Download NIQS workshop on international procurement

THE NIGERIAN INSTITUTE OF QUANTITY SURVEYORS
WORKSHOP
ON
INTERNATIONAL PROCUREMENT SYSTEMS AND PROJECT
MANAGEMENT
“EVOLVING A HOLISTIC
PROCUREMENT METHOD
AND PROCEDURE”
BY
FREDDY OGUGUA ESENWA (Jnr)
NATIONAL UNIVERSITIES COMMISSION, ABUJA
1.0 INTRODUCTION
Development projects are complex undertakings set in
multicultural environments. The success of a project is
determined not just by financial returns but also by its
socio-economic benefits and welfare impacts. To realize the
latter, it is imperative that development projects be
properly planned, conscientiously executed and monitored.
The major flaws of project management in Nigeria have
been identified to include poor costing, unrealistic
scheduling of activities, inability to evaluate the recurrent
cost implications of a project, ineffective monitoring and
evaluation mechanisms, red-tapism and excessive political
interference.
1.1 OBJECTIVES OF THIS WORKSHOP
AND THE PAPER




Enhance participants’ understanding of the concept, significance
and scope of procurement systems and project management, in
relation to the major phases of the project cycle and expose
participants to international procurement methodologies
Examine the various constraints to effective procurement systems
and project management in Nigeria, and acquaint participants
with the various factors that affect project management success
and sensitize participants to contemporary issues in procurement
economy
Afford participants opportunities to benefit from practical
experiences in project management through the use of case
studies on the role of cost management in the achievement of
procurement economy
Provide a forum for experience sharing among participants on
various policy issues in project management.
2.0 PROCUREMENT SYSTEMS AND
PROJECT MANAGEMENT
2.1 PARADIGMS
The fundamental economic problem is that resources
are scare; that is that they are very limited in relation
to numerous wants. From this arises the imperative
for economy, efficiency and effectiveness in resource
mobilization, allocation and utilization.
The salient features and characteristics of projects are that:
•They are performed or executed by people;
•They involve commitment of resources or may
indeed be constrained by resource limitations;
•The resources are committed in the expectation of
some benefits.
Project management encapsulates the entire
gamut of planning and directing the process of
development of a project to enable it reach, in the
best possible way and with the best possible
result, the intended objective. It could also be
seen as the application of knowledge, skills, tools
and techniques in order to meet or exceed
stakeholder requirements from a project.
Yet another conception presents project
management as the art of directing human and
material resources throughout the life of a project
by using modern management techniques to
achieve predetermined objectives of scope,
quality, time and cost, and participant
satisfaction.
FUNCTIONS OF PROJECT MANAGEMENT

Leadership

Planning

Directing and Facilitating Work

Coordination

Control of Performance

Reinforcing Goal Performance

CORE FUNCTIONS:
Scope refers to the project’s required products or

Quality Management: Need for this arises

Time Management: Relates to the need for the

Cost Management: Relates to the need for careful
outputs. The need for scope management arises
because the identified and developed scope of the
project may change during the rest of the project’s life
cycle.
because of desire for certain standards of quality of
products of the project to be defined and achieved.
activities of the project to be carefully planned and
scheduled in order to be completed within the time
available.
management of resources as this costs money.
THE SPECIFIC OBJECTIVES


they form the frame of reference for the
project, against which the success of the
project may be measured
to the sponsor, they represent a set of
requirements

to the project management, they
represent parameters or constraints
THE PROJECT IS ENABLED BY FOUR
FACILITATING MANAGEMENT
FUNCTIONS

Information and Communications

Contract and Procurement

Human Resources

Risk Management


INFORMATION AND COMMUNICATIONS
MANAGEMENT
CONTRACT AND PROCUREMENT
MANAGEMENT

HUMAN RESOURCES MANAGEMENT

RISK MANAGEMENT
3.0 PROCUREMENT MANAGEMENT
PROCESSES
Procurement Planning
Input includes:







Scope statement
Product description
Procurement resources
Market conditions
Other planning Output
Constraints
Assumptions

Methods include: make-or-buy analysis,
expert judgment, and contract type
selection (fixed, cost reimbursable, etc.).

Output includes: Procurement
management plan and statement of work
(SOW) for each planned contract.
3.2 SOLICITATION PLANNING

Input includes: procurement management plan,
SOW's, and other planning Output.

Methods include: standard forms and expert

Output includes:
judgment.
• Procurement documents such as IFB's, RFQ's, and
RFP's.
• Evaluation criteria: the criteria that will be used to rate or
score proposals. The criteria may be subjective or
objective.
• Statement of work updates.
3.3 SOLICITATION

Input includes: procurement documents
and qualified seller lists.

Methods include: bidders conferences and
advertising.

Output includes: Proposals prepared by
the sellers explaining how the seller can
provide the requested product or service.
3.4 SOURCE SELECTION

Input includes: proposals, evaluation criteria, and

Methods include:
organizational policies.
Contract
negotiation.
Weighting
system: A method for quantifying qualitative
data in order to minimize personal prejudice on source
selection.
Screening
system: Involves establishing minimum
requirements of performance for one or more of the
evaluation criteria. For example, the seller project manager
must be certified before the remainder of the proposal would
be considered.
Independent
estimates: The procuring organization may
prepare its own estimates as a check on proposed pricing.
These estimates are generally referred to as should cost
estimates.

Output includes: Contract.
3.5 CONTRACT ADMINISTRATION



Input includes: contract, work results, change
requests, and seller invoices.
Methods includes: contract change control
system, performance reporting, and payment
system.
Output includes: correspondence, contract
changes, and payment requests.
3.6 CONTRACT CLOSEOUT



Input includes: contract
documentation
Methods include: procurement audits
Output includes: contract file and
formal acceptance and closure
4.0 PROCUREMENT MANAGEMENT
CONCEPTS
4.1

CONTRACT ORIGINATION
UNILATERALLY
• Common form for contract is a relatively simple type of
document called a purchase order.
• A purchase order is used when routine, standard cost items
are needed.
• A purchase order is legally binding and should be specific.

BILATERALLY
Procurement documents are used to solicit proposals from
prospective sellers. The procurement document then becomes the
basis for the seller's proposal.
EXAMPLES OF PROCUREMENT DOCUMENTS
1. Request for quotation (RFQ) from different suppliers:



Items are of relatively low cost value such as
supplies and materials
A survey of potential suppliers is completed
The quotation request informing suppliers of
the goods or services needed is sent to a scaleddown number of possible suppliers
2. Request for proposal (RFP):



Items or services are usually high cost
value and non-standard
Examples: construction project, a research
and development project; a made-to-order,
highly complex piece of machinery
Blueprints, drawings, specifications, and
other appropriate data should be included
with proposal
3.


Invitation for bid (IFB):
Appropriate for high cost value, standard items.
A prerequisite to this process is a clear and
accurate description of the supplies, equipment,
and services required.

Includes specifications, drawings, industry
standards, performance requirements, etc.

Must ensure fair competition among all bidders.

Provisions should be stated in such a manner to
avoid misinterpretation.



Formal bids are submitted to the contracting
department in sealed envelopes. All bids are
opened at a specific time.
In most cases, the contract award goes to the
lowest responsible bidder. If not awarded to the
lowest bidder, must document reasons, carefully.
Type of contract is open to fraud, collusion, and
other dishonest conduct. Hence, Project Manager
and contracting personnel must practice defined
ethical business procedures.
4.2 Contract Types

Variable Costs and

Fixed Cost
Unit Price

Simple purchase order

Fixed price per unit of goods or service
Cost-Plus-Award-Fee (CPAF):




An award pool is created. The level of award is
determined by an award committee.
Buyers have more flexibility than CPIF. Subjective
judgments can be used to determine rewards
(such as a contractor's attitude).
Type of contract is gaining with popularity.
Downside: administrative cost is high due to
award committee.
Cost-Plus-Percentage of Cost (CPPC)




Seller is reimbursed for allowable costs of
performing the contract and receives as profit an
agreed upon percentage of the costs.
No limit on the seller's profit. If the seller's cost
increases, so does the profit.
Most undesirable type of contract from buyer's
standpoint.
Prohibited for federal government use. Used in
private industry, particularly construction
projects.




Susceptible to abuse. No motivation for
seller to decrease costs.
The buyer bears 100% of the risk.
The buyer project manager must pay
particular attention to the control of the
labour and material costs so that the seller
does not purposely increase these costs.
Bottom line: no limit on seller's profit!
Cost-Plus-Fixed Fee (CPFF)

Seller is reimbursed for allowable costs of performing
the contract and receives as profit a fixed fee payment
based on the percentage of the estimated costs.

The fixed fee does not vary with actual costs unless
the scope of work changes.

Susceptible to abuse in that there is a ceiling on profit,
but no motivation to decrease costs.


Primarily used in research projects where the effort
required to achieve success is uncertain until well
after the contract is signed.
Bottom line: limit on profit but no incentive to control
costs.
Cost-Plus-Incentive Fee (CPIF)




Seller is paid for allowable performance costs along with a
predetermined fee and an incentive bonus.
If the final costs are less than the expected costs, both the
buyer and seller benefit by the cost savings based on a prenegotiated sharing formula.
The sharing formula reflects the degree of uncertainty faced
by each party.
Primarily used when contracts involve a long performance
period with a substantial amount of hardware development
and test requirements.

Risk is shared by both buyer and seller.

Bottom line: provides incentive to seller to reduce costs by
increasing profit potential.
Fixed Price-Plus-Incentive Fee (FPI)








Most complex type of contract.
Consists of target cost, target profit, target price, ceiling
price, and share ratio.
For every sum of money the seller can reduce costs below
the target cost, the savings will be shared by the seller and
buyer based on the share ratio.
The share ratio is a negotiated formula which reflects the
degree of uncertainty faced by each party.
If the costs exceed the ceiling price, the seller receives no
profit. Regardless of the actual costs, the buyer pays no
more than the ceiling price.
Risk is shared by both buyer and seller, but risk is usually
higher for seller.
Usually used when contracts are for a substantial sum and
involve a long production time.
Bottom line: provides incentive to decrease costs which in
turn increases profits. If costs exceed a ceiling, then
contractor is penalized.
Firm-Fixed Price (FFP)

Seller agrees to perform a service or furnish
supplies at the established contract price.

Will also be called lump sum.

Seller bears the greatest degree of risk.

Seller is motivated to decrease costs by producing
efficiently.

Best specifications are available and costs are
relatively certain.

Common type of contract.
Examples of Contract Types
CPPC
Estimated Cost
N1,000
Percentage
10% (N100)
Estimated Total
Price
N1,100
(Estimated Cost + 10% * Estimated Cost)
If cost increases to N1, 100 the total price would be N1, 100
plus 10% of the actual costs = N1, 210
CPFF
Estimated Cost
N1,000
Percentage
10% (N100)
Estimated Total
Price
N1,100
(Estimated Cost + 10% * Estimated Cost)
If cost increases to N1, 100 the total price would be N1, 100
plus 10% of the original estimated costs = N1, 200.
CPIF
Estimated Cost
N1,000
Predetermined Fee
N100
Sharing Formula
85/15
(buyer absorbs 85% of the uncertainty and the
seller absorbs 15% of the risk)
Actual Cost
N800
Savings
N200
Seller Gets
Buyer Saves
N800 + N100 + N30 = N930
(Actual cost + Fee + {15% * Savings})
N170
Examples of Contract Types
FPI
Target Cost
N1,000
Target Profit
N100 (Seller’s Fee)
Target Price
N1,100
Ceiling Price
N1,200 (The maximum pay-out to the seller)
Share Ratio
70/30
Examples of Contract Types
Example A
Actual Cost
N800
Savings
N200 (Target cost – Actual Cost)
Seller Gets
Buyer Saves
N800 + N100 + N60 = N960
(Actual cost + Fee + 30% * Savings)
N140
Examples of Contract Types
Example B
Actual Cost
Seller Gets
Buyer Loses
N1,300
N1,200
(no profit and a N100 loss on costs)
N100
(the pay-out is N100 over Target price = Ceiling
Price)
FFP (Lump Sum)
Price
N1,000
Examples of Contract Types
Example A
Actual Cost
Seller Profit
N700
N300
(Price – Actual Cost)
Example B
Final Cost
N700
Seller’s Loss
N100 on contract
4.3 Contract Execution Special Considerations







Changes
The change control system should be defined and
included in the changes clause of the project.
The system should cover who initiates a change request,
how is it processed and funded and who has the final
approval authority.
For major projects, a configuration control committee
should be established
The change proposal must be explicit in terms of the
impact of the change on the contract work statement,
specifications and drawings.
Legal: there must be mutual agreement to modify a
contract and that agreement must be supported by
consideration (change clause is important!) OR
Change may also be accomplished by unilateral action if
pursuant to the exercise of options contained in the terms
of the original contract.
Specifications


Either standard in nature where a specific design has
been accepted throughout the industry or tailored and
unique to the situation at hand.
There is a behavioural component associated with the
development of specifications: These include:
•Drive for competency: The person keeps changing the design
which results in increasing complexity and cost. (cannot
come to a closure)
•Safety margin coefficient: related to design parameters in terms
of how much is enough. At some point, costs increase
exponentially, but safety gains do not.
•Indifference methodology: related to an attitude that promotes a
contingency approach to specifications even when not
warranted. (Design is too flexible -- the engineer or
architect is "indifferent" to the final structure of the
product)

Monument syndrome: based on the desire to
build a product that will last forever
regardless of the cost. (i.e., the pyramids)

Budget expansion: the designer develops
the specifications with an eye to the
available funds. The more money available,
the more complex and costly the design.

Sole-source shelter: specifications are
developed so that equipment, materials and
supplies are tailored to require the products
of a specific manufacturer or supplier.
Quality Control

Quality cannot be inspected into the product -it must be built into it.

The attitude of quality must be present when
the product is designed.

Controls must be established to ensure quality
is kept in mind as work progresses.

Periodic checks for specification conformance
are a must.

Cost of rework can be high -- the emphasis
should be on doing it right the first time.

Defects can be costly and damaging to the
reputation of the company and the project
manager and the project team.



Warranties
Express Warranty
Implied Warranty
The
implied warranty of merchantability
The implied warranty of fitness for a
particular use
Analogy
Waiver
Bonds
Performance
Payment
Fidelity and
patent infringement
Breaches
•Breach of contract
•Materials breach of contract
•Time
Negotiation
•Protocol
•Probing
•Scratch Bargaining
•Closure
•Agreement
Negotiation Tactics









Imposing a deadline for reaching an agreement
Surprise -- One party springs information such
as a price change on the other party
Stalling
Fair and reasonable
Delays
Reasoning together
Withdrawal
Arbitration
Fait accompli
5.0 IMPORTANCE OF PROJECT
MANAGEMENT
In order to bring a project to fruition, Project Managers:

Must provide leadership, organisation and direction
to what is usually a large number of people involved
in its implementation and on-going operation;

Need to deal effectively with stakeholders, as much
as they do with suppliers, administrations, bankers,
and contractors who will construct project works or
provided other project inputs.

Need to set in place the organisation for maintaining
and operating the project once implemented so that
it will continue to provide the benefits planned for it.
The Special features of projects


Rarity
Constraints
Limited time (i.e. specific start and finish)
Limited money (i.e. specific budget)
Limited resource (e.g. people, skills, equipment and materials)
Multi-discipline:
The contributing efforts of more than one organisation may
require integrating
The work of more than one discipline may need coordinating
across organisational boundaries
Several skills may require coordination

Complexity:
 Managerially
constraints
complex
due
to
objectives
conflicting
with
 Opposing individual objectives of many parties, both internal and
external, may require managing
 Technology may be changing in methods and approach
 The technology itself may be complex.
 Dynamic Response:
• Visibility of project as an agent of change
• Responsive to external changes during the life of the project
• Responsive to internal developments reflected by the project life
cycle.
 Other Factors

An appreciation of the effect of the project on the
participating organisations; and environment is crucial

Substantial sponsor commitment is needed

A broader-based understanding or the technology is
required

Appropriate technical skills must be found

Day-to-day issues must be dealt with in a timely manner

Effective project management expertise is essential.
6.0 EVOLVING A HOLISTIC PROCUREMENT
MENTHOD AND PROCEDURE

Project Substitution

Plan and Budget Distortion

Weak Audit

Other Adverse Socio Political Influences

Resource Limitation

Technical and Management Problems

Other Factors
CONCLUSION




Enforce audit, transparency and
accountability
Ensure effective monitoring and
evaluation
Properly sequence project activity
Ensure that Project Managers are qualified
and competent
I THANK YOU
ALL
FOR LISTENING
FREDDY OGUGUA ESENWA (Jnr)
[email protected]
[email protected]
[email protected]