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Introduction to Project Management

Unit 9

Unit 9

Project Procurement and Contracting

Structure 9.1 Introduction Objectives 9.2 Importance of Project Procurement 9.3 Project Procurement Management – Overview Operations Procurement and Project Procurement Project Procurement Management Process 9.4 Types of Contracts Traditional Lump Sum Fixed Cost/Time Design (D), Construct (C) Novation and Turnkey (T) CM, PM and PM/CM On-Call Contracting Guaranteed Maximum Price Full Cost Reimbursable Procurement 9.5 Contract Negotiation Techniques 9.6 Summary 9.7 Terminal Questions 9.8 Answers 9.9 Glossary

9.1 Introduction
Procurement and contracting are vastly interrelated domains. These domains constitute the single most important strategic planning exercise in successfully implementing large and complex projects. For example in executing a power plant, the EPC contractor who is implementing the power plant, usually outsources the total implementation of the Water Treatment (WT) plant which is needed to provide de-mineralised water to be fed into the boiler. This is because the agency to whom this work is outsourced has the technological expertise to design, assemble, erect, commission (and even operate and maintain for a pre-agreed period, if desired by its customer) the WT system. The WT system vendor, in turn, treats the implementation of the total WT system as a project that has been secured from the power plant EPC contractor. The WT system therefore involves the works of design, procurement (involving purchase) and site works for implementation.
Sikkim Manipal University Page No.: 179

Introduction to Project Management

Unit 9

Project procurement can be termed as the most significant single contributor to the successful implementation of a project. Project procurement management comprises of purchase, procurement and contracting. In a well planned project, the procurement and contracting strategy is worked out even at the project definition stage. This unit describes the procurement management processes depending on the category of the materials or products, equipment or tools, services, totally engineered systems or the total projects to be contracted. Various types of contracts are also described. Risk sharing between the contracting parties is highlighted as an important process in project procurement management. Contract negotiation techniques are described in terms of how both, the buyer and the seller should approach the task of contract negotiations. The unit emphasises that the project manager should understand the contracting principles and practices well. Learning Objectives After studying this unit, you will be able to:  Explain the influences of the project procurement on the deliverables of the project.  Describe the types of contracts which a firm can select to outsource a portion of the project scope.  Explain the process to share the project risks between buyer and seller.  Elucidate the process to negotiate techniques in contracting.

9.2 Importance of Project Procurement
Project Management Body of Knowledge (PMBoK) defines project procurement management1 as the process of acquiring goods, services or results needed from outside the project team to perform the work as well as the contract management processes. Procurement is formalised by a contract between buyer and seller. Contract is a mutually binding agreement that obliges the seller to provide the specific product or service or result and obligates the buyer to pay for it.

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Fleming, W. Q., Project Procurement Management, FMC Press, CA, 2003, p v

Sikkim Manipal University

Page No.: 180

1 Operations Procurement and Project Procurement The differences between the procurement carried out for the overall operation of an organisation. products or services are acquired or purchased from outside of the organisation in order to complete the task or project.: 181 . 9.3.1. This makes „project procurement‟ a major challenge faced by the project manager when the project is one of infrastructure.Introduction to Project Management Unit 9 When a project sponsor awards the work of a project to a project manager the sponsor himself is procuring the project from the project manager. the project is a commitment. and the procurement carried out for a specific project.e.1: Differences between Operations Procurement and Project Procurement Sikkim Manipal University Page No. i.3 Project Procurement Management – Overview Project procurement management is a part of the project management process. Table 9. a cost increase over the budget for the procured item or a delay in the delivery schedule of the procured item may have an adverse impact on the profitability of the project for the performing company. a “contract” between the project manager and the project sponsor –the commitment is to deliver a product or service to the sponsor within a specified time. Project procurement management can have cost and schedule effects on the internal targets of an organisation i. In real terms. budget and quality specifications. In this process. are shown in Table 9.e. or an industrial plant or a manufacturing facility. 9.

the company or a division of the company already manufactures a product. Kamani Engineering manufactures transmission towers. and the company is also executing projects for its clients which require the same product as part of another project scope. For example. Larsen & Turbo manufactures switchgear. The Table 9. Another example. Managing risk (although risk management is often addressed separately. pressure vessels. and also executes large power transmission projects for Power Grid Corporation of India.: 182 . it is noteworthy that contracts are. These products are also required in several electrical projects or petrochemical projects that they execute for clients. and the timely availability of the manufacturing equipment or shop personnel for meeting deliveries without adversely affecting their other job orders.3.Introduction to Project Management Unit 9 9. For a manufacturing company deciding to starts a project. wherein. heat exchangers etc. The intensity and the effort required in planning depend on the complexity of the scope of work in the procurement package. risk management tools.2 Project Procurement Management Process The project procurement method varies depending on the category of the contracted product or service. Several companies in India exist. the „make or buy‟ decision forms the first step in the procurement planning. at their core. This decision is based on a cost comparison between „make‟ and „buy‟. The broad categories are:          Materials or products Equipment or tools Labours Professional services Totally engineered systems Total project Deciding to „Make or Buy‟ Outsourcing the work for a „Buy‟ decision.2 shows the comparison of costs for in-house development and outsourcing. Sikkim Manipal University Page No.) Project Procurement Management generally involves the following: All procurement requires some level of planning. where the bulk of the transmission towers are their inhouse supply.

oil prices. Single Source: This is a case when your organisation prefers to work with an identified seller. 2500/month) x 20 months.2: Comparison of Costs for In-house Development and Outsourcing The additional investment of Rs 30000 for In-house option will break even if the software usage is for more than 20 months i. Examples of airline fares.e. 3500/month – Rs. The market scenario for the product or service to be procured gives rise to any of the following three conditions:  Sole Source: In this case there is only one qualified seller in the market. Dow Chemicals under their patent was the only manufacturer Reverse Osmosis (RO) membranes which was utilised for desalinating saline water and all water treatment package vendors had to buy RO membranes only from them or their licensee in a country. Sometimes companies show a preference for a supplier with a view to create a long term relationship for a niche product which the company may require to procure often.: 183 . (Rs. Therefore if you plan to use the software for less than 20 months then go for outsourcing but if plan to use the software for more than 20 months then go for In-house development. For example. Sikkim Manipal University Page No.3 summarises the actual procurement processes involved in each of the process groups.   The Table 9. even though other sellers may offer a lower price. Oligopoly: This is a condition where the providers of the product or service are so few in number that the actions and pricing of one seller affect the actions and pricing of the other sellers. and hardware prices can fall in this category.Introduction to Project Management Unit 9 Table 9.

: 184 . It is a process of identifying the risks involved in each make or buy decision.3: Procurement Management Processes (As per PMBoK) The function performed by each process is explained below. Contract Statement of Work (SOW)2 (describes the portion of the project scope which is included in the particular contract).  2 Refer "Information Technology.Introduction to Project Management Unit 9 Table 9. The outputs of this process are:  Project management plan describing how procurement process will be managed starting with development of procurement documentation and culminating in contract closure. Fifth Edition" Kathy Schwalbe. It also reviews the type of contract with regard to mitigating the risk by determining what risks can be transferred to seller. Project Management. Plan Purchases and Acquisition Plan Purchases and Acquisitions is the process for deciding what to buy or acquire and when and how to buy that. Sikkim Manipal University Page No.

ITB and RFQ (both imply the same type of invitation) are focused on getting the seller‟s price. For large value contracts. This document is issued to prospective sellers who are invited to bid. tender notice. Any other technical/financial/organisational data considered relevant by the owner. invitation for negotiation or contractor initial response. completion period. These may involve price loading criteria for technical and commercial deviations stipulated by the bidders in their bids. Audited financial statements like balance sheet. Here.Introduction to Project Management Unit 9 Plan Contracting This process includes preparation of a procurement document for each contract planned. Contract completion certificates from his clients. Request For Proposal (RFP). in which the seller is asked to submit his experience list for similar works carried out by enumerating the following:        List of projects completed with contract value. which implies that there is a bit of consultancy service demanded from the sellers in their response. the ITB is preceded by an invitation to submit a prequalification offer. as well as specific criteria for price loading on utilities Sikkim Manipal University Page No. Firm‟s organisational structure List of key personnel of the firm List of construction equipment/production machinery owned. Profit and Loss (P & L) account for the last 3 to 5 years. Request For Quotation (RFQ). For example if RFP asks for a price that means in addition. a prior assessment of the capability of a firm to perform the intended scope of work is made. The second category of evaluation criteria relates to evaluating the bids received in response to the ITB/RFP. it necessarily asks for the sellers‟ and ideas on how the project work should be done. and not his ideas. eligible to receive the ITB/RFP. Evaluation criteria: The first category of evaluation relates to prequalification of a firm for receiving the ITB.: 185 . and scope of work. The invitation is termed Invitation To Bid (ITB). This data submitted by all prospective bidders is analysed to arrive at a list of pre-qualified bidders.

Select Sellers This process involves complete evaluation (techno-commercial evaluation and price evaluation) of the bids received. Request Seller Responses While the prospective sellers are expected to submit their bids in response to the ITB/RFP as issued to them. Here the bidders have been pre-qualified following a fairly extensive evaluation.  Continuously manage contract related changes. as well as documentation of this performance. it is a common practice in large value contracts to host a bidders‟ conference. After satisfactory completion of this step. It is also provides:  Regular review of seller‟s performance in executing the SOW.) where system performance is evaluated based on system life-cycle costs. This method is followed to ensure that all bidders possess the same information on which to base their prices and proposals. the final selection of the seller is usually based on the lowest evaluated price. water etc. a due date for submission of the bid/proposal is communicated to all bidders. The proposals are the seller‟s prepared document that describes the seller‟s ability to provide the requested products/services at his quoted price. A contract is a legal document backed by the country‟s legal system (as long as it does not include illegal activities). Contract Management Plan: This covers contract administration activities through the life of the contract.  Contract Administration Contract administration is a process of managing the contract between buyer and seller. where all bidders are present and are permitted to ask questions concerning the SOW. This process is called solicitation. The outputs of this process are:  The Contract: This can be a simple purchase order or a complex document. The output of this process is a bunch of bids proposals from the bidders.Introduction to Project Management Unit 9 consumption (electricity.: 186 . followed by negotiations with the bidders. Sikkim Manipal University Page No.  Provide a basis for future relationship with the seller.

pipes.4 Types of Contracts All procurements are carried out based on a „contract‟ between buyer and seller.Introduction to Project Management Unit 9 Contract Closure Contract closure is a process of completing the contract by resolving all open items. Such a purchase order usually stipulates a fixed unit price for each item. Alternatively. For example. the government published copper price index can be used as a basis for arriving at a price variation formula in the contract.: 187 Sikkim Manipal University . in case of copper cables. steel. Sometimes. if the deliveries are required over a long period of time. are usually carried with a simple purchase order (contract). The following major key clauses are incorporated in construction contracts:           Scope of Work Contractor‟s obligations Owner‟s obligations Technical and Commercial specifications Payment terms Warranties Performance security Termination rights Dispute resolution mechanism Indemnities Page No. Purchase of standard products for a project like cement. A contract is a binding agreement between two or more parties for performing some specified acts in exchange for lawful consideration. the contract may contain a price variation clause to take care of price variations in the costs of raw materials used in their manufacture. Activity 1: List down the components of procurement contract between a consultancy (Resources unlimited) and its client (United Technology) 9. cables etc. A contract is entered into after a decision is made by the buyer on which seller to use. a contract may be foreclosed or terminated by mutual agreement between buyer and seller. The nature of the goods and works that are purchased dictate the appropriate contract type.

we look at large construction projects. Unit rate contracts are an example. For a more comprehensive understanding of contracting in large projects. The variations in this category are: o Cost-Plus-Fee (CPF) or Cost-Plus-Percentage of Cost (CPPC): The payment is made for the actual cost plus an agreed percentage of the actual cost as fee. in addition to the payment as per the CPPC or CPFF mode. Here.: 188 .  o  Time and Material (T&M) contracts: Here the contract contains the feature of both cost reimbursable and fixed price contracts. where sharing of the risk between the major stakeholders. the product to be supplied or SOW to be carried out is very well defined and the seller is paid a fixed price.). although a centralised contract department is present in many project companies to undertake implementation of large projects. an incentive is paid upon achieving certain specified performance levels of the project. but the contractor is paid for the actual quantities executed. where the unit rates for specific items of work are fixed. PMBoK categorises contracts into three broad categories:  Fixed price or lump sum contracts: Here. To illustrate project procurement contract examples. Cost-Plus-Incentive-Fee (CPIF). like the buyer (owner) and the seller (contractor) is a very important consideration.Introduction to Project Management Unit 9 Project procurement requires a high level of understanding of contracts by the project manager. Contracts in India are governed by the Indian Contract Law 1872. Cost-reimbursable contracts: Here the seller is paid for his actual costs plus a fee to cover his profit. The actual cost includes direct cost (salaries of full-time project staff) and indirect cost (salaries of management and support staff indirectly involved in the project plus cost of office facilities like rent. electricity etc. we examine seven types of contracts with varying degrees of risks assumed by these stakeholders as per a review Sikkim Manipal University Page No. since quantities are not known at the time of signing the contract with the contractor. o Cost-Plus-Fixed-Fee (CPFF): This is same as CPPC except that the fee is fixed and does not increase or decrease with the actual cost unless project scope changes.

Traditional lump sum fixed cost/time 2.: 189 . Project Management (PM) 3 Adapted from „Procurement strategies – A Relationship-based Approach‟ by Derek Walker and Keith Hampson Sikkim Manipal University Page No. Figure 9. Design + Construct or Turnkey 3. Figure 9.1 shows a construction cost continuum for project delivery. The descriptions of the seven types are as follows: 1. Construction Management (CM).Introduction to Project Management Unit 9 conducted and presented in an international publication „Procurement strategies – A Relationship based approach‟ by Derek Walker and Keith Hampson.1 range from the traditional fixed cost/time type (lowest cost risk to owner and designated as 1) at one end to the fully cost reimbursable type (highest cost risk to owner and designated as 7) at the other end.1: A Construction Cost Continuum for Project Delivery 3 The contract types shown in the figure 9. Design + Novate + Construct 4.

Introduction to Project Management Unit 9 5. Guaranteed Maximum Price (GMP) 7. each of these phases.e. the project is tendered and awarded to a construction contractor at a fixed price and then the construction delivery is completed. The advantage of this type of contract is that the owner is aware of the cost at the time of award based on which the design was finalised. designing. Theoretically.4. it is implied that bidders are prequalified. On-call multitask contracting 6. and thus a substantial value addition opportunity by valuable management and constructability information is lost. based on which a design is generated which is as comprehensive as possible. The evaluation of the bids received leads to selection of the seller at a fixed cost/time. In practice. Tendering can be either „open tendering‟ or „pre-qualified tendering‟. Full cost reimbursable 9. Tenders for construction are invited for this design. The construction contractor becomes answerable to the principal design consultant. on the premise that the design is complete and comprehensive. i. Additional cost claims by the construction contractor on account of consequential damages due to the changes are also likely. while he cannot make suggestions on improved design for constructability4. the owner fixes a Design Consultant. By „pre-qualified tendering‟. the design is already developed by the owner (usually through a design consulting firm). the designs always have gaps which lead to the undermentioned possible disadvantages:    The construction contractor makes extra cost claims to the owner if the design is not complete before tendering.  4 The definition given by the Construction Industry Institute reads “Constructability is the optimum use of construction knowledge and experience in planning. tendering and contract award is discrete and separate. design. The construction contractor is excluded from the design development phase. First. Subsequently.: 190 . procuring and operating to achieve overall project objectives” – constructability applies particularly to buildings and large structures Sikkim Manipal University Page No. however..1 Traditional lump sum fixed cost/time (Fixed Price Contracts) In fixed type contracts.

BOT. the contracting parties i. Notwithstanding these disadvantages. The major function of the contract assignment is to provide for and agree to the mechanism for the assignment and management of these risks. The incentive for minimising the long term costs and developing a highly cost-effective solution over the life cycle thus gets in-built into the entity which is responsible for design. as it covers the life-cycle cost effectiveness. The concept of constructability is therefore present to a high degree. This may lead to a confrontational approach over disputes which may ultimately need to be settled by arbitration or a court of law. build. The conventional wisdom that is accepted here is that.e. client and the entity individually assume the risk within whose control the risk most lies. This mode of contracting is common for infrastructure projects where the concession permits tolls and other payments to be made by end users.Introduction to Project Management Unit 9  Many owners perceive that they may be at the mercy of construction contractors looking for opportunities to create additional revenue and profit from such gaps in the tender. The client therefore has no direct Sikkim Manipal University Page No. fixed contracts are in vogue where designs can be more or less frozen prior to tendering for construction. with some contractual provisions for price variations incorporated in the contract. The entity enters into one of these three types of contract with the client to design. an entity exists or an entity is formed which meets the client‟s project need. BOOT (total package options): The letters here imply: B – Build First O – Operate Second O – Own T – Transfer Here.  BOO. The client makes a concession agreement to fund the facility until the facility‟s ownership is transferred to the client. construction and operation/maintenance of the facility. operate and own for some period of time (called the concession period) and transfers the facility to the owner at the end of this period. Usually the entity is an alliance or joint venture of firms who provide the facility for the client.: 191 .

Novation. While there have been examples of successful BOT projects. As the client is usually a government department. each D + C bidder gets the opportunity to involve his design team in the bid for suggesting innovative solutions over and above this concept. political bottlenecks regarding land acquisition and politically motivated decisions like toll rates being decreased in the operation phase have resulted in failure or inordinate delays in such projects. a Project Management (PM) or Construction Management (CM) entity enters into a contract with the client to represent the client in leading the design team and in the management of the construction process. 9. The PM/CM can have a contractual arrangement with the client in which the design and construct type of contracting takes a financial risk. The mode of „Novated D + C mode of contracting‟ is developed from the D + C model and is gaining popularity among large commercial and residential projects in Australia.  In the D + C mode of contracting.4. implies the replacement of an existing contract between X and Y by a new contract on the same terms between X and Z and this requires the agreement of all Sikkim Manipal University Page No. The „Design and Construct‟ type of contracting is usually considered as falling in this category. There are two variations in this mode of contracting. with a single point of contact in the PM/CM company. Thus. This increases the chances of the client finding a most cost effective solution for the project from among the D + C bids received.Introduction to Project Management Unit 9 cost risk but faces the possible risk that the facility does not meet its needs or that the concession agreement is not satisfactory. The managerial instructions given to the actual contractors by the entity are therefore persuasive rather than directive. the client initially engages a design consultant to develop concept project solution.: 192 . there have also been cases of failures. which mainly arise out of a lack of trust or communication between contracting parties. especially when the PM/CM entity is a builder by experience. they are:  The PM/CM entity is an „Advisor‟ to the client and becomes an internal design and construction group of the client.2 Design (D). which is used as the basis for obtaining bids from D + C bidders. Construct (C) Novation and Turnkey (T) Here. as a legal term.

the Construction Management contractor acts as a consultant bidder and provides advice on the practicality of the design with respect to the construction methods that can be deployed. Fewer contract variations. it is also relevant to briefly discuss the concept of a „Turnkey project‟. 9. the D + C contractor also finances the project. Hence.3 CM. The advantages of this type of contract are:    Availability of construction expertise in the design phase. The client may opt to make milestone payments or payment after handing over to the D + C contractor. The novation parties as per the above referred definition are: X is the Client Y is the Design consultant Z is the D + C contractor The client‟s cost risk is reduced since the D + C contractor engages the design consultant and becomes directly accountable to the client with respect to all the design development.4 On-Call Contracting This mode is adopted by the owner in the beginning of the project when the owner is more familiar with the nature of work than the consultant.4. Y and Z. PM and PM/CM In this type of contract. He also provides services of construction planning.: 193 . Here. and then dividing the project into Task Orders (TOs) that are Sikkim Manipal University Page No. coordination and supervision of the construction work carried out by contractors appointed by the client. An extended form of the CM contract is the PM/CM contract where the PM/CM contractor also takes responsibility for design coordination. For a novated D + C contract. but this balance shifts in the execution stage of the project. and thus the client cannot make a claim for extra costs on account of errors or omissions in design. This scheme is implemented by the owner signing a master contract with one consultant at the beginning of the project. In a turnkey project.4. Less confrontation between the design team and the team responsible for supervising the construction..Introduction to Project Management Unit 9 three parties X. and cost control. conventional wisdom in this mode of contracting is that the consultant should assume most cost risk at the execution stage. 9.

the contract calls for a reimbursable fee. detailed planning. For example in India.Introduction to Project Management Unit 9 released to the consultant in stages. the contractor absorbs the excess. reimbursement of actual cost plus a fee. i.4. Table 9. This mode is similar to novated D + C as the design development is partial at the time of contracting. which is termed the Guaranteed Maximum Price (GMP). The design is however fixed. But in the GMP mode. The contractor makes his judgment of the cushion he must provide in fixing his GMP which becomes part of the contract. but does not find it feasible to deploy the personnel of his own organisation to implement the project.4 shows the typical characteristics of on call contracting. If the actual cost is less than the GMP.6 Full Cost Reimbursable Procurement This contracting mode is applicable when the client prefers to retain control over the design.4: Typical Characteristics of On Call Contracting 9.5 Guaranteed Maximum Price In this contracting mode. Nuclear Sikkim Manipal University Page No. Table 9. This mode of contracting is adopted when the design is partially developed at the time of contracting. If the actual cost exceeds the GMP. a portion of the difference amount is shared with the contractor as an incentive.4. the contractor may or may not agree to take over the design team and its initial design concept. procurement and the construction phases of the project. Some large projects where aspects of safety and secrecy are very important and where client cannot afford to employ a large contingent of project design and project management personnel fall in this category. but there is a cap to the total amount paid. 9.e.: 194 .

In the former. In the middle lie the CM/PM type and the GMP/Novation types of contract. the client depends on the market to provide a total solution to the project and project delivery. the client depends on his appointed design consulting firm‟s expertise in shaping the project details. The first step in the procurement process is to decide whether to ________ or ______.Introduction to Project Management Unit 9 Power Corporation of India Limited (NPCIL) deploys engineering consulting firms like TCE Consulting Engineers for generating all the civil/structural piping drawings for the nuclear power plants being implemented by them. BOO or BOOT type). 2. M. Overview of Types of Contract for Large Projects Three teams are primarily involved in the implementation of a large project like.Dastur Consulting Engineers were also deployed by Steel Authority of India Ltd. Design team and Contractor. procurement and construction processes. For large projects or the type of projects mentioned above. and in the latter.N. the extent of client‟s influence over the design and other implementation areas of the project assume importance. Self Assessment Questions Fill in the blanks: 1. The document detailing the scope of work in a procurement contract is called ________. resulting in the client‟s requirements undergoing changes frequently during project implementation. At one end of the scale is a project where the client has a very high level of confidence in his expertise to control the design. This type of contract can also apply to projects where design details are unknown at the time of tendering and/or external influences on project scope and design are significant. Client. at the other end is the project (example. where these processes are under the contractor‟s control. CPF stand for _______ and CPFF stands for _______. Sikkim Manipal University Page No. This full cost reimbursable type of procurement is based on the client‟s high degree of trust and confidence in the agency deployed by him. The type of contract which the client selects for such projects thus depends on whether the client prefers to exert a high influence on the design and procurement of the project or whether the client permits the contractor to exercise influence over these processes. in the 1950s and 1960s to carry out detailed design and drawings for steel plants.: 195 . 3.

9. conducting the negotiation and documenting the negotiation/forming the contract when the negotiation is successful. The financial risk in a fully reimbursable contract is borne by the contractor. the project manager faces the need to understand and track the negotiating process to ensure that both the project needs and his organisation‟s needs are met in the outcome of the contract negotiations with the seller.5 Contract Negotiation Techniques In a large project. analytical/financial. State whether the following statements are true or false: 6. 7. Project contract negotiation is invariably a two-way street wherein the buyer seeks to exercise a good degree of control over the seller‟s performance. Table 9. each of which requires careful planning and execution effort like planning the negotiation. In a GMP contract. for subcontracting a major portion of the project scope the project manager relies on the personnel in the purchase and/or contract department of the project organisation. In on-call contracting. the needs to become familiar with negotiation techniques as well as negotiation skills. 5.Introduction to Project Management Unit 9 4. as well as wants to maintain a harmonious relationship. The negotiation process itself comprises three phases. Therefore. there is a _______ to the total amount paid. Hard skills include product/service/technical knowledge.: 196 . required in conducting the negotiations. the Master contract keeps the risk with the contractor. In PMBoK. Negotiating skills comprise a combination of hard skills and soft skills.5 shows the checklists for the buyer and a checklist of contract best negotiation practices for an overall understanding of the negotiation techniques. However. computer literacy and legal aspects of contracting. the process of receiving quotations from prospective vendors is called __________. Sikkim Manipal University Page No.

5: Checklist of Contract Negotiation Best Practices Buyer Activity  Know what you want – lowest price or best value. Sikkim Manipal University Page No.: 197 .  State your requirements in performance terms and evaluate accordingly.Introduction to Project Management Unit 9 Table 9.  Evaluate potential sources promptly and dispassionately.  Use a screening system to pre-qualify sources.  Use a weighting system to determine which evaluation criteria are most important.  Follow the evaluation criteria stated in the solicitation.  Conduct market resource about potential forces before selection.  Develop organisational policies to guide and facilitate the source selection process.

Although the personnel of this department usually carry out contract negotiations in large projects. the project manager relies on the personnel in the purchase and/or contract department of the project. For subcontracting a major portion of the project scope in a large project. equipment/tools. an entire system can get outsourced to a firm specialising in that identified system. procurement starts with the „make or buy‟ decision.: 198 . (True/False) Activity 2: List the contract negotiation techniques you will use when dealing with a construction contractor. 10. labour. The three phases in contract negotiations are ______. Contract negotiation requires ______ skills and ______ skills.6 Summary Procurement and contracting are vastly interrelated functions and constitute the single most important strategic planning exercise in successfully implementing large and complex projects. services or results needed from outside the project team to perform the work as well as contract management processes. The procurement method adopted depends on the category of product/service being contracted. The categories are materials/products. and ________ the negotiations. _______. 9. 9. In large projects. For a manufacturing/production taking up a project. professional services. total projects. Sikkim Manipal University Page No. Procurement is formalised by a contract between buyer and seller. totally engineered systems.Introduction to Project Management Unit 9 Self Assessment Questions 8. the project manager should understand and track the negotiating process to ensure that both the project needs and his organisation‟s needs are met in the outcome of the contract negotiations with the seller. Project procurement management is the process of acquiring goods. The project manager does not require being familiar with the contract negotiation skills and techniques since contracts are handled by other departments in the organisation.

soft 10. Refer sections 9.7 Terminal Questions 1. conducting. Planning. „procurement‟ and „contract‟. documenting 9. Cost Plus Fee and Cost Plus Fixed Fee 2. Statement of Work (SOW) 4. False 8.2 3. False 7. Hard. Explain the types of contracts that are entered into in project procurement. USA.3.1 and 9. The negotiation process itself comprises three phases like planning the negotiation. 4.5 Sikkim Manipal University Page No. Solicitation 6. 2. 9. False Answers to Terminal Questions 1.8 Answers Answers to Self Assessment Questions 1. What are the factors that both the buyer and seller should understand as forming a checklist for contract negotiations? 9.4 4.5 5.: 199 .Introduction to Project Management Unit 9 Contract negotiating skills comprise a combination of hard skills and soft skills. buy 3. Refer section 9. conducting the negotiation and documenting the negotiation/forming the contract when the negotiation is successful. Bring out the meanings of the terms „purchase‟. Refer section 9. Make. Cap 5.2 2. Explain the overall project procurement process using the processes outlined in the PMBoK of PMI. Refer section 9. Refer section 9. What are the guidelines which the buyer should keep in mind while negotiating a contract? 5. 3.

The duration of time period over which the private sector operates the service/asset. Sikkim Manipal University Page No. ESI International. Subcontracting. It is a type of project that is constructed by a developer and after that sold to a buyer after completion. Chapter 12 (1996 & 2000 edition) .9 Glossary Term Procurement Description Procurement means purchasing. Procurement 2. Supplementary contractual document that usually includes description related to task and generally used in task type contracts. Procurement Management Section 3.pmi.PMBOK Q&A. A Guide to the Project Management Body of Knowledge. http://www. PMI. Fleming Contracting. Arbitration Concession period Turnkey project Task order References 1. Project Procurement Management: Teaming by Quentin W.: 200 . The procurement department within an organisation manages all the major purchases. Arbitration is a legal technique of settling up the disputes outside of the courts.org/Marketplace/Pages 4.Introduction to Project Management Unit 9 9. PMP Challenge!.