Project Management Institute

Procurement online

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The Internet helps to make managing projects easier, but it is not a magic wand. You must know how to find what you need.

I KNOW THAT, due to proper planning, this has never happened on your project: In order to get last-minute materials and supplies on the construction site to keep craft utilization peaked, the field engineer was a little late with his procurement paperwork. At the same time the home office project procurement manager was increasing her labor hour forecast to cover expanded bid solicitations required to obtain better pricing. The cutoff date for the project status report was at hand and I needed actual cost data along with forecast changes. Combine preparing this report, justifying labor increases, and the bombardment of e-marketplaces, Internet B2B, e-commerce, dot-coms, and web solutions to make my work easier…my head is spinning and I have a headache.

Fifty Percent of Your Project Value is Purchased

About 50 percent of the costs associated with a typical construction project are from purchased equipment and materials. The suppliers of these commodities are thinking that if their business isn't already online, it better be soon, or else it will be dead. There are also many independent Internet-based services that link our current project practices to these suppliers. Dot-com companies are sprouting up, being gobbled up, and going under at a terrific rate, yet the influence they are having on the project management profession is phenomenal. So what path should we pick as we continue executing projects during this evolution? The answer isn't simple, and yet we know we have to get on board. The way we do business is changing rapidly.

 

Don't Reinvent the Wheel

If we look beyond Project Procurement Management in the PMBOK® Guide and include all areas of project management, we will see offerings from the marketplace trying to be Internet fix-alls that will make our lives simpler. Even some of the larger corporations are partnering and designing their internal web-based systems, which they claim will beat the pants off the competition. The analogy I like to use for this path is a reminder to my fellow project managers who have been through engineering and construction projects during the advent of computer-aided design (CAD): Even if you still have some hair left, I'm sure you remember the millions of dollars wasted on private corporate development of internal CAD systems and in the end a few commercial products now dominate the market. Those commercial tools that survived are efficient, user friendly, and can cross corporate boundaries so that suppliers, engineers, contractors, and owners can efficiently transmit and share information.

The key to a successful construction project strongly relies on procurement management that will provide the right materials at the right place and at the right time for craftspeople to build the project. With proper planning and the correct tools, this goal is very achievable using a variety of web-based and conventional methods. The contract administration and closeout processes, in my opinion, still require more development for increased efficiency from the Internet; efficiency that will go beyond the improved communications and contractor selection search tools that are currently in use.

A Project Lesson Learned

Whether you are working on a small project or a $90 million engineering, procurement, and construction (EPC) project like the one I describe, the project tools we use play an important part in our ability to efficiently execute our work. The smaller projects are even more critical because you don't have the luxury of time to follow the learning curve of new systems and procedures. In the project world, we are basically buyers of materials and services. Our tools must support this function and allow us to track our performance.

This project consisted of EPC, with home office and field procurement responsibilities identified for each group.

Procurement Planning. Front-end planning was coordinated with the owner for all engineered process equipment, for prefabrication justification of structural steel and piping along with the subcontracting plan. The procurement plan also identified the owner's preferred suppliers and the EPC contractor's preferred suppliers. A responsibilities matrix was produced, which assigned home office and construction site procurement responsibilities, as described in Exhibit 1, along with an approval matrix. The schedule for request for quote preparation, issue, and award dates based on the construction installation sequence dates was included. Integrating this schedule information focused on not handling anything twice. We wanted to set equipment in its final location directly from the delivery transport. The procurement plan was formally entered as a section of the scope of services section of the project scope of work.

Solicitation Planning. This is the phase of procurement management where the dot-coms can begin to infest the project. By infest, I mean that they can cause confusion as to which better mousetrap to use as your tool of choice. It is at this point that you are standardizing your bid documents to obtain quick, accurate, and complete responses from prospective sellers. My search of Internet suppliers in this line of work revealed more than 120 choices of service providers. This number is changing daily. But when you need bids on common equipment and commodities the utilization of a web-based system adds value. When looking for a provider during the infancy of this explosion, it is recommended that you shop for a no-fee service so that you can remain flexible and try a few. Using the same logic of a good stereo system, I believe that, until the Internet industry matures, your procurement system should also be planned and built one component at a time. Also until this maturity is reached, your solicitation planning should include traditional methods of procuring complex or proprietary-engineered equipment and designed materials or contracts where drawings will be transferred back and forth between the buyer and seller. Most of these suppliers have in-house electronic abilities to secure this information flow for submittal, review, and approval of engineered documents. The award of this type of order is usually based on previous experience with a few suppliers rather than on open bidding.

Dot-com companies are sprouting up, being gobbled up, and going under at a terrific rate, yet the influence they are having on the project managment profession is phenomenal.

Procurement Responsibilities Matrix

Here's a comparison of home office vs. construction site procurement responsibilities

Exhibit 1. Here's a comparison of home office vs. construction site procurement responsibilities.

 

We had 300 purchase orders issued from the construction site by mail, phone, and fax machine, along with the follow-up accounting and paperwork. I still visualize engineers standing by the fax machine waiting for returned quotes for last-minute items that a craft superintendent said he needed by lunchtime. This is not good utilization of resources, but, even with good planning, it happens. In this situation the tool of choice will make a difference. The Internet provides various types of resources that the engineer can catalog search and directly order with the click of a button. Other sites allow you to post requisitions that can be sent to preferred suppliers or can be open to all available sellers to bid. Some sites even concentrate on the surplus market, which can offer a tremendous cost savings to a project in the area of temporary facilities, tools, bulk materials, and even process equipment. These sites can differ by offering postings of surplus materials from sellers or by being buyer-centric and allowing the requester to issue requisitions. As construction enters the e-commerce age, we need to take advantage of whatever we can to improve our work processes.

Solicitation and Source Selection. This activity involves following up on the suppliers identified in the procurement plan for identified items and contacting other prospective sellers. From outside of the project, increasing this base of suppliers looks like a no-cost activity that can decrease your project cost by obtaining more bids in the hopes of lower pricing. When you consider the labor cost associated with finding potential suppliers, copying, collating, printing, mailing, overnight delivery, and clerical time, it is not a low-cost alternative. On our project, I am convinced that we missed some cost-saving opportunities due to the emphasis placed on the procurement labor budget. The Internet could have allowed us to pursue better pricing more aggressively, as shown in the analysis in Exhibit 2.

The labor cost analysis study did not address the areas where the greatest opportunities for project savings are. These areas include schedule compression and allowing surplus materials to enter the traditional bidding cycle.

Why the Internet?

The Internet allows opportunity to be at the procurement manager's fingertips just as e-mail has efficiently increased communications beyond the phone, fax machine, and mail. Issuing bids to a wider base, receiving quotes, and confirming a supplier can now be done electronically, including attaching terms and conditions, specifications, and other documents. Once a deal is made, you may still need the official purchase order with signatures to go through the conventional route for suppliers beyond catalog shopping sites. One caution to be aware of when using a dotcom service for procurement activities is that dot-coms are not responsible for screening the sellers. The more professional Internet companies require registration of buyers and sellers based on them being reputable businesses, but this is normally limited to having a Dun & Bradstreet number. There is always some sort of fee associated with a confirmed transaction. This fee should be justified by lower pricing, contacting the surplus market, reduction of paperwork, reduction in the procurement schedule, and a reduction of labor hours. You may get an additional bonus when it is reflected on the seller's side and is offset by his marketing costs. You will have to be the judge of actual project savings based on your knowledge and experience, without accepting the marketing claims of service providers.

Labor Cost Savings Projection

This projection compares traditional vs. Internet procurement department labor costs

Exhibit 2. This projection compares traditional vs. Internet procurement department labor costs.

THESE WORK PROCESS CHANGES can be made successfully and will improve our projects due to the fast pace of procurement in our hypernetworked world…and we need to take advantage of them. img

 

Wayne Halli, PMP, PE, in a project manager with 25+ years of experience in the engineering, procurement, and construction industry. His team won the 1994 PMI International Project of the Year for the Logan Expansion Project. He is a consultant for MateriaLink.com, an Internet-based transaction service.

This material has been reproduced with the permission of the copyright owner. Unauthorized reproduction of this material is strictly prohibited. For permission to reproduce this material, please contact PMI.

PM Network March 2001

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