Project Procurement Management

Contracting, Subcontracting, Teaming

Quentin W. Fleming

• Publisher: Project Management Institute
• Year: 2019
• ISBN:
  9781628256291
• Edition: 1
• Topic: Business
• Subtopic: Project Management
• Index: Business

Not all project procurements are the same. Unless the project carefully makes an assessment of the items it will make, versus the items it will buy, and then adequately plans for these purchases, the risks of performance will increase. Project procurements are simply sub-projects, which need to be managed well, not blindly delegated to an independent organization to buy for the project. Certain procurements, major complexity developments, creating something new, which does not exist, according to the project's unique specification, must be managed by the project team, and supported by the professional procurement organization. The project's team leader must assume the management responsibility. This book zeroes in on the effective management of that portion of the project which will be performed by another organization. It focuses on the procurement of scope from an organization outside of the project. Often, the success or failure of a project is dependent on how well the project can plan, define, solicit, authorize and manage this external relationship. This book has been updated to be consistent with Chapter 12 of the Fourth Edition of the PMBOK ® Guide, released by PMI in December 2008.

CHAPTER 1

What is Project Procurement Management

Project Procurement Management includes the processes required to acquire goods and services, to attain project scope, from outside the performing organization.

—A Guide to the Project Management Body of Knowledge (PMBOK Guide), Year 2000 Edition ¹

Subcontracting, a way of life. MCI reaps the benefits of over 9,000 research and development engineers not on its payroll.

…in an industry where new products routinely become obsolete in a year, MCI claims that it's more efficient to spend time looking for innovative subcontractors than developing its own technology.

—Dick Liebhaber, MCI, from the Tom Peters book Liberation Management ²

There are many reasons why it is a sound business practice to buy some part of a project's scope from another firm. MCI's Dick Liebhaber cites one of the more important reasons to buy scope: to quickly expand the intellectual base at his company. MCI finds that it is easier to obtain technical brainpower from other companies, than to attempt to recruit and add permanent employees. And there is also the opposite advantage: to be able to quickly downsize the company should that unpleasant task become a necessity. Companies can cancel contracts much easier than to layoff a workforce. But there are also other valid reasons for companies to follow such a policy.

In addition to adding to its intellectual base, firms often find that relationships with suppliers will bring them resources, facilities, investments and equipment, which would not otherwise be available to a project utilizing its own limited company assets. The addition of suppliers to a project will often reduce the risks of a new venture by sharing the costs of the venture, and enhancing their chances of success.

This book is about project management. However, its primary focus is on that portion of the project which will be performed by another company. It deals with the project work which is contractually procured and performed by people working for another company. Such transactions are sometimes called contracts, sometimes subcontracts, and sometimes teaming agreements. The key distinguishing ingredient: they are all procured under some type of a legal relationship.

The purpose of this book is to describe the project procurement process in a meaningful way so as to help the project managers and their teams to better manage this critical work. As our projects become increasingly more complex, more and more we will be finding that we must rely on people from other companies to help us perform our project work. How much project scope do we buy from other companies: estimates range from as little as zero to as high as 90%.

The procurement of project scope whether it be done through teaming arrangements, contracting or subcontracting, will be progressively taking a larger share of our business. Thus, we must perform this management process well, if we are to be successful on our projects.

A basic premise of this book: Contracts or Subcontracts (the procurements) exist to support successful project management. Any contract or a subcontract (a procurement) placed on a project is merely a subproject of the total project. Any contract or subcontract manager can best be thought of as being a surrogate extension of the project manager.

This book will emphasize the importance of managing project procurements well. It will not describe in great detail the legal or contractual issues, the terms and conditions, general or specific contractual provisions, except in a broad strategic way to keep the project team from making avoidable errors. In most cases the project team will be supported by a procurement professional, a person loaned into the project team by an organization which exists under the title of purchasing, procurement, material, materiel, supply management, etc. The main mission of these professionals is to support and improve the management of the project.

The Project = the “Make” content + the “Buy” content

There are numerous definitions of what constitutes a project. Such definitions have multiplied profusely with the expanded interest in project management which came into vogue in the 1990s. One such definition somewhat different from the others is as follows:

A project is a special kind of activity. It involves something that is both unique and important and thereby requires unusual attention. It also has boundaries with other activities so that its extent is defined. And it has a beginning and an end and objectives whose accomplishment signal the end. ³

This definition of a project is consistent with others, but it also emphasizes in particular the outer limits of a project.

Still another way to look at a project is to focus on who will be performing the actual work. One could easily separate a project into two distinct parts: that portion which will be done with your own company employees, and that portion which will be sent outside of your company for performance. It is the external work (from one's own company) which is the theme of this book: the buy content. This approach to subdividing a project into two generic parts is illustrated in Figure 1.1.

Here the project is simply separated into two parts: the “Make” work and the “Buy” work. What is the importance of this distinction? Simply put, the “Make” work will be authorized by the project manager with use of non-legal documents typically called work authorizations or budgets. Most companies have internal procedures which cover this kind of activity.

Question: what happens when the internal “Make” work effort starts to experience problems, as is sometimes the case. Likely such difficulties will be discovered in the periodic project status reviews that takes place within most companies. When the “big boss” identifies such problems often they will gently urge the lagging areas to get back on performance with some benevolent comments such as: I don't care what it takes I want you back on track even if it means working all night! And not surprisingly, most problems are quickly corrected by responding to the recommendations by the “big boss.” Point: the big boss has influence over what happens…within the company.

However, let's now discuss what happens whenever the “buy” work fails to perform up to our expectations. What influence does our “big boss” have over the work we sent to another company for performance. Answer: virtually nothing. Unless there is a special personal relationship between the big boss and the performing company, the work sent outside of the company will be governed strictly by the legal document the buyer has issued called the contract, or subcontract, or purchase order. If we failed to specify precisely what we wanted the other company to do for us, the big boss will be little help getting the other company to improve performance. The safety wall for other companies is the precise language of our contractual document. The contract language has to be right.

This is the key distinction between the make work versus the buy work. Senior management can and will often intercede with the internal make work. They will use their clout, and cause an improvement in performance. But the buy work is a legal and binding formal relationship. In effect, the buy work is a “non-forgiving” relationship. If we made a mistake in defining what we wanted from the seller, an adjustment can be made…but often for an exorbitant price. The process of adjusting such work is called an “equitable adjustment”, sometimes also called seller “claims.”

Project Managers will act both as a Buyer and as a Seller of Scope

Project Managers are somewhat like a Coach of an athletic team. They are responsible for everything that happens to their team, the good and of course the bad. It doesn't matter whether they can control these issues. Someone has to be held accountable and it is typically the Coach or the Project Manager who holds that position.

Project Managers, in addition to overseeing everything that happens on their projects, are also ultimately responsible for what happens with two external company relationships, one (upward) with their customer(s), and the other (downward) with their suppliers. These two external company project relationships are depicted in Figure 1.2.

Shown on the left side of the figure is the relationship between the project manager and the customer(s). Often during the period of project performance the initial agreed to scope of work will need to be changed, for whatever reason. It is critical that whenever the original scope of work changes, that the project's commitment to management also be changed, that it be expanded or decreased as may be the case.

Often when the scope of work is altered there must be an adjustment in the authorized budget, or in the schedule commitment, or both. What constitutes a customer can be internal company management on a funded project, or some external buyer when the project consists of a contract from an external source, like another company or perhaps the government. Many projects start out with a single customer from one source, but will later find that other entities become interested in their project. Thus it is not uncommon for the Project Manager to put other interested candidates on contract, to also sell them scope, most often with another separate contract. In this role the Project Manager can be thought of as being the “seller” of project scope, and often this work is best described as that of contract management.

Conversely, as shown on the right side of the figure, the Project Manager also assumes the role of the “buyer” of scope, from an external source. The Project Manager is essentially acquiring the performance of project scope from another firm. This book will focus exclusively on the Project Manager as the buyer of project scope. However, it must be understood that the other role, that of the seller of project scope, is also an important duty for any Project Manager.

Who exactly has the Procurement Delegation of Authority (DOA) or Centralized versus Decentralized Procurement

With a new, start-up company, virtually anyone can do anything and it is typically alright. There are no formal rules, no procedures, no precedents to follow. However, as a new firm starts to mature, certain rules and restrictions begin to take over. Tasks previously allowed for employees are systematically declared to be off-limits by management. One of the first things to be curtailed by a maturing company is the ability to “buy” things on behalf of the firm.

It isn't necessarily that there is distrust in employees. It is simply a fact, that one of the most judiciously guarded functions in any company is the ability to place orders (legal agreements) to buy something. This practice is called a procurement “delegation of authority” to buy, and such procurement DOAs come straight from the top person of any company.

The top person in most organizations will go by various titles. In the United States they are typically called the general manager. In Europe they are often call the managing director. Without being told, we instinctively know who they are, because they have the best office and the best parking spot in the organization.

General managers are very careful about who is authorized to buy things on behalf of their company. They will carefully execute a memo giving a specific delegation of authority to buy things on behalf of their company. Such delegations will typically go to someone carrying the title of vice president of procurement, or purchasing, or supply management, or perhaps the Chief Procurement Officer (CPO), etc. An important point: such authorities to buy will rarely ever be given to the project manager. Fact: project managers rarely have a delegated authority to buy on behalf of their companies. This revelation sometimes comes as a shock and a disappointment to project managers.

However, if the procurement process is working well, and it generally does work well, it really doesn't matter. The vice president of procurement will assign someone (a buyer or a subcontract manager) to the project manager to support the project effort. The assigned buyer will do anything and everything the project manager asks them to do, but, always working within the formal procurement policies and procedures of the company. A professional buyer will not violate purchasing policy, even if directed to do so by a more senior project manager.

The buyer (subcontract manager) will be required by policy to insist on (for example) a competition, if appropriate, and insist that everyone in the competition be treated equally. These are reasonable requirements to impose on any project. One of the main purposes of company procurement policies and procedures is to prevent any project manager from taking short-cuts, perhaps in the best interests of the project, but not in the best long-term interests of the company and its relationship to the supplier base. Companies have a strategic need for maintaining a viable supplier base to support the company over the long-term. Projects, because of their short term nature, will sometimes overlook the long-term needs of the company.

This issue being des...