THE COLLEGE OF BUSINESS

EDUCATION (CBE)

Public Procurement

Topic II: Public Procurement Cycle

Lecture Notes for PSB 07408

By Mr. Magnus Stephan

23 May 2024 1
Course contents
▪ Define public procurement cycle
▪ Procurement plans
▪ Differentiate price based contracts and cost based
contract

23 May 2024 2
Introduction of Procurement Cycle
▪ Is the systematic approach taken by organizations to acquire
the goods, services, and works they need from suppliers.

▪ It involves a series of steps, starting from identifying the

need for a product or service and ending with the payment of
the supplier.

▪ Procurement process means the successive stages in the

procurement cycle, including;-
• Planning
• Choice of procedures
• Solicitation of offers from tenderers
• Examination and evaluation of offers
• Award of contract
• Contract management (PPA, 2011)
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Cont’d
Traditional Procurement Cycle
1) Identification of the need
✓Specification, Drawings, BOQ, SOR, TOR
2) Transmission of the need
✓PR,MR
3) Source selection
✓ICT, NCT, RIT, RNT, ICQ, NCQ, SSG/S, DCW, MVP,
etc
4) Preparation and signing of Contract
5) Contract implementation Follow up/ expediting/
6) Receiving and inspection
✓DN,GRN
7) Invoicing and payment
✓-Tax invoice, DN, GRN, Inspection report, LPO,
Contract
8) Closing the contract/ order/Recording Keeping
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Public Procurement Planning
▪ Procurement planning is a process of determining in
advance
• What is needed
• How much is needed
• Where to obtain
• How to acquire
• When is needed before the implementation of
procurement.

▪ Procurement planning is the process of identifying and

consolidating requirements and determining the
timeframes for their procurement with the aim of having
them as and when they are required.

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Cont’d
❑Preparation Annual Procurement Plan (APP) as per the
requirements of PPA and its Regulations
▪ Preparation of APP is mandatory.
▪ The APP shall be approved by an appropriate Budget
Approving Authority [vide S. 49 (2)].
▪ The PE shall observe the approved APP and any unplanned
procurement shall get a prior written approval of the Accounting
Officer [vide S. 49 (3)].
▪ The PE shall establish the appropriate method of procurement
to be employed for each requirement [vide Reg. 69 (8)].
▪ The PE shall prepare its estimates based on prevailing market
prices as provided by the PPRA and updated from time to time
[vide Reg. 69 (6)].
▪ The PE shall prepare its APP as part of budget process and
submit the plan to the PPRA within fourteen days after the
completion of the budget process [vide Reg. 70].
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Cont’d
❑ Factors to take in account in preparation of APP
▪ Planning should start at the project identification and
preparation stage
▪ Make strategic decision on achieving efficient procurement by
separating contracts
▪ Ensure there is adequate stock control
▪ Forecast requirements to match with annual estimates
▪ Compare cost estimates against available funds
▪ Ensure sufficient funds are available
▪ Establish appropriate procurement method as per the laid
procedures
▪ The time scale for the delivery of goods or completion of
works or services.

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Cont’d
▪ Note: - The PE shall not divide its procurement into smaller
potential contracts in order:-
• To avoid employment of International or National
Tendering
• To ensure that procurement is authorized at a lower level
than would be appropriate for the total requirement.

▪ The PE may aggregate goods or works requirements of a

broadly similar or related nature in order to;-
• Maximize economy, efficiency, and attract as much
competition as possible

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Cont’d
❑ Importance of APP
▪ Facilitates successful implementation of projects
▪ Limits the scope of non-compliance by PEs
▪ Enhances transparency and predictability
▪ Provides a good basis for monitoring
▪ Avoid emergency procurement
▪ Aggregate the requirements to obtain value for money
▪ Make use of framework contract whenever possible
▪ Ensure timings of inter related activities
❑Consequences or dis-advantages of lack of planning
▪ Results to dis-organized and un- coordinated activities
▪ Loss of time and resources
▪ Inefficiency
▪ Corruption
▪ Costly purchases
▪ Poor quality
▪ Delays
23 May 2024 in completion 9
Cont’d
QN. What are the Practical Challenges in implementation of
APP in Tanzania?
▪ Untimely, Partial or Non availability of the budgeted Funds
(which leads to ‘regular reviews’ of the APP)
▪ Price fluctuations in the supply market prices (this occurs at
the time of planning versus prices at the time of actual
procurement)
▪ Political or government directives
▪ Reallocation of funds to prioritized procurement during
implementation.
▪ Occurrence of ‘emergency’ procurement
▪ Unrealistic estimates
▪ Force majeure
▪ Change of management
▪ Management perception on procurement function
▪ Internal capacity in preparation and implementation of APP

23 May 2024 10
Cont’d
QN. What are the necessities for reviewing or updating
Annual Procurement Plan (APP).
▪ Shortage of funds
▪ Late release of funds
▪ Unexpected availability of additional funds
▪ Shortage of the items or supplies on the market
▪ Failure of contraction to supply a contracted resulting re-
bidding.

Reading Assignment
▪ “Sources of information for preparation of Annual Procurement
Plan (APP)”

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Cont’d
❑ Steps for Preparation of APP
1) Assess/ list the needs or requirements
▪ Collect the lists of needs from user departments
▪ Research the local market for the prices and
availability of goods
2) Determine the quantities and estimated costs
3) Determine when the requirements shall be needed for
use
4) Identify the inter-relationship between and among the
requirements
5) Consolidate similar requirements
6) Identify appropriate procurement methods
7) Schedule lead times for each process
8) Prepare implementation schedule for each
9) Seek approval of APP before implementation
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Cont’d
❑ APP templates
▪ APPs prepared in three set:
• For internal use, which shall contain information on various
procurements to be carried out by the PE in sufficient details to
enable it to meet planned target dates for project
implementations

• For external use, which shall form the basis of General

Procurement Notice to notify the potential bidders of
procurement opportunities within the PE

• For submission to PPRA, which shall contain key target dates

for each procurement so as to enable monitoring of APP
implementation by PPRA

❑Try this!
▪ What are the contents of each type of APP templates?
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 DIFFERENTIATE PRICE BASED CONTRACTS AND
COST BASED CONTRACT
➢Procurement contracts are legal agreements between a buyer (usually
a procurement entity) and a supplier, which define the terms and
conditions of a purchase or service agreement.

➢Procurement contract means any license, permit, or other concession

or authority issued by a public body or entered into between a public
body and a supplier, contractor or consultant, resulting from procurement
proceedings for carrying out construction or other related works or for
the supply of any goods or services (PPA, 2011)

➢These contracts are used to formalize the relationship between the

parties, and provide a framework for the procurement process, including:
✓The delivery of goods or services
✓Payment terms
✓Warranties
✓Delivery etc…

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Cont’d
❑ Importance of Procurement Contracts
▪ It provides some agreed terms which can be referred to in
any case
▪ It spells out the obligations of the parties of the contract
▪ It spells out the rights of the parties to the contract
▪ Procurement contracts provide a foundation for building
long-term relationships between buyers and suppliers
▪ It gives out the means and procedures to be followed
when resolving disputes in case they arise
▪ It is more important in international trade

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Cont’d
▪ It is interesting to note that almost all procurement contracts
are based on some form of pricing mechanism;

▪ Various authors have categorized these contracts into:

✓Fixed price base contracts
✓Cost based contracts

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Fixed Price Contracts
▪ Is a type of contract in which the price to be paid for the goods or
services to be delivered is agreed upon and fixed at the outset of
the contract.
▪ This means that the stated price in the agreement does not
change regardless of any fluctuations in the costs of production or
delivery
▪ The advantage of a fixed price contract is that the customer knows
exactly what they will be paying for the product or service, which
helps them to budget and plan accordingly

1. Fixed price with escalation

▪ Base prices can increase or decrease based on specific
identifiable changes in materials prices.
▪ Fixed price contracts with escalation are commonly used in
industries where the cost of materials and labor can be volatile
▪ This contract will involve the use of price adjustment formula
incase
23 May 2024of anything to happen 17
Cont’d
▪ If anything will happen not in the escalation clause the
contract will not be amended

2. Fixed price with redetermination

▪ In this type of contract the parties to contract agree to
commence the contract with initial guess estimate of the
contract price.

▪ After the completion of the contract the parties calculate the

actual costs involved in executing the contract and the
projects which were not executed before and it is difficulty
for parties to estimate the contract

▪ Initial target price based on best guess estimates of labor

and materials then renegotiated once a specific level or
volume of production is reached
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Cont’d
3. Fixed price contract with incentives
▪ Is a type of contract in which the price to be paid for the
goods or services to be delivered is agreed upon and fixed
at the outset of the contract, but also includes a provision for
providing additional incentives or bonuses based on specific
performance metrics or criteria.

▪ The incentives may be based on factors such as quality of

work, timeliness of delivery, or achievement of specific
milestones

▪ Fixed price contracts with incentives are commonly used in

industries where performance can have a significant impact
on the overall success of the project, such as construction or
software development

23 May 2024 19
Cost Based Contracts
▪ Is a type of contract in which the price to be paid for the
goods or services to be delivered is based on the actual
cost incurred by the vendor in performing the work, plus an
agreed-upon profit margin or fee.

▪ In a cost-based contract, the vendor is typically required to

provide detailed records of all costs incurred during the
performance of the contract, including labor costs, material
costs, and any other expenses related to the project.

▪ The customer then reimburses the vendor for these costs,

plus an agreed-upon profit margin or fee

▪ Typically represents a lower risk level of economic loss for

suppliers, but they can also result in lower overall costs to
the purchaser through careful contract management
23 May 2024 20
Cont’d
▪ Both parties to agree on costs to be included in calculation
of the price of the goods or services procured

▪ Applicable when goods or services procured are:-

✓Expensive
✓Complex
✓Important to the purchasing party
▪ When there is high degree of uncertainty regarding labour
and materials

▪ Financial risk is transferred from the seller to the buyer

23 May 2024 21
Cont’d
1. Cost plus incentive fee
▪ Is a type of contract in which the vendor is reimbursed for the
actual costs incurred in performing the work with additional
incentives or bonuses based on specific performance criteria

▪ The incentive fee is typically negotiated separately and is based

on the achievement of specific performance targets or criteria.

▪ Cost-plus-incentive-fee contracts are commonly used in

industries where the scope of work and deliverables are not well-
defined

▪ It's essential to carefully review and negotiate the terms of the

contract before signing to ensure that both parties are clear on
the cost reimbursement mechanism, fee structure, and incentive
mechanism
23 May 2024 22
Cont’d
2. Cost sharing contract
▪ Is a type of contract in which two or more parties agree to
share the costs of a project or activity.

▪ In a cost-sharing contract, each party agrees to contribute a

certain percentage or amount of the total project costs

▪ Cost-sharing contracts are commonly used in research and

development projects, where multiple parties may have a
shared interest in the outcome of the project, such as the
development of a new product or technology

▪ Allowable costs are shared between the parties on a

predetermined basis

23 May 2024 23
Cont’d
3. Time and materials contract
▪ Is a type of contract in which the vendor is paid for the time
and materials that are used in performing the work, typically
at a predetermined hourly rate for labor and a markup on
materials
▪ Supplier cannot determine accurately costs prior to the repair
service; The contract should spell out the appropriate labor
rate per time
▪ Contract for constructions or product development
▪ Difficult to estimate the project size

4. Cost plus fixed fee contract

▪ Is a type of contract in which the supplier is reimbursed for the
actual costs incurred in performing the work, plus a fixed fee
that is negotiated at the outset of the contract
.

23 May 2024 24
Cont’d
▪ Supplier receives reimbursement for all of its allowable costs
to a predetermined amount plus a fixed fee which is typically
represents a percentage of the targeted cost of the good or
service being procured

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