OVERVIEW OF THE

PROCUREMENT MANAGEMENT
Overview of the Procurement
Management
⦿ This Topic provides an overview of the
Procurement Management processes, examines
the seller vs. buyer, the procurement management
life cycle, the procurement general principles, the
construction procurement process, the common
stakeholders in the construction procurement
process and their different roles and finally risk
management.
Overview
⦿ Procurement Management
⦿ Seller vs. Buyer
⦿ The Procurement Management Life Cycle
⦿ Procurement General Principles
⦿ Construction Procurement Process
⦿ Common Stakeholders in the Construction Procurement
Process
⦿ Risk Management

3
What is Procurement
Management?
⦿ Procurement Management includes the processes
necessary to procure works, services and goods
needed from outside the company.

4
Examples
⦿ Works:
Construction of a building
⦿ Services:
Designing the master plan of a project
⦿ Goods:
Buying cables from a supplier

5
Overview
⦿ Procurement Management
⦿ Seller vs. Buyer
⦿ The Procurement Management Life Cycle
⦿ Procurement General Principles
⦿ Construction Procurement Process
⦿ Common Stakeholders in the Construction Procurement
Process
⦿ Risk Management

6
Seller vs. Buyer
⦿ The organization can be either the buyer or seller.
⦿ Seller
can be called a contractor, vendor, service provider,
consultant, subcontractor or supplier.
⦿ Buyer
can be called owner, employer, client, prime
contractor, purchaser or customer.

Now who are you? 7

Seller vs. Buyer
⦿ Duringthe procurement life cycle, the seller can be
viewed as:
◼ tenderer, then,
◼ selected tenderer or winning tenderer, then,
◼ contractor, vendor, service provider, consultant,
subcontractor or supplier

8
Overview
⦿ Procurement Management
⦿ Seller vs. Buyer
⦿ The Procurement Management Life Cycle
⦿ Procurement General Principles
⦿ Construction Procurement Process
⦿ Common Stakeholders in the Construction Procurement
Process
⦿ Risk Management

9
The Procurement Management Life
Cycle

Bidding Tendering Contracting

Closing Administering
Procurement Procurement

10
The Procurement Management Life Cycle
⦿ Beware of the use of the terminology “Bidding” and
“Tendering”. For the purpose of this course:
◼“Bidding” shall be used to describe the process of
configuring what to procure, preparing the bidding
documents and inviting proposals from tenderers.
◼“Tendering” shall be used to describe the process
where the tenderer completes the tendering
documents and submits his proposal.

11
Overview
⦿ Procurement Management
⦿ Seller vs. Buyer
⦿ The Procurement Management Life Cycle
⦿ Procurement General Principles
⦿ Construction Procurement Process
⦿ Common Stakeholders in the Construction Procurement
Process
⦿ Risk Management

12
Procurement General Principles
⦿ Equaltreatment/fairness
⦿ Competition
⦿ Economy, Efficiency, Value for money
⦿ Transparency

13
 Procurement General Principles
⦿ Equal treatment/fairness:
Ensure the fair and equal treatment of all tenderers.
⦿ Competition:
Competition leads to better price.
⦿ Economy, Efficiency, Value for money:
The aim of a procurement process is to achieve the best value for money,
that is to get good quality at the lowest possible price.
⦿ Transparency:
The Procurement Team needs to demonstrate that the process was
conducted in a proper way and to provide confidence in the procedures
followed in the procurement process.

14
Overview
⦿ Procurement Management
⦿ Seller vs. Buyer
⦿ The Procurement Management Life Cycle
⦿ Procurement General Principles
⦿ Construction Procurement Process
⦿ Common Stakeholders in the Construction Procurement
Process
⦿ Risk Management

15
So ...
⦿ We mentioned that procurement management
includes the processes necessary to procure works,
services and goods needed from outside the
company.
⦿ Wewill start by examining the procurement of
works, services then goods.
⦿ Themain example in the procurement of works is
the construction procurement.
16
Construction Procurement
⦿ It includes the processes required to secure the
construction of a project for an organisation.
⦿ Construction procurement can be a complex
process involving different stakeholders.
⦿ It is important at an early stage to define the role
and obligations of the various stakeholders
involved in a particular procurement process.

17
Overview
⦿ Procurement Management
⦿ Seller vs. Buyer
⦿ The Procurement Management Life Cycle
⦿ Procurement General Principles
⦿ Construction Procurement Process
⦿ Common Stakeholders in the Construction Procurement
Process
⦿ Risk Management

18
Common Stakeholders in the
Construction Procurement Process
⦿ The stakeholders involved in a construction procurement
process can vary considerably depending on the nature and
complexity of the project.
⦿ It is important to identify, particularly in a large project, the
parties involved in that project and their roles within the
project.
Common Stakeholders in the
Construction Procurement Process
⦿ Employer
⦿ Engineer
⦿ Contractor
⦿ Subcontractors and suppliers
Contractual and Administrative
Relationships
⦿ Contracts are made between parties, thus the parties
develop a contractual relationship.
⦿ In addition, administrative relationships should exist in
order to facilitate the administration of the contracts.
⦿ For example, in the contract between the Employer and
the Contractor, a contractual relationship exists between
the Employer and the Contractor, whereas an
administrative relationship exists between the Engineer
and the Contractor.
Contractual and Administrative Relationships Cont.

Employer

Project
Manager
(Engineer)

Contractor 2
Contractor 1

Contractual Link

Administrative Link
Role of the Employer
⦿ Also called ‘client’ or ‘owner’.
⦿ The roles of the Employer include:
◼ To appoint the Project Manager / Engineer to carry out
certain functions on his behalf which are essential for
the administration of the project.
◼ To pay for the work done.
◼ To provide the site and give possession of the site to
the Contractor.
◼ To give instructions or approvals to enable the work to
be carried out.
◼ To provide any materials specified to be provided by
the Employer.
23
Role of the Engineer
⦿ The engineer is sometimes called the ‘architect’,
'project manager', 'employer's representative' or
the ‘consulting engineer’.
⦿ The engineer could play several roles. These roles
could be all covered by the engineer, or each role
could be covered by a separate entity.
⦿ These roles include the roles of a designer
(consultant), construction supervisor and project
manager.
Role of the Engineer
⦿ To design all or parts of the works
⦿ To measure and value work done
⦿ To certify payments
⦿ To inspect work and to issue instructions with regard to the
removal of materials or work that is not in accordance with
the Contract
⦿ To indicate the form of the programme (schedule) of work
and to request a revised programme where necessary
⦿ To explain ambiguities in Contract Documents
⦿ To issue variations
Role of the Engineer
⦿ To grant extensions of time
⦿ To ascertain the sums payable to the Contractor
for claims made under the Contract
⦿ To issue the certificates of completion
⦿ To issue instructions regarding the remedying of
defects that appear in the Works until the expiry
of the Defects Liability Period
Role of the Contractor
⦿ To carry out and complete the Works in accordance with the
Contract
⦿ So far as required by the Contract, to design specified parts of
the Works
⦿ To provide the performance security of the Contract (and the
advance payment security, if required)
⦿ To submit a programme for the execution of the Works
⦿ To take care of the Works and remedy any defects therein
Role of the Contractor Cont.
⦿ To comply with instructions of the Project
Manager / Engineer given under the contract
⦿ To comply with the drawings and specification for
the Works
⦿ To give notices required by the Contract with
regard to delay or additional payment.
Overview
⦿ Procurement Management
⦿ Seller vs. Buyer
⦿ The Procurement Management Life Cycle
⦿ Procurement General Principles
⦿ Construction Procurement Process
⦿ Common Stakeholders in the Construction Procurement
Process
⦿ Risk Management

29
Risk Management
⦿ Risk
management is the process associated with
identifying, analysing, planning, tracking and
controlling project risks.

30
Why are construction projects subject to a large matrix of risks?
⦿ Price of the product is set before the final product is established.
⦿ The time required to plan, design and construct a construction project takes a
relatively long period.
⦿ The materials selected for use could include a number of new products of
unproven performance or strength. Advanced and complex technology is also
necessary in some construction projects.
⦿ The number of people involved in the plan, finance, design, supply materials
and plant, construct, administer, supervise and repair any defects in a
construction project is enormous.
⦿ Extensive interaction is required between many of the firms involved in
construction, including those engaged as suppliers, manufacturers, sub-
contractors and contractors, each with its own different commitments and
goals and sometimes they come from different countries.
31
Examples of Risks in Construction
Industry
⦿ Changes in legislation (law)
⦿ Changes in costs
⦿ Delayed payments
⦿ Errors in design
⦿ Defects in construction
⦿ Force majeure: war, revolution, …etc

32
Allocation of Risks
⦿ When a risk is allocated to the contractor, a contingent price has to be included
in his price.
⦿ The risk might not happen thus the price will not be required.
⦿ If the employer allocates most of the risks to the contractor, the employer would
be paying a larger sum than necessary.
⦿ One main purpose of the contract is to allocate the risks between the parties.

33
Sharing of risks Balanced Contracts

34
The Process of dealing with risks:
⦿ Identifythe risks
⦿ Analyse the risks
⦿ Minimize risks
⦿ Respond to the risk

35
Identify Risks
⦿ This should be linked to the client’s priorities.
⦿ For example, if the timing of the project is critical,
the severity of time-related risks is automatically
increased.

36
Analyse Risks
⦿ Interms of likely frequency of occurrence and likely
severity of impact.
⦿ This may be fairly subjective.

37
Minimize Risks
⦿ Examples of minimizing risks:
◼ Thorough planning to minimize delays
◼ Adequate subsurface exploration
◼ Full disclosure of all information available to the employer
and the designer to the contractor
◼ Obtaining permits in advance
◼ Strong and competent management by all parties
◼ Handling disputes promptly
◼ Good labor conditions to improve productivity
◼ Adequate contract administration

38
Respond to Risks Cont.
⦿ Transferof risk
⦿ Acceptance of risk
⦿ Avoidance of risk
⦿ Insurance of risk

39
Transfer of Risk
⦿ This is achieved through appropriate wording in the
clauses of a contract.
⦿ Contractual clauses are intended to allocate risks among
the parties.
⦿ Risk should be allocated to the party who is in the best
position to control it and/or foresee it.
⦿ For example, risks connected with the design of the
project are best controlled by the designers. Hence,
liability for defective design is usually allocated to them.
⦿ A premium can be included in the tender for the risks
transferred.
40
Acceptance of Risk
⦿ Itis unwise for the employer to try to pass to the
contractor a risk that is difficult to assess.
⦿ Skilled contractors will increase their prices to deal
with them or they may insert qualifications in their
tenders to avoid them.
⦿ Careless contractors will disregard these risks when
preparing their tender and may then find
themselves in difficulty at a later stage and may
sacrifice quality, resulting in disputes.

41
Acceptance of Risk Cont.
⦿ The client should carry highly unforeseeable and
poorly defined risks because the alternative will be
tenders that are so higher in price and thus
unacceptable.
⦿ Examples of such risks are those associated with
war, earthquakes and invasions, which would be
impossible to quantify or predict.

42
Acceptance of Risk Cont.
⦿ Inthe long term, shifting most risks to the
contractors will result in the contractors unwilling to
bear risks to be sent out of business and the
available number of contractors tendering for work
will gradually reduce, reducing competition and
increasing prices.

43
Avoidance of Risk
⦿ Once the risks have been identified, the building
project should be redefined or even abandoned to
avoid the risks.

44
Insuring Against Risk
⦿ Several risks can be insured

45
Procurement Policies

⦿ Most organizations have documented policies and

procedures specifying the procurement rules and
specifying who has authority to approve such
agreements on behalf of the organization.

46
TOPIC EXERCISES
Exercise 1 – Procurement
General Principles
⦿ Answer the following activities related to the Procurement
General Principles.

With acknowledgment to District Participatory Planning and

Budgeting Process, Somaliland
 Scenario A
⦿ Your Company X advertised a tender to construct a project. Three
tenderers were pre-qualified. Peter in your procurement team suggested
to send the estimated tender sum to one of the tenderers because he
had previous experience with the company and was successful in his
project. Mary said that this was unfair and that all tenderers should
receive the same information about a tender.
⦿ In general, who is correct and why?
⦿ Which procurement principle do you think this scenario relates to?
Scenario B
⦿ Your Company X advertised a tender to construct a project. Peter
suggested using the Competitive Bidding process, to get as much
competition as possible and therefore a better price for the contract.
Mary said that such process created too much work, so it was easier to
initiate a direct contracting process.
⦿ In general, who is correct?
⦿ Which procurement principle do you think this scenario relates to?
Scenario C
⦿ Your Company X advertised a tender to supply material. Supplier Y
submitted a tender which was lower than the estimated price and the
materials were very good quality. Supplier Z submitted a tender which
was higher and the materials were not as good quality. Peter suggested
that Y was the best value for money. Mary said that Z were well known in
the market, so it would be better to award the tender to them.
⦿ In general, who is correct?
⦿ Which procurement principle do you think this scenario relates to?
 Exercise 2 - Allocate the following risks to the Stakeholders
Risk Contractor Employer Engineer
Force Majeure
Changes in costs (Price fluctuations)
Economic disasters
Defects in the Work
Changes in legislation (law)
Materials and equipment
Labor Problems
Safety at Site
Conflicts in documents
Defective design

Changes in Quantities of work executed from that

estimated at signing the Contract
Weather
Subcontractor Failure
Delays in the Work

With acknowledgement to Fisk, Edward, Construction Project Administration, (Fifth Edition, Prentice-Hall, 1997)
References & Further Reading
⦿ Bunni, Nael G. The FIDIC Forms of Contract. (3rd Edition,
Blackwell, 2005).
⦿ Fisk, Edward, Construction Project Administration, (5th
Edition, Prentice-Hall, 1997)
⦿ Murdoch John and Hughes Will, Construction Contracts Law
and management, (4th Edition, Taylor & Francis, London and
New York, 2008)

53