Friday, January 27, 2012

Beginners Guide To Project Management
Part 12, The Procurement Plan

Every project gets to a point where you have to get some resources (a laptop, renting office space, cement or whatever). You may also have to decide if you're making the deliverables yourself or if you're buying some of them. This article is about the process of make-or-buy decisions and planning the purchases you decide to make.

Previously on the “Beginners Guide to Project Management”




Make or buy?
After you have some detail about your project you will eventually get to a point where it may make sense to buy some of your deliverables from a supplier instead of making them yourself. Some of the reasons that may push you towards making your delieverables or needed resources yourself are:
  • Cost (if it is cheaper to make it yourself)
  • Keeping the knowledge in-house (in particular when you have to maintain the end-result product of your project)
  • Available, unused in-house skills
  • More control over the making of the deliverable, higher quality
  • Business secrecy (namely in break-through projects)
  • No supplier is good enough (lack of competency, located too far or too busy to a timely delivery)
  • Project team motivation (as they may consider making it a desired challenge)
At the same time you may have forces pushing you towards buying some of the deliverables from a supplier. Some the these reasons are:
  • Cost (if it is cheaper to buy it from a supplier)
  • No in-house skills or knowledge available
  • Project deliverable unrelated to the organization's strategy, no interest in making it
  • No production capacity
  • Procurement policies

Cost-benefit Analysis
After making a list of candidate stuff than you can buy or make it yourself, you have to make the decision: are you buying or are you making them? As long as you can associate a monetary value to each cost and benefit (more on that on the Wikipedia) for each scenario (making or buying) all you have to do now is add the benefits and the costs and choose the less expensive. Easy, right?
It is in fact easy but it's also easy to get trapped if you don't follow the KISS technique by the book. How much will you value motivation, for instance? Or what will be the inflation in the course of the next 5 years? And what about the interest rate? Whatever you do, don't get stuck with these. To keep it simple, maybe you can use one of the following to discard them:
  • Make them explicitly mandatory whenever they're mandatory (it can be that the motivation is a project killer, so why try to associate a dollar value with something that must be that way)
  • Use assumptions: there are public predictions for many things like in the case of inflation so there's no use for you to try to predict it, you can just assume that value for inflation or whatever...

Types of contracts
So now you have a list of things you have to buy. These can be deliverables of your project or resources needed to build the deliverables. It's time to think about what type of a contract is best for you, what type you should be after. This may vary by industry or by the kind of product or service you're buying and it can vary as much as people's imagination but there are 3 basic types of contracts:
  • Fixed price: no matter what, you know what you'll pay in the end
  • Time and Materials: you supply the resources needed and you're billed based on an hourly rate
  • Cost-reimbursable: you cover any costs incurred and plus an additional fee
Choosing the type of contract can be a bit tricky. In general, if you go for fixed price you get low risk and high cost; and you focus the negotiation on price, warranties and acceptance criteria. If you go for time and materials, you get a higher risk and a lower price and you focus the negotiation on skills and hour rates. And if you go for cost-reimbursable, you get high risk and a potentially low cost but very low motivation to complete the work. To make it worse, you probably end up with some mix of these 3 main types of contracts, so choosing one and then negotiating it isn't usually an easy task.
On some industries the task of choosing a type of contract is very easy: there's only one. This is the case of the construction industry (at least in Portugal, but I believe it goes like that around the world) where everyone just does time and materials.

In some cases, there's as much negotiating as when you go grocery shopping: the products are priced and either you take them or leave them. If you have to by a server or a couple of laptops, this is what will happen. But if you're buying something that's not out of the shelves or if the spending is significant there's margin for negotiation. And depending on the contract type, your negotiation focus may shift. You can find some more details on negotiation on "It's all about interests, not positions".

Are you buying or selling?
I've been talking about procurement on the buyer perspective but all is valid changing it to the seller perspective. It may be that you're delievering a project for a client, right?

Much like what's been written previously on this guide, you can't think about procurement isolated from the rest of issues of your project. The most obvious are:
  • Risk (coming up next on the guide)
  • Scope, requirements
  • Resource requirements
  • Schedule
  • Costs

Procurement Plan
In the course of investigating for this article I crossed paths with this NASA public document that's worth studying. Not that you should use it as a template for every project but because it shows how complex can procurement get. Most projects require a much, much simpler document. Nevertheless, you should always cover the following topics on the Procurement Plan:
  • What are the specific products or services that you're buying (details may include the type of contract, if relevant)
  • Decision criteria (really, really important to have this defined and agreed uppon up front)
  • Role definition (at least who approves)
  • Schedule (at least delivery deadlines) 

The end result of your planning efforts regarding procurement should be a list of things you have to buy and a few details that will vary according to several things. And in order to get that list, you'll have to go through some make-or-buy decisions. You'll have to use and possibly review some of your planning (such as scope, schedule and costs) as procurement impacts and is impacted by them.
This is the very essential planning regarding procurement and if you checked the NASA document I mentioned before that will be crystal clear. But less than this is impossible to get.

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