BSBPMG518

Manage Project Procurement

Week 2
 Project procurement
The procurement cycle
The procurement process includes five major steps, as follows:

1. Specification. This step involves the purchasing department in communicating with

the project manager to develop and approve a list of procurement items necessary
for project implementation. The department must specify the approved items to
external vendors.
2. Selection. This step of the project procurement process requires the department to
find potential suppliers which can procure the necessary items, according to the
specifications. For this purpose the department needs to set vendor selection criteria,
which may include such measures as Delivery, Service Quality, Cost, and Part
Performance.
 Project procurement
The procurement cycle
3. Contracting. The department must communicate with the suppliers on delivery dates
and payment conditions in order to ensure “on-time” delivery of the ordered items
within the stated project budget. All the conditions should be listed in a procurement
contract. Also a detailed delivery schedule should be negotiated with the procurers
and approved by the purchasing department.

4. Control. Success of the procurement management process depends on how the

purchasing department controls the delivery and payment processes. Through
arranging regular meetings with the vendors, tracking delivery progress, reviewing the
ordered items against the approved product specifications, and making necessary
changes to the procurement contract, the department can control the process and
ensure successful accomplishment.
 Project procurement
The procurement cycle
5. Measurement. The final step of the project procurement management process refers
to using a system of performance indicators and measures for assessing the
effectiveness and success of the entire process. The project manager needs to set up
such a system and the purchasing department needs to use it in measuring the
process.
Special meetings and workshops can be conducted to view KPIs, intermediate results
of staged delivery, performance of procurers, adherence to product specifications,
communications with suppliers, and the like.
In case any deviations or gaps are revealed the department should notify the project
manager and make necessary changes to the procurement plan.
 Project procurement
Procurement documents
Documents involved in the procurement cycle are called procurement documents.
Procurement documents are an integral part of the early stages of project initiation.

The purpose of procurement documents is to define the contractual relationship

between the customer and the supplier of goods or services.

Procurement documents comprise of all documents that serve as invitations to tender,

solicit tender offers and establish the terms and conditions of a contract. In addition,
requests for information between two parties and requests for quotations, and
proposals and seller's response are also parts of procurement documents.
 Project procurement
Procurement documents
In general, procurement documents have the following attributes:
• Require potential bidders to submit all particulars for the employer to evaluate the
bidder.
• Require all submissions to be set out in a clear and honest manner to ensure that the
short-list criterion is unambiguous.
• Contain clear definition of the responsibilities, rights and commitments of both parties
in the contract.
• Contain clear definition of the nature and quality of the goods or services to be
provided.
• Contain provisions without any prejudice to the interests of either party.
• Are written in clear and easy to understand language.
 Project procurement
Types of procurement documents
• RFP - A request for proposal is an early stage in a procurement process issuing an
invitation for suppliers, often through a bidding process, to submit a proposal on a
specific commodity or service.
• RFI - A request for information (RFI) is a proposal requested from a potential seller or a
service provider to determine what products and services are potentially available in
the marketplace to meet a buyer's needs and to know the capability of a seller in terms
of offerings and strengths of the seller.
• RFQ - A request for quotation (RFQ) is used when discussions with bidders are not
required (mainly when the specifications of a product or service are already known) and
when price is the main or only factor in selecting the successful bidder.
 Project procurement
Types of procurement documents
•Solicitations: These are invitations of bids, requests for quotations and proposals. These
may serve as a binding contract.
•Offers - This type of procurement documents are bids, proposals and quotes made by
potential suppliers to prospective clients.
•Contracts - Contracts refer to the final signed agreements between clients and suppliers.
•Amendments/Modifications - This refers to any changes in solicitations, offers and
contracts. Amendments/Modifications have to be in the form of a written document.
 Project procurement
Selection criteria
Source selection criteria is a set of attributes desired by the buyer which a seller is
required to meet or exceed to be selected for a contract. Under project
management, source selection criteria are often included as part of the
procurement documents.

Selection criteria can be identified and documented to support an assessment for

more complex products, services, or results. Some possible source selection
criteria are:
 Project procurement
Selection criteria
• Understanding of need. How well does the seller’s proposal address the procurement
statement of work?
• Overall or life-cycle cost. Will the selected seller produce the lowest total cost of
ownership (purchase cost plus operating cost)?
• Risk. How much risk is embedded in the statement of work, how much risk will be
assigned to be selected seller and how does the seller mitigate risk?
• Management approach. Does the seller have, or can the seller be reasonably expected
to develop, management processes and procedures to ensure a successful project?
• Technical approach. Do the seller’s proposed technical methodologies, techniques,
solutions, and services meet the procurement documents requirements or are they
likely to provide more or less than the expected results?
 Project procurement
Selection criteria
• The size and longevity of the vendor company
• Whether the product been developed in Australia and does it incorporate specific
compliance or regulatory features required by the business
• Whether the vendor is Australian based and/or does it have a distribution network in
Australia
• The reputation of the vendor
• The extent to which the vendor is prepared to offer reference sites and/or the
opportunity for you to talk to their other customers to gauge their satisfaction with the
product or service you are interested in purchasing
 Project procurement
Legally binding contracts
To make a contract legally binding it must contain the following essential elements:

• Offer- A proposal made by one party to another party indicating a willingness to enter
a contract.
• Acceptance- The agreement of the offeree to be bound by the terms of the offer.
• Genuine Agreement- offer and acceptance go together to create genuine agreement,
or meeting of the minds. Agreement can be destroyed by fraud, misrepresentation,
mistake, duress, or undue influence.
• Consideration- Thing of value promised to the other party in a contract in exchange for
something else of value promised by the other party. This mutual exchange binds the
parties together.
 Project procurement
Legally binding contracts
• Capacity- The law presumes that anyone entering a contract has the legal capacity to
do so. Minors are generally excused from contractual responsibility, as are mentally
incompetent and drugged or drunk individuals.
• Legality- Parties are not allowed to enforce contracts that involve doing something that
is illegal. Some illegal contracts involve agreements to commit a crime or a tort. Others
involve activities made illegal by statutory law
 Project procurement
Contract formation
A range of documents will be required in order to be able to complete a fully compliant
and legally binding contract.
• Conditions of agreement - is the actual printed standard document with all the
conditions and clause. Both parties sign it and initial all pages and amendments.
Special conditions and any schedules are filled in. In the building industry there are
also commonly referred to as ‘contracts’, ‘general conditions’ and ‘conditions of
agreement’.
• Tender letter – is the letter that is submitted to the client at the time of tender should
be attached to the contract conditions and referenced therein. The tender letter gives
the conditions and exclusions that your price is based on.
• Drawings - would be the original tender drawings (which should be working drawings)
with or without amendments. They provide a graphical representation of the extent of
the works. They will be a complete set and will all be numbered and the numbers
listed as part of the contract.
 Project procurement
Contract formation

• Specification - is a written description of the work detailed in the drawings and to be

read in conjunction with the drawings, with reference to other drawings and
specifications for specialist work (such as the installation of lifts, fire services etc).
• Bill of quantities - A quantity surveyor usually prepares bills of quantities. It is a pre-
determined take-off of quantities against which a competitive tender may be awarded.
• Evidence of insurance - A Contractor must effect and maintain insurances as stipulated
in the conditions of contract (e.g. workers’ compensation, public risk, etc). Copies of
these are required to be given to the client prior to commencement of work and at any
time as requested by the client.
 Project procurement
Probity

Probity is the evidence of ethical behaviour, and can be defined as complete and
confirmed integrity, uprightness and honesty in a particular process. Probity in the
procurement process is the responsibility of all stakeholders involved in the process.

Why is probity important:

• avoids conflicts/problems between Buyer and Seller

• helps to avoid corrupt practices
• ensures better outcomes against stated objectives
• provides an objective and independent view on the process
• reduces or eliminates potential for litigation.
 Project procurement
Probity

The broad objectives of the probity process are:

• ensuring conformity to processes designed to achieve value for money

• provides accountability
• ensures that all bids will be assessed against the same criteria
• preserves public and bidder confidence in government processes
• improves defensibility of decisions to potential legal challenge or other external scrutiny