Procurement – Some practical aspects

In my previous post I gave a brief on Procurement and Risk. I deliberated upon who (buyer or the seller) has more/less risk in contract types.

The post was written to help PMP aspirants answer some tricky questions reared to Risk and Procurement in the exam. The post can be read by following the below link

Procurement is risky…How?

I received some practical & thought provoking comments against my post from a very experienced Project Manager & an esteemed educationist. His name is Peter O’Neill and you can look at his profile at

http://www.linkedin.com/profile/view?id=120170865

I am reproducing his comments verbatim. Hope the comments will be useful in practical situations.

Hi, Praveen. You make some good basic points about contract types and risk – thanks. However, it may be worth encouraging readers to consider other factors in order to fully understand the risk distribution. Take the (very common) statement that – in a fixed price contract – the risk is higher for the vendor than the buyer. However, 3 additional factors impact the distribution.

First – how predictable is the price? If the price is highly predictable, the vendor may have almost no risk for a guaranteed profit, while the vendor may incur the risk of the total cost of procurement being inflated due to the cost of developing fixed price RFQs and the restrictions that fixed price bidding may place on potential vendor choice.

Second – Do both parties have equal knowledge of the price uncertainty? Typically the vendor has a better knowledge and this may mean a bid with almost zero downside risk and potentially high profit by accurately factoring a generous risk contingency into the price.

Third – and by far the most important – how sure is the buyer that they can 1. accurately define the scope covered by the contract and 2. are unlikely to need to change the scope during the contract. Too many vendors make most of their profit from low ‘fixed price’ bids – knowing that the two factors will generate a number of variation requests (and will glumly shake their heads and say “You want us to do what? Oh, dear – that’s going to be very, very expensive….).

Best wishes, Peter.  

Praveen Malik, PMP is a certified Project Management Professional (PMP®) with a rich 20+ years of experience. He is a leading Project Management Instructor and Consultant. He regularly conducts Project Management workshops in India & abroad.

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