Every business needs resources such as labor, raw materials, equipment and other inputs. Your team uses resources to execute a variety of projects such as making products or providing services. These resources must be purchased by your organization, and the procurement process must be carefully planned and executed. That’s what procurement management is all about.
What Is Procurement Management?
Procurement management refers to all the actions and strategies related to the cycle of identifying, evaluating and selecting suppliers of production inputs. This involves creating a procurement management plan, testing quality, managing procurement contracts, executing purchases and any other activity that’s needed to control how purchases are made in your organization.
ProjectManager is ideal to keep track of your production plans so you can better estimate when you’ll need to purchase equipment, materials, parts or anything needed for your projects. Use our Gantt charts to map out the tasks in your production process, automate workflows with kanban boards and keep track of costs with workload charts and timesheets. Get started for free today.
The term procurement management is confused with purchase management by most people, but there’s a big difference that’s very important in business, manufacturing and project management alike. Here’s how these two similar concepts differ.
Procurement Management vs. Purchase Management
Purchase management is just a small part of procurement management, which is larger and more strategic. Purchase management is simply the set of documents, tools and procedures that are used to manage the purchase process, such as purchase requisitions, requests for quotes and purchase orders.
What Is Project Procurement Management?
Procurement, in terms of project management, is when you need to purchase, rent or contract with some external resource to meet your project goal. These relationships, like any process in the project, need management.
Managing these relationships means getting the best quality from the outside vendors employed by the company to assist in doing business. There are vendor management constraints that revolve around cost and time. Procurement management is a way to more efficiently and productively handle the process of sourcing, requisitioning, ordering, expediting, inspecting and reconciliation of procurement.
However, before making partnerships or purchases, the question of whether the goods and services are required from outside vendors must be answered. Weigh the pros and cons of producing the goods or services in-house and contracting the workout. Is the relationship with outsider companies necessary and cost-effective in the long term? Once an informed decision has been made, only then can you move forward with confidence that the steps you’re taking are financially sound and fit within your timeframe.
What Is a Procurement Management Plan?
A procurement management plan outlines the procurement requirements, guidelines and overall process that’ll be followed by an organization for a particular project. The level of complexity and detail of a procurement management plan varies from one organization to another, but at a basic level, your procurement management plan should:
- Define evaluation criteria for the selection of suppliers
- Outline the bidding process
- Identify the cost methodology to be used
- Include a cost-benefit analysis
- Explain why procurement activities are needed and how they align with the organization’s strategic goals.
- Set a timeline for procurement activities
- Identify procurement management stakeholders
- Define KPIs for procurement activities
- List any resource constraints or project assumptions that might affect procurement activities
- Define general legal & payment terms
- Explain the different procurement management roles & responsibilities
- Include the estimated costs for the procurement project
- List potential risks that might affect purchasing and any mitigation strategies
- Include procurement contracts and documentation such as purchase requisitions, purchase orders, requests for proposals and requests for quotes
There are several documents that are needed for the procurement process. Here are some of the most important ones.
This document is used for a formal information-gathering process. It’s directed towards those suppliers of goods and services with which you might want to contract. The RFI helps procurement managers find the supplier who’ll deliver what they need and when they need it for a price with which they’re comfortable.
When an organization is looking to contract with a vendor or contractor, it’ll send out an RFP that explains what they want to be done. The document then captures the description and price of doing that work by a variety of entities, where one can be chosen as they offer the best all-around deal.
This process is used to ask a vendor or vendors to submit their price quotes for items that will be used in a project or other venture. This allows the sender to compare prices with other potential vendors who are vying for the job. It’s an essential part of making the right decision about who to contract with.
Procurement Management Process
Once you’re ready to procure goods from a vendor, project procurement management is broken down into four processes.
1. Plan Procurement Management
Procurements are first identified during the planning phase of the project. For every external contractor, there needs to be a statement of work (SOW) to serve as a document outlining the work being contracted.
Prior to the contract, however, is a request for proposal in which multiple contractors get to bid on the job, and the project manager can determine from their bids who will get the contract.
These requests are well-thought-out as they work as guiding documents throughout the project. The more specific, the better. This avoids confusion later and helps develop more accurate plans. This process is collected in the procurement management plan, which includes requirement documents, risk register, activity resource requirements, project schedule, activity cost estimates and more.
To guide these decisions there are tools and techniques, such as make-or-buy analysis, which helps to determine if the activity needs an external supplier or can be done in-house. Seeking help from experts, doing market research and meeting with stakeholders also helps guide this decision.
2. Conduct Procurements
After finishing the paperwork of the first phase, the conduct procurement phase is when you study the bids that come back and determine which one to accept. Before deciding, however, there should be a criterion in place to decide which bid is best for the project and fits your logistics management. The agreements are then signed and the project management plan is updated.
Decide the winner by conferencing with the bidders, having techniques for evaluating the proposals and having independent estimates to make sure the bids are within the range of normal. It doesn’t hurt to seek the advice of experts in the areas you’re contracting to get their perspectives.
There are also analytical techniques you can apply. Advertising is a good way to make sure you’re casting the widest net possible, so you can decide based on all potential bidders. Then there are procurement negotiations that will be needed to tweak the final contracts to meet your needs and the contractor. You should use a purchase order to document the price, quantity, delivery window and terms of payment of the goods/services you order. It’s a legally binding document that ensures that you and your vendor are on the same page. Our purchase order template can help you create one that fits your project.
3. Control Procurements
Once the contracts are signed, the management of those contractors must be folded into the overall management responsibilities. Contractors can have a negative impact on budgets and schedules, which can lead to a project going off-track or worse.
Therefore, regular status updates are necessary to review contractor agreements, get progress updates and review work performance to make sure that the contractors are meeting the requirements outlined in their contracts. Though you hire contractors because they’re experts in what they do, you still need to monitor and track their work to make sure it’s proceeding as planned.
It’s best to contract a change control system and have regular procurement performance reviews, including inspections and audits to make sure the work is going right. Performance reporting helps keep managers informed, too. A payment system needs to be in place as well as a claims administration and a records management system. Work orders must include all the details about the work being performed by contractors to facilitate performance monitoring.
4. Close Procurements
Just as there’s a process to start the procurement, there needs one in place to finalize it. What constitutes completed work should be detailed in the initial agreement with the contractor so there’s no confusion on either’s part as to when the work is done.
Insurance and bonding also usually require a formal release of liability. This makes sure that there are no outstanding changes related to the value and completion date of the contract.
Procurement audits help with this process, as well as having structured procurement negotiations. A records management system will also be needed to manage all the paperwork that’ll be involved with this stage of the procurement process.
What Is the Project Manager’s Role in Procurement?
The project manager is involved with procurement, the same as any other aspect they control in the project management process. However, this is a process they might not own with the same authority as other parts of the project.
While the project manager does have the authority to make agreements with contractors on behalf of the company, the project manager is often not the person who administers that contract once in place. Regardless, it’s important that the project manager is in the loop.
That means knowing the six processes within the project procurement management knowledge areas as outlined in the Project Management Body of Knowledge (PMBOK). The first is the plan purchases and acquisitions, meaning determining what external resources are needed for the project. The project manager has control over this, as they’re more knowledgeable about overall project needs.
Plan contracting is the creation of requirements for whatever products or services are needed, including what companies offer these products or services. They request seller responses by narrowing down the companies to a handful and then selecting the sellers, which is usually the purvey of the purchasing department.
Contract administration is the management of the contract with the vendor. The project manager works daily with the vendor’s account manager. When the contract is fulfilled, there is contract closure. This is usually handled by the purchasing department.
How ProjectManager Can Help with Procurement
Like any part of a project, having the right tools can make project management procurement more effective. ProjectManager offers an online Gantt chart that allows you to plan the contract of your procurements, noting when they start and when they’re planned to end. Status updates are instantly reflected, and you can track the progress of your contractors to make sure the project remains on schedule. The Gantt chart can also help with scheduling materials if they need to come on board at a certain time in the project.
Because ProjectManager is online, all status updates, including procurement payments, instantly reflect on the real-time dashboard. The real-time dashboard then takes those numbers and crunches that data, which is delivered in easy-to-read graphs and charts. Now you can see if the project is on track and manage whatever procurement has been made for the project.
ProjectManager is an online project management software that has online Gantt charts to help with scheduling and a real-time dashboard that gives you an up-to-date picture of the project’s progress. Managing project procurement has never been simpler. Try it for yourself by taking a free 30-day trial.