10 Components of the Procurement Management Plan
What is a procurement management plan?
A procurement management plan details how purchasing will be conducted within the project. It refers to goods or services procured from outside of the project team. The management plan deals with the processes of planning, conducting and controlling the procurement process as per the Project Management Body of Knowledge (PMBOK Guide).
There is no one-size-fits all procurement plan. Each business or project will have a different process. Procurement management will vary depending on the complexity of the project, the size of the organization, governance and regulatory requirements, etc.
As with all the project processes, everything is intertwined. For example, procurement will have a direct influence on quality, costs and the schedule of the project. Overall, the project management plan outlines the strategy for purchasing goods and services.
10 Components of a Procurement Management Plan
- Coordination & integration within the project
- Resources
- Schedule
- Budgeting & estimates
- Responsibilities of all stakeholders
- Assumptions and constraints
- Legal jurisdiction
- Commercial/payment terms
- Risk management
- Prequalified suppliers
1. Coordination & Integration
As per all the project processes, procurement requires integration and coordination with the project management plan. The project management plan components include scope management, requirement management, communication management, risk management and cost management.
2. Resources
The resources required for the project will drive the procurement management plan. Think of the different type of resources such as consultants, contractors, equipment and materials.
3. Schedule
Key procurement timeframes must be established in line with the project schedule. The procurement of key equipment could be on the project’s critical path if it has a long manufacturing lead time. Leaving procurement activities too late could result in higher costs, lower quality and delayed schedules.
4. Budgeting & Estimates
Procuring from outside sources has a strong estimating component. Estimation can be obtained from prior experience, prequalified vendors, or specialist cost consultants. The objective is to ascertain whether the budgets can be met in line with the approved scope.
5. Roles & Responsibilities
In large organizations, there will be an entire department dedicated to procurement. In this case, a project engineer may send a SOW to the procurement department, evaluate the quotes received, place a requisition and approve the invoices after the goods or services have been delivered. Other roles include buyers, contract managers, project managers, lawyers, technical managers, cost managers, executives for approval, etc.
In smaller organisations, the project manager or engineer might carry out all 13 steps above.
The procurement management plan should include the delegation of authority in terms of who places and approves orders. The criteria would include minimum quotations required, order amounts, contractual requirements and risk evaluation.
It is important that roles are clearly defined at the start of the procurement process. Roles and responsibilities would be assigned to the 13 procurement steps below.
13 Procurement Steps
- Identify the needed item
- Develop the Statement of Work (SOW)
- Identify and verify suppliers/contractors
- Send out an RFQ
- Conduct an evaluation of quotes received
- Right quality
- Right quantity
- Right time
- Right price
- Right place
- Right payment terms and conditions
- Select the best quotation
- Develop and sign-off a contract if required
- Create a Purchase Requisition (PR)
- Obtain authorisation
- Generate a Purchase Order (PO)
- Receive an Acknowledgement of Order from the supplier
- Verify the procured good/services in line with acceptance criteria
- Pay invoices according to payment terms
Statement of Work (SOW) & Terms of Reference (TOR)
The statement of work must include the following:
- Technical specifications
- Quality specifications
- Performance metrics and data
- Work location
- Acceptance criteria
- After-sale support
- Warranty
- Life cycle costs (energy consumption, maintenance, etc.)
- Contractor tasks
- Schedules
- Standards that must be met
Bid Documents
A standardized approach to bid documents will ensure that consistent criteria is established, leading to detailed quotations that can be easily evaluated. It is important to maintain flexibility to allows suppliers to offer better goods, services or approaches to the work.
Request for Information (RFI)
The RFI document will be used by a supplier to request more information from the buyer. Or vice versa. The RFI document is important to clarify the Statement of Work and any other points that need to be resolved before an agreement is reached. It is good practice to set up a RFI register that numbers each request, provides a description of the request and records the response to the request.
Request for Quotation (RFQ)
The RFQ is sent out to qualified suppliers who can supply the required goods or services. The RFQ would include the SOW and any other supporting documentation. The RFQ will also state the preferred terms of the buyer, or strict requirements that need to be adhered too in order to be considered. The RFQ should include:
- Statement of Work
- Source selection criteria
- Proposal timeline and deadline for submission
- Preferred payment terms if it is a new supplier or an unusual purchase with an existing supplier
- Terms and conditions
Request for Proposal (RFP)
This is a formal request that includes the SOW, contractual requirements and how the response must be submitted.
6. Assumptions/Constraints
As with all project plans, certain assumptions will be made and there will be various constraints. These should be considered and record. Assumptions and constraints include:
- Budget constraints
- Contractor availability
- Macro-economic conditions
- Schedule constraints
- Laws and regulations
- Approvals and permits
- Technical standards
7. Legal jurisdiction
For international procurements, the legal jurisdiction will be clearly defined in the contract or terms and conditions. It is therefore important to keep in mind the effect of culture and local interpretation of laws. Procurement also has to deal with legal requirements for health, safety, environmental laws, security, insurance, intellectual property, permits, licences, standards, etc.
8. Commercial/Payment Terms
During the negotiation stage, the project manager must negotiate the most favourable terms for their project. Generally, you want to align payments to keep your project cash flow positive.
Terms could be progressive payments or linked to certain milestones. Milestones could be in terms of manufacture, transportation, delivery, installation or commissioning.
9. Risk Management
The procurement process introduces risks to the project. Frequent risks are associated with the statement of work where boundary limits were not clearly defined. This leads to cost and schedule overruns. Where practicable and required, a contract should be agreed to and signed by both parties, however, this does not mean disputes will arise.
Another example of a procurement risk involves purchasing equipment in another currency. Let’s say you order equipment for $1 million in US dollar but your currency is Australian dollars. At an average rate of 1 AUD = 0.68 USD your original price would be $1,470,588. A 10% fluctuation in the exchange rate could lead to a loss of $163,398 or if it goes the other way a gain of $133,689. The solution here would be to secure a fixed foreign exchange contract.
Each seller comes with risks and should be captured and evaluated in the risk register.
10. Prequalified Supplier/Vendors
Having prequalified suppliers can speed up the procurement process. This is particularly relevant when the suppliers have supplied goods or services for previous projects. They would have met or exceeded performance requirements. They therefore shorten the procurement timeline.
Poor performing suppliers from previous projects must be removed from the list.
References
Project Management Book of Knowledge (PMBOK Guide 6th Ed.)