Project

Procurement
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 CHAPTER TWO

PROCUREMENT
PLANNING & ANALYSIS

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 Chapter Contents

2.1. Introduction

2.2. Procurement Process

2.3. Procurement Requirement Analysis

2.4. Factors Affecting Make-or-Buy

Decisions
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 2.1 Introduction
 Procurement planning is the process of
deciding what to buy, when and from what
source.
 During the procurement planning process
the procurement method and the
expectations for fulfillment of procurement
requirements will be determined.
 Procurement planning is the process of:
 identifying and consolidating requirements
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 Project Procurement
Management
• Project Procurement
Management:
• includes the processes necessary
to purchase or acquire products,
services, or results needed from
outside the project team/
Organization. 5
 Importance of Procurement Planning
1. It helps to decide what to buy, when and from
what sources.

2. It allows planners to determine if

expectations are realistic; particularly the
expectations of the requesting entities, which
usually expect their requirements met over a
shorter period than the application of the
corresponding procurement method allows.

3. It is an opportunity for all stakeholders involved

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 Importance of Procurement Planning
Cont’d

4.It permits the creation of a procurement

strategy for procuring each requirement
that will be included in the procurement
plan.
Such strategy includes a market survey and
determining the applicable procurement
method given the requirement and the
circumstances.
7
Importance of Procurement Planning
Cont’d

6. The need for technical expertise

to develop technical specifications
and/or scope of work for certain
requirements can be assessed,
especially where in-house technical
capacity is not available or is non-
existent. 8
Key Concepts for Project Procurement
Management
• there can be significant legal
obligations and penalties tied to the
procurement process.
• The project manager:
• does not have to be a trained
expert in procurement management
laws and regulations but should
be familiar enough with the
procurement process to make
intelligent decisions regarding
contracts and contractual
9
 Cont’d

• The Project Procurement

Management processes involve
agreements that describe the
relationship between two
parties—a buyer and a seller.

• The contracting approach and

the contract itself should reflect
the simplicity or complexity of
10
 Cont’d

• Although all project documents may

be subject to some form of review
and approval to ensure that the
contract adequately describes the
products, services, or results that the
seller is agreeing to provide, while
being in compliance with the laws
and regulations regarding
procurements.
• The winning bidder may manage the
work as a project. 11
 Cont’d
Terms and conditions of the contract
and the procurement statement of
work (SOW) become key inputs to
many of the seller’s management
processes.
The contract can actually contain
the inputs (e.g., major deliverables,
key milestones, cost objectives) or
it can limit the project team’s
options (for example, buyer
approval of staffing decisions is12
 Tailoring
Considerations
• Because each project is unique, the
project manager may need to tailor the
way that Project Procurement
Management processes are applied.
• Considerations for tailoring include but
are not limited to:
1. Complexity of procurement. Is there
one main procurement or are there
multiple procurements at different
times with different sellers that add to
the complexity of the procurements? 13
 Cont’d

3. Governance and
regulatory environment.
Are local laws and regulations
regarding procurement
activities integrated with the
organization’s procurement
policies? How does this affect
contract auditing
requirements? 14
 3 Factors Affecting
1. Market Analysis
Procurement Planning
• Before devising a procurement plan, it is vital
for the buyer to have a strong understanding
of the market dynamics of the industry they
are looking to procure work from.
2. Spend Analysis
• Without visibility of spend data, it becomes
difficult to accurately analyze the goods and
services that have been historically procured,
and therefore it becomes more difficult to
forecast accurately purchases for the future.
3. Needs Analysis
• It is important to identify the ‘need’ and not
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 Procurement Management processes

• The processes include the following (based on

PMBOK):
1. Plan Procurement Management—The process of
documenting project procurement decisions, specifying
the approach, and identifying potential sellers.
2. Conduct Procurements—The process of obtaining seller
responses, selecting a seller, and awarding a contract.
3. Control Procurements—The process of managing
procurement relationships, monitoring contract
performance, making changes and corrections as
appropriate, and closing out contracts. 16
17
 Plan Procurement Management
• Plan Procurement Management is the process of
documenting project procurement decisions, specifying the
approach and identifying potential sellers.

• The key benefit of this process is that it determines

whether to acquire goods and services from outside the
project and, if so, what to acquire as well as how and when
to acquire it.

• Goods and services may be procured from other parts of

the performing organization or from external sources.

• This process is performed once or at predefined points in

the project. 18
 Cont’d

• Defining roles and responsibilities

related to procurement should be done
early in the Plan Procurement
Management process.

• The project manager should ensure that

the project team is staffed with
procurement expertise at the level
required for the project.
19
 Cont’d

 Prepare a high-level cost estimate to

determine the budget.
Identify a short list of qualified sellers.
Prepare and issue bid documents.
Conduct a technical evaluation of the
proposals including quality.
Perform a cost evaluation of the
proposals. 20
 Cont’d
Procurement Strategy
• Once the make-or-buy analysis is complete and the
decision is made to acquire from outside the project, a
procurement strategy should be identified.
• The objective of the procurement strategy is to
determine the project delivery method, the type of
legally binding agreement(s), and how the procurement
will advance through the procurement phases.
• Contract payment types. Contract payment types are
separate from the project delivery methods and are
coordinated with the buying organization’s internal
financial systems. 49
 Cont’d

• Bid Documents: Bid documents are used to

solicit proposals from prospective sellers.

• Terms such as bid, tender, or quotation are

generally cussed when the seller selection
decision is based on price (as when buying
commercial or standard items), while a term
such as proposal is generally used when other
considerations such as technical capability or
technical approach are the most important.
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 Cont’d

• The conditions involving their use are

presented below:
Request for information (RFI). It is used
when more information on the goods and
services to be acquired is needed from the
sellers. It will typically be followed by an
RFQ or RFP.
Request for quotation (RFQ). It is
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commonly used when more information is
 Cont’d

• Request for proposal (RFP). It is used when

there is a problem in the project and the
solution is not easy to determine. This is the
most formal of the “request for” documents
and has strict procurement rules for content,
timeline, and seller responses.

• The buyer structures procurement documents

to facilitate an accurate and complete
response from each prospective seller and to
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 Cont’d

• Procurement Statement of Work: It is

developed from the project scope baseline and
defines only that portion of the project scope
that is to be included within the related contract.
• The SOW describes the procurement item in
sufficient detail to allow prospective sellers to
determine if they are capable of providing the
products, services, or results.
• Sufficient detail can vary based on the nature
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 Cont’d

• Information included in a SOW can include

specifications, quantity desired, quality levels,
performance data, period of performance,
work location, and other requirements.

• The procurement SOW should be clear,

complete, and concise.

• The SOW can be revised as required as it

moves through the procurement process until
incorporated into a signed agreement. 54
 Cont’d

• Similar to the procurement SOW, a TOR typically

includes these elements:
 Tasks the contractor is required to perform as
well as specified coordination requirements;
 Standards the contractor will fulfil that are
applicable to the project;
 Data that needs to be submitted for approval;

Definition of the schedule for initial submission

and the review/ approval time required. 55
 Cont’d

• Source Selection Criteria: In choosing

evaluation criteria, the buyer seeks to ensure
that the proposal selected will offer the best
quality for the services required. The source
selection criteria may include but are not
limited to:
• Capacity;
• Product cost;
• Delivery dates; 56
 Cont’d

• Specific relevant experience;

• Key staff’s qualifications, availability,
and competence;
• Financial stability of the firm;
• Management experience; and
• Suitability of the knowledge transfer
program, including training.
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 Cont’d

Make-or-buy Decisions: A make-or-buy analysis results in a

decision as to whether particular work can best be
accomplished by the project team or needs to be purchased
from outside sources.
Independent Cost Estimates: For large procurements, the
procuring organization may elect to either prepare its own
independent estimate or have a cost estimate prepared by an
outside professional estimator to serve as a benchmark on
proposed responses.
Significant differences in cost estimates can be an indication
that the procurement SOW was deficient or ambiguous, or that
the prospective sellers either misunderstood or failed to respond
fully to the procurement SOW. 58
 Activity multiple choice
questions
Which one of the following
analysis is/are used as
Factors Affecting
Procurement Planning?
A.Market Analysis
B.Spend Analysis
C.Needs Analysis
D.All of the above 59
Answer
The correct answer is D

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 2.2. Procurement
requirement Analysis
 Procurement requirements
analysis represents the key element of the
every procurement activity.
 It aims to precisely define needs, technologies
& services related to the accomplishment of
the project activates;
 The general purpose of all requirement
definition is to identify the precise needs of the
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requisitioned, and to search for the best
 Cont’d

 Requirements that are to be a determining factor in the

evaluation of offers must be considered at the needs
definition stage, and will be eventually included in
solicitation documents.
 A procurement process should always be initiated based
on a properly executed need assessment, approved by the
budget owner.
 The procuring unit or budget owner is expected to
document and forward the need assessment to the
procurement Personnel using the Need Assessment Form
together with the Specifications or Terms of the Reference.
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 Cont’d

 In order to avoid receipt of inappropriate

equipment, supplies or services, as well as to
enable suppliers to compete fairly, it is essential
that requirements must be clear, concise and
flexible (generic) and supporting information as
detailed as possible.
 The requisitioner is responsible for ensuring that
all requirements and supporting information for
purchase and delivery of the requested goods
and/or services are appropriate. 63
 Cont’d

• The requirements can be specified in the following

types of documents;

Specifications
• Description of what the purchaser wants to buy and,
consequently, what the supplier is required to
provide.

Terms of Reference (ToR)

 define the work required of a supplier to provide
solicited services;
 can also be used for goods when the requirement
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cannot be quantitatively defined;
Make-or-Buy
Analysis

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 This means figuring out whether or not

you should be contracting the work or

doing it yourself.

 It could also mean deciding whether to

build a solution to your problem or buy

one that is already available. Most of
the same factors that help you make 66
 Cont’d

• How much does it cost to build it as opposed

to buying it? How will this decision affect the
scope of your project? How will it affect
the project schedule? Do you have time to do
the work and still meet your commitments?
As you plan out what you will and won’t
contract, you need to think through your
reasoning very carefully.

• There are some resources (like heavy

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2.3. Factors influencing procurement make or buy decisions

Two primary factors which have a decisive influence on

the choice of make or buy are the cost and availability of
production capacity.
 Facilities are made available and other things being
equal cost consideration assumes primacy.
 If the cost of making an item in-house is going to be
higher than the cost of acquiring it from an outside
supplier, the choice is to buy it.
 On the other hand, if the cost of making the item in
one’s own plant is cheaper than buying it from the
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supplier, the choice is to make it.
Considerations which favor making the
parts are:
1. Cost considerations less expensive to make
the part

2. Desire to integrate plan operations

3. Productive use of excess plant capacity to

help absorb fixed overheads.

4. Needs to exert direct control over

production and/or quality

5. Design secrecy.
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Considerations which favor buying the part are:

1. Cost considerations less expensive to buy the part

2. Supplier’s research and specialized know-how

3. Small volume requirements

4. Limited production facilities

5. Desire to maintain multiple source policy.

6. Government’s policy favoring ancillary industries.

7. Monopoly items which are rationed by the

government and on which, the buyer has no
option. 70
Guidelines to “Make or Buy” policy
• The following are often an answer to most “make or buy”
decisions relating to supplies and services:

1. When a dependable source does not exist outside, it is

desirable for the company to produce the goods of the
desired quality, unless some unforeseen circumstances
develop. For instance, most big companies prefer to
have their own thermal supply because public power
plants are not reliable.

2. When a dependable source exists outside which provides

goods at an economical price, it should be used, unless
there is a strong case for not doing so. 71
Guidelines to “Make or Buy” policy

• Under the following conditions, it is always desirable to

depend on their own resources:

a. When an item is required in large quantities which

can be produced at a low cost by the company itself;

b. When suppliers are not willing to provide goods of

the desired quality to the special needs of their
buyers; and

c. When coordination with suppliers seems to be quite

difficult.
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 End of Chapter Two
Review questions

2.1. Discuss the Procurement Process based on

PMBOK

2.2. What do we mean by Procurement

Requirement Analysis

2.3. List Factors Affecting Make-or-Buy Decisions

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