Once the tasks which need to be outsourced are identified, the procurement team will begin to handle purchasing tasks by developing procurement plans. The process of purchasing goods and services for the project will depend on the complexity and unique details of the project, and the importance of the good/service. One popular approach for procurement plans is by relationship type with the providers of outsourced project parts.
Some goods and services are easily accessible, with little variation in quality or availability. These goods and services are known as commodities. The commodity providers are suppliers and most all commodities have multiple suppliers. A key goal of the project manager in purchasing commodities is to achieve the lowest price possible. On smaller, less complex projects, supplies can be purchased as needed from a supplier’s catalog, which is where prices of commodities can be found for most sellers.
Additional cost savings are often available for wholesale when purchasing large quantities from the same supplier. On bigger, more complex projects a list of materials and supplies is created for the project budget and project cost estimate. Project managers can then take this materials list to suppliers and receive a quote for the total cost of materials, and suppliers can offer their lowest price and bid for the project.
To avoid choosing a bid from a company that may be unreliable, many groups will maintain a working list of suppliers that meets the organizational needs. These needs will usually include proven capability to meet the quality and schedule requirements.
The project team will develop a process for requesting and receiving a quote. On small projects, the parent company may process all RFQs (Request for Quote). On larger, more complex projects, a procurement group is formed with expertise in purchasing goods and materials. This team will develop a list of all the purchasing requirements for the project and develop a schedule that assures the necessary materials will be available when they are needed.
The project team develops an RFQ based on quantity and schedule needs of the project, which is sent to the qualified suppliers approved by the project team and/or parent company. From here, the suppliers will develop a quote for the proposal including listing the specific materials, price for materials and schedule for delivery. This process is done with multiple suppliers, and the project team will determine what quote meets the project and budget best and make their selection. Most often, the supplier with the lowest price will win the bid for the project.
In some cases, organizations that perform many projects will develop relationships with 1-2 suppliers based on mutually beneficial cost savings. These relationships are known as key supplier relationships.
Vendors often give a unique good or service that is not a commodity. The vendor often provides a good or service designed for the project; a custom made good/service. This is mostly seen with major complex projects, such as building a newly-designed military aircraft or a software used in hospitals designed to improve the efficiency of that specific hospital.
Goods and services from vendors need expertise and insight from the vendor, because they are among the few people who truly understand their products and/or services. Rather than sending a request for quote (RFQ) for a commodities list, project teams will send a request for proposal (RFP).
Vendors who receive these RFPs are invited to develop creative solutions to adding value to the project. Vendors are encouraged to offer alternatives in their designs, material alternatives, and schedule alternatives that all meet the project requirements and lower project costs. Bids are analyzed on total value added to the project, including how they plan into the overall project goal.
Because vendor performance is essential to the success of a project, the vendor relationship management is a top project priority. Project managers and management teams will frequently implement processes that promote the vendors to submit suggestions that will help reduce total cost of the project, decrease the schedule or add value in improved performance. The project manager will often designate a team member to monitor the vendor relationship and ensure vendor success by providing support via project resources.
If a parent company does not have the necessary skills or relationships to complete a project, the organization may pair with another company, and we often see this with international projects.
A partnership is a formal agreement to execute the project, with each party being responsible for contributing resources. In the majority of partnerships, both parties benefit from a successful project, and share the costs incurred with a less successful or unsuccessful project. One essential factor in a successful partnership is clear communication of roles/responsibility, project goals and scope of work for each party.
There is a strong parallel in building the relationship between two major partners and building the relationship with a client. On large, complex projects a partnership alignment meeting is often held to build trust among the companies and develop strong and open communication channels. Maintaining the relationship creates better problem solving and coordination in taking action on tasks in the project.
A well-managed partnership can aid strongly in achieving the project goal, reducing costs in multiple areas of the project, and shortening the project schedule. In most situations, the parent company is aware of weaknesses in project resources or skills and aims to find a partner who has these needed skills/resources. Both companies will research the capabilities of their potential partner and see if they possess the skills/resources they need.
The procurement project cycle includes all procurement activities, from decision-making about purchasing to payments and closing of procurement contracts.
After the decision to purchase goods or services has been made, the procurement team creates procurement plans which typically includie the following factors: selecting appropriate contracts and relationships for all purchased goods/services, preparing RFQs and RFPs and the associated relationships, Evaluating RFQ and RFP and partnerships, deciding and signing contracts, managing project factors like quality, schedule and contract changes, and closing contracts.
Depending on the complexity level of the project, some of the above steps can take upwards of weeks to complete. Each step is also listed in the master project schedule. The associated time of the procurement cycle can influence the scheduling of project tasks, including the decision to complete tasks internally or outsource work to third-parties. The completion date for deliveries of materials and contracts are all recorded in the project schedule and any procurement activities that delay the project dates or impact critical path tasks may need special attention from the project team.
Selecting the Right Contract Approach
The tech teams will usually develop a description of the work to be outsourced. From this info, the project manager and team will aim to answer some critical questions such as:
- Is the required work involving commodities, custom goods/service, or a unique skill / connection?
- Who is needed: supplier, vendor, or partnership?
- How should the outsourced party be approached: RFQ, RFP or contract?
- How detailed is the scope of work for the outsourced tasks/items?
- What are the major risks and which party will be impacted by what kind of risks?
- Does this outsourcing impact the critical path tasks, and how much float do the tasks have?
- How important is an accurate cost in advance?
The procurement team uses the answers to these questions in two separate ways: the first three questions determine the approach to outsourcing the necessary goods/services, and the following questions determine what kind of contract should be used.
A major player in selecting the right contract is deciding which party will assume the most risk. The team will analyze the amount of risk managed by the project and what risks will be assumed by contractors. The project team will usually aim to assume the project risk, but sometimes contractors are more experienced or have more control that make them better suited to manage risks involved with the contracted work.
Solicitation is the process of requesting prices and other relevant information from bidders. Solicitation often takes the form of a request for quote (RFQ) or request for proposal (RFP), depending on the circumstances. Parent companies will pursue partnerships on a project-by-project basis, which is usually decided by senior managers of the parent company.
Analyzing Qualified Bidders
Potential bidders are people or groups who can provide the materials or services needed on the project. On small, less complex projects, the parent company will usually have a list of established vendors and suppliers that have successfully worked with firms and are reliable bidders. The project manager and team will also have access to past project information to see how different suppliers, vendors and partners operate and their overall capabilities.
For complex and uncommon projects where no list of suppliers exists, the project team will develop a list of potential suppliers and then analyze them to become eligible to bid on the project. Eligible bidders are put onto a “bidders list” and given a schedule of when certain tasks on the project will be bid.
Suppliers are analyzed by their ability to complete the project tasks in a way that meets the project expectations and demonstrates financial stability. “Ability to complete project tasks” includes ability to meet quality standards and operate within the project schedule. When economic activity is strong in an area, many suppliers will become busy and their resources become thin. The project team must understand this and investigate the prospective suppliers to assure they are capable of meeting deadlines before they are placed on the bidders list.
To be included on the bidders list, the suppliers must also be financially stable, and the project team is responsible for finding this out. The project team is able to obtain the necessary financial reports from financial providers to determine if the supplier is capable of successfully working on the project tasks.
As the project schedule progresses, the project team will begin to be tasked with the purchasing and procurement of goods and services needed for the project. In order to successfully, most teams will develop procurement plans in order to ensure they acquire all the necessary materials and services.
In order to accomplish this, the project team must assess what kind of resources they will need (commodity, custom/special item, or unique connection) and what kind of third party to work with (supplier, vendor or partnership).
The project team will assess factors such as price, past experiences with suppliers/vendors/partners, and complexity of the project. From here, the third parties will have the opportunity to bid on the project, and most often the party with the best price will earn the bid.
In some cases, strong, mutually-beneficial relationships will form between parent companies and third-parties and the parent company will consistently work with this party. In summation, the procurement process and procurement plans are centered around finding the right fit for the parent company and the project.