Procurement Principles : Project Procurement

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Baily et al., Procurement, Principles and Management, 11e © Pearson Education Limited 2015
Part 3
Applications
Chapter 11
Project procurement

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Objectives of this chapter
• To outline the key features of projects
• To understand how procurement adds value in project
management
• To examine various success factors and how these impact on the
procurement activity
• To examine the issues of project planning
• To appreciate the importance of procurement within project control
• To consider the various types of contract for major projects such as
Wembley football stadium and the Terminal 5 Building at Heathrow
Airport
• To appreciate the issues involved in subcontracting
• To outline network analysis
• To provide an overview of risk management and its benefits

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A project is a set of activities which:
• Has a defined start point
• Has a defined end state
• Pursues a defined goal
• Uses a defined set of resources.
Introduction to projects

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• An objective – definable end result, output or product.
• Complexity – large number of different tasks.
• Uniqueness – projects are usually ‘one-offs’.
• Uncertainty – projects are planned before they are
executed, hence they carry an element of risk.
• Temporary nature – defined beginning and end.
• Life cycle – resources needs change during the life of
the project.
Introduction to projects (Continued)

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Figure 11.1 Earned value

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The completion of the £757 million Wembley stadium project faced
many delays after claims by main contractor Multiplex that client
Wembley National Stadium Ltd (WNSL) had not begun some of the
works required to achieve practical completion.
The delays by WNSL meant that Multiplex was unable to sign off the
works for approval and reach practical completion.
Wembley Stadium firmly rejected Multiplex’s statement and refuted
any claims made against them.
WNSL appeared to blame Multiplex 100 per cent for the delays.
Multiplex strongly disputed the claims and replied that design changes
from the client were partly to blame.
Multiplex believed that the changes justified an extension of time.
Mini case study – Wembley Stadium

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Figure 11.2 Subcontracting

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Figure 11.3 Arrow diagram for project X

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Figure 11.4 Bar charts for project X

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Internal/external drivers of key risks
Financial Risks
Financial Risks
Operational Risks
Operational Risks
Strategic Risks
Strategic Risks
Hazard Risks
Hazard Risks
Interest rates
Exchange rates
Credit
Regulations
Culture
Liquidity and cash flow
Accounting contracts
Recruitment
Supply Chain
Information systems
Competition
Customer changes
Industry changes
Customer demand
Contracts
Natural events
Suppliers environment
Research & development
Intellectual capital
Employees
Properties
Products/services
Internal Risks
External Risks
Table 11.1 Examples of internal and external drivers of key risks

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The risk management process
Organisation’s Strategic Objectives
Risk Reporting (threats/opportunities)
Monitoring
Residual Risk Reporting
Risk Treatment
Decision
Risk Assessment
Risk Analysis
Risk Identification
Risk Description
Risk Estimation
Risk Evaluation
Monitoring Formal
Audit

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Risk description table
1 Name of risk
2 Scope of risk
Qualitative description of the events, their size, type,
number and dependencies
3 Nature of risk
e.g. strategic, operational, financial, knowledge or
compliance
4 Stakeholders
Stakeholders and their expectations
5 Quantification of risk
Significance & probability

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Risk description table (Continued)
6 Risk tolerance/appetite
Loss potential and financial impact of risk
Value at risk
Probability and size of potential losses/gains
Objective(s) for control of the risk and desired level of
performance
7 Risk treatment and control mechanisms
Primary means by which the risk is currently managed
Levels of confidence in existing control
Identification of protocols for monitoring and review

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Risk description table (Continued)
8 Potential action for improvement
Recommendations to reduce risk
9 Strategy and policy developments
Identification of function responsible for developing
strategy and policy.

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Risk estimation – Consequences
Both threats and opportunities
High
Financial impact on the organisation is likely to exceed £x
Significant impact on the organisation’s strategy or
operational activities
Significant stakeholder concerns.
Medium
Financial impact on the organisation likely to be between
£x and £y
Moderate impact on the organisation’s strategy or
operational activities
Moderate stakeholder concern.

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Risk estimation – Consequences
(Continued)
Both threats and opportunities
Low
Financial impact on the organisation likely to be less than
£y
Low impact on the organisation’s strategy or operational
activities
Low stakeholder concern.

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Probability of occurrence – threats
Estimation Description Indicators
High
(probable)
Likely to occur each
year or more than
25% chance of
occurrence.
Potential of it occurring several
times within the time period
(for example – 10 years)
Has occurred recently.
Table 11.3 Risk estimation

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(Continued)
Medium
(possible)
Likely to occur in a
ten year time
period or less than
25% chance of
occurrence
Could occur more than once
within the time period (e.g. 10
years)
Could be difficult to control due
to some external influences
Is there a history of occurrence?
Table 11.3 Risk estimation (Continued)

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(Continued)
Low
(remote)
Not likely to occur in a
ten year time period or
less than 2% chance of
occurrence.
Has not occurred
Unlikely to occur

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Probability of occurrence – opportunities
High
(probable)
Favourable outcome
is likely to be
achieved in one year
or better than 75%
chance of occurrence
Clear opportunity which
can be relied on with
reasonable certainty, to
be achieved in the short
term.

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(Continued)
Medium
(possible)
Reasonable prospects of
favourable results in one
year of 25% to 75%
chance of occurrence
Opportunities which
may be achievable but
which require careful
management

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(Continued)
Low
(remote)
Some chance of
favourable outcome in
the medium term or less
than 25% chance of
occurrence.
Possible opportunity
which has yet to be
fully investigated by
management

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Risk identification techniques
Examples
Brainstorming
Questionnaires
Industry benchmarking
Scenario analysis
Risk assessment workshops
Incident investigation
Auditing and inspection
HAZOP (Hazard & operability studies)

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Risk analysis methods and techniques
Examples
Market survey and test marketing
Research and development
Business impact analysis
SWOT analysis (Strengths, Weaknesses, Opportunities,
Threats)
Event tree analysis
Business continuity planning
Real option modelling
PESTLE (Political Economic Social Technical Legal
Environment)
Threat analysis
Fault tree analysis
FMEA (Failure Mode & Effect analysis)

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Incorporating risk considerations
Incorporating risk considerations into what have
historically been highly cost-focused analyses
requires a shift in thinking and organisational
behaviour. While procurement teams remain focused
on price reduction, waste reduction and supplier
performance measures – rather than engaging fully
with the ever more important issue of supply chain
risk – opportunities for total cost reduction are ignored
and the prospect of serious supply failure is
increasing.

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Best practice risk management
Risk identification
Your business probably already has a risk register and the
procurement and quality teams, in particular, should have
a proactive approach to identifying where supply chain
risks lie.
Reworking the risk register is a multi functional process,
which needs the collaboration and experience of
colleagues throughout the business in quality, planning,
forecasting, operations, logistics.

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(Continued)
Risk valuation and prioritisation
It s not just a matter of prioritising the risks according to
potential impact and likelihood. The key step is to calculate
a credible financial value for the risks, where value = cost
of failure x likelihood (probability) of the event occurring.
Once the risks are valued, they are easy to rank and
prioritise.
Make sure that you appreciate the true cost of failure.
Procurement/supply chain management should think in
terms of cost, but also the value to the business should be
measured in lost profitability.

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(Continued)
Establish contingencies and controls
Risk management is the process of taking actions to
reduce the likelihood and/or impact of the event. For each
important risk, control measures should be identified and
given to a risk owner.
And the impact of each control measure can be forecast
and valued. This vital step will help you allocate the correct
resources to address the most important risks. And
measurable actions can be added to personal objectives,
individuals can be held accountable and rewarded.

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(Continued)
Measurement and monitoring
Once you have identified and valued the risks and
produced the action plan, the final step is to monitor and
measure progress. By monitoring reviewing and enhancing
managing potential supply chain problems becomes an
ongoing and sustainable process.

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Best Practice Risk Management
Risk management benefits
It is a source of competitive advantages, enabling
companies to pursue rewarding strategies, with confidence
that they are able to manage the attendant risks.
It enables you to involve individuals and departments and
reward them according to the impact their actions have on
supply chain risk.

Procurement Principles : Project Procurement

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