All about risk

Not all tasks in the WBS will be completed by the project team – quite often, we outsource large parts (or even all) of a project’s work.

The word ‘procure’ literally means to obtain something, although the act of procurement implies that you are putting special care or effort into the ‘obtaining.’

Procurement, therefore, refers to all the purchasing that an organization does.

In project management, this means the acquisition of capital, materials, equipment, and labor – the cluster of necessary resources we have already talked about as ‘costs.’

Although some of these resources may be available internally (such as labor), projects by their very nature as unique undertakings often need to obtain a significant amount of new resources to enable the delivery of outputs.

The level of care or effort that goes into a procurement depends on a number of factors, many of which relate to the organizational risk matrix we introduced in the last Module. For example:

• How expensive is the resource we need to procure?
• How long will it take to deliver?
• How complex is it?
• Have we undertaken this type of procurement before?
• How dependent is our project on this procurement?

Obviously the higher the overall risk, the closer our attention should be to the purchase process.

Ultimately, procurement is a mechanism for transferring risk – organizations procure resources when it is riskier to produce them internally than it is to get someone else to do it.

The extent to which a project team engages with each process on each procurement will be a judgment call for the organization based on the independent level of risk tied to the purchase.

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The contract

There is an entire body of law devoted to procurement, as every country has a strong interest in ensuring that the transactions made in it are fair and equitable.

The contract is the document that sits at the center of this.

In most jurisdictions, a contract arises when:

• One party (a person or organization) makes an offer
• Another party accepts it
• Something meaningful is exchanged between the parties, and
• Both parties have the capacity and intent to be bound by their agreement.

Obviously, there are countless interpretations of and exceptions to this basic rule. However, that framework has been remarkably robust in standing the test of time.

The purpose of a contract is to provide clarity on roles, responsibilities, and obligations under the agreement.

A contract can be a complex 200-page document or something as simple as a cash register receipt.

That said, in most circumstances, there is no requirement for contracts to be written, even though oral contracts are often uncertain and difficult to enforce.

Contracts are an integral part of many projects; some projects are entirely made up of contracts.

To give certainty to the contracting parties, they are also invariably rigid – what you sign is what you are stuck with, and changing your mind can be quite expensive.

Contracts can favor either the supplier or purchaser

Firm- or fixed-price contracts demand that cost over-runs are worn by the supplier; whereas, cost-plus contracts promise an output, but at an uncapped hourly or daily rate.

Incentive fee contracts may more evenly distribute the benefits, whereby the purchaser gets certainty in pricing but may offer a bonus for early completion.

So, which is the best contract for your project?

Fixed-price is the obvious answer. However, the circumstances of your project and procurement may demand a more flexible approach, depending on the scarcity and quality of bidders.

Ultimately, the project manager and their employer should be at least basically aware of the general principles of contract law, especially as they apply to the country or region you are purchasing in.

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Procurement policies

Beyond the legal constraints of each procurement, most organizations have a suite of policies and procedures that will either directly or indirectly inform each purchase.

Some of these policies may be informal, in that they are the accepted way of doing things around here.

Others may be more specific and include the following:

Delegated authorities

A delegated authority is a limit placed on the decision-making authority of an employee.

A project manager, for example, may have the authority to make minor changes to the project plan and exceptional purchases up to the value of $500.

The sponsor may have the authority to sign off on purchases up to $2,500, whereas larger amounts not already authorized in the project plan may have to go to the steering committee for approval.

Having clear delegations of authority not only provides role clarity but also allows necessary procurements to be made quickly and with the minimum of bureaucratic intervention.

Competitive processes

To ensure the best value for their procurement money, organizations may stipulate that purchases greater than $10,000 need to consider at least three quotes from competing suppliers.

Procurements greater than $50,000 may require a formal tendering process.

There may also be organizational rules that govern how tenders are conducted, a process we will explore in more detail in the rest of this Unit.

Preferred suppliers

To speed the procurement process, many organizations maintain a panel of preferred suppliers.

These are businesses that are pre-approved to supply goods or services to the organization.

These pre-approvals may exempt them from parts or all of the tender process on the basis that they have previously proven their ability to meet the demands of the procuring organization.

Government agencies, not-for-profit groups, and some firms may also extend preferential treatment to certain classes of suppliers, such as local traders and minority- or women-owned businesses.

Codes of conduct

Organizations may also have policies that deal with the following specific risks to obtaining the best value for money from suppliers:

* Conflicts of interest

* Gratuities and kickbacks

* Misuse of confidential information

All organizations should also have complementary processes that deal with disciplining employees who violate procurement policies or codes of conduct and suspending vendors under specific circumstances.

We will discuss some of these ethical considerations in greater detail later in this course.