Contract Management Coursework

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Procurement, Contracts and

payment terms

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Lecture structure and content

• Carillion – A case study

• A classification of Contracts

– Lump Sum

– Measure and Value

– Cost reimbursement

• Contracts and Procurement

• Procurement

– The University Procedures

• Collaboration

• Payment Terms

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Carillion

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Carillion

• Collapsed under £1.5bn debt

• How to avoid in the future?

– That’s the problem for procurement

• Political issue

– Public Work Importance

• Procurement of products and services for the

public sector is important [across the EU ~16% of

GDP]

• Needs to be Transparent and accountable and

open to corruption

– Long term and infrastructure projects 4

Contracts

• Lump Sum

• Measure and Value

• Cost Reimbursement

• Remember IChemE

• Lump sum, the red book, fourth edition, 2001 Reimbursable, the green book, third edition, 2002

• ICE 6th Edition Measure and Value

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Contracts

• Lump Sum

– [Risk Mostly with

Contractor]

• Measure and Value

– [Risk Mostly shared

Client/Contractor]

• Cost Reimbursement

– [Risk Mostly with

Client]

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Contract Types and Risk

Risk to Client Neutral Risk to

Contractor

Cost Reimbursement

Lump Sum

Measure and Value

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Lump sum

• Where the work is clearly identifiable and

quantifiable and where the extent,

boundaries and detail of the work are

known

• Examples:

– Extension to Peter Fenn’s house

– New computer for Peter Fenn

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Measure and Value

[Remeasurement]

• Although the work is clearly identifiable the

extent, boundaries and detail of the work

are not clear and the quantities may

change

• Example:

– A new railway line between Manchester and

London

– New computers in every student ‘cluster’ in

the University of Manchester

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Cost Reimbursement [Cost Plus]

• The work is NOT clearly identifiable or quantifiable; the extent, boundaries and detail of the work are not clear

• Examples:

– Any huge scheme where the details are unknown

– Asbestos removal from Peter Fenn’s Office

– A computer for every MOP student for the next 10 years

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Which is The Eron Task Foundation Inc. and

Fenn Project Management

• Lump Sum ?

– Are the details known?

• OR Cost Reimbursement ?

– Are the details known?

• OR Measure and Value ?

– Are the details known?

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Procurement APM BoK

• Procurement is the process by which the

resources (goods and services) required

by a project are acquired. It includes:

– the development of the procurement strategy

– preparation of contracts

– selection and acquisition of suppliers

– management of the contracts

• APM Body of Knowledge, 5th edition (section 5.4)

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Procurement

• Procurement is about buying stuff

• Make-or-Buy Decision sometimes [the

outsourcing decision] is a judgment made

by management whether to make a

component internally or buy it from the

market. While making the decision, both

qualitative and quantitate factors must be

considered

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IPM [make or buy]

• Eron Task Foundation Inc has no project

managers and doesn’t want to make them

[employ them]

– Fenn Project Management Inc makes some PMs

[you]

• Fenn Project Management Inc sells PMs to Eron

Task Foundation Inc

– OR Eron Task Foundation Inc OUTSOURCES to

Fenn Project Management Inc

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Why Contracts & Procurement?

• Good contracts and good procurement are project management fundamentals

• Without good contracts and good procurement in place – parties [client and contractor] may have the wrong

partner

– parties maybe unsure of their rights and obligations

– parties maybe motivated to perform to different objectives

– The chances of a successful project are diminished

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Good procurement

• good contracts and procurement

• help drive the project towards success

through:

– selection of the right parties

– the right contract strategy

• aligns the parties’ motivations under clear contract

terms.

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What is procurement

• Procurement is about obtaining the goods and services required from external organisations. It breaks down into two main activities: – Strategic decisions in terms of make or buy [see

transactional cost analysis]; work breakdown structure and which parts of the project are allocated to what type of organisations; allocation of principle risks; how these organisations are paid and incentivised to perform; the degree of co-operation required between participating organisations and how they are selected etc.

– The selection procedure itself to select the ‘best fit’ organisations for their part of the project.

• Procurement is about buying stuff 17

APM Overview

• Many organisations still view procurement as a transactional process, rather than a function that can add value. As projects become increasingly more unique, complex, subject to change and therefore risky, a more sophisticated approach to procurement is needed. This requires an understanding and application of procurement concepts and techniques and of the contracts which control the relationship between the various parties.

• In some industries this role is well established, but in many others it is still emerging.

• Intelligent procurement can provide savings on project delivery times and costs and increase certainty of delivery.

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The benefits of procurement

• A project in which procurement is aligned with the project deliverables is more likely to meet its objectives

• Procurement often represents a major portion of project spend and hence needs careful consideration to ensure value for money is realised

• Contracts ensure that all parties involved in the project are legally protected.

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Complex Procurement • A complex procurement may be one where the

specification is difficult to define or is complex or innovative, the procurement is high risk, the competition is restricted to do a limited market, the contract will be based on unusual commercial models (e.g. PFI or a PPP variant) or where the procurement involves spend in a number of categories. For these procurements, specialist advice will always be required

• http://webarchive.nationalarchives.gov.uk/20110 822131357/http:/www.ogc.gov.uk/procurement.a sp

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Why are Contracts &

Procurement important? • In an era of technology and complexity, few

organisations deliver projects, let alone major ones, with no external help. Where the goods or services are predefined or simple, the contract and procurement process is relatively easy. Where you are procuring complex projects, with evolving needs and which may involve tangible and intangible deliverables it becomes much more complicated.

• On major projects, research has shown that good procurement decisions can have just as much effect on delivering projects to time, cost and functionality as technical decisions.

• http://www.apm.org.uk/contractprocurement/page.asp?c ategoryID=9

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Websites

• CIPS: The Chartered Institute of Purchasing &

Supply • http://www.cips.org/

• Royal Institution of Chartered Surveyors • http://www.rics.org/

• Wikipedia

– http://en.wikipedia.org/wiki/Procurement

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Procurement steps

• Information gathering: If the potential customer does not already have an established relationship with sales/ marketing functions of suppliers of needed products and services (P/S), it is necessary to search for suppliers who can satisfy the requirements.

• Supplier contact: When one or more suitable suppliers have been identified, requests for quotation (RFQ), requests for proposals (RFP), requests for information (RFI) or requests for tender (RFT or ITT) may be advertised, or direct contact may be made with the suppliers.

• Background review: References for product/service quality are consulted, and any requirements for follow-up services including installation, maintenance, and warranty are investigated. Samples of the P/S being considered may be examined, or trials undertaken.

• Negotiation: Negotiations are undertaken, and price, availability, and customization possibilities are established. Delivery schedules are negotiated, and a contract to acquire the P/S is completed.

• Fulfillment: Supplier preparation, expediting, shipment, delivery, and payment for the P/S are completed, based on contract terms. Installation and training may also be included.

• Consumption, maintenance, and disposal

• Procurement is about buying stuff

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Procurement the ‘new’ agenda

• Collaboration/cooperation

• Collaborative law • http://en.wikipedia.org/wiki/Collaborative_law

• Wikinomics - How Mass Collaboration Changes Everything

• http://en.wikipedia.org/wiki/Wikinomics

• http://www.wikinomics.com/blog/

– E.g. web 2.0; Open source software

• Game theory

• Partnering and Alliancing 24

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University of Manchester

Procurement • Procurement Office

• The role of the Procurement Office is to promote

efficient and effective procurement as part of the

acquisition of any goods, services and

works. We do this by working with users to

ensure that value for money is maximised, by

disseminating best practice, advising on

appropriate management of risk and ensuring

compliance with statutory requirements.

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University of Manchester

Procurement • For Staff

• Procurement best practice

– Ensuring competition

– Obtaining competitive bids

– Lowest bids

– Sole suppliers

• For suppliers – The Procurement Office seeks to adopt contracts that offer

quality products and services as well as value for money across

the University. 26

Can you answer these

questions • Why is Procurement important to the

university?

• Why is it important to university staff?

• Why is it important to external

suppliers/contractors?

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Payment terms

• Before the work

– In advance

• During the work

– Stage or interim or milestone

• After the work finishes

– Turnkey

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Discussion Threads

• This week

– Collaboration: Why would commercial people collaborate on

projects? They seek to make profits not friends?

– Why is Procurement important ? Your client [or your Employer or

firm] seeks to procure a new IT system for its global operation.

The board know nothing about procurement and have asked you

to tell them what to do in < 100 words. There is a lot riding on

this you could be given a lot more work or a key new role if you

do a good job here. Are you the procurement genius?

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