The Conduct Procurements Process distributes procurement documents, collects responses, and evaluates the bids or proposals, and lastly establishes a contract with the seller.
The buyer determines who will be invited to bid.
The methods used to solicit bids or proposals will vary depending on the project type, procurement need, industry or professions involved, and organizational policies.
Some procurement needs will require public notices or advertisements that potential sellers will respond to.
In most cases, these types of public invitations will include a bidder conference where the procurement documents will be supplied and any questions will be answered.
A qualified sellers list identifies which vendors meet the organization’s criteria.
The performing organization might already have such a list, or it may be up to the project team to develop a qualified-sellers list through research, interviews, referrals, past procurement experience, or any method that objectively evaluates which potential sellers meet the basic prerequisite criteria.
A bidder conference or vendor conference is a forum open to all invited sellers, and it gives the buyer an opportunity to make sure that all sellers understand the requirements and for the sellers to ask any questions.
Some invited sellers may decline to participate in the bid or proposal.
This could be due to a lack of capacity or resources, constraints or deadlines in the SOW, the type of work or material involved, or what the potential seller may see as a lack of adequate profit in the endeavor.
Too few interested sellers limit the procurement options and may require the project team to re-plan the procurement to make it more attractive for sellers.
Conduct Procurements Process Decomposition
Conduct Procurements Process: Inputs
- Project management plan
The procurement management plan, a component of the project management plan, describes how procurements will be conducted.
- Procurement documents
This term refers to the collection of written materials that provides the potential sellers all the information they need to develop and submit a bid or proposal.
- Source selection criteria
These are the criteria established during procurement planning that determine how the bids or proposals from potential sellers will be evaluated.
- Qualified seller list
A qualified sellers list identifies which vendors meet the organization’s criteria.
- Seller proposals
These are the replies from potential sellers in response to requests from the buyer for bids or proposals.
- Project documents
As they may relate to procurement decisions, any other project documents, such as decisions regarding risks, should be reviewed.
- Make-or-buy decisions
The determination and its rationale as to whether the project need is developed by the project team or procured from outside sources are documented in a document referred to as the make-or-buy decision.
- Teaming agreements
Teaming agreements are contracts that establish a joint venture or similar agreement that offers business advantages for all parties.
- Organizational process assets
Any historical information the organization may have from its past experiences with the potential sellers should be reviewed as part of the proposal evaluation activities.
Conduct Procurements Process: Tools and Techniques
- Bidder conferences
A bidder conference or vendor conference is a forum open to all invited sellers, and it gives the buyer an opportunity to make sure that all sellers understand the procurement requirements.
- Proposal evaluation techniques
These are the defined evaluation methods that the bids and proposals from potential sellers will undergo. It can include ranking and rating methods that score seller responses against criteria established by the buyer.
- Independent estimates
These are third-party, independent estimates that are performed for procurement needs to help establish a cost estimate against which bids and proposals will be checked for reasonableness.
- Expert judgment
Expert judgment is based on the experience and knowledge of subject matter experts. It's used to assess and evaluate the inputs and the information they contain.
Potential sellers may be solicited from advertisements and public notices. Some government contracts require public notices.
- Internet search
The internet has a major influence on most project procurements and supplies chain acquisitions in organizations. While many commodities, components, and off-the-shelf-items can be quickly located and secured at a fixed-price on the internet, the high-risk, highly complex, procurement effort that must be closely monitored cannot be obtained by this means.
- Procurement negotiations
Negotiations will occur between the buyer and selected seller before a contract is established.
These negotiations involve clarifying and documenting the requirements, objectives, expectations, obligations, and responsibilities of both parties.
Conduct Procurements Process: Outputs
- Selected sellers
Based on the evaluation of the bid or proposal responses, one or more sellers will be selected.
- Procurement contract award
A contract is established with each selected seller. A contract is a legally binding document that establishes the buyer and seller relationship. A contract describes the obligations and responsibilities of both parties.
- Resource calendars
Project resource calendars will be updated with dates and quantities after procurement contracts are established.
- Change requests
Contract awards will result in change requests to the project management plan or any of its components.
- Project management plan updates
Contract awards will result in updates to components of the project management plan, including cost and schedule components.
- Project document updates
Contract awards will very likely result in updates to other impacted project documents.
There is a lot involved in evaluating potential seller responses to arrive at a decision.
Every type of product, service, or result carries its own evaluation challenges, and the unique objectives of the project, organization, and stakeholders have to be considered.
And, except perhaps for very basic bid responses, the proposals from potential sellers will each have unique characteristics for achieving the product, service, or result, which make a side-by-side comparison between proposals difficult.
Expert judgment and involvement of the appropriate stakeholders and project team members throughout the analysis and decision-making process are vital to make sure the best seller is chosen and to encourage buy-in from the stakeholders.
The evaluation criteria that were established earlier are applied to each bid or proposal, but how this is done will likely differ for each procurement need, and will usually involve a number of different techniques and more than one round of evaluations.
For example, proposals might first be evaluated by several groups who then come together and further evaluate the top-ranking proposals. Proposals might also undergo different evaluation rounds that focus on specific criteria, such as technical approach, price, and quality.
If established in the procurement documents, a screening system makes sure that bids or proposals (or the potential seller making the bid) meet a set of minimum prerequisites.
The screening system can save time by weeding out bids, proposals, or potential sellers who don't have the financial or operational resources, skills or expertise, or any other prerequisites needed to be viable candidates.
Independent estimates may also be gathered from an objective third party to serve as a cost basis to gauge submitted bids or proposals.
Independent estimates will result in a cost to having the estimate made, but they can be helpful to make sure bids or proposals are within reason.
A significant variation between the independent estimate and a bid can imply that the potential seller is providing more or less than what was asked, misunderstood the statement of work, or may have uncovered a fact that the independent estimate or other potential sellers overlooked.
Some organizations maintain a seller rating system, which provides key performance indicators based on its prior contracts with the seller.
While referrals from other organizations are valuable, feedback from others within the organization who've dealt with the potential seller should carry significant weight.
Potential sellers are most often evaluated through a combination or variation of three primary methods:
- Rating, ranking, or scoring based on quantifiable data, such as price
- Rating, ranking, or scoring that is based on qualitative criteria
- Weighted qualitative-based rating, ranking, or scoring that is focused on specific buyer’s objectives
Contract Award and Negotiations
Once a seller is chosen, they will collectively negotiate and agree upon a contract. This may start with the buyer sending a letter of intent to the seller. Letters of intent let the seller know that the buyer intends to conduct business with it.
However, if not properly worded, letters of intent can be viewed as contracts and can cause legal issues if the buyer changes its mind.
Contract negotiations will likely involve a series of revisions and counter-offers before a final agreement is reached, and though all project documents are subjected to review and some method of approval, contract approvals require a very formalized review, usually involving procurement experts, such as attorneys, before being presented to the potential seller as an offer.
During contract negotiations, it's best to approach the selected seller as a partner and not as an adversary.
A win-win agreement for both parties is best because it reinforces long-term supplier relationships that are fundamental to good quality management.
Contracts tend to be lengthy documents because they have to contain explicit descriptions, objectives, requirements, obligations, and requirements for both parties.
Regardless of any verbal agreement or written correspondence, the contract is the only document that establishes the legal basis for the buyer-seller relationship, and once signed, each is bound by all of the provisions in the contract.
It's therefore important for the subject matter experts most knowledgeable about the procurement need to participate in establishing and reviewing the contract before it's signed because words, terminology, and meanings can become unintentionally jumbled as the contract gets revised.
The project manager and project management team may only have cursory roles establishing the contract, as it's often handled by the buying organization's purchasing or procurement department, but they need to maintain close involvement to ensure that the contract meets the project’s procurement need.
Point of Total Assumption
In a fixed price contract with incentives, the buyer and seller may negotiate the seller's profit, target cost, target price, ceiling price, and a sharing ratio for cost overruns.
The point of total assumption (PTA) is when the seller becomes responsible for all costs. The formula uses the ceiling and target prices and the buyer's cost-sharing portion. The ceiling price is the most pessimistic cost based on reasonable factors.
Anything above the ceiling price is considered to be due to lack of oversight by the seller.
The formula for calculating PTA is:
PTA = Target Cost + (Ceiling Price - Target Price) / Buyer's Percentage Share of Cost
For example, a contractor has agreed to build a storage depot at a ceiling price of $100,000. The targeted price is $90,000, and the buyer and seller agree that the target cost is $80,000 and that the seller will be responsible for 25% of costs that run over the target.
This structure will make the buyer responsible for 100% of the costs up to $80,000, and 75% of costs between $80,000 and $100,000.
Target Price: $90,000
Target Cost: $80,000
Ceiling Price: $100,000
Share Ratio: Buyer = 75%; Seller = 25%
PTA = $80,000 + ($100,000 - $90,000) / 75%
PTA = $80,000 + $10,000/.75
PTA = $80,000 + $13,333.33
PTA = $93,333.33