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PROJECT PROCUREMENT MANAGEMENT

The Project Procurement Management section presents additional considerations for planning, executing, monitoring and controlling, and closing procurement on construction projects. It includes the processes required to acquire design and engineering services and construction-related materials, equipment, machinery, and services. It includes the acquisition of all goods and services to design and construct a new residential home, transportation route, electrical or water utility, public infrastructure, or manufacturing facility, or the disposition/decommissioning of an outdated facility, often including the financing for these procurements. Homeowners may pay for the project from their private savings or an organization from its retained earnings. As projects increase in value with longer construction durations, the project owner often depends on financial contracts for funding, which can be the make-or-break component for going forward.

12.1Project Procurement Management in Construction

Construction projects are often multilayered hierarchies characterized by numerous buyers and sellers, with many of the project stakeholders serving in both capacities, and multiple levels of procured goods and services. Typical contractual relationships exist between the owner and the general contractor, and between the general contractor and its subcontractors and suppliers. Examples of project procurements include acquisition of property, engineering and design or turnkey services, construction, and even operational services. From a contractor's perspective, this may include the acquisition of labor, lower-tier subcontracting services, materials, and equipment from vendors and suppliers. Basically, procurement in construction is conducted to better transfer the performance risk to sellers who specialize and are skilled in a particular scope of work.

The PMBOK® Guide discusses procurement within the context of the buyer-seller relationship. In construction, the buyer may be characterized as an owner, client, customer, developer, general contractor, or governmental agency. Numerous terms can refer to the seller, including designer, architect, engineer, bidder, contractor, subcontractor, vendor, subconsultant, and supplier.

The buyer-seller relationship on a small project is relatively straightforward: two organizations contractually doing business together. In construction, that basic relationship exists between the owner of the project and the primary performing organization, or general contractor. From that point on, the procurement process for the performing organization (seller) is repeated multiple times and, perhaps, hundreds of times on large projects. An example of this repetition is the general contractor procuring specialty services such as mechanical or electrical services, which in turn procure equipment and materials from a lower-tier subcontractor, which in turn procures the finished goods and materials from a supplier of a manufacturing organization. Figure 12-1 illustrates the common tiered structure of contractor procurement relationships.

One of the most significant factors in construction is the competitive nature of the estimating and bidding process that exists in most all procurements. Competitiveness increases due to the existence of buyers and sellers globally, which also requires the adoption of strategies, practices, and efficient procurement management on a global basis. The project owner seeks the greatest value at the least cost and within the project financial constraints. Although the least cost bid is a significant component of contractor selection, other factors such as experience, reputation, and personnel staffing can form important criteria for selection, especially for qualified skills such as engineering and project management. Many owners utilize an iterative method of analyzing the estimate with a bid value in a comparative estimate with present market factors, experience, technical capabilities, and personal staffing while selecting sellers.

12.1.1Contractor's Perspective

The bidding process can be extensive for a contractor seeking work. If unsuccessful, the organization needs to focus on the next opportunity and the bidding process starts over. From an organizational process asset perspective, the bidding exercise is considered a cost of doing business for the contracting organization. For successful bids, an agreement, often dictated by the contract clauses, is established between the various sellers and buyers. Special attention is needed in managing scope, risk, cost, and time through the integration processes and activities given the competitive nature of construction procurement. For that reason, it is necessary that the organization has the expertise in preparing wining offers.

Procurement processes should identify the products, services, or results that can be achieved within the buyer organization and those items that should be acquired from outside sellers. As construction practices evolve, the general contractor is focused on directing and managing its specific trades and subcontractor activities. General contractors generally align their management systems with industry standards, and their subcontractors should also be aligned with those standards.

12.1.2Owner's Perspective

From an owner's perspective, the decision to construct a new project can depend on various project delivery methods, most of which affect the overall cost and time for completion. Variations to these traditional delivery methods may further result in specialized or hybrid contracting methods, which could dictate the scope of work that is subcontracted along with the maximum price guarantees. For example, fast tracking compresses the project schedule by running design and construction phases simultaneously. Design may run as little as 1 week ahead of construction, and often design decisions are made in the field. Fast-track methods have been around for decades and now account for a significant number of all building projects. Figure 12-2 illustrates a project comparing the completion milestones and procurement components for three of the most common project delivery methods.

Procurement in construction has high financial conditions and factors that can result in devastating consequences to the project owner and can also ripple throughout the procurement hierarchy. Contract management, including scope management and knowledge of construction law, is necessary for even the seasoned practitioner.

12.2Project Procurement Management Planning

The project owner's decision to construct a new facility may immediately initiate the procurement process by seeking and retaining professional expertise to help in this effort. The project delivery process addresses the proposed scope of work, breaks down the work activities into discrete packages, identifies the project stakeholders, and determines the timing of their participation. Successful project delivery depends on real-time monitoring and control of supply chain management and project workflows. All procurement activity related to these flows should be captured in a permanent audit trail as defined by the procurement management plan.

12.2.1Procurement Management Plan

The procurement management plan (sometimes referred to as the project “buy-out”) defines what, how, and when procurements will be carried out. It is an important component of the acquisition process and is influenced by organizational policies, culture, and procedures, and by lessons learned from previous construction projects. It also has significant influence over how controls of cost, time, and quality functions will be exercised on contracts. Moreover, this plan reflects senior management's guidance, which considers the threshold for procurement risks and its allocation among the stakeholders. The construction project has stakeholders that are more often bound by contract requirements, which raises the projects’ financial risk and also the technical and quality risks that could jeopardize the stakeholder relationships and success of the project.

12.2.2Enterprise Environmental Factors

The planning effort should begin within the organization and its enterprise environmental factors (EEFs). Organizations that outsource all construction-related activities may cause the availability of management personnel, skilled labor, and material inventory to be a concern. Conversely, the use of in-house resources may require the acquisition of additional material inventories, equipment fleets, and staffing accommodations to perform the work within operations.

Market research can be an invaluable tool during procurement planning. Past experience with sellers, shipping lead times, unique local requirements, and the general marketplace environment all influence procurement planning. Adding to this concern are factors that can significantly impact how procurements are packaged, solicited, awarded, and executed. These factors include location, culture, climate, and political stability, which affect contractor liability and competency, work rules, work hours, labor competency, productivity, form of currency, including foreign exchange rates, hedging, and bartering practices.

In a global economy, material availability or shortages of major construction materials, and the ensuing price escalations, are risks that may seriously affect the ability to complete a project on time and within budget. During initial procurement planning activities, the buyer organization most often conducts service provider solicitation using a form of request for interest to obtain feedback from potential contractors (seller). Buyer organizations usually rely on the expertise of the seller's project team to provide analysis and guidance on decisions relating to project issues and other environmental factors, including governmental and industry standards. However, it is also necessary that the buyer's team include some specialists in local and international procurements practices.

12.2.3Supply Chain Management

There is a growing need for construction organizations to adopt supply chain management strategies to counter industry competition that is not only regional or national, but also global. Buyers are increasingly seeking the best value for their money, and advances in technology and transportation have provided the ability to buy from practically any company anywhere in the world to reduce costs, add value, and remain competitive. Inventory is a non-value-added asset and a significant cost element for the contractor. An effective supply chain management strategy can enable a business to achieve a reduction in inventory-related costs.

On the other hand, the chain of organizations involved in producing and delivering a product is complex and is fraught with many inherent uncertainties, such as inaccurate cost forecasting, delays in import or export processes, unknown or late equipment deliveries, breakdowns, or substandard material quality. Such events can contribute to time and cost overruns on a project. The more complex the supply chain, the greater the degree of uncertainty, and the more adverse the impact on the supply chain. Lean production, total quality management (TQM), prefabrication, and modular construction methods are enabling many organizations to realize major gains by eliminating waste from their operations in terms of time and cost.

12.2.4Organizational Process Assets

Organizational process assets among stakeholders on a construction project can vary widely. A multinational manufacturer may have lengthy and specific guidelines for the renovation of a plant while a small manufacturing business may have no procedure or concept on how to procure a new facility to satisfy its needs and be totally reliant on outside services. A large subcontractor firm performing work over a wide area would likely have well-developed procedures for procurement operations. In contrast, a small subcontractor firm may rely on past knowledge without any formalized approaches.

12.2.5Project Scope Statement

The initial project scope statement outlines the procurement strategy and activities that need to be conducted. These activities provide a common understanding of the project scope among the stakeholders and, among other things, describe the project deliverables and the work required to create the deliverables.

It is likely that large corporations with significant and ongoing construction needs have established processes to develop a formal scope statement. Owners that rarely utilize construction services may engage a representative, such as a designer or construction manager, to assist in the creation of a scope statement. Sellers such as the general contractor and subcontractors will normally utilize documents created by the buyer (owner) for their scope statements.

12.2.6The WBS in Procurement

Good practices define that both product deliverables and project deliverables should be identified and broken down using a WBS. The development of the construction project deliverables should consider the dimensional components of the project as well as the acquisition within labor jurisdictions or union agreements, the contracting hierarchy and work phasing, and the existence of multiple-contract coordination.

It is common for the owner to designate the architect/engineer (designer) to prepare the contract documents as part of their work, which then defines the total scope of the project. The construction manager, while planning the work with an eye toward scheduling and cost control, may subdivide the project tasks into work packages. A primary focus of the prime contracting organization is the identification and management of the contractually responsible organization because of the potentially extensive number of contractual relationships on a construction project.

12.2.7Other Service Provider Procurements

Construction projects are almost entirely based on agreement both by choice and by the requirements to satisfy contract obligations. Beyond the typical designer and contractor service procurements, other provider procurement types specific to construction are:

• Bonding:
  • Bid bonds,
  • Performance bonds, and
  • Payment bonds.
• Insurances:
  • Project site insurance,
  • Project liability insurance,
  • Workers’ compensation insurance,
  • Professional Indemnity, and
  • Other specialty insurance (delay in start-up [DSU], transport and shipping services, builder's risk, etc.).
• Inspection services:
  • Topography,
  • Geotechnical,
  • Third-party construction inspection,
  • General quality control inspection, and
  • Health, safety, and security inspection.
• Permits and other purchases:
  • Utility locate services,
  • Utility relocation and service connections,
  • Road and public access permits,
  • Environmental and land use permits,
  • Building permits (including specific electrical and service permits), and
  • Commissioning services.

12.2.8Make-or-Buy Analyses

Buyer and seller activities include specific techniques for assessing source selection criteria and procurement strategies. The make-or-buy analysis in construction relies on either self-performing the work or soliciting bids from subcontractors for the work. On certain projects, these buyers and sellers may contemplate a competitive bidding advantage by evaluating the procurement alternatives available to them. This also involves determining the degree of contractual risk that an organization is willing to assume or the amount of potential revenue it is willing to forgo in exchange for transferring the risk to an outsourced entity.

12.2.9Project Delivery Methods

Selecting the appropriate strategy for project delivery considers factors such as degree of design definition, time of completion desired, budget limitations, owner engagement, and often jurisdictional statutes for public projects. Determining which aspects of the project are best suited for a particular procurement approach can involve the dynamics of the business environment and the needs of the project itself. The project delivery approaches are traditional, integrated, and turnkey; however, one should keep in mind that these form only the general approach for delivering the project and each method can be further modified or enhanced by the contract agreement.

12.2.9.1Traditional Approach

The design-bid-build (DBB) project delivery is considered to be the traditional approach, whereas its construction functions are performed by organizations under separate contracts with the owner. This traditional delivery method relies upon a construction design that is essentially complete, and contractor solicitations are performed by way of competitive bidding for all component and trade disciplines of the project. Figure 12-1 illustrates this contractual arrangement.

12.2.9.2Integrated Project Delivery and Turnkey Approaches

Integrated and turnkey project delivery methods integrate people, systems, business structures, and practices most often into a single construction project contract process. These methods combine the expert knowledge and skills of participants for all phases of design, fabrication, and construction with the intention to optimize efficiency in project cost and schedule. A few of the integrated project delivery and turnkey approaches are listed below:

• Construction manager/general contractor (CM/GC). Similar to the DBB delivery method, the owner solicits a contractor based on an early development set of design criteria. The general contractor is selected based on qualifications, past experience, and best value for its capability in performing preconstruction services, feasibility studies, and constructability reviews, and in estimating services during the design processes. The CM/GC provides input regarding scope, time, cost, and constructability, which all contribute to reducing the risk and construction unknowns. Once design has reached 60% to 90% completion, a contract for construction is negotiated based on the defined scope, time of completion, and total project cost, most often in the form of a maximum price type contract. The CM/GC subsequently conducts procurement solicitation for subcontractors, materials, and equipment. Variations of this method, which may be governed by jurisdictional law, include construction manager-at-risk (CMR) and construction manager as advisor or agent (CMA).
• Design-build (DB). The responsibility for both design and construction is obtained from a single source solicitation. That single source may in turn be a specially formed collaboration between the designer and contractor specifically for a project. Sellers (subcontractors) are subsequently solicited and retained by the DB organization.
• Design-build-operate-maintain-(transfer) (DBOM). This method encompasses the design-build method with the added feature of time-scaled functions for operating and maintaining the product after construction is completed. After the DBOM contract is completed, the finished product can be transferred to the owner or another contract for ongoing operation and maintenance. Alternate terms for this method is build-operate-transfer (BOT) or design-build-operate (DBO).

  In certain cases the responsibility to obtain financing for the project and the long-term right to use all the finished project assets, is recognized as a concession. Governments use this method mainly for major public projects, which could not be financed without the participation of the private sector. (See also public-private partnership below.)

• Engineering-procurement-construction (EPC). The EPC project delivery method has emerged as a preferred choice for many industries and is most often used for processing or equipment-driven projects, such as oil refineries, mining plants, or electrical energy production. The owner procures a single contract for performance of the design, equipment/material acquisition, and construction services for turnkey delivery of the facility. The EPC firm has responsibility for preconstruction services to define the scope, schedule, and costs of the project, and ultimately final responsibility for the design and construction. The advantage of this method is optimal project performance resulting in a collaborative, value-based construction process that reduces project risks, delivers predictable results, and obtains effective financial capital planning. A derivative of the EPC method is the engineering-procurement-construction and installation (EPCI) method. Front-end engineering and design (FEED) is commonly used in conjunction with EPC. FEED is a more mature basic design, allowing the timely procurement of long-lead items and reducing the uncertainty in final design for the detailed engineering, with a subsequent reduction in risk and overall project duration. With FEED in hand, the owner can move to procure an EPC-based contract.
• Construction management (CM). The CM organization, under contact with the owner, sometimes known as the professional services contractor, manages the overall functions of the project including designing, bidding, purchasing, and construction, and can execute the delivery of construction “at-risk” or as an agency (CM at-fee). The at-risk CM functions much like a prime contractor with its subcontractors, whereas the CM as an agency manages the work of multiple general contractors and their subcontractors. The expectation of this method is to provide high construction value at a lower cost while providing preconstruction services during design. Owners that do not have the skills or capacity to manage in-house large construction programs and/or are less inclined to add internal staff to do so are turning to professional firms for a wider spectrum of services. Construction management for fee and program management (CMF-PM) is a growing market in both the public and private sectors.

  A CM as agency delivery method is also known as an engineering, procurement, construction, management (EPCM) contract in many parts of the world. This method is strictly a professional services contract where the contractor is responsible for engineering, procurement, and management of the construction phase of the project, on behalf of the owner; management of construction as the owner's representative; and has overall responsibility toward the owner for the overall quality of the project. In brief, the primary responsibilities include:

  • Engineering/design:
    • EPCM contractor performs the basic front-end engineering and design (FEED) works;
    • A specialist supplier performs the design, usually by an agreement between the specialist and the owner; and
    • The specialist assumes the risk and responsibility for the design—not the EPCM contractor.
  • Procurement:
    • EPCM contractor advises the owner of the optimum procurement strategy, and
    • EPCM contractor assists owner and acts as owner's agent in implementing the procurement strategy.
  • Construction site management:
    • EPCM contractor performs the coordination, supervision, and management of the construction activities being performed by the various construction contractors.
• Public-private partnership (PPP). This alternative delivery method is a form of alliance or partnership and is best used when owner financing is limited or sometimes nonexistent. It is a means of funding and managing the end-to-end life of the delivery and/or ownership of the project. It can provide new sources of financial support for the construction and maintenance of public infrastructure by combining the resources of public and private sectors. The approach can provide the owner with design, construction, financing, operations, and maintenance services with a single source of project responsibility. Stakeholders form a hybrid joint venture entity with a contractor who may provide expertise in a variety of roles including the design/engineering lead, owner's representative, construction contractor, consultant, or even equity partner.

  This method can facilitate projects that might otherwise be delayed or not built at all. Project risk is of particular importance to these partnerships due to the participation of insurance underwriters who should look beyond the construction period and into long-term operations. The PPP approach can also incorporate delivery methods previously described as DBOM, DBO, and BOT. Yet another method is the BOOT (build-own-operate-transfer). A BOOT project model is often seen as a way to develop a large public infrastructure project with most if not all private funding. BOOT is sometimes known as BOT (build-own-transfer) with variations of the model as BOO (build-own-operate), BLT (build-lease-transfer) and BLOT (build-lease-operate-transfer).

• Single source, noncompetitive. In cases where the construction requirements are unique or where there is only one source for the desired result, a negotiated contract with the source is the usual route.
• Job order contracting. This method reduces the need for unnecessary levels of engineering, design, and contract procurement by awarding a single contract for a wide variety of renovation, repair, and construction projects. It is most often used by organizations that need to construct numerous projects quickly and easily through multiyear contracts while also reducing time and procurement costs.

12.2.10Construction Contracts

The type of contract for service providers might not remain the same throughout the project life cycle and may be different for specific services. Reimbursable contracts are often used for conceptual and early design definition while a fixed-price contract is most commonly used for the construction services. Factors that can affect the selection of the contract type for specific work packages include:

• Level and maturity of design detail available;
• Urgency of the procurement;
• Level of competition desired or level of competition available;
• Organization's risk utility or tolerance;
• Buyer competency in managing a construction project;
• Unique requirements committed to by owner;
• Funding source, such as government funding, financial institutions, or self-funded; and
• Owner familiarity and experience with construction contracts.

It is important to note that procurement documents should be prepared correctly, as they form the basis for all contract requirements, work scope, and changes to the project. Contract format, content, and language are guided by documented good practices and developed standards from many industry organizations, many of which also provide standard industry contracts.

Special or long-lead equipment items that take time to procure are usually identified by the architect or engineer and often purchased by the owner or buyer separate from the construction contract. This procurement is often initiated early and subsequently incorporated into the contractor's contract for management and installation.

12.2.11Contract Risk Allocation

How one intends to allocate contract risk on a project influences the type of contract selected. For government-type projects, contracts should be drafted according to the specific country's legislation, if such legislation exists and is obligatory for all government projects.

The most common types of construction contracts, each with their own parameters, are as follows:

• Fixed-price or lump-sum contracts. Work is performed and paid for based on a fixed value or lump-sum price according to the contract. These contracts are suitable for projects that are sufficiently defined, which allows for an estimate of the total project cost.
• Unit-rate (price) or remeasurable contracts. Work is performed and paid for based on a fixed amount (unit rate) for each unit of work. Purchase orders most often fall in this category. These contracts are suitable for projects where the types of items are known, but not necessarily the quantity of units. Contracts can be written that combine the unit price and lump-sum method of payment.
• Cost-reimbursable contracts. The contractor performs the work on a reimbursable cost basis plus a fee. These contracts often include variations of one another, often with the final fee determination being the result of negotiations. Examples are:
  • Cost plus fixed-fee contract,
  • Cost plus fixed fee with bonus contract,
  • Cost plus fixed percentage contract,
  • Cost plus fixed fee with guaranteed maximum price (GMP) contract (also known as maximum allowable construction cost (MACC)),
  • Cost plus fixed fee with guaranteed maximum price (GMP) and bonus contract, and
  • Cost plus fixed fee with agreement for sharing any cost-savings contract.
• Time and materials contracts. The contractor is reimbursed for the time spent and resources expended on the work performed.
• Incentive contracts. Payment is based on the services provided in accordance with an agreed-upon scope, budget, schedule, and quality. These contracts take the form of fixed-price incentive and cost-reimbursement incentive contracts.
• Hybrid contracts. Large projects may create a hybrid form using one or more combinations of contracts. For example, on a large design-build project, the civil works may be under a unit-price contract, while other bid packages are awarded on a fixed-price basis upon design completion. Occasionally, a provisional sum may be reserved for work in which the design is not yet completed.

  Figure 12-3 identifies the spectrum of risk for various types of contracts.

12.2.12Procurement Planning Outputs

Procurement statements define the scope of work to be performed by a particular organization such as the general contractor, architect, engineer, subcontractor, or supplier. For each work package, these statements may also define the boundaries and interfaces with other work packages, anticipated resource or production requirements, and criteria by which work progress and validated deliverables are determined.

Contract administration relies on the construction project management plan and a set of documents often referred to as a construction project manual, which is developed through a team effort led by the project manager. The manual is usually prepared once the contract assignments are in place and contains each team member's responsibilities, levels of authority, and detailed descriptions of the systems to be followed for monitoring and controlling, contract terms, and requirements.

Government-funded projects often establish project goals and may dictate procurement requirements for bidders, such as retaining local contractors and labor resources and utilizing minority- and woman-owned businesses. Most procurement documents primarily include:

• Procurement requirements, including the invitation and instruction to bidders;
• Contracting requirements, including the agreement, its forms, and conditions of the contract;
• Specifications, including the administrative and technical specifications;
• Construction drawings, illustrating the design and engineering details; and
• Addendums, if any, which supplement the procurement documents with any updates or changes that may have been issued since the solicitation was initiated.

Change control is the means by which procurement can be modified and it is integrated into a change control system. The construction contract establishes the procedures for the project's change control system. Standard provisions often include certain notice requirements, submittal procedures, and review responsibilities of the appropriate stakeholders. Methods to expedite changes in work performance include construction change directives, work change authorizations, field instructions/modifications, force account authorizations, and architect/engineer's written supplemental instructions.

12.3Project Procurement Management Executing

Using the statements of work as a foundation, conducting procurements is focused on soliciting and acquiring the various sellers to provide construction services for the project. This process may be a well-defined and regulated government mandate or an entirely private undertaking, such as searching the internet for contractors, briefly describing the project needs, and signing an agreement for services. Executing procurement in public or government sectors can be a lengthy and heavily regulated process. Regardless of the procurement methodology, documents will be produced that prescribe the scope of work and form the contract agreements.

12.3.1Procurement Solicitation

The procurement solicitation method is either based on a request for quotation (RFQ) or request for proposal (RFP). The RFQ process is a direct evaluation that is focused on the apparent low bidder, provided that the seller's submission satisfies the procurement and contract requirements. An RFQ is considered a more rigid process that provides an exact monetary amount for a prescribed set of deliverables. An RFP is a bit more flexible in that it provides a base price for the scope of work to be performed, but allows for additional adjustments for scope and cost and may be set to an hourly or task-oriented basis as the job becomes more defined.

12.3.2Contract Statement of Work

The contract statement of work (SOW) describes the facilities to be constructed in sufficient detail to allow potential bidders to determine if they are capable of providing the required construction services. It is important to note that a performance specification states requirements in terms of the required results with criteria for verifying compliance, but without stating the methods for achieving the required results. On the other hand, a detail specification specifies design requirements, such as materials to be used, how a requirement is to be achieved, or how an item is to be fabricated or constructed. Contract SOWs can contain both performance and detail requirements yet still be considered a detail specification.

In addition, the SOW should describe any special requirements, including collateral services, performance reporting, post-project operational support, and/or specific content and format requirements. Likewise, the SOW should specify what is included and excluded in the scope of work. This may include a methods statement for all primary construction activities; however, this should be used cautiously to reduce risk transfer back to the owner for prescriptive direction of construction.

Typically, the A/E engaged in project design develops the SOW. In cases where a turnkey or design-build contract type is chosen, the owner will provide the functional and aesthetic requirements of the facilities they envision in a statement of requirements (SOR). In addition, the SOW may solicit potential bidder input to propose solutions for certain problems. The SOW and associated tender documents should be clear and concise, and specify all contract requirements.

All project delivery components should be included in contracts. Even well-developed administration processes involving procurement documents can be a primer for a legal challenge. It is crucial that special attention be devoted to complete and concise documents with a high level of accuracy.

12.3.3Procurement Documents

In the public sector, processes mandate that the buyer prepares documents to support the request for seller responses and selection. Preparation should include a review of regulatory procurement requirements, the contractual interpretation of the contract documents, and the proposed project delivery method. A review of the contractor evaluation and selection criteria is also a critical component that needs clarity to avoid the risk of unfair or ethically suspect contractor selection. Such reviews would include the following:

• Standard forms. Construction trade organizations, professional societies, and large owner organizations generate standard forms for use in contract development. These standard forms help reduce the time and expense for each contract and tender solicitation. These also help standardize processes from project to project and help ensure the quality of the final agreement.
• Procurement documents. These documents should describe the tendering procedures and seller evaluation process and criteria, and convey the information to be submitted by the seller. These documents should specify the following:
  • The items the buyer is expecting with the seller's response to satisfy the deliverables and requirements, which can range from price data only to a larger list of information such as drawings, product data, and preliminary bill of materials (BOM); company brochures/contract history; and qualifications of key personnel.
  • The process the buyer will use to evaluate the seller's response. The buyer outlines a brief narrative on how the bid information in the seller's response will be evaluated to determine the contract award. For RFQs, the price and bid information of the apparent low bid response is evaluated. For RFPs, the bid information for all seller responses is evaluated. Evaluation criteria are usually listed in order of importance with the highest-weighted criteria listed first.

12.3.4Prequalification of Service Providers

Prequalification or screening of potential service providers establishes a short list of bidders who possess the required technical and commercial capability to perform the work package. Prequalified sellers are invited to submit a response to the procurement solicitation.

12.3.5Nongovernment Organizations (NGO) Solicitation of Seller Responses

Both buyers and sellers should be vigilant in adhering to the practices and rules for construction procurements. The most common practice for solicitation of sellers is the development of a qualified sellers list where the project owner (buyer) relies on the expertise of the architect or engineer for a list of qualified bidders (sellers). The criteria for assessing bidder eligibility for the qualified seller lists may include:

• Relevant construction experience;
• Identification of key members, including résumés with descriptions of relevant work experience and upper-level team members, such as project managers;
• Project health, safety, security, and environmental (HSSE/(HSE) and sustainability programs that indicate the contractor's approach and experience with these project components. In some instances, a verification of the bidder (seller) experience rate from its workers’ compensation insurance carrier can validate a contractor's safety record;
• Description and availability of the proposed project resource elements, such as manpower, equipment, machinery, and materials;
• Description of and experience with quality programs, including quality planning, quality assurance, and quality control;
• Surety bonding that demonstrates the ability to secure construction surety bonds for the appropriate amount and coverage;
• Insurance certificates that meet the requirements set forth in the contract documents;
• Previous contract disputes that describe any claims of the material breach of contract that have led to arbitration, litigation, or some other form of dispute resolution proceedings; and
• Regulatory requirements that demonstrate the ability to comply with any special regulations for the project.

Although private organizations are free to proceed as they will, major owners have governance principles that require them to proceed with transparency and ethics, thus leading them to mirror their solicitation processes with those used by governments.

12.3.6Public and Government Solicitations

The solicitation of potential bidders (sellers) through the internet is a dominant source for buyers seeking qualified sellers and for sellers seeking potential projects. Subsequent to the solicitation announcement, bidder conferences, commonly referred to as pre-bid conferences, are conducted and often include a tour of the proposed site.

Technology enables buyers to conduct procurement solicitation and contractor selection almost entirely through the Internet, including gathering real-time quotations from potential sellers for their projects. The European Union (EU) procurement directives, the EU consolidated directives, and EU invoicing directives offer clear guidance for use of electronic tools within the government purchasing sector. Similar guidance and use directives are most often prescribed by the country of origin for the project. A major concern for solicitation and bidding processes in the public sector is the potential for corruption and bribery. The use of governance principles and process audits help ensure that proper, ethical, and professional conduct is continually in place.

Figure 12-4 depicts the typical estimating and bidding process for a construction contractor.

12.3.7Evaluation and Selection of Sellers

The process of selecting sellers as service providers (contractors) includes the receipt of bids or proposals and the application of evaluation criteria to select one or more sellers that are both qualified and acceptable as sellers. Expert judgment plays a key role when interpreting seller proposals, especially when lower-tier subcontractors are competing for the same work scope. Special attention to detail should not be overlooked in exchange for just selecting the lowest bid price.

When feasible, the priced proposals of the contract bidders (sellers) should be compared against an independent estimate prepared by the owner's representative to help analyze apparent discounts and premiums offered by the contract bidders. Evaluating the priced proposals against the independent estimate helps ensure that the bidder has understood the criteria and can realistically perform the contract work at the stated price and has offered a fair price.

A proposal offering an apparent discount may be intentional underbidding by a potential seller to “buy the job,” or uniformly higher or lower bids could indicate bid shopping or other unfair or illegal bidding practices. Analyzing higher-priced bid proposals helps determine if the apparent premium is worth the cost. Awarding a contract to a contractor that cannot properly perform the work for the proposed price will likely create difficulties during the contract execution, and potentially cause a project to fail. Financial modeling may be used to assess the bidders’ proposals, including the potential life cycle costs, and as a means to control any potential bias in the selection process. Upon seller selection, often varying degrees of negotiation take place to determine the exact terms and conditions of the seller's work. This step can be a complex, independent process involving many inputs and considerations surrounding the scope and payment terms. Decisions need to be made and documented, as they become the basis for the contract agreement.

The designated responsible organization (DRO) log is similar to a resource assignment matrix; however, rather than focusing on tasks, DRO logs provide the contract requirements, parameters, and obligations, which become a significant component of the project management plan. The DRO helps to confirm that the scope of the project has been contractually assigned. Figure 12-5 illustrates the components of a DRO log, which, together with the individual work package contracts, can make up the primary output of the executing processes in project procurement management.

12.3.8Single-Source Procurement

In some situations, the procurement of construction work may come from a single source. The level of justification to preclude competitive bidding can vary depending on the organization's (buyer's) policies. Comprehensive justifications are required for public sector contracts where significant limitations are imposed by the organizations. Single sourcing may be considered in the following cases:

• A single bid/proposal response was submitted,
• Time constraints during emergency conditions prevent the use of the procurement cycle,
• Technical uniqueness of requirements prevents nonoriginal equipment manufacturer (non-OEM) from bidding, and
• Extended warranty on the product prevents the use of non-OEM contractors.

Section 12.1 of The PMBOK® Guide provides components that can be used as source selection criteria when executing for procurement.

12.4Project Procurement Management Monitoring and Controlling

In monitoring and controlling, procurement contract administration is a two-way process to ensure the buyer and seller adhere to contract requirements. Both the buyer and seller administer procurement contracts for similar purposes, involving items such as directing and managing project work, controlling quality, controlling risks, performing integrated change control, and controlling the financial management components.

12.4.1Contract Management and Contract Administration

Contract management is the function of experienced, knowledgeable staff for the purpose of providing contract oversight and authority to manage contract creation, execution, and analysis to maximize financial and operational performance while minimizing risk. It requires a thorough understanding of contracting procedures, an understanding of standard contract documents, and expertise with existing legislation and regulations.

Contract administration can be described as the primary organizational function of negotiating and implementing the contractual terms and conditions of project contracts by following established policies, processes, and procedures. As previously stated, contract administration should rely on the construction project manual for controlling procurements. The contract document should be continually updated during the project, including all approved change orders; resolved issues; and agreed-upon constraints for scope, cost, schedule, regulatory environment, and quality.

12.4.2Work Performance Reporting

The seller reports on a variety of topics specified in the contract, which may include work performed by its subcontractors, vendors, suppliers, and testing facilities. Onsite personnel, such as the designer or construction manager, submit independent field reports as required by the buyer. The criteria may include physical progress, schedule progress, earned value, material delivered on site, and resource usage. Performance reporting in many contract documents is called progress reporting.

12.4.3Approved Change Requests

Approved change orders (change requests) reflect agreed-upon modifications to the contract scope, price, and/or schedule. Although most contract documents require changes to be submitted in writing, the time sensitivity of construction projects often necessitates the recognition, approval, and processing of verbal change orders. Verbal change orders should be acknowledged by the buyer and seller, and confirmed through a formal written change to the contract. A confirmation of verbal instructions (CVI) is a document frequently used in the construction industry.

12.4.4Buyer-Conducted Performance Review

The buyer may direct the designer or a consultant to conduct performance reviews of the seller's work to address issues such as adherence to the project schedule, the quality of the work, and the budget. The designer is usually in the best position to perform such a review, as the designer is most familiar with the buyer's needs and the contract clauses that describe the format and frequency for technical and financial reviews.

12.4.5Inspections and Audits

Inspections and audits cover the processes and deliverables. In construction, such inspections usually focus on compliance with the technical parameters and industry standards for materials and workmanship as outlined in the contract documents. For example, a core sample of concrete may be taken to verify that the correct water-to-cement ratio and compression breakage pursuant to the approved mix design is present in the concrete slab. Audits may also involve mandatory (contractual or regulatory) audits and inspections by insurance companies, financial/lending institutions, governmental or program administrations, and audit organizations that adhere to International Organization for Standardization (ISO), generally accepted accounting principles (GAAP), or statement on auditing standards (SAS) requirements.

12.4.6Progress Payment System

The contract typically outlines the payment procedures for a construction project and may vary depending on jurisdictional requirements. Each seller has its own system that should be sufficiently flexible to meet the buyer's requirements as to the form and timing of invoices, breakdown of costs, supporting documentation, warranties, employee payroll certification, and such guarantees that all obligations of the seller, relevant to the portion of work being invoiced, are guaranteed to have been made. Payment certificates are one means to confirm that all requirements for an approved payment have been met and that work progress has been substantiated to support such payment. The seller should have sufficient financial resources and honor the release of subcontractor payments in order to avoid potential payment delays and disruption to the work progress. Continual disruption or large delays in progress payments could result in claims.

12.4.7Claims Administration

Claims administration is an important component in all construction projects, as it is likely that there could be disputed or contested changes, project delays and penalties, and risk events that in some capacity impact the contractors, subcontractors, or owner. Contract provisions include processes and procedures for the buyer or seller to resolve these issues and, in such cases, describe the formal remedy such as arbitration or litigation. Annex A1 of this extension is devoted entirely to project claims, including prevention and resolution techniques. Figure 12-6 depicts various techniques for effective claims administration, including dispute avoidance and dispute resolution.

12.4.8Records Management Systems

Records management systems are as varied as the projects they serve. Such systems assist project managers in retrieving and archiving contract documents. Technology has advanced all areas of project documentation through shared databases, real-time design changes, and more efficient communications. The records management system should include all documentation and project records, including set processes for control and automation, and tools for consolidating and incorporating information into the project management information system (PMIS).

In addition to regular updates to the project plan, the project team should be cognizant of any written communication for any adjustments to the contract terms and conditions. Updates to organizational process assets (OPAs) and EEFs should address seller performance evaluations, lessons learned, verified good practices, and any new performance criteria that can provide insights and knowledge for future projects.

12.4.9Project and Contract Documentation

Construction projects generate more documentation—technical, administrative, and contractual—than nearly any other kind of enterprise. Most construction contract documents require archiving of all aspects of the contract work. It should be noted that many of these documents are considered to be confidential according to contract. Technology has enabled the construction industry to produce documentation on all aspects of the design and construction process. The records management system is the database for all project records, documentation, and contract documents.

Documentation on any negotiations and settlements may also need to be documented such that all contracts can be modified to reflect the agreements and subsequent closure. When it comes to disputed changes, the process to reach a resolution can be extensive, financially exhausting, and most often entirely dependent on the quality of the project documentation and project records.

12.4.10Project Management Plan Updates

Updating the project management plan usually requires updating the procurement management plan, and any contract administration documents generated through the procurement and contract administration process. Any approved change orders to the contract documents, including revised drawings and specifications, require the responsible project management team to make the appropriate updates, revisions, and amendments to all affected subsidiary plans.

12.5Project Procurement Management Closing

Most contracts are closed at the end of the project; however, certain contracts may be closed upon completion of the contracted work regardless of the time frame in relation to the completion of the project. Project contract closure is initiated by a written communication, such as a notice letter or specified form submitted by the contractor (seller) advising the designer and owner (buyer) that the seller has achieved substantial completion.

The architect or engineer of record should certify that substantial completion has been reached, or advise the seller as to why it has not. Closure documentation prepared and submitted by the contractor may include all terms and conditions of the contract and the procurement management plan, including:

• Material warranties and workmanship guarantees,
• Equipment manufacturer warranties,
• Final inspection approvals from buyer (owner or government authorities),
• Equipment manufacturer operation and maintenance manuals,
• As-built drawings,
• Sign-off sheets for training of owner personnel, and
• Subcontractors and material/equipment supplier payment certifications.

Of primary importance in the contract documentation is the seller's submission of warranties. The warranties can encompass the seller's workmanship as well as material vendors’ and manufacturers’ warranties that meet or, in many instances, exceed the seller's warranty period.

12.5.1Punch List

When a construction contract is completed, a list of the remaining items—a project “punch list”—documents all outstanding work and installed works that require corrective action to be performed by the contractor. Verification that the remaining items are complete and have been accepted by the buyer is crucial for project closeout. The contractor completes all items on the punch list within a definitive time period per the contract, prior to final contract closure or the expiration of the construction defects liability period specified in the contract. When all items on the punch list are completed, the general contractor requests a final inspection. For some projects it is often more appropriate to request final inspections for each major group of completed works. The final inspection record testifying that all contract work is complete is mandatory for a proper contract closeout.

12.5.2Administrative Closeout

Administrative closeout of all procurements can be an extensive undertaking once the construction work has been accepted. This administrative closure includes items such as the release of any retained funds or progress payments, insurance policy closures, activation of any warranties, and the issuance of certificates of works completed or certificates of proper equipment or machinery installations. The presence of any outstanding claims may postpone final payments and possibly the start of warranty periods. The construction project management professional should be intimately aware of all contractual obligations and requirements until all aspects of the administrative duty are complete.

Audits and procurement negotiations to settle all final contract adjustments, issues, and claims are usually an essential part of procurement closure. The records management system should incorporate all final settlements and records of the procurements and lessons learned for archival purposes. The management of potential contract disputes is ultimately required to close procurements.

Early terminations in construction are not infrequent and can occur at any time during the project when circumstances merit. Reasons for early termination can be between the primary buyer and seller due to nonperformance, or between the general contractor and a subcontractor for the same reason. The rights and responsibilities of the parties in this event are outlined in the termination clause of the procurement contract.