UNIT 12:

MANAGING PROJECT PROCUREMENT

Public-sector purchasing processes are more complex than their privatesector counterparts and
have additional objectives that include:

 Maintaining fair processes

 Avoiding conflicts of interest
 Establishing an objective basis for vendor selection
 Obtaining the best value
 Documenting seller performance and requirements
 Obtaining flexible arrangements

Today, public-sector organizations are experimenting with a variety of creative relationships

with vendors and, even in some cases, employees as they experiment with programs that allow
employees to work from home or remote sites and build their schedules using flexible hours. In
this new organizational environment, the role of managers has changed. Rather than only
managing long-term, on-site employees, whose activities are monitored on a daily basis,
managers in today’s modern public-sector organization and those managing public-sector
projects are being asked to:

 Manage resources with only periodic, rather than daily, personal contact
 Devise creative yet accountable schedules and work arrangements, such as job sharing
and less-than-full-time work
 Manage vendors who have been assigned critical organizational functions
 Make the most of periodic face-to-face meetings and even-rarer fullteam meetings
 Communicate more effectively using electronic technologies

Meeting these challenges requires a new set of management skills, which are focused more on
managing toward outcomes rather than activities. The challenges include identifying those
outcomes; specifying them clearly; managing changes in needed outcomes; creating the legal
frameworks that build relationships; ensuring compliance with laws, rules, and policies; and
managing transitions.

Public-sector project managers can meet both the challenges of public-sector project
procurement and the challenges of the new workplace environment. In specific, it details the
required functions of project procurement management; describes the challenges of vendor,
outcome, and performance management; identifies the legal framework for outsourcing and
vendor management; explores the development of effective service-level agreements and
statements of work; and identifies methods and tools for managing changes in vendor
relationships The intention of this chapter is not to recommend outsourcing of services or
products in public-sector projects. Instead, it is intended to recognize the inevitability of the new
environment and prepare publicsector project managers to deliver successful projects even when
those projects require the use of vendors.

12.1 Necessary functions for public sector project procurement management

Three necessary functions for project procurement management in the public sector are:

 Identifying necessary purchases and resource acquisition

 Working with purchasing offices to identify and select vendors
 Managing contracts and vendors

[1] Identifying Necessary Purchases and Resource Acquisition

Even though the ‘‘how’’ of purchasing in public-sector projects is clearly defined by purchasing
processes that may have their requirements embedded in statutes, public-sector project managers
still have to consider what they will purchase for their projects. Although purchasing equipment
and supplies can be a challenge, the most challenging decisions are those that identify how
human resources will be acquired.

Make-or-buy decisions require the analysis of whether the goods or services can be better created
in-house or through the use of vendors. Some decisions are easy. It probably is not efficient to
build computers inhouse from purchased parts. On the other hand, creating in-house software
versus buying off-the-shelf or custom-built software is a far trickier question. There is also no
simple answer to the question of whether to use vendors or in-house resources for projects.

In the private sector, quantitative, financial criteria can be applied to those decisions, employing
structured make-or-buy analysis. Even in the private sector, however, other criteria can also
apply to the decision to use in-house resources rather than to purchase resources from outside the
project or contract for services with vendors. Some of those other criteria can include
consideration of:

 The willingness of the organization to share project data with the vendor
 The organization’s long-term need for capacity development (Vendors may be cheaper
than using in-house staff, but vendors typically take their knowledge with them when
they go.)
 The need for secrecy
 A philosophy of allowing in-house staff to grow in their jobs
 A prior history of using vendors successfully (or the reverse)
 The availability of vendors with the necessary skills
 The administrative costs and time needed for hiring vendors versus the administrative
costs and time needed for hiring staff
 The need for the good or service beyond the life of the project
  The availability or non availability of in-house staff
 Internal Revenue Service (IRS) rules

In addition to these nonfinancial criteria applied by private-sector organizations as they consider

the use of in-house resources versus vendors, public-sector organizations also have to consider
other factors. Those additional criteria include:

 Legal requirements and restrictions on the use of vendors

 Political pressures
 Union or civil service requirements
 Media oversight
 Purchasing processes that attempt to address social goals

Whether or not public-sector organizations employ these nonfinancial criteria, at least some
portion of the purchasing decision should rely on make-or-buy analysis. That analysis requires
the comparison of the costs of using in-house resources with the costs of acquiring them from
outside.

The costs of in-house resources can include:

 Salaries and benefits

 Indirect costs charged to the project
 Training to ensure that employees have the necessary skills
 Management and supervisory costs (When some jobs are outsourced, the management of
the resources providing services may be the responsibility of the vendor.)

The costs of acquiring resources for the project from outside the organization can include:

 Direct costs paid to the vendor

 The costs of the acquisition process
 The costs of contract management
 The potential costs of legal action
 Long-term vendor costs if in-house capabilities are not developed

Another factor that may influence make-or-buy decisions is any productivity differential that
may be perceived to exist between in-house staff and vendors. In some cases, in-house staff
will simply not have the necessary skills for the project. In other cases, in-house staff may
have the necessary skills but may not be able to perform those skills as efficiently as vendor
staff might. That is sometimes the case when vendors have more experience in the
application of sophisticated or proprietary information technologies. Those productivity
differentials need to be weighed against cost and nonfinancial criteria, such as those listed
earlier, and can be factored into make-or-buy analysis. If the project team elects to acquire
 human resources from outside the agency, it will also need to determine if it intends to hire
those external resources on a pa art-time or full-time basis, or if it intends to issue a contract
and treat them as independent contractors. The Internal Revenue Service (IRS) identifies
rules for treating a resource as a staff person or a contractor. Those rules are biased toward
employment rather than contracting to ensure that withholding taxes are paid by the
employer rather than passed on as an obligation to the contractor. Public-sector project
managers should always consult with human resource or legal experts when they are faced
with this decision, because substantial penalties can accrue to the organization if the IRS
determines that contractors should have been classified as employees. Once the project team
has considered the resources it needs and has completed the necessary make-or-buy analyses,
it can create a list of resources to be purchased or acquired from outside the organization.
With that list in hand, the project team can begin to create a plan for managing the
purchasing and acquisition processes.

[2] Working with Purchasing Offices to Identify and Select Vendors

In public-sector organizations, the responsibility for purchasing goods and services are
usually carefully defined and assigned to designated purchasing officers or departments. In
addition, most public-sector purchasing processes are well-defined and represent a constraint
for the project. Those constraints can affect the project schedule, budget, risk, and quality.
Public-sector purchasing processes are intended to:

 Ensure that the best price is achieved, including making use of bulkpurchase
discounts
 Limit opportunities for conflict of interest or outright theft by agency staff, avoid
politicization of the purchasing process, and limit conflicts of interest and the
potential for ethical conflicts
 Accomplish social goals, like providing for more minority contractors

Although the project team cannot directly control purchasing and resource acquisition processes,
public-sector project teams need to create a plan for managing those processes and interfacing
with procurement agencies so that necessary goods and services can be purchased and the goals
of the project met. That plan could contain such elements as:

 Identification of purchasing processes and rules that may constrain the project
 Team members responsible for working with purchasing agencies
 Identification of procurement documents that the project team will need to complete
 Methods, if available, for expediting purchases and resource acquisition
 Methods to be used for vendor selection
 Points at which project managers can influence purchasing decisions
 Durations of purchasing processes and their impact on the project schedule
 The types of contracts that can be used
For public-sector projects, the procurement plan might also include the ethics and conflict-of-
interest provisions that apply to the project team and to vendors. For example, public-sector
employees are usually prohibited from accepting anything ‘‘of value’’ from vendors or outside
parties. There are different definitions of what something ‘‘of value’’ constitutes. In some cases,
it can be as small as a cup of coffee. In other jurisdictions, a dollar limit is placed on daily gifts.

All project team members must be aware of those rules, and the project manager should monitor
compliance. Few things can derail a public-sector project faster and more thoroughly than ethics
violations or even the allegation or appearance of ethical violations. In addition, public-sector
vendor management plans should ensure that both vendors and agency staff clearly understand
the limits of their authority and the mechanisms for creating changes and accepting deliverables.

Public-sector project managers also have to be aware of the influence that economic or market
conditions have on public-sector purchasing systems. If markets for required goods and services
are competitive, the procurement process will likely require that a competitive process be
applied. In those circumstances in which vendor competition does not exist, sole-source
purchasing can often be applied. Vendors will sometimes attempt to convince purchasing
officials that they offer a unique product or service to prevent the imposition of competitive
bidding processes. Competitive bidding processes typically add time to the project but can result
in lower costs if a productivity differential between the best and the cheapest provider of services
does not eat up savings. The project team needs to create a workable balance between hiring
vendors that they are comfortable with against the cost benefits of competitively bidding project
work.

Once the project team has decided what to buy and created a plan for managing the interfaces
with purchasing agencies, another question to address is the type of contract to employ. Three
general types of contracts exist:

 Fixed-price contracts, which pay an agreed-upon price for goods or services without
regard to the cost incurred by the vendor
 Cost reimbursement contracts, which reimburse the vendor for legitimately incurred
costs of providing services or good
 Time and materials contracts, which pay an agreed-upon hourly rate for services, which
is multiplied by the number of hours provided

Other variants can be created to provide incentives for vendor performance. Payment incentives
can be provided to vendors for coming in under cost targets or for complying with other
standards. For example, many public-sector road-building contracts contain incentives for early
completion.

It is commonly believed that fixed-price contracts are to be employed if the buyers of goods or
services are uncomfortable with price risk—the risk that the price of the good or service could
vary dependent on the costs incurred by the vendor. That can be a concern.
Of more importance, however, is the extent to which the buyer of goods or services can define
the product to be produced. If the buyer (the public agency) can clearly define the scope of the
goods or services to be purchased, it can use a fixed-price contract to shift the price risk to the
vendor.

That way, the buyer does not have to worry or care about the costs incurred. That risk belongs to
the vendor. If the scope of goods or services is not clear, or if it changes in the course of the
project, several problems can arise if a fixed-price contract is in place.

12.2 New demands on managers and new tools for managers

12.3 Differences among activities, outputs and outcomes

12.4 Challenges of outcome management for suppliers contractors and consultants

12.5 Performance management

12.6 Legal framework for outsourcing project products and services to vendors

12.7 Managing suppliers relationships

12.8 Best practices for public sector project procurement management