Learning Outcome 9

Question 1

9.1 Explain the purpose, typical content and importance of a procurement strategy

Answer 1

• Purpose: to set out the high level approach for securing goods and services required from external suppliers. Informed by decisions made on strategic sourcing and is part of the PMP
• It addresses: how much risk should be retained in the project and how much shared with suppliers, what type of relationship is required with different suppliers
• It contains: make or buy decision (internal capability vs what the market is capable of delivering), use of single, integrated or multiple suppliers (preferred supplier with relationship and lower procurement cost vs supplier contact in team with relationship but awkwardness vs cost but not putting all eggs in one basket and avoiding supply chain disruption), conditions and forms of contract (bespoke or standard like JCT and NEC, utility vs cost), methods of supplier reimbursement (below), types of contractual relationships (below), supplier selection process (below)

Question 2

9.2 Differentiate between different methods of supplier reimbursement

Answer 2

• Payment mechanisms are used to achieve the appropriate allocation of risk and also encourage suppliers to perform
• Options range from fixed price (where all cost risk is with the supplier) through to reimbursable contracts where the project pays the supplier for new costs when they emerge (there are many intermediate options in between)
• Some projects or programmes lend themselves to a strategy where the supplier finances development in return for receiving fee for operation (e.g. building a bridge and then collecting tolls)
• Fixed price: Fixed price is agreed for a defined scope. Where the scope of work is delivered for a greater cost to the supplier, they have to fund the difference. The customer has low risk but supplier might try to cut corners (which brings scheduole and performance risk)
• Cost plus fee: Where the customer agrees to pay for all costs plus an agreed fee (sometimes a percentage). The high risk to the customer because they age without knowing final cost.
• Time and material per unit quantity: Where a price is agreed for a unit quantity of material or time. The highest risk to customer as final cost isn’t apparent until the very end. Necessary when customer has little idea of the scope of work. Risk can be reduced through robust contract management. Less performance risk to customer.
• Target cost: Target sum is agreed in advance by both parties who expend but efforts to reach it. If the final cost is more or less, the surplus or excess is shared between customer and supplier. This is typical where their are opportunities for incentives.

Question 3

9.3 Differentiate between different contractual relationships

Answer 3

One comprehensive contract: The simplest arrangement in which one supplier is responsible for everything required (turn-key or design and construct). The risk involved is that all responsibility is with one supplier.

Sequential contract: The sequential use of two or more contractors during a project. For example, design and then construction. This allows options to be considered before costly work of construction or manufacture. Detailed design can be completed and price before customer is committed to greater costs. However, interaction between the stages must be planned well and it’s hard to know final cost of project int he first stages.

Parallel contract: Where a similar scope of work is given to two or more suppliers and they work in parallel to deliver the completed project. E.g. refurbishment of a multi-storey building where diffeent contractors do each floor. Good if individual suppliers have different capacities and competition can be generated (but management is key so as not to compromise on design or safety).

Subcontracts: A prime contractor holds the contract and then subcontracts it to others to complete (often in parallel). Customer may only have indirect ability to assess and influence so conditions may be necessary for sub-contracting. It also lessens the possibility of pipeline work for suppliers and therefore may lead to poorer performance.

Partnering/Joint Venture: Very large projects are completed by a number of suppliers working together in a partnership. May be necessary if the total work is too large or complex for a single supplier. Often a separate company is set up and each supplier will nominate a director to sit on the board of the joint company.

Question 4

9.4 Explain a supplier selection process

Answer 4

• It is important that supplier be open to scrutiny, objective to identify the best-value supplier
• A typical process is: research (identifying suppliers with capability, may not be necessary where there is a list), pre-qualification (reducing size of list through capacity, willingness to tender, financial stability, technical experience - often ascertained through questionnaire), tender (shortlist asked to bid and assessed against criteria, risk assesment, records maintained), award (negotiation and agreement of contract), manage (active management of contract), close (ensuring all financial arrangements have been honoured and may set up a maintenance contract).

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