Lesson 1, Topic 1
In Progress

Entering a contract


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Entering contract usually involves the procurement activities. All projects involve procurement as it involves the acquisition of goods or services or hiring of people. The overall objective of project procurement is to provide whatever is required, to meet a schedule, at a predetermined standard of quality and at a cost that equates to value for money. It is to ensure that the project will have the right resources at the right time at the right place of the right quantity with the right cost. Most of procurement activities will involve some sort of agreement or contract for and must be planned and managed just like any other aspect of the project.

Procurement, in essence, refers to the management and contractual frameworks, methodologies and systems used to deliver a project from its concept to completion. It involves the acquisition of human and other resources such as materials, components, equipment etc. using ‘in-house’ teams and generally though additional commercial contracts with external entities. It is thus concerned with establishing the optimal level of risk distribution (or conversely the degree of control over project outcomes), the roles, responsibilities, selection methodologies and contractual relationships of the various project team members, the degree of ‘off-project’ activity, the need for technology transfer, implementation methodologies, and overall project control.

In other words, it delivers the project!

Procurement encompasses not only the traditional buying processes, but also a wide range of supply processes, like the management of value analysis processes, supplier negotiations, supplier quality certification including market research. Figure 3-1 provides a summary of the contracting process and provides a brief framework showing the relationship between project phases and contracting processes.

FIGURE 3-1: THE CONTRACTING PROCESS

It is worth to note that procurement management applies to ‘goods and services’ and is not restricted to delivery of the ‘project’ nor the finished product – it applies to all goods, human resources and services that are to be outsourced by the performing organisation, and includes professional services, resources for the project team, project outcomes etc. The principles of procurement apply equally to all aspects of the project process, and the project deliverables. Note also that a unique perspective is generally taken from the point of view of the ‘performing organisation’ or ‘procurer’, and that this has a strong influence on the perceptions of risk and the processes undertaken to achieve procurement of the project at hand. Each stakeholder will have unique requirements in relation to procurement of their required goods and services, and these will rarely overlap. This represents the ‘quicksand’ of procurement, where any selected method will quickly become bogged down in competing interests and conflicting needs.

Outsourcing the supply of goods and services is a strategic decision and careful consideration should be given to the advantages and disadvantages of such an approach. It have been indicated that outsourcing is a growing trend in larger organisations, and is used as a competitive tool to gain operational advantages.

Before entering any contract, project managers are to refer to the approved Project Management Plan in specific the Project Scope and Resources requirements. In assisting project manager, below is some guide that can be adopted.

Plan purchases and acquisitions – this first stage of procurement planning examines the processes and outputs of the overall project management, and identifies those goods and services that can be achieved in-house, and those that are best outsourced.

In effect, procurement management is a series of project management exercises in itself. The importance of procurement planning should not be dismissed, as strategic decisions are made that can impact on the project throughout its lifecycle. An inappropriate procurement strategy will have major implications on many aspects of the project outcomes, including cost, time and quality, and overall aggravation as a result of an adversarial environment. The desire to avoid such experiences has brought about many different approaches to procurement apart from the ‘traditional’ methods, including design / construct, partnering, strategic alliances, cost plus, guaranteed maximum price (GMP) etc.

Plan contracting– when procurement strategies have been decided by key stakeholders, specific procurement processes need to be undertaken appropriate for each procurement activity. Documents need to be prepared, suppliers have to be identified, arrangements made for submission of tenders or bids, and evaluation criteria defined.

Request seller responses– at this stage, it is necessary to obtain submissions from potential suppliers in the form of bids, quotes, tenders, proposals etc. appropriate for the procurement strategy. It is from this body of information that eventual suppliers will be chosen, and the terms of supply defined.

Select sellers – evaluation criteria defined during solicitation planning will be utilised to compare competing bids (unless sole source supply is the selected approach) and negotiate the most appropriate agreement for the project requirements. Agreements will be entered into for each of the supply contracts, and these can then be handed over to members of the project team for administration during the later stages of the project.

Contract administration – during this stage, it is the responsibility of the project team to ensure that all parties to the contracts meet their obligations, and that all parties receive their due entitlements, either in the form of deliverables or payment for goods and services. Poor contract administration will often lead to conflict amongst key stakeholders, so it is important to understand the nature and range of skills necessary for this role, together with the constraints imposed by the legal aspects of procurement, including contract law, tort, agency, etc.

Contract close-out – this is like project completion, where it is important to ensure that all requirements of the procurement process are completed, and that all administrative aspects of the contract are finalised. These will include supply and performance of goods and services, payment of all outstanding claims, enactment of all operational warranties etc., and archiving of all records in case of future disputes.

Different organisations treat their procurement activities differently. The policies, procedure and processes within a private entity is different from those of the public sectors. The project manager must be fully aware and familiar with the differences in governance to ensure that all procurement activities are conducted in accordance to the governance requirements. Failing which, will put all the affected stakeholders in jeopardy.

It is beyond the scope of this course to discuss the legal framework and the details of the contractual requirements. However, the following are widely used contractual relationship between the affected parties in managing projects.