Procurement

CDU School of Information Technology Procurement - Slide 1
Procurement means acquiring goods and/or

services from an outside source. Procurement is
the term generally used by government, while
business uses the term purchasing and
outsourcing is commonly used by the information
technology industry.
It is estimated that in the year 2003 the worldwide
information technology outsourcing market has
grown to over US$110 billion.
HIT241 - PROCUREMENT & CONTRACT MANAGEMENT
Introduction
Why Outsource?
Outsourcing is a growing practice within the IT
industry, and it is important to appreciate the
reasons it is adopted:
To reduce both fixed and recurrent costs.
To allow the client organization to focus on
its core business.
To access skills and technologies.
To provide flexibility.
To increase accountability.
Procurement Management Processes
Project procurement management includes the following
processes for acquiring goods and services from outside
the project organisation:
Procurement planning: determining what to procure and
when.
Solicitation planning: documenting product requirements
and identifying potential sources.
Solicitation: obtaining quotations, bids, offers, or proposals
as appropriate.
Source selection: choosing from among potential vendors.
Contract administration: managing the relationship with the
vendor.
Contract close-out: completion and settlement of the
contract.
Procurement Management Processes & Key Outputs
The figure below summarises the major processes involved
in procurement management, and identifies important
milestones associated with each stage.
For example, after procurement planning the key milestone
is the make or buy decision. This will determine if further
procurement management processes are required.
Procurement Planning
Procurement planning involves identifying which project
needs can be best met by using products or services
outside the organization. It includes deciding:
Whether to procure.
How to procure.
What to procure.
How much to procure.
When to procure.
It is essential to be thorough and creative when planning
procurement. Even though a company may be viewed as a
competitor, it will often be advantageous to collaborate on
some projects.
Inputs to Procurement Planning
The inputs needed for procurement planning include:
The project scope statement.
Product description.
Market conditions.
Constraints and assumptions.
It is important to define the scope of the project, the
products, market conditions, and constraints and
assumptions. However, it is also essential to know
exactly why you want to procure goods or services.
Tools and Techniques
Procurement management will often incorporate the
following:
Make-or-buy analysis: determining whether a
particular product or service should be made or
performed inside the organization or purchased from
someone else. Often involves financial analysis.
Experts, both internal and external, are valuable
assets in procurement decisions.
Internal experts are particularly useful in providing
knowledge of organisational and personnel issues.
External experts can provide expert judgement,
especially with regard to vendors and technology
issues.
Types of Contracts
A contract is a mutually and legally binding agreement
that obligates the seller to provide specified products
or services, and obligates the buyer to pay for them.
Different types of contracts are suited to particular
circumstances, there are three broad categories:
Fixed price or lump sum: involve a fixed total
price for a well-defined product or service.
Cost reimbursable: involve payment to the seller
for direct and indirect costs.
Unit price contracts: require the buyer to pay the
seller a predetermined amount per unit of service.
Fixed Price Contracts
Fixed price or lump sum contracts involve a fixed total
price for a well-defined product or service. These contracts
are particularly suited where supplies or services can be
clearly specified before tenders are invited. The buyer
incurs little risk in this situation.
Fixed price contracts may also include incentives for
meeting or exceeding project objectives. They may also
include safeguards in the form of penalty clauses,
however these may be difficult to apply before the
consequences of delay are felt.
An important consideration is that any changes to
resource requirements due to project revision (change) is
likely to lead to additional claims by, and extra payment to
the contractor.

Cost Reimbursable Contracts
Cost reimbursable or cost-plus contracts involve payment to
the seller for direct and indirect actual costs. These contracts are
often used for projects that include the provision of goods and
services associated with new technologies. The buyer absorbs
more risk with the type of contract, which has three forms:
Cost plus incentive fee (CPIF): the buyer pays the seller for
allowable performance costs plus a predetermined fee and
an incentive bonus.
Cost plus fixed fee (CPFF): the buyer pays the seller for
allowable performance costs plus a fixed fee payment
usually based on a percentage of estimated costs.
Cost plus percentage of costs (CPPC): the buyer pays the
seller for allowable performance costs plus a predetermined
percentage based on total costs.
Unit Price Contracts
Unit price contracts require the buyer to pay the
seller a predetermined amount per unit of service, and
the total value of the contract is a function of the
quantities needed to complete the work.
Unit price contracts are also called a time and
materials contract, and may incorporate volume
discounts.
This type of contract is often used for services that are
needed when the work cannot be clearly specified and
total costs cannot be estimated in a contract. Many
contract programmers and consultants prefer to use
unit price contracts.
Contract Types Versus Risk
The figure below summarises the spectrum of risk to the
buyer and seller for different types of contract. Note that a
low risk option for a buyer will be high risk for the seller, and
visa-versa.
Statement of Work (SOW)
Many contracts include a statement of work (SOW). A
statement of work is a description of the work required for
the procurement. The SOW describes the work in sufficient
detail to allow prospective sellers to determine if they are
capable of providing the goods and services required, and
to allow them to determine an appropriate price.
A good SOW gives bidders a better understanding of the
buyers expectations, and therefore should be as clear,
concise and as complete as possible. It should describe all
the services required, and include performance reporting
requirements. The SOW should specify the product of
the project, use industry terms, and refer to industry
standards.
Statement of Work (SOW) Template
I. Scope of Work: Describe the work to be done to detail. Specify the hardware and
software involved and the exact nature of the work.
II. Location of Work: Describe where the work must be performed. Specify the
location of hardware and software and where the people must perform the work
III. Period of Performance: Specify when the work is expected to start and end,
working hours, number of hours that can be billed per week, where the work must
be performed, and related schedule information.
IV. Deliverables Schedule: List specific deliverables, describe them in detail, and
specify when they are due.
V. Applicable Standards: Specify any company or industry-specific standards that
are relevant to performing the work.
VI. Acceptance Criteria: Describe how the buyer organization will determine if the
work is acceptable.
VII. Special Requirements: Specify any special requirements such as hardware or
software certifications, minimum degree or experience level of personnel, travel
requirements, and so on.
Solicitation Planning
Solicitation planning involves preparing of the documents
needed for requesting bids (solicitation), and determining
the evaluation criteria for the award of a contract. Common
documents used in this process are:
Request for Proposals: used to solicit proposals from
prospective sellers where there are several ways to
meet the sellers needs.
Requests for Quotes: used to solicit quotes for well-
defined procurements.
Invitations for bid or negotiation and initial
contractor responses are also part of solicitation
planning.
Outline for a Request for Proposal (RFP)
I. Purpose of RFP
II. Organizations Background
III. Basic Requirements
IV. Hardware and Software Environment
V. Description of RFP Process
VI. Statement of Work and Schedule Information
VII. Possible Appendices
A. Current System Overview
B. System Requirements
C. Volume and Size Data
D. Required Contents of Vendors Response to RFP
E. Sample Contract
Solicitation
Solicitation (or tendering) involves obtaining proposals,
tenders or bids from prospective sellers. Prospective
sellers do most the work in this process, usually at no cost
to the buyer or the project. The buying organisation is
responsible for advertising the request to tender (the
solicitation).
Organizations can advertise to procure goods and services
in several ways:
Approaching the preferred vendor.
Approaching several potential vendors.
Advertising to anyone interested.
A bidders conference or similar meeting between the
buyer and the prospective sellers can help clarify the
buyers expectations.

Source Selection
Once buyers receive proposals, they must select a
vendor or decide to cancel the procurement.
Source selection involves:
Evaluating bidders proposals.
Choosing the best one.
Negotiating the contract.
Awarding the contract.
It is highly recommended that buyers use formal
evaluation procedures for selecting vendors.
Buyers often create a short list.
Sample Proposal Evaluation Sheet
The following template could be used by a project team to
help create a short list of the best three proposals.
Source Selection
After developing a short list of possible sellers,
organisations will often undertake more detailed
evaluation.
The following figure lists items that might be part
of an evaluation of the top three vendors for a
large information technology project.
All of the evaluation criteria are given a certain
number of possible points (based on ranked
importance), and the project team members and
other stakeholders then evaluate each proposal
by assigning points to each criteria.
Detailed Criteria for Selecting Vendors
Contract Administration
Contract administration ensures that
the sellers performance meets
contractual requirements. Contracts are
legal relationships, and are subject to
the contract law in the country where the
project is conducted, and in the case of
international projects, the country of
supply.
However, due to their complexity, many
project managers ignore contractual
issues. This can result in serious
problems. Ideally, the project manager
and the project team should be actively
involved with contract law experts in the
preparation and administration of
contracts.
Project members must be aware of the
legal problems they might cause by not
understanding a contract. In particular,
most projects involve changes, and
these changes must be handled
properly for items under contract.
Change Control for Contracts
Change control is an important part of the contract
administration process. The following change control
process must be applied where there are contracts:
Changes to any part of the project need to be reviewed,
approved, and documented by the same people in the
same way that the original part of the plan was
approved.
Evaluation of any change should include an impact
analysis. How will the change affect the scope, time,
cost, and quality of the goods or services being
provided?
Changes must be documented in writing. Project team
members should also document all important meetings
and telephone phone calls.
Contract Close-out
Contract close-out is the final project procurement
management process. It includes:
Product verification to determine if all work was
completed correctly and satisfactorily.
Administrative activities to update records to
reflect final results.
Archiving information for future use.
Procurement audits are often undertaken during
contract close-out to identify lessons learned in the
procurement process.
Conclusion - 1
It is essential that organisations obtain good
contracts that minimise risk while ensuring
optimum results through effective contract
administration.
With the current competitive and demanding
conditions found in information technology
projects, it is very important to prepare
contracts with great care and expert
assistance. It is equally important to initiate
and follow effective contract administration
procedures.
Conclusion - 2
The following guidelines can help can assist in preparing
proposals, contracts and administrative procedures:
Use checklists and templates where appropriate.
Evaluate risks by reference to suggested contract
provisions where appropriate.
All major proposals and contracts, and contracts with
questionable provisions, should be reviewed by a
contract law expert.
Appropriate pricing and/or insuring of risk under
the contract.
Periodic review, improvement and updating of
contract preparation and administration procedures.

Procurement

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CDU School of Information Technology Procurement - Slide 1

Procurement means acquiring goods and/or

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