169059437-procurement.ppt

8/10/2019 169059437-Procurement.ppt

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CDU – School of Information Technology Procurement… - Slide 1

Procurement means acquiring goods and/orservices from an outside source. Procurement isthe term generally used by government, whilebusiness uses the term purchasing andoutsourcing is commonly used by the informationtechnology industry.

It is estimated that in the year 2003 the worldwideinformation technology outsourcing market hasgrown to over US$110 billion.

HIT241 - PROCUREMENT & CONTRACT MANAGEMENT

Introduction





Why Outsource?

Outsourcing is a growing practice within the ITindustry, and it is important to appreciate thereasons 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 followingprocesses for acquiring goods and services from outsidethe 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 proposalsas appropriate.

Source selection: choosing from among potential vendors. Contract administration: managing the relationship with the

vendor.

Contract close-out: completion and settlement of thecontract.





Procurement Management Processes & Key Outputs

The figure below summarises the major processes involvedin procurement management, and identifies importantmilestones associated with each stage.For example, after procurement planning the key milestoneis the “make or buy decision”. This will determine if further

procurement management processes are required.





Procurement Planning

Procurement planning involves identifying which projectneeds can be best met by using products or servicesoutside 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 planningprocurement. Even though a company may be viewed as acompetitor, it will often be advantageous to collaborate onsome 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 andassumptions. However, it is also essential to knowexactly why you want to procure goods or services.


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Tools and Techniques Procurement management will often incorporate thefollowing:

Make-or-buy analysis: determining whether aparticular product or service should be made or

performed inside the organization or purchased fromsomeone else. Often involves financial analysis.

Experts, both internal and external, are valuableassets in procurement decisions.

– Internal experts are particularly useful in providingknowledge 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 agreementthat obligates the seller to provide specified productsor services, and obligates the buyer to pay for them.Different types of contracts are suited to particularcircumstances, 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 totalprice for a well-defined product or service. These contractsare particularly suited where supplies or services can beclearly specified before tenders are invited. The buyer

incurs little risk in this situation.Fixed price contracts may also include incentives formeeting or exceeding project objectives. They may alsoinclude 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 toresource requirements due to project revision (change) islikely to lead to additional claims by, and extra payment tothe contractor.




Cost Reimbursable Contracts Cost reimbursable or cost-plus contracts involve payment tothe seller for direct and indirect actual costs. These contracts areoften used for projects that include the provision of goods andservices associated with new technologies. The buyer absorbsmore risk with the type of contract, which has three forms:

Cost plus incentive fee (CPIF): the buyer pays the seller forallowable performance costs plus a predetermined fee andan incentive bonus.

Cost plus fixed fee (CPFF): the buyer pays the seller forallowable performance costs plus a fixed fee paymentusually based on a percentage of estimated costs.

Cost plus percentage of costs (CPPC): the buyer pays theseller for allowable performance costs plus a predeterminedpercentage based on total costs.




Contract Types Versus Risk

The figure below summarises the spectrum of risk to thebuyer and seller for different types of contract. Note that alow 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). Astatement of work is a description of the work required forthe procurement. The SOW describes the work in sufficientdetail to allow prospective sellers to determine if they are

capable of providing the goods and services required, andto allow them to determine an appropriate price.

A good SOW gives bidders a better understanding of thebuyer’s expectations, and therefore should be as clear,

concise and as complete as possible. It should describe allthe services required, and include performance reportingrequirements. The SOW should speci fy the product of

the project , use indu stry 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, travelrequirements, and so on.




HIT241 - PROCUREMENT & CONTRACT MANAGEMENT Solicitation Planning

Solicitation planning involves preparing of the documentsneeded for requesting bids (solicitation), and determiningthe evaluation criteria for the award of a contract. Commondocuments used in this process are:

Request for Proposals: used to solicit proposals fromprospective sellers where there are several ways tomeet the sellers’ needs.

Requests for Quotes: used to solicit quotes for well-defined procurements.

Invitations for bid or negotiation and initialcontractor responses are also part of solicitationplanning.





Solicitation

Solicitation (or tendering) involves obtaining proposals,tenders or bids from prospective sellers. Prospectivesellers do most the work in this process, usually at no costto the buyer or the project. The buying organisation is

responsible for advertising the “request to tender” (thesolicitation).

Organizations can advertise to procure goods and servicesin several ways:

Approaching the preferred vendor.

Approaching several potential vendors.

Advertising to anyone interested.

A bidders’ conference or similar meeting between thebuyer and the prospective sellers can help clarify the

buyer’s expectations.





Source Selection

Once buyers receive proposals, they must select avendor 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 formalevaluation procedures for selecting vendors.

Buyers often create a “short list”.





Sample Proposal Evaluation Sheet

The following template could be used by a project team tohelp create a short list of the best three proposals.





Source Selection

After developing a short list of possible sellers,organisations will often undertake more detailedevaluation.

The following figure lists items that might be partof an evaluation of the top three vendors for alarge information technology project.

All of the evaluation criteria are given a certain

number of possible points (based on rankedimportance), and the project team members andother stakeholders then evaluate each proposalby assigning points to each criteria.





Detailed Criteria for Selecting Vendors





Contract Administration

Contract administration ensures thatthe seller’s performance meetscontractual requirements. Con tracts arelegal relat ion sh ips , and are subject tothe contract law in the country where theproject is conducted, and in the case of

international projects, the country ofsupply.






However, due to their complexity, manyproject managers ignore contractualissues. This can resul t in ser iou s

prob lems. Ideally, the project managerand the project team should be activelyinvolved with contract law experts in thepreparation and administration ofcontracts.






Project members must be aware of thelegal problems they might cause by notunderstanding a contract. In particular,

most projects involve changes, andthese changes must be handled

proper ly for i tems under con tract .





Change Control for Contracts

Change control is an important part of the contractadministration process. The following change controlprocess 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 thesame way that the original part of the plan wasapproved.

Evaluation of any change should include an impactanalysis. How will the change affect the scope, time,

cost, and quality of the goods or services beingprovided?

Changes must be documented in writing. Project teammembers should also document all important meetings

and telephone phone calls.





Contract Close-out

Contract close-out is the final project procurementmanagement 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 duringcontract close-out to identify lessons learned in theprocurement process.





Conclusion - 1

It is essential that organisations obtain goodcontracts that minimise risk while ensuringoptimum results through effective contractadministration.

With the current competitive and demandingconditions found in information technologyprojects, i t is very important to prepare

contracts with great care and expert

assistance . It is equally important to ini t iate

and fol low effect ive con tract adm inist ration

procedures.



CDU School of Information Technology Procurement Slide 28


Conclusion - 2

The following guidelines can help can assist in preparingproposals, contracts and administrative procedures:

Use checklists and templates where appropriate.

Evaluate risks by reference to suggested contractprovisions where appropriate.

All major proposals and contracts, and contracts withquestionable provisions, should be reviewed by acontract law expert.

Appropriate pricing and/or insuring of risk underthe contract.

Periodic review, improvement and updating ofcontract preparation and administration procedures.

169059437-procurement.ppt

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