Procurement documents are often used as a form of communication channel between bidders and sellers.
Your company may not be able to produce the components required by the project. It may procure goods and services from any other vendor who has capability to provide you the requested goods and services.
As we discussed in my previous blog post Type of procurement contracts, there are always at least two parties involved in the procurement contracts. The first who buy or opt for goods or services. And the second one is called as seller who provides the goods and services to the buyer.
As part of the procurement management cycle, buyer and supplier communication happens through various procurement documents. By the way supplier is another term used to represent the seller.
To understand various procurement documents it is essential to understand the procurement management process at least in high level.
Procurement Management Process
In a very high level, the procurement process happens between the buyer and suppliers (sellers) as follows.
Identifying potential suppliers
A buyer first gather information on the potential suppliers or sellers to provide the required goods and/or services to the buyer.
Shortlisting the suppliers
After identifying the supplier, buyer sends the solicitations to the supplier requesting their response on usually a template provided by the buyer.
This is phase mainly majority of the procurement documents are prepared and circulated.
The document includes request for information, invitation for bid and re quest for proposal or quotation are the common procurement documents that you see during this phase.
Buyers usually provides template where all the supplier has to comply to send their responses in the pre-defined information and format.
Buyer may also organize the bidder conferences at this stage, depending on the volume and complexity of the bid.
At the end of this phase usually buyer gets an idea on who will be in the race for bid. Meaning that buyer will shortlist the suppliers.
Once buyers has all the information from suppliers, they would compare them based on various parameters such as proposed solution, price, references, capability, flexibility, different alternate pricing models, etc.
Finally both the parties negotiates, in case if they wish the other party to agree on some inclusions or exclusions as part of the project.
At the end of the negotiation phase, usually both the parties signs the contracts.
Fulfillment or delivery
Once both the parties signs the contract, then the supplier has to start the fulfillment of delivery as per the contracts . Usually contracts will also have a structure for the payments. According to that payments will initiate between buyer and seller.
Expiry or Renewal
Contracts are always prepared for a finite period or duration. For example it could be for an year or a multiyear contract. Once the contract term is over, if the buyer wants the same supplier to continue, there would a renewal process for the contract. Otherwise the contract terminates or expire.
Procurement documents are the documents prepared by the buyer or seller to complete the procurement management process.
Solicitations are all invitations or requests from the buyer to seller. For example invitation for bid, request for information, request for quotation or proposal, etc. are solicitations.
And the proposal or solutions, quotations that the supplier offers to the buyers are termed as offerings.
Let us see now the most important procurement documents that are important for the PMP exam.
Procurement Statement of Work (SOW)
Buyer usually prepares the SOW towards the seller. SOW contains the actual work the seller needs to do as part of the procurement.
Request for Information (RFI)
Buyer asks all the selected suppliers to provide information related to them. For example information on supplier pertaining to organization capabilities, capacity, skill sets, references, etc.
Invitation for Bid (IFB)
Invitation for bid is a formal way of buyer asking suppliers to provide the bid. IFB is primarily used when buyer has a good understanding on what work is involved and solution is also more or less the same from all sellers and the prime differentiator is only the price.
Request for proposal (RFP)
On the other hand request for proposal (RFP) is similar to IFB and will be issued by the buyer to suppliers. However this involves buyer asking for sellers proposal to solve an issue or complete a project. This usually includes a solution to propose along with commercials, level of compliances, and other terms and conditions.
Invitation for Quote (IFQ)
Invitation for quote is a type of procurement solicitation in which buyer asks the suppliers or sellers for a fixed price quotation to bid for a project. Sometimes buyers asks the sellers for IFQ or RFQ to understand the cost of the project in very high level before issuing an RFP.
Purchase Order (PO)
Purchase order (PO) is type of fixed price agreement or contract from buyer to seller asking the seller to supply the products and services that are agreed by both the parties.
Procurement Management Process – Best practices or important concepts to understand
Here are some of best practices, during procurement management process, but not limited to
- Every contract should clearly state the scope of the work and also the payment structure.
- In any contract the ground rule is both the seller and buyer must agree and satisfy with the contract. Otherwise it increases the risk in the project.
- There has to be a clause in the contract for Force Majeure. Force Majeure is a clause in the contract pertaining to any disaster or natural calamities. It says contracts terms and conditions are not applicable, in case of natural calamities and disasters.
- Point of total assumption – This is the point at which the seller assumes the total cost.
To conclude with we have traversed through a high level view of the life cycle of procurement management process.
Also we have looked at several procurement documents used in the procurement management process.
We can spend much more time in explaining each of these procurement documents to a great detail. However I try to scope this post to explain to the level it is important for the PMP Exam.