Project Based Procurement

BY RachelS

1: Introduction

Project-based procurement occurs when there is a specific project activity and goal. This may be a project that repeats at regular intervals or it may be a one-off project.
The project could include volume purchases, small purchase volumes, standard items, specification of unique one-off items and tailoring of items based on individual projects. All included within any one project activity.

The defining nature is that there is a duration of time over which the project procurement occurs and a need to capture the procurement activity in the context of this project. There are also time dependencies within a project procurement activity, where purchases need to occur in chronological order for the project to run smoothly.

2: Typical steps associated with a project purchasing process

An image showing the steps in project based procurement

Planning the procurement project, including project risk assessments and assessment of the relative importance of the project to the business
Supplier and Market research. Including identifying potential suppliers and any areas to be focused on at the Category or a Strategic level within the business
Start a tendering process: RFI, RFP, RFQ
Short-listing of suppliers and assessment of the opportunities for cost reduction, quality improvement and revenue enhancement that exist
Negotiation and awarding of contracts and supply agreements for any new suppliers: agreeing on the terms for supply, including the nature of the relationship and its subsequent management within the project framework
Transactional procurement and expediting
Monitoring the procurement activity within the project: ensuring obligations and any compliance aspects are met
Closing the project and associated contracts and supply agreements
Supplier evaluation and performance feedback

3: Project and Category Procurement Differences

Project based procurement groups all the purchasing activity within a project framework. The alternative approach would be Category based where items are bundled into categories based on their similarity and managed as a category.

A project procurement activity does allow Category specialists to be involved in the purchase of the items within the project. Allowing the category specialist to apply their knowledge and lever their supplier relationships. However, the purchases are not grouped into an overall category-based procurement. The project requirements and timelines are the driving force of the project-based procurement process, not the Category emphasis. The purchases made in association with the project.

Category or Project based procurement should be used as appropriate to the nature of the purchase. The use of one should not eliminate the use of the other. They serve different purposes and should be used within a procurement organization appropriately.

4: Table of the key differences between Project and Category based procurement

The following table outlines some of the key differences between Project and Category based procurement processes.

Category Management

Project Procurement

Focus

Focus is on purchase demand and consolidation. Sourcing based on volume and supply across the business

Focus is on a project specific objective. Ensuring overall project delivery

Strategic or Tactical

Typically strategic to achieve lower unit prices and supply chain optimisation

Tends to be tactical , though for larger repeating projects these can be strategically managed

Centralised or devolved

Centralizes the purchasing administration and lessens miscommunication with suppliers

Devolves the administration towards the project team. Supplier engagement emphasises quick wins and timely results.

Compliance handling

Compliance activities are centralised within, and specific to, the category.

Centralises compliance around the project.

Relationships

Focuses on longer term supplier relationships, optimisation over the longer term and volume discount structures

Focuses on a project based relationship and engaging suppliers around a specific project objective

Timelines

Supplier relationships are typically over the longer term and involve engagement and optimisation on supply.

Typically, supplier relationships are short – the duration of the project. The focus is on project timelines and leveraging a suppliers’ capability and potential cost savings during the project.

Sustainability

Emphasis is over the long term and across all aspects of the lifecycle of purchased goods and services

Sustainability is focused on the project impact. It is by no means less important; however, it is more difficult to achieve substantive gains given the short duration of the engagement. If projects are large or repeated the opportunity is similar to that of a Category focus.

Change Management

All changes can be discussed and mutually agreed over an extended time to achieve a long term need

Changes tend to be associated with a specific scope of work, drawing or specification. Possibly affecting other project purchases and the overall project timelines.

Price

Typically, unit and volume-based pricing

Mostly, based upon specific delivery milestones associated with the project. Professional services may be fixed or time and materials based.

Payment

Based on delivery of a product or service

Milestone or percentage of completion based. Though, for some aspects, it will also be delivery based.

Delivery

Agreed by the parties and typically to a fixed location

Mostly will be to a specific project location, though there may be need to vary delivery locations

Competences

Helps to develop capabilities to locate suppliers with key category competencies. Category focused expertise develops and knowledge of supply chain optimisation specific to this category.

Helps to develop a sound project procurement process. Ad-hoc procurement situations become easier to manage. Strong change management, project and expediting skills tend to develop

Note 1: for projects a combination of category and project focus will produce the best results. With some purchases better made using category experts. Note 2: depending on the nature of the project there can be many different contractual differences between procurement by category or project-based procurement. Example areas such as liability, insurance, termination, Governing laws, the order of precedence of terms, acceptance criteria, amendments, survival, claims (specifically on late delivery) and continuity would all differ depending on whether project based or not. This article does not explore these or any other contractual differences.

5: Types of activity suitable for Project based procurement

Projects can range from large projects, for example in manufacturing operations, to small projects such as exhibiting at a conference. Marketing campaigns are also project based activities. There is one common theme and that is that purchases are directly associated with a specific project or purpose. Making it more sensible to source within a project framework.

Examples could include:

Setting up a new manufacturing location
Exhibiting at a major trade fair
Developing and testing a new product
Launching a new product
Fitting out an office
Building a new station on the UK HS2 rail link

It should be noted that the common theme, of all of the above, would be that they have a very clear goal and a definite timeline/finish date.

6: The inherent challenges of project-based procurement

One of the biggest challenges facing Procurement overall is the fragmentation of the supply chain creating a very diverse supply market from which to source: there exists a large number of suppliers, now on a global basis, with which any firm may do business in the delivery of their requirements (from small specialist companies to large multifunctional firms delivering complete solutions). The challenge is to know who could offer an advantage in the supply of a specific requirement. This is a difficult enough challenge at the Category level. Taking this on a project by project basis increases the difficulty if the project is not to be repeated either in whole (with subtle differences) or in part: managing to identify and contract suppliers within the timelines of a specific project adds pressure to the sourcing process. Ensuring project purchasing is captured within an automation process helps. Since the suppliers for any project are captured and can be requested to bid against any new project requirement.

However, the increased choice of supplier is not the only factor that will impact on the inherent difficulties facing those sourcing within projects. Another critical area to address is any lack of effective communication within an organisation and towards suppliers involved in the project. Capturing these communications, in association with the project, is essential. This is particularly important where problems are addressed contractually by, and between, project supply chain participants.

7: Characteristics of good Project Procurement activity

Companies that consistently capture the most value from project procurement typically have these critical procurement capabilities:

Superior supply-market expertise for procurement of project-based goods and services
Project based automation for Sourcing through to Payment
Early assessment of project-related procurement risks
A cross-project sourcing focus to gain from common project activity
A focus on TCO associated with all purchases within the project and for the overall project
Use of RFQs and Contractual terms that are designed to optimise supply performance against the project objectives