7.5. Procurement Process

The project procurement cycle reflects the procurement activities from the decision to purchase the material or service through to the payment of bills and closing of procurement contracts.

Procurement Plan

After the decision has been made to purchase goods or outsource services, the procurement team develops a plan that includes the following:

• Selecting the appropriate relationships and contract approaches for each type of purchased goods or outsourced service
• Preparing requests for quotes (RFQs) and requests for proposals (RFPs) and evaluating partnership opportunities
• Evaluating RFQs, RFPs, and partnerships
• Awarding and signing contracts
• Managing quality and timely performance
• Managing contract changes
• Closing contracts

Depending on the complexity level of the project, each of these steps can take either hours or sometimes weeks of work to complete. Each of these steps is also included in the project master schedule. The time involved in the procurement cycle can influence the scheduling of critical activities, including the decision to self-perform the work or contract the work to others. The delivery dates for equipment and materials and the work completion dates for contracted works are placed on the project schedule. Any procurement activities that create a project delay or fall on the project critical path may require special attention.

Request for Quote

An RFQ focuses on price. The type of materials or service is well-defined and can be obtained from several sources. The bidder that can meet the project quality and schedule requirements usually wins the contract by quoting the lowest price.

Request for Proposal

An RFP accounts for price but focuses on meeting the project quality or schedule requirements. The process of developing a proposal in response to an RFP can be very expensive for the bidder, and the project team should not issue an RFP to a company that is not eligible to win the bid.

After an idea makes it through the project selection process and becomes a funded project, an organization typically issues an RFP, which is a “document that describes a project’s needs in a particular area and asks for proposed solutions (along with pricing, timing, and other details) from qualified vendors. When they’re well crafted, RFPs can introduce an organization to high-quality vendor-partners and consultants from outside their established networks and ensure that a project is completed as planned” (Peters, 2011). The exact form of an RFP varies from one industry to the next and from one organization to another. You can find many templates for RFPs on the web.

In response to an RFP, other organizations submit proposals describing, in detail, their plan for executing the proposed project, including budget and schedule estimates, and a list of final deliverables. Officially, the term proposal is defined by Merriam-Webster as “something (such as a plan or suggestion) that is presented to a person or group of people to consider.” Depending on the nature of your company, this “something” might consist of little more than a few notes in an email, or it might incorporate months of research and documentation, costing hundreds of thousands of dollars to produce. When creating a proposal, you should seek to clearly understand and address your client’s needs and interests, convincingly demonstrate your ability to meet their needs (quality, schedule, price), and prepare the proposal in a form that meets requirements.

After reviewing all submitted proposals, the organization that issued the RFP accepts one of the proposals and then proceeds with negotiating a contract with the vendor. The term contract is more narrowly defined as “an agreement with specific terms between two or more persons or entities in which there is a promise to do something in return for a valuable benefit known as consideration” (contract, n.d., para 1). As with proposals, however, a contract can take many forms, ranging from a submitted invoice which can serve as a binding agreement) to several hundred pages of legal language.

Selecting the Contract Approach

The technical teams typically develop a description of the work that will be outsourced. From this information, the project management team answers the following questions:

• Is the required work or materials a commodity, customized product or service, or unique skill or relationship?
• What type of relationship is needed: supplier, vendor, or partnership?
• How should the supplier, vendor, or potential partner be approached: RFQ, RFP, or personal contact?
• How well-known is the scope of work?
• What are the risks and which party should assume which types of risk?
• Does the procurement of the service or goods affect activities on the project schedule’s critical path and how much float is there on those activities?
• How important is it to be sure of the cost in advance?

The procurement team uses the answers to the first three questions listed above to determine the approach to obtaining the goods or services and the remaining questions to determine what type of contract is most appropriate.

A key factor in selecting the contract approach is determining which party will take the most risk. The team determines the level of risk that will be managed by the project and what risks will be transferred to the contractor. Typically, the project management team wants to manage the project risk, but in some cases, contractors have more expertise or control that enables them to better manage the risk associated with the contracted work.

Soliciting Bids

A solicitation is the process of requesting a price and supporting information from bidders. The solicitation usually takes the form of either an RFQ or an RFP. Partnerships are pursued and established differently on a case-by-case basis by senior management.

Qualifying Bidders

Potential bidders are people or organizations capable of providing the materials or performing the work required for the project. On smaller, less complex projects, the parent company typically has a list of suppliers and vendors that have successfully provided goods and services in the past, and the project has access to the performance record of companies on that list. On unique projects, where no supplier lists exist, the project team develops a list of potential suppliers and then qualifies them to become eligible to bid on project work. Eligible bidders are placed on the bidder’s list and provided with a schedule of when work on the project will be put out for bid.

The eligibility of a supplier is determined by the ability to perform the work in a way that meets project requirements and demonstrates financial stability. The ability to perform the work includes the ability to meet quality specifications and the project schedule. During times when economic activity is high in a region, many suppliers become busy and stretch their resources. The project team investigates the potential suppliers before they are included on the bidder’s list, to ensure that they have the capacity and track record to meet deadlines.

The potential supplier must also be financially stable to be included on the bidder’s list. A credit check or a financial report from Dun and Bradstreet (D&B)—a well-known provider of financial information about individual companies—will provide the project with information about the potential bidder’s financial status. D&B services include the following:

• D&B proprietary rankings and predictive creditworthiness scores
• Public filings, including suits, liens, judgments, and UCC (uniform commercial code) filings—standardized financial disclosure documents that conform to the uniform commercial code
• Company financial statements and history

Evaluating Bids

Evaluation of bids in response to RFQs for commodity items and services is heavily graded for price. In most cases, the lowest total price will win the contract. The total price will include the costs of the goods or services, any shipping or delivery costs, the value of any warranties, and any additional service that adds value to the project.

The evaluation of bids based on RFPs is more complex. The evaluation of proposals includes the price and also an evaluation of the technical approach chosen by the bidder. The project team evaluating the proposal must include people with the expertise to understand the technical aspects of the various proposal options and the value of each proposal to the project. On more complex projects, the administrative part of the proposal is evaluated and scored by one team, and the technical aspect of the proposal is evaluated by another team. The project team combines the two scores to determine the best proposal for the project.

“13. Procurement Management” from Project Management – 2nd Edition by Adrienne Watt; Merrie Barron; and Andrew Barron is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.