purchasing and contracting for projects

2017-2018 Module 3 A:
Purchasing and
Contracting for
Projects
17MEE55
Compiled by: Somashekar S M, Assistant Professor
DEPARTMENT OF MECHANICAL ENGINEERING, NEW HORIZON
COLLEGE OF ENGINEERING, BENGALURU

Module 3 A: Purchasing and Contracting for Projects
5th Semester BE, Mechanical, NHCE Page 1
Purchase Cycle
Contract Management and Procurement Process.
PURCHASE CYCLE
Definition of Purchasing: The process undertaken by the organizational unit that, either as a function
or as part of integrated supply chain, is responsible for procuring or assisting users to procure, in the most
efficient manner, required supplies at the right time, quality, quantity and price management of suppliers
thereby contributing to the competitive advantage of the enterprise and achievement of its corporate strategy.
In simple manner, purchasing is the procurement of goods and services from some external sources.
Purchasing is a vital function of most projects. Purchasing is also a greedy function, because it
consumes time and money in prodigious amounts. The role of the purchasing organization is not simply to
dispatch purchase orders. The key issues involved in purchasing are.
➢ Quantity
➢ Quality
➢ Time
➢ Palace
Objectives of purchasing are:
➢ To avail the materials, supplies and equipment at the minimum possible costs.
➢ To ensure the continuous flow of production
➢ To increase the asset turnover.
➢ To develop the alternate sources of supply
➢ To establish and maintain the good relations with the suppliers
➢ To achieve maximum integration with other departments
➢ To train and develop the personnel
Purchase Cycle:

Specifying the goods to be purchased: The first step is to specify the requirements. In many projects, this
function is often the responsibility of a project engineer or designer.
Part lists or purchase control schedules are often used to list all the requirements. Both methods are
similar and require the engineer to list each item, give the quantity required, and add a description or catalogue
number. The current revision status of all specifications must be given.
In construction and civil engineering projects the quantities of bulk construction materials required are
listed on take-off lists.
Sometimes a relevant standard specification will exist that can be quoted to specify the requirements
of a purchase. There are some specifications provided by official bodies, including the armed services.
Bought-out parts, equipment and materials can often be specified by reference to a manufacturer’s
catalogue or part number. This might seem to be a sufficiently rigid description of the goods. However, most
manufacturers reserve the right to modify their designs. If goods are supplied by a stockiest, the stockiest might
decide to restock from more than manufacturer, and there might be significant differences in the materials
quality or design.
Some companies take no chances and produce their own drawings and specifications and allocate part
numbers themselves. This practice costs engineering time, but has much to commend it. Apart from removing
any ambiguity about what is being ordered, provision is thus made for a common part-numbering system. That
simplifies purchasing procedures, stock handling, stores procedures and cost accounting.
The project engineers must always write a detailed purchase specification for complex or specially
manufactured goods for any item that could give rise to safety and reliability difficulties if it were to be
incorrectly supplied. Companies with good project experience will keep outline specifications in their digital
files, greatly reducing the design or engineering time and effort to write a particular purchase specification.
Identify and shortlist vendors: The buyer’s first responsibility is to select a suitable supplier. Occasionally
only one supplier can be found, or one may be specified as the preferred supplier on the project engineer’s
requisition.
There are, of course, occasions when urgency is the most importance factor, when there is simply no
time in which to conduct a thorough supplier selection procedure. In all other cases, the supplier should be
chosen after the collection and perusal of several competitive quotations.
Whenever competitive quotations are required; the engineers must help the buyer to compile a bid
package. This package will include the technical specifications and commercial needs of the project. The
engineers might have a preferred supplier, or shortlist of possible suppliers. Buyers in the purchasing
department will usually have their own knowledge of the market an might know of others who should
approached
Some guiding factors for the choice of supplier
Reliability of Supply: - Past performance specially in the time of crisis as well as sound financial position of a
supplier classifies him to be reliable.
Assurance of timely delivery
After sales service
Attitude with regard to the goods rejected by the purchaser
Technical assistance
Send invitations to tender or call for bids: The request for tenders outlines what is required, the contractual
requirements and how vendors should respond.

Tender requests are invitations to suppliers to provide a competitive offer to win a contract for the supply of
their products and services.
There are many different terms for tender requests, and each may have slight difference, with the most common
being request for tender (RFT) and invitation to tender. Other terms include request for proposal (RFP),
expression for interest (EOI), and call for bids.
The documents themselves will vary between organization, but common elements of tender request documents
include:
➢ Descriptions of the goods and services to be procured: this will include what the work will involve and
any technical specifications or details relating to requirements, deliverables or outcomes of the project.
➢ Conditions of tender; this stipulates the terms and requirements that must be met in order to be
considered for the project or contract. There may be technical qualifications, experience, licensing,
legal or financial conditions that ought to be met in order to be eligible.
➢ Submission content and format; details may be provided on how supplier present their submission.
There may be specifications relating to length of submissions, file format, presentation etc, Templates
or response forms may also be provided. It is important to use these when available, and adhere to
format and presentation instructions.
➢ Process and rules information; this may include things such as the deadline for submission; where and
when it should be submitted, what should be included in the submission; for example, pricing
information or schedule, and person(s) to contract for clarification or enquiries regarding the tender.
➢ Conditions of contract: Draft contract conditions; this may indicate the general or standard terms and
conditions of the contract, with additions or alternations made when a winning tender is announced.
This should also include any non-standard terms and conditions-these should be highlighted within the
tender documents.

Choose preferred vendor and place tender:

When all the bids are in, they have to be compared so the best option is selected. In a ‘sealed bid procedure’,
each proposal is presented in two separate packages, one technical and the other commercial. The buyer opens
all the technical bids first and rejects out of hand those that fail to meet the specification. Then the surviving
commercial bids are compared.
The buyer would normally be expected to favor the lowest bidder, but this choice must be tempered by
knowledge of the bidder’s reputation for quality, delivery performance and commercial standing. It is usually
undesirable and risky to allow the buyer to choose a supplier without the knowledge and agreement of the
relevant project engineer. In some organizations vested interests or jealously guarded power means that this
essential partnership between the purchasing agent and the project engineers is lacking. That is always
unfortunate and should be corrected, if necessary by intervention of more senior management.
An essential part of bid comparisons requires that information received from bidders is tabulated on a
summary form which allows direct comparison of quoted prices, promised delivery times and other critical
factors. An example of a bid summary form is shown in above Figure. This is a matrix that is intended to
convert all bids into one common currency, and to include all required items that some bidders might quote as
optional extras, so that the bottom lines of the bid summary allow the buyer to compare the cost delivered at
the point of use. Thus estimated packing, carriage, insurance, port and customs costs arising from foreign
bidders have to be included. These steps ensure that the total delivered costs are compared in every case on a
like-for-like basis.
Similarly, delivery times are adjusted where necessary to include shipping and port delays, so that all
quotations are compared according to the estimated delivery time at the point of use. Technical evaluation of
quotations must, of course, be a matter for the relevant project engineer.
Monitor and Expedite the progress: Moving further round the purchasing cycle, when a supplier has been
chosen, the enquiry specification is reviewed and updated to include all changes resulting from discussions
with the supplier. The enquiry specification has now become the purchase specification, which is re-issued to
the purchasing agent by the project engineering department, attached to a purchase requisition. The purchase
requisition gives the purchasing agent formal permission to issue a purchase order. Issuing the purchase order
is the most routine and obvious job, usually consisting of typing and printing the order, checking it, signing it
and the either popping it in the post or transmitting it to the supplier electronically along with a fresh copy of
the purchase specification.
Expediting is a follow-up process performed by the purchasing agent to check the progress of each
order. It might require visits to suppliers’ premises to verify progress claims and inspect for conformation with
specification. This process also deals with managing all aspects of project progress.
Receive inspect and accept goods: Receipt of the goods is not the end of the purchasing story. The
consignment must be examined at the project site or factory’s receiving bay to check for possible lost items or
damage caused in transit.
There might also have been some mistake by the supplier, either in the quantity supplied or in the nature
of the goods.
Goods inwards inspectors may wish to examine the goods more thoroughly to ensure that they comply
with the purchase specification although, in recent years, the tendency has been to place more reliance on
suppliers’ own quality procedures.
If the goods are accepted, the goods inwards personnel will record the consignment, usually by preparing and
distributing a goods inwards certificate or by copying the supplier’s own dispatch note (to act as a certificate).
At least one copy of the certificate will go to the accounts department, who will need it before they can pay the
supplier’s invoice. Another copy will go to the buying department, to cut short any further expediting action

and close off the file on that particular order. Routing of other copies might include other departments such as
the stores, but this depends on the nature of the company and the goods.
If the consignment is not received in satisfactory condition for any reason, it will be sent smartly back
whence it came accompanied by a rejection note. Distribution of rejection notes generally follows the same
pattern as acceptance certificates, but will produce opposite reactions from the various recipients. For example,
the accounts department will not pay any associated invoice, and the purchasing department will redouble its
expediting efforts.
When the correct goods have been received they will be passed into stores or placed with project stocks
to await use.
CONTRACT MANAGEMENT AND PROCUREMENT PROCESS
The procurement management process is the method by which products are acquired for a project from
external suppliers. The process involves controlling the ordering, receipt, review and approval of products from
suppliers as well as managing the overall performance of the supplier.
A procurement process is used to ensure that all products are acquired within the correct timescales, to
the level of quality defined and within the budgeted cost identified. The process also sets out the procedures
for ensuring that supplier relationships are properly managed, through the regular review of supplier
performance and resolution of supplier issues.
The procurement process is initiated after the procurement plan has been approved and the supplier
contract signed. The procurement process is usually managed by a single resource within the project (such as
a procurement officer or manager) and overseen by the project manager.
Without a formal procurement process in place, it will be difficult to confirm that the products provided
by the supplier are ‘fit for purpose’ and therefore meet the requirements outlined within the procurement plan.
It will also be difficult to identify and manage supplier issues, and this will therefore increase the overall level
of risk to the project. The procurement process is terminated only when the execution phase is complete.

Figure: Procurement management process
Above Figure describes the processes and procedures required to manage the procurement of products
from suppliers for the project. Where applicable, procurement roles have also been identified. Note that this
process caters for the procurement of all types of products, including ‘goods’ (such as computer hardware, raw
materials and equipment) and ‘services’ (such as raw labor, technical services, consultancy and management).
ISSUE PURCHASE ORDER
The first process initiated to purchase product from a supplier is the creation and issue of a purchase order.
Identify required product
The procurement manager identifies the products to be purchased and their suppliers from the
procurement plan. He or she also identifies the timeframes within which the products must be delivered and
the level of quality that each product should adhere to.
Document purchase order
To request product from an external supplier, the procurement manager must complete a purchase order
form. This form lists the specific product required, the components, delivery timeframes, delivery address and
project cost center to be charged for its purchase. A purchase order form may be completed for several products,

but each form is used for only one supplier. It is important that the purchase order is completed well before the
required delivery date to give the supplier the maximum notice period possible and therefore increase the
likelihood of the delivery occurring on time.
Approve purchase order
The purchase order is then forwarded to the project manager for approval. The project manager will
consider the following criteria prior to approving the form:
• Is the product listed as a required product in the procurement plan?
• Is the product defined in sufficient detail for the supplier to interpret the requirement?
• Is there likely to be sufficient time for the supplier to deliver the product and meet the timeframes
outlined in the procurement plan?
• Does the project have a contractual relationship with the supplier?
Issue purchase order to supplier
Once the purchase order is approved by the project manager, it is issued to the supplier for fulfilment.
Communicate delivery timeframes
The supplier then confirms receipt of the purchase order and issues an ETA (estimated time of arrival) for
the product(s). The ETA describes the likely timeframe for delivery of the product to the designated project
location.
FULFIL PURCHASE ORDER
The purchase order is then processed by the supplier and the product is delivered to the project as
ordered. The procurement manager reviews the product and identifies and resolves any product issues. The
product is then accepted and supplier payment is authorized.
Receive product
The supplier fulfils the order by delivering the product as defined by the purchase order to the project.
The procurement manager physically views the product received and confirms that the project team have
received it into their care. In the case of a service delivered by the supplier, the procurement manager confirms
from the project team that the service has been performed and is ready for review.
Review product
The product is then reviewed to determine whether or not it meets the requirements of the purchase
order. This may involve a physical inspection (in the case of a good) or a series of interviews (in the case of
a service) to determine that the product was delivered on time, within cost and at the level of quality required.
Resolve product issues
If the outcome of the review is that one or many of the requirements set out by the purchase order have
not been satisfactorily achieved, then an issue is raised by the procurement manager. The extent of the
problem is then quantified and the impact and severity of the issue is rated. The project manager will then
lead the resolution of the issue to ensure that it is quickly and appropriately resolved.
Accept product
Once all product delivery issues have been resolved, the project manager will accept the product on
behalf of the project team and notify the supplier.

Approve payment
The supplier will then send the project team an invoice, which is approved for payment by the project
manager.
MANAGE SUPPLIER CONTRACT
The above procedures are undertaken for each purchase order issued by the project. In parallel to the
purchase order process, the overall performance of the supplier is assessed to determine whether it is
continuing to meet its commitments outlined in the contract.
Confirm milestone reached
A number of supplier review milestones will have already been identified and documented as part of
the procurement plan. Review milestones may be triggered by the completion of a particular project phase,
deliverable or date. Once each milestone is reached, the procurement manager informs the project manager
that the supplier’s performance is ready to be assessed, and a formal assessment programme is initiated.
Review supplier performance
The procurement manager reviews the supplier’s performance by:
• confirming that the review milestone has in fact been reached;
• identifying the products provided by the supplier and assessing whether or not they met the
requirements of the purchase order;
• confirming that each condition listed within the supplier contract has been met.
Identify supplier issues
Any issues identified during the review are listed and the impact on the project is quantified. The issues
are then documented and formally raised with the project manager for resolution.
Resolve supplier issues
The project manager then oversees the resolution of each issue by helping the procurement manager to
negotiate a resolution with the supplier. There could be any of the following outcomes:
• The supplier is congratulated on its performance if no supplier issues were identified.
• The supplier is informed that should further issues occur, payment will be withheld
and the contract may be terminated.
• Supplier payment is withheld and a dispute is initiated under the terms of the contract.
Legal action may also be commenced by either the project manager or the supplier.
Communicate review outcome
Once the review is complete and any issues resolved, the outcome of the review is communicated to
key project stakeholders.

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