APM PMQ (BoK7) Procurement

In this APM Project Management Qualification (BoK7) podcast, Paul and John discuss procurement. This podcast is ideal for anyone doing one of the APM PMQ project management courses and aims to address the following assessment criteria:

• Explain the purpose, typical content and importance of a procurement strategy
• Differentiate between different methods of supplier reimbursement (including fixed price, cost plus fee, per unit quantity, and target cost)
• Differentiate between different contractual relationships
• Explain a supplier selection process

A procurement process is used by companies in the acquisition of goods and services. This will usually have a defined procurement strategy document and include details on selecting suppliers, setting up contracts and management of those contracts.

Because the procurement strategy document is a standard project document it needs to be in place at the start of a project as it is an important factor at the same time as considering the business case of a project.

Typical parts of the procurement strategy documentation are:

Make or buy decision:

Would it be better to produce the required goods within the organisation or would it be more efficient or cost-effective to use an external producer/suppler. This decision can only be made when the specification of the product is fully understood.

Contractual relationship:

There is a wide choice of contractual agreement types fro the single contract between the client and supplier to more complex agreements between the client and a main contractor and between main contractor and sub-contractors.

Reimbursement methods:

These are the payment terms and the way in which the goods or services will be paid for. This could be as simple as a fixed-price method for a clearly specified product through to much more flexible arrangements where an innovative new product is being developed by the supplier for the client.

Supplier selection:

Large organisations will usually have an established process to help in the selection of the right suppliers, most usually through a competitive tender process where several suppliers provide costs for the required product/service. The aim being for the organisation to acquire the product or service at the most competitive price.

Contract administration:

This should be a regular, ongoing process throughout the term of the contract to confirm that both supplier(s) and client are complying with the terms of the contract which they have agreed.

Feedback and review:

This is important in any type of strategy in order to learn lessons about what went well and what did not; in order to improve the process for future projects.

This podcast is just part of the Parallel Learning System for the APM Project Management Qualification. This approach includes a wide range of learning resources including a printed study guide, on-line e-learning, a tutor lead study group and a wide range of project management courses.

SEE THE TRANSCRIPT BELOW:

Introduction:

Welcome to a Parallel Project Training APM Project Management Qualification podcast based on the APM body of knowledge seventh edition. You should be using this in conjunction with our e-learning, podcasts and potentially a tutor-led course. For more information please visit www.parallelprojecttraining.com

Paul Naybour:

Hello welcome to another parallel project training podcast we're on to procurement for the APM PMQ with Paul Naybour and John Bolton.

Hello, John

John Bolton:

Hello everybody.

Paul:

Last chapter. By now the guys are hurray. Guys and girls.

John:

If this takes two minutes it’s because we've had a long day. Yeah, well. It's quite a big topic, though so let’s crack on

Paul:

By completing this subsection you will be able to understand the learning objectives:

• Explain the purpose of a procurement strategy. We need to get that clear, because it causes confusion
• Differentiate between the different types of reimbursement method.
• Differentiate between the different types of contractual relationship
• Explain the supplier selection process.

So, let's talk about procurement strategy first. What is a procurement strategy I think this is the thing that I see causing the most blanks. Also called procurement plans. So basically,

John:

I don't think they do I think if you could say procurement plans, a lot of people they think about supplier selection.

Paul:

Yes, and they get confused. Because strategy is a is a document written early in the project, about how you're going to procure those goods and services.

John:

I think it's a bit more profound than that actually because. Let's say I write a business case. And I'm going to build a bridge. I could if I was a bridge building company. Let's take a different example. Let's say, I'm a construction company. And I'm going to move into a new headquarters. Yes. Right. I could decide to use my own staff to fit the building out and then move us in.  Or I could hire a consultancy firms do it for me,

Paul:

Or, you could just lease the building? Or you could build a building.

John:

Let's just worry about how I'm going to fit the building out. Right. Okay. So we've already acquired the building. It's a building. So now I've got to fit it out. I've got to make it fit for purpose for my people. Yeah, I'm going to move my staff in there. But because I'm a building company, I could decide to do all the building work, lay all the carpets, do all the partitions, offices, everything myself. I could use my own staff to do that. Or I could hire somebody else to do it.

Paul:

Or I could just go into a serviced office.

John:

Or, I could hire somebody else in to do it. Okay.

So I've got a choice between using my own people, which would be make it myself. Or I could buy those services in, right. I will talk about service office in a sec. But let's just keep it simple. There's two options. One is where I make it and one is where I buy it. So why would I make it myself it’s because it might be a bit cheaper. I've got more control. I haven't got such a long lead time. So I'm going to go to 10 dodge got a design and get on with it. So there's lots of advantages do it myself. Or if I go to tender I might get a better job done. I haven't got to tie my people up doing fairly mundane work as they might see it.

So there's choices to be made. Now. those choices are fundamental to what project you've got because if you decide to do it yourself, you've got to go and buy all the materials, do all the plans. If I get a consultancy in to do it, a prime contractor, they'll just it.

So now I've got very different contracts. All I'm doing is managing them. Yes. And what they do, I'm not managing my people and how they do it. So the procurement strategy side kind of fits between the business case and the project management plan. Because when you write the project management plan, you've got a very different project.  So you kind of go down one limb or the other.  And to me, that's the essence of a procurement strategy.  And now, if you talk about Yes, we can have a serviced office.  If your requirement is a new office, yeah, then yeah, I mean, that might be another form of buying it in.  So yeah,

Paul:

So I actually think it goes back to the business because, you know, in the business case, we show different optionss. So some of those may be different procurement option. You know,

John:

That's right or I might decide to do multiple contractors or I might decide to do prime contractors.

Paul:

Before we can get on with the planning of the project. We need to decide what procurement approach or procurement strategy is going to be - a fundamental decision.

John:

That's right. So that document contains a few things. The first thing which is fundamental is whether we're going to make it or buy it.

And the second thing is going to be, are we going to contract people if we do? Yes, and you've very rarely just have one or the other is usually a mixture of the two. You might decide that you're going to do that on the basis of ascertain costs or fixed price or target costs are so it's going to be issues around how you're going to want to pay for it. Milestone payments, lump sums. What form of contract - JCT or NEC3 or whatever it's going to be. Or your own, or IPS.

So there's that procurement strategy kind of laying down the rules. And quite often organisations have these already. They have a way of a standardised way of doing things.  And you just tune it.

It's also influenced by business rules as well, because the chances you know that one of your procurements parts of your procurement strategy might be that you make all your acquisitions through some sort of Credit Card, some sort of corporate credit card arrangement. Or you might have to go to three tenders. So there's, there's things that are stipulated to you.  So the procurement strategy is a kind of composite of what the organisation wants you to do and how you're going to do this particular project. That's why it's a bit of a hybrid. That's why it doesn't live in the business case or the project management plan, really, because both documents…

Paul:

It’s usually actually written by a procurement specialist. Yeah, what I've done. Yeah, the procurement specialist to go this is the procurement strategy for this.

John:

They're quite popular in the oil and gas industry.  And instead of a project management plan, you get a procurement strategy and a project execution plan.

Paul:

Remember, going to that talk by the guy from HS2. And he talked about the procurement strategy, the packages, the way we're going to package up those projects, right, and how the different contractors that they were going to appoint to the different packages. That was like really, really early in the project.  So I think that's a really good description because it differentiates the procurement strategy - strategic document - with the bits that we're going to look at next, which are things like the options in terms of different contractual relationships that we can have.

John:

Yeah, so the strategy will say it is our intention to do fixed price only. One of our customers used to do ascertain cost then they went to a fixed price and now they’re back to ascertain cost. So I expect in a few years’ time they’ll go back to fixed price, but that's the kind of global decision that they've made.

Paul:

So different types of contracts relationship, we could adopt…let's do the different types of contract relationship next. So they’ve simplified this quite a lot. Yeah, they’ve basically said… let’s do the most common first.

John:

I've a bit of an issue about this because I think they've like they've really simplified, dumbed this down to a point where it’s meaningless in a lot of ways.

Paul:

The first option is to go to a prime contractor or, principal, or main contractor. Usually a large company, but this should then subcontract the work out and the prime or main contractor may or may not add that much themselves. So they may subcontract everything out, or they may add quite a lot of value themselves. So that's quite common in big projects, because that probably that one be, you know, that big project is too big for one organisation to take on and they need lots of subcontractors. And the client wants to one point of contact so they won't be able to go to one organisation say, right, you're running this project for us. You go away and make it happen.

John:

Yes. So I mean, just to summarise, you've got a client with a contract with a main contractor, and the main contractor intern contracts to subcontractors. So if you had to subcontractors actually you should have three contracts, you know, one main contract and two sub contracts.

Paul:

Yes. But you wouldn’t necessarily - as the customer - see those sub contracts though

John:

That's the problem - one of the problems is you have no direct line of sight with the people that are on the ground. You always have to go through the main contractor and legally, you can't sue a sub-contractor unless you have third party rights.  So you know it can take a lot of the burden away from you because what's going to happen is that principle contract is going to integrate all the works everything, they're gonna make sure that bricklayers aren't tripping over the plumbers and electricians are coming in before the plasterer and all that sort of stuff.

Paul:

The advice I heard is if you've got one of these contracts then “eyes on hands off”. So you keep an eye on what's going on. You let the main contract to get on with doing their job as you appointed them to manage that contract. So don't start telling subcontractors what to do.

John:

You might need some decent reporting though. Just to make sure they are on track because otherwise if you have no line of sight with the subcontractors they could be telling you black’s white and you don't know any different so you need quite a good, really good reporting anyway but, even more so in that instance.

Paul:

So then to overcome those disadvantages what you can do is have direct relationships with one or more suppliers single or multiple contractors so people also call this a hub and spoke. So I'm in the spoke and there's loads of people around the hub but now I'm doing the role of the prime contractor. I'm sort of coordinating all those different contractors together so this is a bit like Grand Designs you know where they got the plumber and the electrician and the guy doing the wall and the roof and he's on the phone all the time trying to, you know, put the plumbing guy back because the guy who's doing the plastering hasn't arrived you know.

John:

The first time I did our kitchen I did it the hub and spoke – I don’t want to call it hub and spoke - but anyway, with multiple suppliers. So I got the guy who did the work top because we didn't have any money. It was cheaper. So I managed it all myself and I took the risk of making sure the floor was level so that when they put the worktop in he didn't moan about the floor being unlevel right so, but the next time I did it, I did it with the prime contractor. A kitchen fitting company came in and did it all. They charged me a lot more, but probably, arguably, a better result.

Paul:

I had a kitchen fitted once and the kitchen fitters left their order in the kitchen overnight, and they been paid like £300 - £400 to fit the kitchen and I'd been charged like 1,500 quid for kitchen fitting.

John:

Well, that's the problem.

Paul:

Whoa, I should just employ those guys directly.

John:

Yeah, exactly. But I did the prime or principal guy from the shop in the town. What occurred to me was he had a bigger book than I. He just had more people that he knew.  

Paul:

But they knew that if he wasn't happy they weren't going to get any more work.

John:

To be fair, he had more buying power as well. But he didn't use that buying power to reduce my price he used it to reduce his cost

Paul:

For his car! Did he have a nice car?

John:

He did. Yeah, he had a Lotus Cortina.

Paul:

So the advantage is you get more flexibility. So Terminal 5 I think was done this way. So they acted as the hub. And they pulled in the different resources as and when they needed. It gives you more flexibility, but you do have to be a lot better. You have to be more on it. You have to be much more - like you - making sure the floor’s level. And if there's any disputes between those different suppliers, you're the one who's got to fix them.

John:

Well, I mean, when you're thinking about this as well, you need to think about it from a different point of view. These two are not different depends who you are. Because if you're the project manager managing multiple suppliers, you might be doing that on behalf of a main contractor. So the Hub and Spoke is no different to prime contractor. It just depends who you are. So the only thing you're adding to a hub and spoke model is the prime contract between you and the client. That's the only difference.  So anyway…

Paul:

So that moves us on to payment rates. So there's different types of payment. And I think people get confused about this, because each of those different types of contracts will probably have multiple payment forms in them - probably some that we call fixed price components where you've agreed, say, a certain amount for your kitchen. And then they'll have a day rate for extras. So within a contract, well, there’s schedule a rate so that's paying so much per unit.

John:

That's not in the book - not anymore. You didn't want it in there so I took it out. And it doesn't appear in any of the indicative content. Any of that. That’s what I'm saying ...

Paul:

Okay.

John:

Okay.

Paul:

So right, what should we do then let's just go quiet and see if I can edit in.

Paul:

So that moves us on nicely talk about the different types of payment that you might see in a contract. Any one contract might have multiple payment mechanisms. So the typical ones, you'll see are fixed price. I think everyone knows what a fixed price is. fixed price fixed scope. Yeah, except it should be firm price.

John:

Woah, really?  There was a silence there.

Paul:

A firm price contract is what most people mean by fixed price. Our firm price means that fixed price with a firm scope, fixed actually means it's fixed to some form..

John:

No, no, no, no, no, no. Firm price is firm. Nothing ever changes – nothing. Fixed price is the same as a firm price, except for the things that can change. So in a fixed price contract, you can have inflation. It can be indexed against certain... So fuel prices, consumables. So firm price and fixed price are different. But I've never seen a firm price contract.

Paul:

People usually use him to mean the same thing.

John:

Anything over about a year in duration, you're mad because of inflation and anything can happen to the commodity prices. So I think firm price from the point of view of being one end of the continuum - it's not in the syllabus, anyway.  So I think when we talk about fixed price, what we really mean is, there's a reasonably fixed price for reasonable fixed scope of work and any changes will incur extra cost.

Paul:

So next one's cost plus fee. So basically, you pay all my costs, plus an agreed fee. And that fee includes my profit. So implies some form of open book relationship. So you know what my costs are. So I have to send you timesheets or something like that.

John:

The thing is cost not price, so I'm paying your cost. Whereas before I was paying a fixed price so I don't see your costs under a fixed price. Cost plus is typically where they do the scheduler rates. We decide what components we're going to do, but when it actually comes to buy them, I pay you what you've actually paid. So if you want 40 metres of concrete, we estimated that was going to cost five grand.  But then it actually turns out to be £3,800. I pay you £3,800 plus an agreed fee, wherever your profit fee is.

Paul:

And are we going to percentage and fixed fees?

John:

Well, they don't differentiate. But we could, I mean, that confuses a lot of people because you can have cost plus percentage fee so I'll pay you 1,000 pounds – sorry -  I'll pay your cost plus 10%,. Or I could pay you your cost plus 1000 pounds. Which is slightly different. So cost plus fixed fees. Not really. I might just charge you a design fee. So you might charge me cost plus design fee.

Paul:

Yes percentage is more common, isn't it? Per unit quantity -  that's like carpet fitting. So you pay for the quantity - each square metre you have you pay so much per unit.

John:

We used to call that time & materials. So your everyday work we pay an amount of money but it's price, it's not cost. So we pay you your fee for that one day's work. So we pay you for your time & materials.

Paul:

Yeah, it isn't usually quantity though - the output quantity, so it's usually per metre or per square foot.

John:

I think it could be either.

Paul:

Target cost is where you agree a target – we’re going to pay you a million pounds. And then if you underspend the cost I will share the saving and if you overspend we'll share the pain.

John:

 Or you might have incentives around that as well. So you've got some target in mind that you're both trying to achieve. And that's the good thing, because you're both working towards the same target because the pain or gain will hit both of you.

Paul:

Correct. And differentiate between different types of contracts we’ve done. For the supply selection process - how did you get into contracts? So most people have met this before.  And we've got five steps but there's about 20! Like issue an invitation to tender, get the quotes back, tenders back, off the suppliers. Review those quotes, bids back and then award the contract to the successful supplier. That's actually a vast simplification of a 20 or 30 step process.

John:

Well, I think it can be. I mean, it also can be many years coming – if you’re spending a billion pounds I think, the only way this works, is because it's principles based The only way this works is to describe the principle and let people adapt to their own local conditions. Because every organisation you come across has got a different way of doing this. Do we have three suppliers or five tenders? Have bidders conferences or not? How do we do weighting criteria? You know, so there's a whole bunch of suppliers.

Paul:

Sector-specific as well.

John:

You might get bound up in the European Union's procurement regulations, and there's usually anti-competitive law, and the US has got different laws again.

Paul:

I expect the best advice is if you're going to do a major or significant procurement, go and talk to the procurement specialist because in the UK, certainly, (I’ve only just  discovered this actually) the procurement has personal liability for the process having been followed properly. And they can be personally under European law.

John:

Yes.  For European procurements. Yes. That’s right. It's custodial sentence as well. You can't do things like breaking it up into two small chunks to get under the limits. It was 200,000 euros, isn't it? 200,000 euros for services and about 1.5 million euros for capital.  There's a whole load of other boundaries for service contracts.

Paul:

In practice, most people will get a procurement specialist.

John:

That’ll be a key point in strategy as well. You see, the procurement strategy will raise the fact that you are liable to go through these processes of which you're not in control.

Paul:

Yeah, it's another interesting point, you know about the three-point accountability thing? So best procurement practice is you have a requester, who's a technical person who asked for the work. There's a procurement specialist who place the contract and a finance person who checks and pays the invoice. So you have those three different departments involved in procuring and paying for work. It just means there's less chance of things go wrong. less chance of corruption.  Less chance of fiddling the books.

John:

They call it separation of duties.

Paul:

 So you'd have that principle of three.

John:

 Well, I think you know, great. Good idea.

Paul:

Good. Thank you, John.