9. Procurement Flashcards
What should a procurement strategy include?
Make or buy decision
Use of single, integrated or multiple suppliers
Required providers relationships (transactional to collaborative)
Provider selection (single source or competitive)
Conditions and forms of contract
Types of pricing methods of reimbursement
Describe payment mechanisms
- Fixed price / lump sum - Defined scope. Paid at defined times. May need contingency for additional items
- Cost plus fee / reimbursement - Where scope not accurately defined. paid on cost basis. Costs can escalate. Ensure invoice matches work done.
Low risk to supplier
Per unit quantity / bill of quantities - Where units are known but not number of. Customer knows per per unit and can budget based on that. ie servers where no. servers not known. Adv - No need to renegotiate. Supplier can proceed without having to know full scope. Enables payment at agreed rate for said unit.
Target cost /price - Shares risk. Realistic targets set and penalties / bonus incentive to motivate performance. Partnering arrangement though takes time to reach this collaborative step. Adv - Both sides take risk so creates a collaborative work style.
Supplier Funded - Supplier pays for development in return for receiving a fee for operation for a set period of time. Adv. Cust. gets free base, supplier gets on going custom.
What are the stages of procurement
*Pre qualification - Assess which suppliers will bid including experience, financial security, safety standards, resources, managerial capability. May include a pre qualification Questionnaire which-
- Enables reducing a potential long list of suppliers
- Purchaser can focus on real potential suppliers
- will include elements to ensure financial stability
- Aim for yes / no questions to make process fast and fair.
*Tendering / Bidding - Must be structured with strict controls. Pre arranged selection criteria. Includes
- invitation to tender
- Clarity on process, criteria, risk and scoring mechanisms and timings.
- Usually contains a pricing model all bidders must complete.
- Bidders may be invited to ask clarifying questions to enable innovative solutions.
*Evaluating bids - Against pre agreed criteria. May mark technical and financial separately to remove bias. Criteria includes;
- Price, delivery timescale, Capability and capacity and quality processes.
Negotiation and contract award - Include reply to non successful.
Explain three steps in a competitive supplier selection process for a project – 30 marks (10 marks each)
Pre-qualification questionnaire (PQQ). • Using a PQQ enables the potential purchaser to reduce a ‘long list’ of potential suppliers, down to a much reduce shortlist, by asking closed and pre-determined questions. • This enables the purchaser to focus their efforts and attention on potential suppliers who are able to meet key criteria based on a high-level scope, avoiding resources and time being wasted on unsuitable suppliers. • Typical questions will include whether a supplier meets key financial ratios such as cashflow and profitability, to avoid the risk of engaging suppliers that are not financially stable. • The questions are more likely to be objective, “yes/no” style questions, to enable the reviewers to quickly make a decision about which suppliers to proceed with or not, speeding up the evaluation process without compromising effective control.
a) /2 Issuing the tenders to shortlisted suppliers. • The purchaser will issue an invitation to tender (ITT) to a reduced number of potential suppliers, setting out more detailed requirements to enable the suppliers to propose how they will deliver the scope of the potential contract. • This ensures that suppliers fully understand what is required, the level of risk and how to price their tender, along with the scoring mechanism and when to return it so that procurement rules are followed. • The tender will usually contain a pricing model that all bidders will be required to complete. This ensures that the prices from each supplier can be structured in the same way and reduces the risk of them overlooking something. • Bidders may also be invited to ask clarifying questions or offer alternative tenders to the standard tender. This allows for innovative proposals from suppliers that may prove more beneficial to the project.
a) /3 Evaluating the tenders. • The returned tenders will usually all be opened at the same time, with the names of the bidders logged to ensure that required processes have been followed. • The different sections of the tenders may be split between different teams, such as the commercial team to evaluate the costs and the operations team assessing the proposed delivery models. • This ensures that evaluations are unbiased, such as the scores given for the assessment of the quality/delivery proposals being influenced by the price, and that the weighting of the sections matches the original tender. • This is important because under public sector procurement rules, an unsuccessful bidder can raise an appeal if the specified process hasn’t been followed or if favouritism is suspected. This means the whole tendering process may have to be re-run at significant expense.
Explain two differences between fixed-price and cost-plus fee supplier reimbursement methods – 20 marks (10 marks each)
Fixed price reimbursement requires a detailed scope of products and work, whereas cost-plus often involves more uncertainty around what is to be delivered.
• This is essential as the supplier will need to know what they will be expected to deliver, and the resource effort needed to meet the specific needs of the client.
• This is important to the supplier because they will be able to plan more accurately for a fixed-cost approach, compared to the acceptance by the client that the scope of the work could change under the cost-plus model.
• The client will need to keep a tight control on any changes to the scope for a fixed cost contract, as these could have a disproportionate impact on the cost.
• However, the fixed-cost approach reduces the risk to the client as the value of the work can only change if the scope changes.
b)/2 The fixed-price approach provides more cost certainty whereas cost-plus fee makes client budgeting more difficult.
• This approach is useful to the purchaser as it will enable more predictable budgeting and cost management, compared to the fluctuations that can occur using cost-plus.
• The supplier will need to allow contingency for any actual or perceived uncertainty for a fixed-cost approach, whereas with a cost-plus approach the client bears the risk of the cost rising if the work increases.
• This will give confidence to those providing the funds for the project, resulting in their ongoing buy-in and increased likelihood of making funds available for fixed-cost contracts.
• Conversely, funders may be reluctant to commit funds to projects using a cost-plus approach, as the actual cost of the work is much more difficult to predict and control.
Explain the purpose of three distinct elements of a procurement strategy– 30 marks (10 marks each)
The strategy will include the type of contract to be used.
• This is important because different contracts allow for different levels of risk (opportunities and threats) to be allocated to clients and suppliers.
• In addition, an available form of contract may or may not be entirely suitable as an off-the-shelf solution and may therefore require some tailoring, or even a bespoke contract drawn up.
• This is important as it will have an impact on the time it takes to procure the contract, as well as the amount of negotiation around contractual terms that may be required.
• Clients should also use a form of contract that is relevant to their project or industry and with which they are familiar. This ensures that the contract provisions are appropriate and avoids the risk of contractual disputes due to misunderstandings.
a)/2 The type of supplier – single, multiple or integrated.
• This will be determined on the basis of the scale and complexity of the work required, compared to the capacity and capability of the client. • This is essential to make sure that the right skills and resources are available to deliver the needs of the project.
• The approach will also have implications for the level of administration for the client. This is because multiple suppliers will require more work due to having multiple direct contracts as opposed to single contracts with one prime contractor or a consortium/joint venture.
• The client may also choose a multiple supplier approach if they prefer to choose the specification and purchase of individual elements of the work based on different criteria, for example one supplier because they’re cheaper and another supplier for other parts of the work as they’re available immediately.
a)/3 Make or buy decision.
• The organisation will need to decide whether they have the skills or resources to do the work in-house, or whether they need to outsource it.
• This decision will need to take into account a number of factors such as cost, time and quality for either option, which will support a better-informed decision.
• The organisation will also need to understand the risks regarding outsourcing, such as exposure of intellectual property or creating a dependence on the external suppliers.
• This is also important as they must also take into account regulations and policies, for example a defence client may not be able to outsource work to certain countries for security reasons.
Explain two differences between two different types of contractual relationships – 20 marks (10 marks each)
A single supplier relationship is simpler to manage than a multiple supplier relationship for the client.
• This is because there is only one contractor to recruit, engage and manage rather than many. The client will also have a single point of contact which simplifies work allocation, progress monitoring and reporting. This will save the project manager time and effort.
• With multiple suppliers there will be multiple contracts to manage which will require extra client resource and expertise.
• The project manager will have to spend significant time collecting and collating information on progress to gain a complete picture of project status.
• Additionally, with multiple suppliers, issues and change requests will be more complex due to the need to understand the wider impact on the other suppliers which can lead to errors and claims. Using a single supplier will make this understanding simpler due to reduced stakeholders.
b)/2. A single supplier relationship will usually expose the client to less risk that a multiple supplier relationship.
• This is because a single supplier will be accountable for the work they are contracted to do and will manage any key interfaces between sub-contractors whereas the client will have to manage those interfaces where multiple suppliers are directly engaged.
• For example, where there are interface problems such as the output of one supplier not meeting needs of a subsequent supplier (e.g. foundations by one contractor and the walls by another), a single ‘prime’ contractor will absorb the cost to rectify the issue. In the absence of a prime contractor the client would have to negotiate remedial action by the defaulting supplier and absorb any consequential damages.
• This higher risk is increased where the client lacks experience of managing suppliers whereas in a single supplier relationship, the client relies on the suppliers project management expertise
