Procurement is the process of acquiring goods and services for a particular project. This process aims at promoting fair and open competition from among the vendors while minimizing cost and meeting the buyer’s needs.
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A procurement management plan is essential in the procurement process as it outlines requirements for the project, documentation and completion of the project. The plan plays a major role in directing the process of procurement. This ensures successful completion of the project because the necessary changes made at the right time.
The plan identifies the products and services needed for the project, the types of contracts to be used for the entire project or in parts of the project, the approval of the contact, coordination of procurement processes by various individuals involved, and the metrics used in measuring activities in the procurement process.
Background of the Study
On 21st august 2007, Mirage Resort (MGM) and Dubai World entered into a contact for the construction of a grand gaming center CityCenter in Las Vegas. The details of the contract were drawn up as agreed by the two companies, in preparation for the construction process.
However, as is in line with construction requirements, procurement of the goods and services required for construction has to be done to guide the construction process. Procurement is in turn guided by a procurement plan that includes details of items and services required for the construction.
Purpose of the Study
This study outlines the procurement plan that contains all items and services required for the construction of the building in the agreement contract between the two companies. Such a study is necessary to guide the purchasing process so that all required items are obtained in the right manner that is cost effective.
The study specifies the bidding process so that appropriate vendors are selected and awarded tenders for supplying the required items, which measure up to the quality standards as intended by the purchaser.
Information for this study was gathered from documented sources about the procurement process. These include journal articles and books on procurement. Information about the required items and services was obtained from the project manager, the lead engineer, and design technician through interviews and analysis of past projects.
The Role of the Project Manager
The project manager is a key figure in the procurement process. He should ensure that the plan is comprehensive enough to facilitate the entire project and see it to completion. He liaises with the project team, the purchasing department, project owners, and other players involved in coordinating procurement activities and process (Gido & Clements, 2006).
He leads the project team in identifying all items and services needed for the project. His office then scrutinizes the procurement list to ensure it is accurate before handing it to the purchasing department that evaluates the viability of purchasing the items of producing them internally. This evaluation is largely based on cost effectiveness, quality required and efficiency of the process (Gido & Clements, 2006).
Parts of a Procurement Plan
This is the initial section of the plan which contains the name of client, the title of the project, a brief description of the project itself, the period of the project and the estimated cost of the project. These are used for basic identification and for legal purposes in cases of dispute or conflict of ownership between the two owning companies (Egeland, 2009).
List of Items to be procured
The plan should give a list of items that must be procured and the reasons as to why they cannot be generated internally. Deadline for the provision of these items is also included in the plan so as to meet the project schedule for timely completion of the project.
Technical information or detailed specifications for the items is given to ensure that the right items are procured. Individuals in the relevant fields who should approve the procurement are also listed in this section. These may include the project manager or design technician (Gido & Clements, 2006).
Type of Contract to be Used
Different types of contracts for procurement include firm-fixed price contracts, time and materials (T&M) contracts, cost reimbursable contracts, and many others. The type of contract used depends on the nature of items or services in the procurement list.
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In other cases, a single type of contract can be used for the entire project. This will require the project team and purchasing department to specify and define all items in terms of quantities and dates of delivery (Benslimane, Plaisent & Bernard, 2005).
Contract Approval and Decision Criteria
This section gives directions concerning the steps that must be followed before contracts are approved. The processes vary according to various companies.
Large organizations follow formal tendering procedures and selection of successful bidders. The decision maker in such a case is usually a tendering committee as chosen by the company. The process should be transparent and competent bidders in terms of cost and quality reputation are awarded the tenders (Egeland, 2009).
Those awarded tenders for the provision of items and services need to be managed and supervised so that they deliver them in good quality, quantity, and time as agreed in the tendering agreement. This role is done by the project manager and purchasing department (Egeland, 2009).
Performance Metrics for Procurement Activities
Metrics is used to ensure the project goes on as scheduled and records progress of various vendors and their performance to point out inconsistency and inefficiency. This information can be used later in future procurement for selection suitable vendors (Egeland, 2009).
The Procurement Plan
The clients in this project are Mirage Resort (MGM) and Dubai World. The title of the project is CityCenter and the project involves construction of a gaming center in Las Vegas. The project will begin on 1st of November 2007 and last to 31st of December 2008. This project is estimated to cost $5 billion (Gido & Clements, 2006).
Items to be procured
The project team, through its project manager, has presented the following procurement items that they determined as necessary for the project. The list has been reviewed by the office of the project management and approved as correct. They, therefore, should be submitted to the contracts and purchasing department for purchasing (Benslimane, Plaisent & Bernard, 2005).
Roofing tiles needed for constructing the roof. We can not make this item and will have to be purchased externally. Deadline for its delivery is on 23rd august 2008. Electrical appliances are needed for supplying electricity throughout the building.
We could provide these internally, but the cost would be higher compared to that of procuring them. These should be delivered by 1st of July 2008.
Drainage facilities are needed for draining sewage from the building. We could also provide these, but we can not meet the deadline as stated on the 1st of January 2008. In order to restrict the project to the scheduled timeframe, it is recommendable that they are purchased externally (Hachmi, Moslemi & Campbell, 1990).
Sand/gravel is needed for the construction of the floor and walls. While we are able to manufacture blocks, we will have to procure gravel as we are not able to provide. These should be delivered by 1st of December 2007. Wood is needed for constructing the roof.
We cannot provide wooden and has to be delivered by 15th May 2008. Electric wiring services are required for connecting the entire building with electricity. We do not have experts for this service, so we shall have to procure. The services should be availed by 10th July 2008 (Hachmi, Moslemi & Campbell, 1990).
Plumbers are required to install water systems and gas in the building. Although we have our own internal plumbers, they are not experts and familiar with handling large buildings. The quality of their services may be lower, thus risking the entire operation. We, therefore, have to procure these services from experts (Egeland, 2009).
The above list has been reviewed and approved by:
- Paul Watkins, project manager.
- Rick Meyers, head project management office.
- Isabel O’Brien, design technician.
Type of Contract to be used
The entire procurement process will use the Fixed-Price with Economic Price Adjustment contract. We preferred this type of contract as it protects the contractor from economic fluctuation that is likely to affect prices of items and labour during the period of performing the contract.
Economic fluctuations have been and continue to be experienced in the USA and the world at large. Besides, this is a big project that will take a long time to complete. Within the length of time, more fluctuations are likely to occur as the global economy continues to dive lower (Egeland, 2009).
The Economic Price Adjustments (EPAs) are calculated based on actual costs incurred, current market prices, and or cost indices of the materials and labour. At the completion of the project, a report on EPA will be submitted by the contractor, who together with the contracting firms will negotiate a reasonable price (Egeland, 2009).
Contract Approval and Decision Criteria.
A cost analysis on the items to be procured will be carried out. The cost of producing Items internally will be compared with that or purchasing them from outside. Besides cost, quality of the items will also be compared and the time frame for their delivery.
The process of approving the contracts will try as much as possible to cut costs, ensure good quality and schedule for the project. Items that can be provided internally but on a longer duration of time will be purchased so that the project is not derailed. Bearing all these considerations, the contracts committee will approve the procurement proposal (Gido & Clements, 2006).
The purchasing and contract departments will then send solicitations to vendors to bid for the provision of the items. Vendors will return their proposals to the same committee with all required quotations and specifications as outlined in the solicitations.
The committee will then embark on the process approving the proposals. It will also determine which proposal will meet the criteria as required by the project team and purchasing and contracts departments (Gido & Clements, 2006).
The approval process is categorized by the costs involved. Items costing less than $500,000 will be approved by the project manager alone. Those costing above this figure will have to be approved by the Contract Review Board. This board comprises the project manager, purchasing and contract departments, the finance department, and the project management office.
Representatives from each department as stated will sit on the board. Because of the high cost, approval will have to be carefully done so as to ensure that the items merit the cost by quality and quantity. This will also reduce incidents of fraud and corruption (Benslimane, Plaisent & Bernard, 2005).
The Criteria in selecting and awarding contracts will be guided the need to cut costs, work within the provided time frame, and ensure the quality of the project. Selecting suitable vendors will be based on the capability of the vendor to deliver items by the dates specified, thereby beating the deadline.
The chosen vendor should be able to provide goods and services of high quality, the costs should be reasonable; not too high, the items to be delivered by the vendor should not be those that can be produced internally, and the vendor’s reputation will be used to determine their suitability (Gido & Clements, 2006).
Depending on the costs involved, as stated above, the criteria used will be reviewed by either the contracts review board or the project manager.
In cases of contracts for items and services that are relatively few, procurement agents shall be combined to share the services amongst them to create a centralized procurement system. This will create economies of scale, which will in turn lower operating costs (Gido & Clements, 2006).
After suitable vendors have been selected, the team manager will be fully responsible for managing and supervising the vendors. In order to ensure vendors meet their delivery deadlines, the project manager and purchasing and contract department will schedule for weekly meetings with the vendors to assess the progress in plans to avail procured items (Benslimane, Plaisent & Bernard, 2005).
In these meetings, tender specifications will be run through by both vendors and the project manager to ensure that all details as specified are met.
The purchasing and contract departments can also perform quality tests on the items to ensure that they meet desired standards. Assessment of how far the vendors are in delivering the items will also ensure that the items all will be delivered in good time (Benslimane, Plaisent & Bernard, 2005).
These meetings will also be used by both vendors and the involved departments to make necessary alterations and modifications to the procured items.
Deadlines can be adjusted as will be necessary and possible, quantity can be increased or decreased depending on new developments in the project such as adjustments in cost, or new vendors sought in good time if existing ones apologize for not being able to deliver the items as required (Egeland, 2009).
These meetings are very important to keep track of the delivery of items and services so. Adjustments are made early into the project so that the schedule for the project is maintained.
Items will be delivered according to the just-in-time system of delivery. In this case, once the quality and quantity of items has been certified through the meetings, vendors will deliver the items in a span of one to three days prior to the deadline.
This is in an effort to reduce the risk of the items getting destroyed during storage, lowering storage costs and security risks, and avoiding inventory costs (Benslimane, Plaisent & Bernard, 2005).
This project is based two major assumptions:
- The summer period will last until July next year as is always the case.
- The US Dollar will maintain its current value. However, if it surges, its depreciation rate will be less than 5%.
- The rules and regulations concerning construction in the state of Nevada shall stay consistent as they are today for the entire period of the project.
Performance Metrics for Procurement Activities
The project manager will design performance metrics that will assess vendor performance. The metrics will be rated on a scale of 1-4 and will feature the following details:
- Quality of product.
- Timely delivery.
- Cost of development.
- Time used in the development.
- Cost per unit.
- Efficiency of transaction.
- Excellent efficiency.
- Good efficiency.
- Very poor efficiency.
Besides the rating, actual values will be indicated for each vendor so that they can bear future reference when selecting them for more procurement.
This procurement management plan provides a comprehensive step-by-step process that will be followed in the CityCenter project. A formal procurement plan as this may seem too bureaucratic and cumbersome to many, but the benefits of adhering to the plan surpass the hectic in following the plan.
The plan is intended to achieve three major things. It is to guide the contractor to spend the right amounts of money for the products and services. This need not be the lowest cost, but the most appropriate in proportion to the services and products given.
The plan will also ensure that the project is done and completed within the specified time period. It organizes delivery processes so that delay of items does not cause the project to delay in completion also.
Lastly, the plan is useful to help the contractor not to overlook important steps that may cause the project to stall or some bit of work to be undone. If these steps are not accomplished, the quality of the entire project might be compromised. This could also be costly to the project owner.
Benslimane, Y., Plaisent, M., & Bernard, P. (2005). Investigating Search Costs and Coordination Costs in Electronic Markets: A Transaction Costs Economics Perspective. Electronic Markets, Vol.15 (3): pp.213-224.
Egeland, B. (2009). The Project Procurement Plan. Retrieved from https://pmtips.net/
Gido, J., & Clements, J. (2006). Successful Project Management. KY: Thompson South-Western.
Hachmi, M., Moslemi, A. A., & Campbell, A. G. (1990). A New Technique to Classify the Compatibility of Wood with Cement. Wood Science Technology, Vol. 24(4): pp.345-354.