Contract closeout

Time

Figure 2

Let's consider the processes.

Procurement planning - determining what to procure and when

The project team is the main source of procurement planning for the project, even if the purchasing resource is not part of the project team. The team needs to first decide what aspects of the project should be contracted out. This might mean capital expenditure to purchase equipment, or the hiring of manpower, or contracting of specific expertise. The team should evaluate what can be done in-house, and what would be best handled externally.

According to the PMBOK® GUIDE, the inputs to procurement planning are

1. Scope Statement

2. Product description

3. Procurement resources

4. Market Conditions

5. Other planning outputs

6. Constraints

7. Assumptions

The tools used for this process are a. Make or buy analysis b. Expert judgment c. Contract type selection

The team should use these, but the purchasing input should be strong, as they should be most familiar with contracts, corporate policies on outsourcing, and possible issues that might arise in the specific type of agreements.

The outputs of this process are

1. Procurement management plan

2. Statements of work

The statements of work will become part of any contracts that are issued.

The activity identified for this part of the process is the preparation of the bidders lists. These are lists of companies who might potentially bid on a product or service that the company wants to procure. If the team is familiar with the companies that offer these products, the lists can be prepared directly. These lists might be reduced later in the process, if the team feels that some companies no longer qualify to bid, or if the team thinks that they cannot afford the time to evaluate a large number of proposals. Of course this might also cut out some good proposals that might be of interest to the team.

If the team is not familiar with the potential suppliers, they may prepare a list at this point of vendors who should receive an RFI. The results of the RFI will then determine which suppliers should receive any RFQ or RFP to be issued later.

Solicitation planning - documenting product requirements and identifying potential sources

In order to go outside for products or services, the team must issue some information to potential suppliers describing the requirements. These documents are generally quite formal, and the suppliers will then reply (or not) with their offers.

According to the PMBOK® GUIDE, the inputs and outputs for this process are as shown in Figure 3:

Figure 3

At this point the team clearly defines the product (or project) requirements, and documents these in one of the solicitation documents. At this point the PM must proceed with caution, as some of these documents carry inherent legal implications, which the PM should understand before anything is issued. Because of this any document issued should be reviewed by the lawyers unless it is a standard format which has already been approved.

The documents which might be used include:

RFI - Request for Information RFP - Request for Proposal

■ Proposal Contract

Of these, only the RFI does not carry legal implications. But even with an RFI the PM should be careful. An RFI should not ask for prices. In his response to the RFI, the vendor is welcome to provide pricing information, especially if he feels that doing so will gain him a competitive advantage. But the issuer cannot ask for prices, because doing so would turn the RFI into an RFQ or RFP, and this would change the legal obligations of the parties. Of course, the team needs to have a general idea of the cost, in order to decide whether they can afford to even pursue the opportunity. For this purpose they might request a planning cost. However they need to be aware that vendors are not bound by any prices provided in responding to this request, so the price could change if serious interest is shown.

Solicitation - obtaining quotations, bids, offers, or proposals as appropriate

When a project team has decided to obtain goods or services from outside the company, the team needs to 'shop' for the best available goods or services at the best available price. In some situations the team can simply go to a store or a web site and order the desired product. In other cases, the team does not have ready access to information about what is available, or the company is required to allow fair opportunity to multiple bidders. Governments, for example, do not award contracts for services without first opening the opportunity for multiple providers to propose their solutions. When companies wish to allow or encourage multiple vendors to present their offerings, the solicitation process starts. At least one of the solicitation documents is used.

The first step in the process is the qualification of bidders, This will allow the invitation to bid will go to those who appear to be reasonable contenders. The project team or the purchasing department may be familiar with the vendors and their products, in which case qualification might consist of reviewing information collected from previous purchases or projects from experience of others, and deciding which vendors might possibly qualify to make a good proposal. If the team is not familiar with what is available in the marketplace, qualification can be done via an RFI. The Request for Information consists of the specifications for the product or service required, and a request for information about solutions that the vendors might wish to propose. The buyer then reviews the inputs to evaluate which suppliers to include on the bidders list.

Thus the RFI is a useful tool because it helps to qualify availability and capabilities. It is not binding on requesting organization in the sense that the recipients cannot presume that the buyer will actually buy anything. He is simply asking for information. For this reason, many sellers chose not to respond to an RFI. An RFI response can be time consuming, and if the buyer then decides not to buy anything that time has been spent in vain. Since there is no commitment on the part of the seller, responses to RFI's come in many forms. In one case, in which an RFI was issued for information about billing systems, 5 responses were received, which encompassed a wide range of formats. First, one company said simply, "Call me if you decide to move on this, and I'll make you a proposal". They were not prepared to put any time into something that was not a real opportunity. This is not uncommon for small vendors who cannot afford the time to respond to all requests when there is real work on the table. Another company prepared a beautiful custom reply, addressing each element of the specification carefully, printed nicely and laid out in a binder with both the bidder and the buyer identified throughout. Two companies sent boilerplate - standard product description material with the name of the buyer inserted. Another suggested that the buyer check their web page, sending the url. One company did not respond. The final company sent a CD, with a sample of their billing system! An RFI gives the buyer a great deal of useful information. However, the disadvantage of using this tool is that it introduces a sizable delay into the overall procurement process while the Request is prepared, the sellers are allowed time to respond, and the responses are analyzed.

Once the bidders list is ready, an RFP or RFQ can be issued A Request for Proposal is generally used when skills or knowledge are a key part of the work. The buyer issues a specification, and requests a description of what the seller will provide. A Request for Quote is Similar to an RFP, but is used when price, as opposed to knowledge or skills, is the deciding factor. The appropriate response may be simply a price quote for some equipment, rather than a systems approach. Sellers choose whether or not to respond.

Either of these documents has legal implications. The implication of issuing an RFP or RFQ is that a vendor will be chosen. A bidder has the right to assume that he has a chance of selling his product unless it is clearly specified in the request that it is possible that no bidder will be selected. The wording for this statement should be reviewed by lawyers to ensure that it satisfactorily protects the buyer. The inclusion of such a statement has the potential to cause some bidders not to respond, if they think that they might be preparing a bid for no purpose. Otherwise, if it should happen that the buyer decides not to select any bidder, some bidders, particularly the lowest bidder, but possibly also others, might be able to sue for at least their costs for preparing the bid, and possibly even for some revenue. It is probably also wise to include a statement that the buyer reserves the right to select other than the lowest bid, if there are factors which might override the price in the selection. Otherwise in some situations an unsuccessful bidder with a lower price than the selected seller might be able to sue. The PM should review the implications and the wordings with his lawyer, since laws vary from place to place and from one situation to another. This book is not a legal text.

The RFP should contain a clearly written specification of the requirements, to allow the bidder to prepare the best solution. Specifications can be functional, detailed or performance specs. A functional specification describes the purpose for or use of the product or service, to give the bidder the context in which it will be used. Since the seller then proposes something that he presumes will perform in the way the buyer expects, the seller takes the risk of proposing something that does not meet the expectations.

A detailed spec describes in detail the service or product required. To do this the buyer must give detailed information. To do this he perhaps uses: S3 standards samples(s)

eg multi-page description of all aspects, or network or product diagrams Ea Brand name

Specify an existing standard

Performance specifications detail measurable capabilities - perhaps for switches the specification gives the number of calls/second that can be processed, or the number of lines or trunks that can be terminated, etc. risk of performance is on the seller. A well-prepared RFP has the potential to attract some excellent bids. The team might then want to follow up with the bidders if they require further information. But this must be done carefully.

Source selection - choosing from among potential sellers

An RFQ or RFP gives a date, and usually even a time, at which the bids are due. Both before and after this time all bidders must be treated equally and provided with the same information. Any discrepancy in treatment of the bidders can be construed as giving one an unfair advantage, which can be grounds for legal action. Therefore if any potential bidder asks a question, the recommended procedure for the seller is to document the question, document the answer, and then share these will all potential bidders. This way all bidders will receive identical information.

Another technique that buyers use to ensure that all questions are answered equally for all bidders is to hold a bidders meeting. All potential bidders must be invited to the meeting. If a bidder does not attend, this is not an issue for the buyer, as long as there is no question that the invitation was received, in time to give the bidder fair opportunity to attend.

The dynamics at these meetings are interesting because all bidders are hoping that someone else will ask questions. They all have questions about the request, but generally they worry that in asking a question they will reveal their strategy for responding, giving competitive advantage to the other bidders. So some bidders meetings are quite tense, but quiet, until someone finds a way to ask a question.

Bids should be time stamped to show the time of receipt. It is in the seller's interest to submit the bid by courier, requesting a signature with the time of receipt, to give a record of the delivery and the time. Any bids received after the deadline should not be accepted, unless all bids are late. In the bid evaluation process the buyer should first ascertain that each bid is compliant. Any non-compliant bid should not be accepted, but sometimes these are determined to be acceptable. If the team wants to consider non-compliant bids, the legal implications should be determined.

The team evaluates all compliant bids to select the one that best meets their needs. There should be an objective ranking scheme that assigns weightings to each criterion in the specification. Then each response should be rated on the degree of compliance to each requirement. Some of the rankings will have a degree of subjectivity, but the existence of the ratings and the weightings will allow the team to select the seller offering the best value.

Once bids are received and evaluated contract negotiation begins. In order to select the optimum vendor, the buyer might need to negotiate some issues with the winning vendor.

The goal of any negotiation is to satisfy the needs of both sides with a mutually beneficial solution. Negotiation experts recommend that that the participants think objectively, take a positive approach to finding a solution, and envision creative solutions that will create a win-win situation. It is recommended that the participants adhere to the following principles:

• Do not take a position; then bargain just to reach that position. There should be something behind each position, which is the real crux of the issue. Focus on the interests of the parties, and build the bargaining proposals on arguments on these, not on what was requested.

• Take the people out of the problem. What matters is the issue, and the needs if both parties. It does not matter whether the bargainers like each other. What is relevant is that the solution meets the needs.

• Look for and propose alternative solutions that might possibly meet the needs of the other party. Put these forward as proposals for consideration, and be prepared to consider such alternatives to your own proposals as well.

Insist on using objective criteria. These criteria can be industry standards, information obtained from independent sources such as consultants or studies, or criteria mutually established through discussion with the other party.

■ Know what you will do if things fall completely apart. Suppose that the other side cannot meet your request, and at some point walks away. What would happen then? Knowing this will probably change your approach. What would happen to them if you walk away? Can you use this as an argument in your favour? The output of source selection will be an agreement to obtain products or services from a successful supplier. In most cases this will involve a contract. Therefore it is important to understand what makes up a contract, and the types of contracts to ensure that you are properly covered. As with anything legal, it is always best to have a lawyer involved in any contract.

Five elements make up a contract.

These are:

1. Offer and acceptance

2. Mutual intent

3. Consideration

4. Capacity to Contract

5. Lawful purpose

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