Hello, and welcome to another Parallel Project Training podcast. I’m Ruth Phillips, and today I’m joined by Paul Neighbour. We’ll be discussing procurement as it relates to the APM PMQ syllabus for exams beginning in September 2024. Welcome to the podcast, Paul.
Hello, Ruth. How are you today?
I’m well, thank you. I’m keen to hear your thoughts on procurement, so let’s review the syllabus and start our discussion on the various aspects of procurement. The supplier states that we need to understand procurement as the securing of resources and choosing strategies to obtain the best value from supply chains. It’s quite interesting, isn’t it? Securing resources can imply all types of resources, can’t it? It could refer to human resources, material resources, and so on. Ultimately, it’s about getting the best value, isn’t it?
Absolutely, and the importance of negotiation in securing that value. Yes, it’s about acquiring goods, services, and other resources necessary for the project. After all, it’s unlikely we’ll be able to deliver everything in-house. Perhaps I could have phrased it better—understanding procurement involves securing external resources.
We have several learning objectives related to this. The first is understanding the purpose and importance of a procurement strategy. What exactly is a procurement strategy, and why is it so important for our projects?
In many organisations, there’s typically a formal strategy document, but often in project management, people assume that if something isn’t written down, it doesn’t exist. However, most places might have what they call a procurement plan, or simply a process for acquiring the goods and services needed. The purpose of such a strategy is to ensure that we make effective procurement decisions. For instance, if I were fitting a new bathroom, I might obtain three quotes from different suppliers. I wouldn’t just choose the best value; I’d also consider competence. It’s not solely about price; it’s about ensuring the right resources are in place to deliver the project.
You mentioned that some organisations might not formally document their procurement process. Is that an issue? Should we aim for formal documentation?
Not necessarily, in my opinion. Many processes are not written down; that’s just the way things are done. Most organisations will have a procurement plan or approach, even if it isn’t documented. The primary purpose is to ensure value for money. Additionally, some organisations, such as public sector bodies, are regulated and have rules they must follow when spending public funds. Therefore, having a procurement plan or strategy ensures these regulations are followed.
As with many areas, it’s crucial that our project aligns with the organisation’s procurement practices—we don’t want to deviate and do something completely different. Procurement is typically one of the most highly regulated areas within organisations. Large organisations often have a procurement department, which brings us to the next point: defining roles and responsibilities for procurement. It’s vital to determine who can issue orders, who can sign contracts, and who can approve invoices. Clear principles or divisions of responsibility are important, often involving at least three people in the loop to prevent corruption.
I believe the three key elements are getting value for money, complying with regulations, and clearly defining responsibilities. These are the benefits of having a procurement plan. If I were to create and document one, what would be its typical contents?
That’s a good question. For a large project, the document could be extensive, while for a smaller project, it might be a section of the project management plan. Typically, you would start by considering what will be done in-house and what will be outsourced—known as the make-buy decision. For example, if you take the work breakdown structure, you would determine which work packages should be handled internally and which should be outsourced. That’s the first step: understanding what will be purchased from the market.
The next step is to decide how to divide those packages. Should we go to one supplier for everything—a prime or principal contractor—or should we split the work among several suppliers who can work in parallel? For instance, we could hire an electrician, a plumber, and a carpenter separately, or we could contract a bathroom company to handle the entire project. While the latter might be more expensive, it offers the convenience of a single point of contact. Alternatively, we could phase the project, such as having an architect do the design work first, followed by hiring various tradespeople to complete the installation.
In summary, we need to determine what to buy, how to break it down into contract packages, and how this aligns with our work breakdown structure. When making these decisions, it’s about balancing risk, convenience, and cost. I believe it’s primarily about risk management. If there’s a risk, we should consider whether to manage it in-house or outsource it to someone more capable.
There’s also the positive aspect of risk regarding innovation. If we outsource to someone whose expertise lies in the task, they’re likely to innovate and find more efficient ways of doing things. For instance, I could probably create a website for Parallel, but it would take me a long time and the result wouldn’t be very good. So, it would be more cost-effective and less risky to contract that work out to a professional web developer. A procurement strategy involves thinking about where to place risks on the project and who is best suited to manage them.
That’s a great perspective. The APM also mentions other considerations, such as whether to have a transactional or collaborative arrangement for contracts. What’s the difference between those?
A transactional approach is something like Amazon, where you purchase a standard service. It doesn’t mean it’s of poor quality, but it’s more of an off-the-shelf service, like buying bricks, sand, or computers. A collaborative approach, on the other hand, involves working with someone like an architect or software developer. It’s more bespoke, with the supplier bringing their intellectual property and ideas to the table, resulting in a cooperative working relationship.
So, after deciding on the necessary contracts and the nature of those contractual relationships, there are a few more decisions to make before finalising the strategy. One of the first is choosing the type of contract. There are standard contract templates, such as the NEC suite of contracts, which includes various types labelled A, B, C, D, E, and F. These templates provide a set of legal terms and conditions that define the duties of the customer and supplier. Another example is the JCT (Joint Contracts Tribunal) contracts, which are widely used in the construction industry. These contracts are often tailored by large companies to suit their needs, and any changes typically require consultation with legal departments.
We also need to think about payment methods and set out the supplier selection process in the procurement plan. The plan will outline the steps we’ll follow, which can result in a substantial document. In larger organisations, a procurement department usually provides templates for such documents.
When it comes to contracts, the legal department will likely have a say, ensuring that everything aligns with the organisation’s policies. The procurement department usually handles the details, and if any amendments are needed, they’ll consult the legal team.
Regarding supplier selection, what are the typical stages in the process?
It’s quite similar to managing a home improvement project. First, you would research what you want and draft your specifications. Then, you would find local suppliers, perhaps by searching online, and send them your specifications to obtain quotes. After site visits and discussions, you would receive price proposals, review them, and decide who to hire. The process is similar in project management but more formal and complex.
In the professional context, the first stage is market research, followed by pre-qualification (PQQ). Pre-qualification helps narrow down the list of potential suppliers, ensuring that only those with the necessary skills and capacity are invited to bid. Sometimes, market consultations are conducted to gauge interest and feasibility, especially for unique projects.
Next is the formal invitation to tender (ITT), where a detailed pack of information is sent to the selected suppliers. They are given time to respond, and any questions they ask are usually shared with all bidders to ensure fairness. After receiving the bids, they are evaluated based on quality and cost, often separately. Quality evaluation might include social value and ESG (Environmental, Social, and Governance) criteria, with each section scored accordingly.
In public procurement, the contract is awarded to the bidder with the highest score, subject to an appeal process known as the standstill period. This ensures transparency and fairness before the final award is made. After awarding the contract, there’s typically some negotiation over the fine details, leading to contract signing and contract management to ensure that work is delivered on schedule and within budget.
How do we incorporate procurement into project timelines?
Procurement is often treated as a phase within a project. It usually starts during the definition phase but can’t be completed until the business case and project management plan are signed off, as contracts can’t be signed without these approvals. It’s important to have procurement inform the business case, especially regarding costs.
Sometimes, organisations have a pre-contract approval gate just before signing contracts, which acts as a significant decision point. This is quite common in in-house project lifecycles.
Once we’ve selected our supplier and negotiated the contract, the APM PMQ syllabus mentions various negotiation techniques, including ZOPA, BATNA, and win-win strategies. Can you explain what these mean?
Certainly. ZOPA stands for the Zone of Possible Agreement. Imagine you’re buying a house. If I’m the seller and I want £130,000 but am willing to accept £110,000, and you, the buyer, are prepared to spend up to £120,000, there’s a ZOPA between £110,000 and £120,000 where we can potentially reach an agreement. If our expectations don’t overlap, there’s no ZOPA, and a deal is unlikely.
BATNA, or Best Alternative to a Negotiated Agreement, is your fallback plan. For instance, if there’s another house down the road that meets your needs for £115,000, why would you spend £120,000 on mine? Knowing your BATNA gives you confidence in negotiations because you have an alternative option if an agreement can’t be reached.
Win-win is often misunderstood. It’s not about both parties compromising but rather finding a solution that fully satisfies both parties’ needs. For instance, building houses in a factory and delivering them to the site might be cheaper and more environmentally friendly, benefiting both the buyer and the builder. Win-win is about achieving mutually beneficial outcomes without compromise.
We’ve discussed supplier selection and negotiation, so let’s now turn to contractual relationships and reimbursement methods. Once we’ve appointed our supplier, what types of contractual relationships can we establish, and when are different reimbursement methods appropriate?
Contractual relationships can vary. A single supplier might handle everything, such as a web developer managing the entire project. Alternatively, you might use a prime contractor who subcontracts parts of the work. You’ll pay a premium for this service, but the prime contractor manages the risks between subcontractors. Another option is to manage separate contractors yourself, which requires you to coordinate their work.
In sequential contracts, one organisation might handle the initial phase (e.g., design), and another might handle the next phase (e.g., construction). The key is determining who is best suited to manage the risk and where the risk should lie.
As for reimbursement methods, the syllabus mentions fixed price, cost-plus-fee, per unit quantity, and target cost contracts.
Fixed price contracts are used when the scope is well-defined, allowing the contractor to provide a fixed price for a fixed scope of work. This method is best suited to projects with a clear, detailed specification.
Cost-plus-fee contracts involve paying the supplier’s costs, with a profit margin added on top. This method requires transparency, as you’ll need access to timesheets and expenses. It’s often used in iterative lifecycles or projects with high uncertainty.
Per unit quantity contracts pay an agreed price for each unit of work, such as £0.45 per mile driven. These are often used where quantities can be measured after the fact.
Target cost contracts set a target price, with a pain-share/gain-share mechanism. If the project is delivered under budget, both parties share the savings; if it’s over budget, they share the additional costs. This method works well when the scope is well-defined and there’s potential for cost efficiencies.
Each method has its pros and cons, depending on the project’s nature and the level of risk involved. Target cost contracts, for instance, can motivate suppliers to find efficiencies, but only if the target is realistic and achievable.
We’ve covered all the learning objectives, Paul. We started by considering the purpose and importance of procurement strategies and looked at the typical contents of such a strategy. We then discussed the stages of supplier selection, how to plan this into your project, and how to conduct negotiations. Finally, we examined different types of contractual relationships and reimbursement methods.
This has been a thorough and insightful discussion on procurement. Thank you very much.
