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CONTRACT FORMATION

Case Study Solution
Reliability: All staff must be present 10 minutes before the start of their shift and only finish when their relief has arrived Responsiveness: respond to all alarm calls with an on-site officer within 10 minutes Competence: demonstrate that all officers have full and up-to-date training in security methods Access: provide a 24-hour emergency number at which a senior manager

Case Study contd.
Courtesy: ensure that all staff treat employees with respect and desist from using offensive language Communication: report daily to the operations manager and write weekly report on all incidents occurring Credibility: be completely open with the buildings manager and act in good faith with all dealings. All incidents occurring on the premises

Contd.
Security: any change or potential disruption to normal service must be communicated Understanding: security staff are expected to deal with staff and visitor queries in a different manner, bearing in mind any company secrets Tangibles: all security staff must wear uniform with tie and be of neat appearance at all times

Purchased inputs
• Production inputs: materials,
components and parts used directly in the production, the term direct purchasing is used to cover this category, blue-collar purchasing term is used to refer to this purchasing • Non Production inputs: organizations need infrastructure and staff which lead to the need to have materials, equipment, office equipment, security, stationery, furniture etc. Also known as Indirect purchasing

Categories of Purchased inputs
• Production material used in
manufacturing • Consumables and MRO supplies • Capital Equipment • Commodities • Services

Production Material
• Raw Materials • Semi-finished goods and processed
materials • Component parts and assemblies • Bills of materials

Consumables and MRO supplies
• Consumable supplies: consumable
– – – – – – Stationery and office supplies Machine oil, fasteners Uniforms Safety apparel, wrapping materials Fuels Small tools, packaging etc.

items used in the operations of the business enterprise

Maintenance, Repair and Operating (MRO) items
• Items which are needed repeatedly
or recurrently to maintain the operational efficiency of the business such as
– – – – Fire and safety equipment Electrical supplies Caretaking requirements Wide variety of repair parts, or spares for plant and equipment

Capital Equipment
• Buildings (construction materials) • Installation Equipment • Accessory Equipment • Operating Equipment • Tools and Instruments • Furnishings and Fittings

Difference in purchasing capital and non-capital goods
• Total costs • Cost Price • Lack of buying experience • Intangible benefits • Extended negotiations • Complex specifications • Team approach

Weighting factors according to their importance for capital equipment

• Overall suitability for purpose • General quality of technical design • Estimated life • Economy of performance and

reliability • Economy of maintenance and aftersales service • Environment factors • General reputation of supplier • Estimated trade-in value at end of life or on disposal

Factors to be considered in quotations for capital equipment • Ex-works cost of equipment • Delivery and handling costs • Cost of insurance • Additional costs for essential spares • Installation costs for essential spares • Installation costs payable to supplier • Cost of extra work specified by buyer • Customs duties and other tariffs etc. • Price escalation charges etc

Factors contd.
• Terms of payment • Warranty/guarantee payments • Servicing, If any by supplier • Less discounts • Trade-ins • Other deductions • Final cost

Bills of Quantities (BOQs)
• BOQs are documents prepared by
quantity surveyors from drawings and specifications prepared by architects or engineers, setting out as price able items the detailed requirements of the work and the quantities involved. • A typical BOQs will have the following six sections • Section 1: Preliminary items and general conditions

BOQs contd.
• Section 2: Trade Preambles, this sets out
general requirements relating to such aspects of a construction contracts as: • Excavation and earthwork • Concrete work • Brickwork and block work • Roofing • Structural steel work • Metalwork • Plumbing installation • Foul drainage above ground • Holes/chases/covers/supports for services

BOQs contd.
• Electrical and heating installations • Floor, wall and ceiling finishes • Glazing • Painting and decorating • Section 3: Demolition and spot items • Sections 4: General alteration and
refurbishment work • Section 5: Provisional sums and contingencies • Section 6: Grand summary

Life cycle costing
“ the practice of obtaining, over their lifetime, the best use of the physical assets at the lowest cost to the entity” Life cycle costing involves estimating many unknowns and is not a perfect science Life cycle cost of a capital item can be

Components of life cycle costing
• Acquisition Costs
– – – – – – – – – – Initial cost of transportation Costs of installation and commissioning Initial spares Cost of supervisor / operator training Supervision Operator wages and employment costs Expenditure on fuel, power Cost of dealing with emissions Insurance Maintenance costs and down time

• Cost of Operation

Life cycle costing contd.
– – – – Maintenance agreements Intervals between servicing Cost of spares Maintenance materials

• Disposal Costs
– Cost of depreciation (obsolescence) – Estimated disposal value, if any – Environmental or other costs of disposal

Commodities
• Minerals • Ores • Timber • Petroleum and scrap • Dairy products • Fruits and Vegetables etc.

Services
• Catering • Travel • Maintenance
Payroll Call Centers Inventory Design Security Printing Training

Management • Warehousing • IT Services • Recruitment • Medical

Price Analysis- as comparison
‘ the process of examining and evaluating a proposed price without evaluating its separate elements of cost and profit’ Comparison may be made on following basis • With competing offers on recent purchase • With established catalogue prices • With established market prices • With prices set by law or regulations • With producer price or other market indexes • With in-house estimates • With values determined by value & visual

Price Analysis – As price breakdown
Includes breakdown of price into its constituent elements; an analysis can be based on • Cost experience of the buyer’s company such as when subcontracting items previously manufactured • Cost estimates prepared by the estimating or costing staff of the buyer’s company

Contracting Process
Plannin g Identify Need Plan Purchase Develop Request Invite & Receive Offers Evaluate Offers
Negotiate/Due Diligence

Formatio n

Finalise & Award Manage Transition Contract Operation
Complete, Extend, Renew

Managemen t

Review & Evaluate Link to Supplier Performance Management

Tender Documents
•Precise and unambiguous •Invitation to Bid •Instructions to Bidders •Form of Bid •Form of Contract •General and /or Special Conditions of
Contract •Specifications and drawings or performance criteria (where applicable)

Tender Documents (Contd.)
•List of Goods or bill of quantities
(where applicable) •Delivery time or completion schedule •Qualification criteria (where applicable) •Bid evaluation criteria •Format of all securities required (where applicable) •Details of standards (if any) •Any other detail not inconsistent with

Contract Formation
Pre-Release of Tender • Draft Tender may be issued to industry for comment prior to release • Draft Tender to legal for opinion/comment prior to release • Obtain end user approval prior to release

Contract Formation
Pre-Release of Tender • Obtain details of potential suppliers from end user • Agree on timeframe for tender • Agree on media to be used • Determine acceptable means of submission • Determine location of tender box

Contract Formation
Issue Tender • Advertise in Local Press • Advertise in other press as appropriate • Forward Tender to any identified potential suppliers

Contract Formation
Pre-Tender Briefing • Clarifies aspects of the requirement • Clarifies problems/issues • Avoids confusion/uncertainties • Develops understanding of the aims and requirements of all parties • Provides a perspective on the current market potential to meet the requirement

Contract Formation
Site Inspection • Provides supplier opportunity to review site prior to tendering • Provides clearer picture of requirement • Highlights potential issues

Contract Formation
Issue Addendums Where Necessary • Where additional information becomes available that will assist in the Procurement process, and addendum should be issued

Contract Formation
Receive and Record Offers Received • Offers placed in secure tender box • Tender box only opened at official closing date and time • Tender box opened by minimum 2 persons • All submissions to be recorded • Confidentiality to be maintained

Contract Formation
Evaluation Panel • Technical expertise • Commercial expertise • Conflict of interest

Contract Formation
Preparing for Evaluation Evaluation Plan • Objectives of the request and evaluation • Responsibilities of evaluation panel • Time schedule • Reporting requirements • Process details • Principles to be followed • Evaluation criteria and weightings

Contract Formation
Evaluate Offers • Commercial • Against selection criteria • Supplier presentations

The Cartel Tester by Richard Russill
• Are all prices offered higher than
expected? • Are there trends as to who has won orders before? • Are one or more suppliers reluctant to negotiate? • Have one or more suppliers refused to bid? • Is supplier reluctant to enter into a long term deal? • Is the best price significantly lower than the rest?
Three or more ‘yes’ answers and a cartel may be operating!

Contract Formation
Due Diligence • Testing expectations and understandings • Verification of abilities

Contract Formation
Conduct Negotiations • Explore all options • Concessions and negotiating limits • Determine goal/objective • Identify negotiable/non-negotiable areas • Identify supplier’s objective

Contract Formation
Principles of Negotiations • Always know your BATNA (Best Alternative To Negotiated Agreement) • Negotiation is not a game – there are no rules • Everything is negotiable • Focus on interests not positions • Ask for a better deal • Do not be afraid to say no

Contract Formation
Award Contract • Letter of Engagement/Intent • Preferred Tenderer Letter • Award Letter • Draft Contract • Contract signed

Contract Formation
Notify Unsuccessful Respondents • Unsuccessful letter • Debriefings

When tendering should not be used • When it is impossible to estimate

costs with high degree of certainty • When price is not the only important variable • When the buyer anticipates a need to make changes in the specifications • When special tooling or set up costs are major factors • When close supplier collaboration is desirable and necessary

Direct Negotiations
Factors affecting the negotiated price level: • Quantity ordered • Length of contract • Time of requirements • Cost structure of the vendor and degree to which costs have been covered • Delivery requirements • Supplier pricing strategy

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