Explain The Importance Of Procurement Strategy

Paul Naybour

  1. Importance of Procurement Strategy: Procurement strategy is a document which defines how a project would procure and manage services and goods. Procurement strategy is most likely considered when the project is being formulated / developed along with the business case, procurement strategy may be also component of the PMP. For example, a project for building a warehouse will have a procurement strategy which will determine whether works will be carried out in house or by others; cover contractual relationships; determine reimbursement methods, suppliers / contractors selection, contract administration; and include provision for feedback and lessons learnt.
  2. Make / buy: one of the main and early components of procurement strategy is the make / buy decision which will determine whether we make the goods in house or buy / procure them at lower prices and better quality. In order to take that decision we should have clear understanding of the specifications and the requirements (i.e. we should know exactly what we want) and we should know exactly whether we have the capabilities / capacity to meet the requirements or not. This single decision will have key effect on the whole project. For example, in a project for building a warehouse we will get Mechanical, Electrical, and Plumbing (MEP) sub-contractor since we do not have the experience with the new specifications.
  3. Fixed Price Contract: One of the forms for reimbursement agreed between Client and Contractor / Supplier (i.e. contractual agreement). In a fixed price contract client agrees with supplier / contractor a fixed price for carrying out fixed scope of works regardless how much it will actually cost. The risk here lays with the Contractor. Fixed price contracts tend to cost more since Contractors usually over-estimate in order to cover the carried risk of over-run. For example, fixed price contract for building a ware house where Contractor increased his cost estimates to cover the risk of the possible need for piles since the construction area is famous for poor soil conditions.
  4. Supplier Selection Criteria: Key consideration of the procurement strategy is how to select the right contractor / supplier. The process includes different stages such as, market researches and requirements / scope of works definition in a proper document, prequalifying suppliers to reduce the number of potential bidders, issue an invitation to tender (ITT) which has response period, enough information to enable bidders to quote, and the criteria for judging the bidder’s offers. Responses will be provided to all bidders. Receive and evaluate the bidders offers where straight forward compliance to the requirements defined in the ITT is a minimum need for qualification, and then award the contract to the successful Bidder. For example, the aforementioned stages are followed to award the MEP works in the warehouse building to competent MEP contractor who has financial capabilities, qualified resources and previous experience to carry out the required works.
  5. Cost plus fixed fee: another form for reimbursement agreed between Client and Contractor / supplier where the Client will pay the Contractor the actual cost (not price) for carrying out the works plus either fixed amount or percentage of the cost to cover the Contractor’s profit/fees. Contractor will be slightly motivated differently according to the profit method of payment. The percentage fee rises as the cost rises and therefore protect the contractor’s margin. However, Client need to closely monitor the construction methods used by the contractor in order to make sure that he will not be increasing the cost purposely in order to increase his fees. For example, Contractor proposes building the ware house on piles without carrying out necessary soil investigations which will justify the need for piles. Contractor may aim to increase the construction costs and thus increase his fees.

2 thoughts on “Explain The Importance Of Procurement Strategy”

  1. Ok except for suppler selection criteria. These are the criteria used by the client to evaluate each of the bids. Typically each bid is assessed against quality and cost, with a weighting assigned to each criteria for example 60% for cost and 40% for quality. Points are awarded against pre-defined criteria such as experience delivering similar projects. The contract is awarded to the supplier with the highest score.

  2. OK except for 4.Supplier Selection Criteria: The refers to the criteria used by the client to evaluate the bids. Typically these will split the weighting between quality and cost. Fore examples a 60/40 split between quality and cost is typical. Scoring sheets are used to evaluate each bid again defined criteria, such as track record delivering similar projects.

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