Understanding the Concepts of Project Procurement

Reasons for Project Procurement

  • Scarcity/Unavailability of in-house Competence
  • Cost constraints
  • Less Requirement (Cost Effectiveness)
  • Time constraints
  • Brand preference
Important Procurement Concepts
Bidding

It is the entire process from the time the Buyer/Seller advertises his intention to buy/sell goods or services to the signing of Agreement between the Buyer and Seller

Bid

An offer in response to an Invitation for Bids (IFB). Bid may also be considered as an indication of willingness to buy or sell goods or services or to undertake a task, at a specific price and within a specific timeframe.  Other terms used are:

Bid, Tender, or Quotation

when the Seller selection decision is to be based on price (as when buying commercial or standard items)

Project Proposal

when other considerations such as technical capability or technical approach are the most important

Bidding (or Tender) Documents

Documents used by a Buyer to solicit proposals from prospective Sellers

Common Bidding Documents
  1. Invitation for Bid (IFB)

An advertisement published in a newspaper inviting Sellers to meet Buyer’s needs

  1. Request for information (RFI)

Used when more information on the goods and services to be acquired is needed from the sellers. Typically followed by an RFQ or RFP

  1. Request for Quotation (RFQ)

A Legal document with information on what to procure, with Terms & Conditions (T&Cs) for Buyer & Seller and/or how much it will cost

  1. Request for Expression of Interest (RFEOI)

An advertisement in a newspaper requesting Consultants to submit general or specific information concerning potential future purchase of goods, services or both. This is RFI for Consultancy Services.

  1. Request for Proposal (RFP)

Used when there is a problem in the project and the solution is not easy thereby needing Consultancy services.  This is RFQ for Consultancy

  1. Expression of Interest (EOI)

Response of Consultant to Buyer’s RFEOI showing his interest in participating for the activity

  • Proposals Response of Consultant to Buyer’s RFP. This is the Solution (an idea, conceptual framework, or Work Program) given by the Consultant to address the Buyer’s problem
Terms of Reference (TORs) contain Project’s:
  • Background information
  • Scope of work,
  • Buyer’s technical expertise
  • Institutional strength,
  • Contract selection method and
  • Expected deliverables
Bill of Quantities & Specification (BOQS)

A descriptive & quantitative listing of materials/parts to be procured

Procurement Process
Understanding the Concepts of Project Procurement
Understanding the Concepts of Project Procurement

Make-or-buy analysis

A Make-or-Buy analysis results in a decision as to whether work can best be accomplished by the project team or needs to be outsourced (purchased/procured). The decision is based on any analysis technique, like Break-Even figure, Cost Effectiveness, Payback Period, Return on Investment (ROI), Internal Rate of Return (IRR), Discounted Cash Flow, Net Present Value (NPV), Benefit/Cost Analysis (BCA), etc.

Example (based on Break-Even figure/Cost Effectiveness):

A small construction project requires 30K masonry blocks.  Two options are available:

  • Option A: Install a block-making plant on site at a cost of Rs 1 million. Manufacturing cost will be Rs40 per block.  The plant will have a resale value of Rs 0.5M
  • Option B: Procure blocks from King Crete@ Rs55 per block plus transportation cost of Rs 10,000 per truck which carries 2,000 blocks.

What will be the Make-or-Buy decision? What will be the Break-Even figure?

  1. Make-or-Buy Decision:

Option A: (1M-0.5M) + 40x30K = 1.7M

Option B: (55+10,000/2,000) x 30K = 1.8M

Decision: Option A

  1. Break Even Figure: Let it be ‘Q’. Then:

Option A Cost= (1M-0.5M) + 40Q

Option B Cost= (55+10,000/2,000) Q = 60Q

For Break-Even, (1M-0.5M) + 40Q = 60Q ⇒Q = 25000

Decision: If Q>25,000, Option A

If Q<25,000, Option B

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