/What Is Project Procurement Management?
Procurement Management

What Is Project Procurement Management?

Project Procurement Management

All the activities cannot do with same project team. Some parts of the project are done by external teams.

Civil Contractor hire specialist electrical contractor for Electrical Installation works in building projects.

What is procurement Management

All the activities cannot do with same project team. Some parts of the project are done by external teams.

Civil Contractor hire specialist electrical contractor for Electrical Installation works in building projects.

Developing Procurement Management Plan

Steps in Procurement Management
  1. Identify the product or service, which have to be acquired from outside

Like the previous example, assume that you are working in a construction company. You are constructing a Highrise apartment. Your company does not have capabilities of handling electrical installation.

Decision – Hiring electrical installation specialist from the industry.

  1. Evaluation of potential sellers

Now you have taken the decision of hiring an electrical contractor. The next step of procurement management is collecting details of existing electrical contractors. The details contain previous project details, staff details and financial capabilities of those companies.

  1. Make or buy decisions

The third step of the procurement management plan is make or buy decision. In the previous step the client has studied the current rates and capabilities. Sometimes recruiting a new team is cheaper than out sourcing the contract.

In the previous example, if the electrical installation is small, recruiting an electrical installation team may generate more profit than out sourcing the contract.

  1. Reviewing risk and contract type

Different contract types are used in procurement management. Contract type may depend on the scope of work, time and the cost of the project.

Types of contract in Procurement Management

Fixed Price contract, Cost Reimbursable contract, Time and Material contract are the main three types of contract.

Types of Contract

Fixed Price (Lump Sum)

  • Firm Fixed Price

Most commonly used contract type in procurement. The price is fixed and subject to change when the scope is changed. The seller has to bear the cost overrun. Here the buyer’s risk is low and the seller’s risk is high.

The contact value of these type of contracts are high because they add additional fee considering the risk.  

  • Fixed Price incentive fees contract

Performance targets are established at the beginning of the project. Final contact price is decided at the end of the project, because the incentive amount may depends on the date of completion. Price limit is set under this contract. All the costs above the price limit have to bear by the contractor.

Company A awarded a contract to install servers in an office building. The contract price is $30,000.00 and the duration is 4 months. If the company complete their works before one month, they may eligible for additional $ 8,000.00 incentive fee.

If the company A complete the project in four months with the cost of $35,000.00. The additional $5,000.00 is a loss for the company. The company can follow a strategy of completing the project in three months with the cost of $35,000.00 and get additional profit of $3,000.00

  • Fixed Price with Economic Price Adjustment

Use when the contract period is considerable long. The living cost and the material cost increase with the time. This is a fixed price contract, with flexible for defined adjustments linked to inflation, cost increases and other special conditions.

Cost Reimbursable

Cost reimbursable are the second type of contract use in procurement process. Cost Reimbursable contracts are used when the scope (activities to do) is not defined exactly. This involve payments for direct and indirect actual costs. Buyer has more risk here.

  • Cost Plus Fixed Fees Contract (CPFF)

Seller is reimbursed for all allowable costs and receive a fixed-fee payment. This fee is calculated as percentage of the initial estimate. This fee does not change unless the project scope change. There is no incentive for early completion.

  • Cost Plus Incentive Fees Contract (CPIF)

Seller is reimbursed for all allowable costs and receives an incentive fee. This incentive fee is calculated based on achieving certain milestones. If the final cost is less than the original amount, both the buyer and the seller share the cost.

This type of contract is recommended, when the client does not have an idea about the scope of the project and wants to complete it quickly. 

  • Cost Plus Award Fee Contracts (CPAF)

Seller is reimbursed for all allowable costs but the majority of the fee is earned only based on the satisfaction of certain broad subjective performance criteria defined and incorporated into the contract.

Time and Material

Cost is charged for identified tasks. Quantity is defined as scope per unit.

You want an office table in home. You hire a carpenter and ask him to make office table. All the materials will be provided. You pay the carpenter agreed amount per day. Risk is always with you, because you don’t have an understanding about how many days the carpenter will take to complete the works.

These type of contract are proposed for small works.

Summary of Contract