Yrahmawati MP Mbits 9thweek Procurement

Department of Business Management
Institut Teknologi Sepuluh Nopember
(Manajemen Proyek TB 141207)
9th week course material:

Procurement & Contract Management
Dr. Yani Rahmawati

yanirahmawati@mb.its.ac.id
ProjectManagement/MB-ITS/YRahmawati/2017 2
Procurement
A. Basic Understanding: Procurement can be defined as the acquisition of goods or
1. Definition services.
2. Strategies Procurement (and contracting) is a process that involves

two parties with different objectives who interact on a
3. Objectives given market segment.
Good procurement practices can increase corporate
B. The Process: profitability by taking advantage of quantity discounts,
minimizing cash flow problems, and seeking out quality
1. Plan Procurement
suppliers.
2. Conduct Procurement
Because procurement contributes to profitability,
3. Administer Procurement procurement is often centralized, which results in
4. Close Procurement standardized practices and lower paperwork costs.
Contract management includes procurement
management. Procurement management is the buyers
side of contract management, and sales/proposal
management is the sellers side of contract management.
Procurement
A. Basic Understanding: Contract management is defined as art and science of
1. Definition managing a contractual agreement throughout the
contracting process.
2. Strategies
Since contracts involve at least two parties the buyer
3. Objectives and the seller (contractor), contract management
processes are performed by both the buyer and seller.
B. The Process:
1. Plan Procurement
3. Administer Procurement
4. Close Procurement
Procurement
A. Basic Understanding: The sellers contract management processes (correspond to
1. Definition the buyers processes) consist of the following activities:
2. Strategies 1. Presales Activity: The process of identifying prospective

and current customers, determining customers needs and
3. Objectives plans, and evaluating the competitive environment.
2. Bid/No Bid Decision-Making: The process of evaluating
B. The Process: buyers solicitation, assessing competitive environment
and risks against the opportunities of a potential business
1. Plan Procurement
deal, and then deciding whether to proceed.
3. Bid/Proposal Preparation: The process of developing
3. Administer Procurement offers in response to a buyers solicitation or based on
4. Close Procurement perceived buyer needs, for the purpose of persuading the
buyer to enter into a contract.
4. Contract Negotiation and Formation: The process of
reaching a common understanding of the nature of the
project and negotiating the contract terms and conditions
for the purpose of developing a set of shared expectations
and understandings.
Procurement
A. Basic Understanding: 5. Contract Administration: The process of ensuring that
1. Definition each partys performance meets contractual
requirements.
2. Strategies
6. Contract Closeout: The process of verifying that all
3. Objectives administrative matters are concluded on a contract that is
otherwise physically complete. This involves completing
and settling the contract, including resolving any open
B. The Process:
items.
1. Plan Procurement
Procurement
A. Basic Understanding: There are two basic procurement strategies:
1. Definition 1. Corporate Procurement Strategy:
2. Strategies The relationship of specific procurement actions
3. Objectives to the corporate strategy. An example of this
would be centralized procurement.
B. The Process:
2. Project Procurement Strategy:
1. Plan Procurement
The relationship of specific procurement actions
2. Conduct Procurement to the operating environment of the project. An
3. Administer Procurement example of this would be when the project
4. Close Procurement manager is allowed to perform single source
procurement without necessarily involving the
centralized procurement group, such as
purchasing one small amount of a special
chemical for an R&D project.
Procurement
A. Basic Understanding: Procure all goods/services from a single source.
1. Definition Procure all goods/services from multiple sources.
2. Strategies Procure only a small portion of the goods/services.
3. Objectives
B. The Process:
1. Plan Procurement
Critical Factor of Procurement
There are two critical The macro environment includes the general
factors of environment external variables that can influence how and when
we do procurement.
that influence the
Macro environment refers to Enterprise
procurement, that are: Environmental Factors.
1. Macro environment The factors include recessions, inflation, cost of
2. Micro environment borrowing money, whether a buyer or sellers
market exists, and unemployment.
Example: a foreign corporation had undertaken a
large project that involved the hiring of several
contractors. Because of the countrys high
unemployment rate, the decision was made to use
only domestic suppliers/contractors and to give first
preference to contractors in cities where
unemployment was the greatest, even though
there were other more qualified
suppliers/contractors.
There are two critical The microenvironment is the internal procurement
factors of environment processes of the firm, especially the policies and
that influence the procedures imposed by the firm, project, or client in
procurement, that are: the way that procurement will take place.
1. Macro environment The micro environment includes the procurement/
2. Micro environment contracting system, which contains four processes:
Plan Procurements
Conduct Procurements
Administer Procurements
Close Procurements
The contracting process is used as the vehicle for
transitioning the project from one life-cycle
phase to the next.
There are two critical For example, a contract can be awarded for the
design, development, and testing of an advanced jet
factors of environment aircraft engine.
that influence the The contract is completed when the aircraft engine
procurement, that are: testing is completed. If the decision is made at the
phase gate review to proceed to aircraft engine
1. Macro environment production, the contracting process will be reinitiated
2. Micro environment for the new effort. The processes would be repeated
for each life-cycle phase.
As the project progresses from one phase to the next,
Example: and additional project knowledge is acquired through
each completed phase, the level of uncertainty (and
Major projects for risk) is reduced. The reduction in project risk allows the
Department of use of lower-risk contracts throughout the project life
cycle. During higher-risk project phases such as
Defence (DoD) conceptual, development, and testing, cost-type
contracts are traditionally used. During the lower-risk
project phases such as production and sustainment,
fixed-priced contracts are typically used.
Procurement
A. Basic Understanding: The Plan Procurement Process includes:
1. Definition 1. Defining the need for the project
2. Strategies 2. Development of the procurement statement of work,
3. Objectives specifications, and work breakdown structure
3. Preparing a WBS dictionary, if necessary
B. The Process: 4. Performing a make or buy analysis
1. Plan Procurement 5. Laying out the major milestones and the timing/schedule
2. Conduct Procurement 6. Cost estimating, including life-cycle costing
3. Administer Procurement 7. Determining whether qualified sellers exist
4. Close Procurement 8. Identifying the selection criteria

9. Preparing a listing of possible project/procurement risks
10. Developing a procurement plan
11. Obtaining authorization and approval to proceed
There are always options in the way the end item can be
obtained.
Procurement Procurement alternatives include make or buy, lease or buy,
buy or rent, and lease or rent
A. Basic Understanding: The make decision

1. Definition a. Less costly (but not always!!)
b. Easy integration of operations
2. Strategies c. Utilize existing capacity that is unoccupied
3. Objectives d. Maintain direct control
e. Avoid unreliable supplier base
f. Stabilize existing workforce
B. The Process:
1. Plan Procurement The buy decision
a. Less costly (but not always!!)
b. Utilize skills of suppliers
3. Administer Procurement c. Small volume requirement (not cost effective to produce)
4. Close Procurement d. Having limited capacity or capability
e. Augment existing labor force
f. Maintain multiple sources (qualified vendor list)
g. Indirect control
Procurement planning must address the risks on the
Procurement contract as well as the risks with procurement.
A. Basic Understanding: PARTIAL LIST OF IDENTIFIED PROCUREMENT RISKS

1. Definition a. Contract and agreements (specifications open to
misinterpretation, unclear/blurred wording, paperwork
2. Strategies
requirements)
3. Objectives b. Responsibility and liability (force majeure, liability limits
for each party, unclear scope limitations)
B. The Process: c. Financial (payment plans, inflation, currency exchange)
d. Political (political stability, import/export restrictions)
1. Plan Procurement
e. Warranty (nonstandard requirements, repairs)
2. Conduct Procurement f. Schedule (unrealistic delivery time, work by others not
3. Administer Procurement finished on time, approval process, limitations on
4. Close Procurement available resources)
g. Technical and technology (nonstandard solutions, quality
assurance regulations, inspections, customer acceptance
criteria)
h. Resources (availability, local versus external)
Procurement
A. Basic Understanding: The procurement plan will address the following questions:
1. Definition How much procurement will be necessary?
2. Strategies Will they be standard or specialized procurement activities?
3. Objectives Will we make some of the products or purchase all of them?
Will there be qualified suppliers?
B. The Process: Will we need to prequalify some of the suppliers?
1. Plan Procurement Will we use open bidding or bidding from a preferred
2. Conduct Procurement supplier list?
3. Administer Procurement How will we manage multiple suppliers?
4. Close Procurement Are there items that require long lead procurement?
What type of contract will be used, considering the
contractual risks?
Will we need different contract types for multiple suppliers?
What evaluation criteria will be used to score the proposals?
Procurement PROCUREMENT PROCESS
A. Basic Understanding: Once the requirements are identified and a procurement plan
1. Definition has been prepared, an application form for each item to be
procured is sent to procurement to begin the procurement or
2. Strategies requisition process.
3. Objectives
The process of conducting the procurements includes:
a. Evaluating/confirming specifications (are they current?)
B. The Process: b. Confirming qualified sources
c. Reviewing past performance of sources
1. Plan Procurement
d. Reviewing of team or partnership agreements
2. Conduct Procurement e. Producing the solicitation package
3. Administer Procurement The solicitation package is prepared during the procurements
planning process but utilized during conduct procurements
A typical solicitation package would include:
Bid documents (usually standardized)
Listing of qualified vendors (expected to bid)
Proposal evaluation criteria (source selection criteria)
Bidder conferences
How change requests will be managed
Supplier payment plan
Procurement BIDDER CONFERENCE
A. Basic Understanding: The solicitation package also describes the manner in

1. Definition which solicitation questions will be addressed, namely
bidder conferences.
2. Strategies
Bidder conferences are used so that no single bidder has
3. Objectives more knowledge than others. If a potential bidder has a
question concerning the solicitation package, then it must
wait for the bidders conference to ask the question so that
B. The Process:
all bidders will be privileged to the same information. This
1. Plan Procurement is particularly important in government contracting.
2. Conduct Procurement Some companies do not use bidder conferences and allow
3. Administer Procurement bidders to send in questions. However, the answer to each
question is provided to all bidders.
Procurement BID EVALUATION
A. Basic Understanding: The solicitation package usually provides bidders with

1. Definition information on how the bids will be evaluated.
2. Strategies Contracts are not necessarily awarded to the lowest

bidders.
3. Objectives
Some proposal evaluation scoring models assign points in
regard to each of the following, and the company with the
B. The Process: greatest number of points may be awarded the contract:
a. Understanding of the requirements
1. Plan Procurement
b. Overall bid price
2. Conduct Procurement c. Technical superiority
3. Administer Procurement d. Management capability
e. Previous performance (or references)
f. Financial strength (ability to stay in business)
g. Intellectual property rights
h. Production capacity (based upon existing contracts
and potential new contracts)
Procurement BID PROTEST
A. Basic Understanding: Bidder conferences are also held as part of debriefing

1. Definition sessions whereby the bidders are informed as to why they
did not win the contract.
2. Strategies
Under some circumstances, bidders who feel that their bid
3. Objectives or proposal was not evaluated correctly can submit a bid
protest, which may require a detailed reappraisal of their
bid.
B. The Process:
The bid protest is not necessarily a complaint that the
1. Plan Procurement
wrong company won the contract, but rather a complaint
2. Conduct Procurement that their proposal was not evaluated correctly.
Procurement REQUEST SELLER RESPONSES
A. Basic Understanding: There are three common methods for acquisition:

1. Definition a. Advertising
2. Strategies Advertising is when a company goes out for sealed
3. Objectives bids. There are no negotiations. Competitive market
forces determine the price and the award goes to the
lowest bidder.
B. The Process: a. Negotiation
1. Plan Procurement Negotiation is when the price is determined through a
2. Conduct Procurement bargaining process.
3. Administer Procurement a. Small purchases (i.e., office supplies)
Procurement SELECT SELLERS
A. Basic Understanding: The evaluation criteria reflect the selected contract

1. Definition award strategy, which is typically a price-based award
strategy.
2. Strategies
The priced-based award strategy is used when the
3. Objectives contract will be awarded to the lowest priced and
technically acceptable proposal.
B. The Process: The best-value award strategy is used when the contract
may be awarded to either the lowest priced, technically
1. Plan Procurement
acceptable offer, or a higher-priced proposal offering a
2. Conduct Procurement higher level of performance. During a best-value source
3. Administer Procurement selection, the procuring organization conducts trade-offs
among price, performance, and other non price factors to
select the proposal that offers the overall best value to the
buyer.
NOTE:
If you are the buyer, what is the maximum you will be willing to pay? If you are the seller, what is the minimum you
are willing to accept? You must determine what motivates your opponent. Is your opponent interested in profitability,
keeping people employed, developing a new technology, or using your name as a reference? This knowledge could
certainly affect your strategy and tactics. The objective of the conduct procurements process is to negotiate a
contract type and price that will result in reasonable contractor risk and provide the contractor with the
greatest incentive for efficient and economic performance.
The contract administrator is responsible for compliance by the seller to
the buyers contractual terms and conditions and to make sure that
Procurement the final product is fit for use. Contract administrators can shut down a
manufacturing plant by allowing the seller to make late deliveries.
A. Basic Understanding: The functions of the corporate administrator include:

1. Definition a. Change management
b. Specification interpretation
2. Strategies c. Adherence to quality requirements
3. Objectives d. Inspections and audits
e. Warranties
f. Performance reporting
B. The Process: g. Records management
1. Plan Procurement h. Contractor (seller) management
i. Contractor (seller) performance report card
j. Documenting sellers performance (for future source
3. Administer Procurement selection teams)
4. Close Procurement k. Production inspection
l. Approval of waivers (give up/surrender)
m. Violation of contract
n. Resolution of disputes
o. Payment schedules
p. Project termination
q. Project closure
Procurement
A. Basic Understanding: The contract administrator is responsible for verification
1. Definition that all of the work performed and deliverables
produced are acceptable to the buyer.
2. Strategies
Contractual closure is then followed up with administra-
3. Objectives tive closure, which includes:
a. Documented verification that the output was accepted
by the buyer
B. The Process:
b. Debriefing the seller on their overall performance
1. Plan Procurement c. Documenting sellers performance (documentation will
2. Conduct Procurement be used in future source selections when evaluating
contractors past performance)
d. Identifying room for improvement on future contracts
4. Close Procurement e. Archiving all necessary project documentation
f. Performing a lessons-learned review
g. Identifying best practices
Contract Management
Four related process focus only on the buyers side
of contract management.
Contract management is defined as art and
science of managing a contractual agreement
throughout the contracting process.
B. The Process: Since contracts involve at least two parties the
buyer and the seller (contractor), contract
1. Plan Procurement
management processes are performed by both
2. Conduct Procurement the buyer and seller.
Contract management process (sellers)
The sellers Presales Activity: The process of identifying prospective and current
contract customers, determining customers needs and plans, and evaluating the
competitive environment.
management
processes, which Bid/No Bid Decision-Making: The process of evaluating the buyers
solicitation, assessing the competitive environment and risks against the
correspond to opportunities of a potential business deal, and then deciding whether to
the buyers proceed.
processes, Bid/Proposal Preparation: The process of developing offers in response to
consist of the a buyers solicitation or based on perceived buyer needs, for the purpose of
following persuading the buyer to enter into a contract.
activities : Contract Negotiation and Formation: The process of reaching a common
understanding of the nature of the project and negotiating the contract
terms and conditions for the purpose of developing a set of shared
expectations and understandings.
Contract Administration: The process of ensuring that each partys
performance meets contractual requirements.
Contract Closeout: The process of verifying that all administrative matters
are concluded on a contract that is otherwise physically complete. This
involves completing and settling the contract, including resolving any open
items.
Contract
Types There are generally five types of contracts to consider:
1. Fixed-price (FP),
2. Cost plus-fixed-fee (CPFF), or cost-plus-percentage-
fee (CPPF),
3. Guaranteed maximum-shared savings (GMSS),
4. Fixed-price-incentive-fee (FPIF),
5. Cost-plus-incentive-fee (CPIF)
Contract On the owner (buyer) side
Fixed-price (FP) 1. This contract provides maximum protection to the

owner for the ultimate cost of the project, but has the
Lump-sum disadvantage of requiring a long period for preparation
and adjudications of bids.
2. Also, there is the possibility that, because of a lack of
knowledge of local conditions, all contractors may
necessarily include an excessive amount of emergency.
3. This form of contract should never be considered by the
owner unless, at the time bid invitations are issued, the
building requirements are known exactly.
4. Changes requested by the owner after award of a contract
on a lump sum basis lead to troublesome and sometimes
costly extras.
Contract On the contractor (seller) side
Fixed-price (FP) 1. Under a fixed-price or lump-sum contract, the contractor

must carefully estimate the target cost.
Lump-sum 2. The contractor is required to perform the work at the
negotiated contract value.
3. If the estimated target cost was low, the total profit is
reduced and may even disappear. The contractor may
not be able to underbid the competitors if the expected
cost is overestimated. Thus the contractor assumes a large
risk.
Contract
Cost plus-fixed- 1. Traditionally, the cost-plus-fixed-fee contract has been
employed when it was believed that accurate pricing
fee (CPFF) could not be achieved any other way.
2. In the CPFF contract, the cost may vary but the fee
remains firm. Because, in a cost-plus contract, the
contractor agrees only to use his best efforts to perform
the work, good performance and poor performance are
rewarded equally.
3. The total dollar profit tends to produce low rates of return,
reflecting the small amount of risk that the contractor
assumes.
4. The fixed fee is usually a small percentage of the total or
true cost.
5. With this form of contract the engineering-construction
contractor bids a fixed dollar fee or profit for the services
to be supplied by the contractor, with engineering,
materials, and field labor costs to be reimbursed at actual
cost.
Contract
Cost-plus- 1. Cost-plus-percentage-fee contract provides maximum
flexibility to the owner and permits owner and contrac-
percentage-fee tor to work together cooperatively on all technical,
(CPPF) commercial, and financial problems.
2. However, it does not provide financial assurance of
ultimate (final) cost.
3. Higher building cost may result in this type of contract.
Contract
Guaranteed 1. It is unique model, where owner and contractor share the
financial risk and both have a real incentive to complete
maximum-shared the project at lowest possible cost.
savings (GMSS) 2. The contractor is paid a fixed fee for his profit and
reimbursed for the actual cost of engineering, materials,
construction labor, and all other job costs, but only up to
the guaranteed maximum.
3. Savings below the guaranteed maximum are shared
between owner and contractor, whereas contractor
assumes the responsibility for any overrun beyond the
guaranteed maximum price.
4. This contract form essentially combines the advantages as
well as a few of the disadvantages of both lump sum and
cost-plus contracts.
5. This is the best form for a negotiated contract because it
establishes a maximum price at the earliest possible date
and protects the owner against being overcharged, even
though the contract is awarded without competitive
tenders.
Contract
Fixed-price- 1. Fixed-price-incentive-fee contracts are the same as fixed-
price contracts except that they have a provision for
incentive-fee adjustment of the total profit by a formula that depends
(FPIF) on the final total cost at completion of the project and that
has been agreed to in advance by both the owner and the
contractor.
2. To use this type of contract, the project or contract
requirements must be firmly established.
3. This contract provides an incentive to the contractor to
reduce costs and therefore increase profit. Both the owner
and contractor share in the risk and savings.
Contract
Cost-plus- 1. Cost-plus-incentive-fee contracts are the same as cost-
plus contracts except that they have a provision for
incentive-fee adjustment of the fee as determined by a formula that
(CPIF) compares the total project costs to the target cost.
2. This formula is agreed to in advance by both the owner
and contractor.
3. This contract is usually used for long-duration or R&D-
type projects.
4. The company places more risk on the contractor and
forces him to plan ahead carefully and strive to keep costs
down.
Contract
Type of
commonly
used
contracts
and their
comparison
Taken from Kerzner (2009),

pp. 856
Contract
Type of
commonly
used
contracts
and their
comparison
Taken from Kerzner (2009),

pp. 856 ProjectManagement/MB-ITS/YRahmawati/2017 35
References
Most of materials in this lecture are adopted from:

Kerzner, H., (2009), Project Management: A System Approach to
Planning, Scheduling, and Controlling, 10th Ed., New Jersey: John
Wiley & Sons.

Yrahmawati MP Mbits 9thweek Procurement

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Department of Business Management

Institut Teknologi Sepuluh Nopember

(Manajemen Proyek TB 141207)

9th week course material:

Dr. Yani Rahmawati

2. Strategies Procurement (and contracting) is a process that involves

2. Strategies 1. Presales Activity: The process of identifying prospective

B. The Process: 4. Performing a make or buy analysis

2. Conduct Procurement 6. Cost estimating, including life-cycle costing

3. Administer Procurement 7. Determining whether qualified sellers exist

4. Close Procurement 8. Identifying the selection criteria

A. Basic Understanding: The make decision

A. Basic Understanding: PARTIAL LIST OF IDENTIFIED PROCUREMENT RISKS

3. Administer Procurement How will we manage multiple suppliers?

A. Basic Understanding: The solicitation package also describes the manner in

A. Basic Understanding: The solicitation package usually provides bidders with

2. Strategies Contracts are not necessarily awarded to the lowest

A. Basic Understanding: Bidder conferences are also held as part of debriefing

A. Basic Understanding: There are three common methods for acquisition:

A. Basic Understanding: The evaluation criteria reflect the selected contract

A. Basic Understanding: The functions of the corporate administrator include:

Fixed-price (FP) 1. This contract provides maximum protection to the

Fixed-price (FP) 1. Under a fixed-price or lump-sum contract, the contractor

Taken from Kerzner (2009),

Taken from Kerzner (2009),

Most of materials in this lecture are adopted from:

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