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Forms of Procurement

Letter of Intent

You should understand this is normally NOT a contract but simply a letter, without legal binding, that says the buyer intends to hire the seller.

Privity

Means a contractual relationship. You should understand the following because it explains privity and shows you how questions on this topic are asked.

Company A hires company B to do some work for them. Company B subcontracts to company C. The project manager for A is at the job site and tells company C to stop work. Generally, does company C have to listen?

Answer No. Companies C and A have no contractual relationship. A needs to talk to B who needs to talk to C.

Non-Competitive Forms of Procurement

What if there is only one seller, or you want to work with a company you have worked with before? Do you have to go through the procurement process? No. There is no reason that you must go through the procurement process unless the procurement is for a government, or the performing organization has rules restricting such procurements. You would, however, lose the value of competition.

When would you award work to a company without competition?

The following is a more complete list.

  • The project is under extreme schedule pressure
  • A seller has unique qualifications
  • There is only one seller
  • A seller holds a patent for the item you need
  • Other mechanisms exist to ensure that the seller’s prices are reasonable.

You should be familiar with the following forms of non-competitive procurements:

  • Single Source Contract directly with your preferred seller without going through the procurement process. This might be a company that you have worked with before and, for various reasons, you do not want to look for another.
  • Sole Source There is only one seller. This might be a company that owns a patent.  You may save time not having to do the procurement process before bids or proposals are received, but you will have to spend the time (perform extra work) after they are received to come up with a contract.

You may save time not having to do the procurement process before bids or proposals are received, but you will have to spend time (perform extra work) after they are received to come up with a contract.

Most of the questions on the exam will present various situations and ask you questions about those situations. In procurement, tricky questions can include addressing concepts that you many have not dealt with before, such as describing the work that would need to be done to negotiate a contract when there is no competition. The following exercise will help.
Exercise  What topics must be addressed in creating a contract for noncompetitive procurement that would not need as much attention in a competitive environment?

For Single Source—Preferred Supplier

  • Scope More work will be needed to document all the items received free in the past to make sure you get them now. Only what is in the contract will be received.
  • Scope There could be a tendency for the performing organization to say, “The seller knows us and we know them, we do not have to spend so much time determining our requirements and completing a contract statement of work. They know what we want.”
  • Quality The seller may never be asked to prove they have the experience, cash flow and manpower to complete the new work.
  • Cost Time will need to be spent to compare previous costs to the new cost to check for reasonableness.
  • Schedule Now that the seller knows they have you as a longer term customer, they may not be as responsive to your needs.
  • Customer satisfaction Now that the seller knows they have you as a longer term customer, they may not be as responsive to your needs.
  • Risk The risk can be weighted more toward the buyer unless the above are investigated.

For Sole Source—There Is Only One Supplier

  • What if the seller owns a patent and goes out of business?
  • If the seller owns a patent and goes bankrupt, who owns the patent?
  • Quality You may have to take what you get rather than request a certain quality level.
  • Cost Multiple year agreements will be required for the purchase of items to prevent a price increase in the future.
  • Schedule The seller has little incentive to agree to a schedule.
  • Scope You may have to change the project to accommodate the procurement rather than change the procurement to accommodate the project.
  • Customer satisfaction The seller has little incentive to be concerned with the buyer’s needs and desires.
  • Risk The overall risk can be weighted more toward the buyer unless the above are investigated and resolved.

Make sure you read questions on the exam carefully. They might ask what to watch out for, or what needs to be negotiated in non-competitive procurements. They may simply ask about the procurement process. Wouldn’t your efforts during the contracting process be different if there wasn’t another company to go to for the goods or service?

Evaluation Criteria

Evaluation criteria are included in the procurement document to give the seller an understanding of the buyer’s needs and help them decide if they should bid or make a proposal on the work. During select sellers, evaluation criteria become the basis by which the bids or proposals are evaluated by the buyer.

If the buyer is purchasing a commodity like linear meters of wood, the evaluation criteria may be just the lowest price. If they are buying construction services, the evaluation criteria may be price plus experience. If the buyer is buying services only, the evaluation criteria will be more extensive. In the latter case, such evaluation criteria may include:

  • Understanding of need
  • Overall or life cycle cost (see definition in the Cost lesson)
  • Technical ability
  • Management approach
  • Financial capacity
  • Project management ability (I had to put this in! Shouldn’t you require your sellers or vendors to use the project management techniques you have learned? How about asking for a WBS, network diagram and risk analysis?)

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