be passed to the buyer Buyer have experience and know the total price at project start Can be more expensive than cost reimbursable Two type: Fixed price Incentive Fee: Incentive fee for meeting a target specified in the contract; eg completed ahead of schedule Fixed price Economic Adjustment: For case when fluctuations in the exchange rate / interest rate may impact to the project

Cost Reimbursable Risk on Buyer Often used when the buyer can only describe what they need rather than what to do Simpler scope of work Two type: Cost plus fixed fee The seller passes the cost back to buyer and receive additional fix fee upon competion of project. Risk on buyer Cost plus incentive fee The seller passes the cost back to the buyer and gets an incentive fee for meeting a target (eg. Keep the cost remain low). Risk on Buyer and Seller

Time & Material In this case, Seller charges for time, plus the cost of any materials needed to complete the work Form: contract is priced on a per hour or per item basis and has elements of a fixed price contract (price per hour) and cost reimbursable (material used and total is unknown) Buyer has medium amount cost of risk Used when scope of work not completely defined, but everyone agrees that the project is relatively small and the need is urgent Quick to create, good choice when you are hiring people to augment your staff Require the most day to day oversight from the buyer

Output Procurement Management Plan: High Level document that describe how the remaining procurement process (solicitation planning~Contract Close Out) will be maintained Statement of Work: Describe what work is to be completed under the contract Should be clear, complete and concise Describe all the work & activity that the Seller is required to complete May be changed during procurement process Type: performance, functional, design

Suggested Risk Sharing Principles Scope of work information Very Little Partial Complete Uncertainty High Moderate Low Degree of risk High Medium Low 100% 0% Suggested risk allocation Owner (client) contractor 0% 100% Contract Types CPPF CPIF CPFF FPIF FFP CPPF : Cost Plus Percentage Fee CPIF : Cost Plus Incentive Fee CPFF : Cost Plus Fixed Fee FPIF : Fixed Price Incentive Fee FFP : Firm Fixed Price

12.2 Plan Contracting Documenting products, services and results requirements and identifying potential Sellers

Plan Contracting Documenting products, services and results requirement and identifying potential sellers Output: Procurement documents Evaluation criteria Contract Statement of Work (updates)

Procurement Document (1) Procurement document consist: Information for the sellers: Background Procedure for replying Guideline for the proposal Evaluation criteria Pricing forms Scope of work Proposed terms and condition

Procurement Document (2) Invitation of Bid (IFB) Request one price do all the work Request for proposal (RFP) Request a price, but also detail proposal on how the work will be accomplishe, who will do it, resume, company experience etc Request for Quotation (RFQ) Request a price a quote per item

Contract Terms Standard Contract Standard of contract that used by the company. No need further review Special provision Addition to standard terms and condition, what need to be added, changes or removed from standard provision so that the resulting contract addresses the particular need of the project As a result of: Risk analysis Requirement of the projects Type of project Administrative, legal or business requirements Letter of Intent It is not a contract, but a letter without legal binding, that says the buyer intends to hire the seller

Non Competitive Forms of Procurement This form is used when the scope is awarded to a seller without competition. This would be implemented in the following condition: The project under schedule pressure A seller has unique qualification There is only one seller A seller hold a patent Other mechanism exist to ensure that the seller’s price are reasonable The forms are: Single source: contract directly to preferred seller. This might be a company that have worked before and for various reason don’t want to look for another Sole source: there is only one seller. This might be a company that owns a patent

Evaluation Criteria Objective Used to rate or score the proposal. In common practice, the criteria didn’t include in procurement document (only use as internal purpose) Rank of Criteria All of the criteria should be ranked which is the most priority and the less priority based on the weight of each criteria Criteria, example: Understanding of need Overall of life cycle cost Technical capability Project implementation/management approach Credentials Time to Deliver Evidence or demonstration of proven deliverable Team member Expertise Company performance: financial performance, customer base, license and certification, and organization

12.3 Request Seller Response Obtaining information, quotation, bids, offers, or proposals as appropriate

Technique Bidder’s Conference Meeting with prospective sellers to make sure that they all have a clear and common understanding of procurement Making sure the pricing of the seller is matches with the work Collusion Sellers is not asking their question in front of their competition Question and answer should be written and issued to all potential sellers Advertising vs qualified seller lists Advertising: open, attract additional sellers, avoid the collusion Shorted list: closed, potential seller has been checked in advance

Request Seller Responses Output: Qualified sellers list Procurement document package Proposal

12.4 Select Sellers Reviewing offers, choosing among potential sellers and negotiating a written contract with each seller

Select Seller Reviewing offers, choosing among potential seller and negotiating a written contract with each seller Output: Selected sellers Contract Contract Management Plan Resources availability Procurement Management Plan (up dates) Requested changes

Proposal Review Evaluation criteria needed to review the proposal A seller may be asked to make presentation then negotiation (if ok) A seller may simply be selected and asked to sign a contract The list of sellers may be narrowed downs (short listed) Short listed maybe asked to make presentation May combination of presentation and negotiation

Technique Weighting system: weighting the according to each of the evaluation criteria Screening system: eliminating sellers that do not meet minimum requirements Independent estimate: comparing the cost to an estimated created in house or with outside assistance Past performance history

Contract Negotiation Objective Obtain fair and reasonable price Develop good relationship with the seller Tactics Attacks Personal insults Deadline Good guy bad guy Lying Missing man Delay Withdrawal Limited authority Fair & reasonable Extreme demand Fait accomply

Items to Negotiate Responsibilities Authority Applicable law Technical & business management approaches Contract financing price

12.5 Contract Administration Managing the contract and relationship between buyer and seller, reviewing and documenting how a seller is performing or has performed to establish required corrective actions and provide a basis for future relationship with the seller, and managing contract related changes

Contract Administration Contract admin: is the process of ensuring that the Seller’s performance meet contractual requirement Contract Change Control System: A process for modifying a contract that should be included in the contract Changes: review the impact Contract administrator is the only one with authority to change the contract There are potential conflict between project manager and contract administrator Correspondence: written documentation of certain aspect of buyer seller communication, such as clarification, contract changes, unsatisfactory performance

Manage Contract Changes Contract changes are requested from: Seller Request (Material, Resources availability) Buyer Request (change of scope) Amendment To change the contract content (time, scope, cost) Addendum To add article/sub article that has not been made in the contract original

Logistic

Inland Transport

Sea Freight

Air Freight

Railway

Heavy Lift

Contract Administration Output: Contract documentation Requested changed Recommended corrective actions Organizational process assets (updates) Project Management Plan (up dates) To become a new and innovative energy company PT Rekayasa Industri

12.6 Contract Closure Completing and settling each contract, including the resolution of any open items, and closing each contract applicable to the project or a project phase

Contract Close Out Done When: Contract ends Contract is terminated before the work is completed Activities: Verification Financial closure Update record Final contract performance report Contract file Procurement Audit Review of procurement process, not audit of cost. It is a lesson learned of the procurement process

Contract Closeout Vs Administrative Closure Contract close out occurs first. At the end of contract, PM would perform a procurement audit, administratively close out the contract, then administratively close out the project Administrative closure may be done at the end of each project phase and at the end of the project as a whole. Contract close out is done only once. Administrative closure uses the term lesson learned and contract close out uses term procurement audit Contract closeout requires more documentation than administrative closure

Contract Closure Output: Closed contract Organizational process assets (up dates)

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