Contract management is a continuous procurement process that ensures suppliers adhere to their agreed contractual obligations along with negotiating any future changes that need to take place.CONTRACT PROCUREMENT 7:6
Different Types Of Procurement Contracts: Everything You Need to Know
Procurement contracts are the agreements to use certain products and services on a project. 3 min read
Procurement contracts are the agreements to use certain products and services on a project. The types of procurement contracts and are typically either fixed-price, cost-reimbursable, or time and materials. Some agreements can include more than one of these payment structures on a single procurement contract.
The process of procurement management allows you to find the right contractors and suppliers for the goods and services you need for your project. Using the right type of procurement contract can have a significant impact on a project’s success since each type of procurement contract comes with specific benefits and downsides.
The procurement manager is responsible for analyzing the scope of the project to determine whether it can be completed using internal resources or whether outside vendors will need to be hired. Needs that must be outsourced will be subject to the formal procurement process. For example, a telecommunications company may outsource invoice creation to a printing vendor who can create these forms and mail them to subscribers.
Both buyers and sellers in an organization should understand the formal procurement process. Procurement contracts are used across almost all industries and businesses. While private companies have flexibility when it comes to procurement, government agencies must comply with specific rules and regulations because they are spending public funds.
Ideally, procurement results in obtaining appropriate goods and services that meet standards for time, location, quality, and quantity at the best possible cost.
Your business may require procurement when the following applies:
- You don’t have the expertise to conduct a specific task.
- You don’t have the resources to handle a specific task or to complete a project.
- You don’t have the required capacity for the goods or services in question.
- Outsourcing the goods or services in question costs much less than obtaining them in-house.
Procurement can involve buying hardware, equipment, or other goods needed for a project, or it can require hiring a consult or service provider. Before beginning the procurement process, determine whether the benefits of procurement outweigh those of completing the project in-house.
Procurement is the best option to save the time, money, and stress involved in training employees to conduct a task in which they are not experienced. It makes more sense to hire an expert and have the job done right. Procurement allows your venture to focus on its core business and to outsource tasks that fall outside that mission.
While businesses once completed everything they needed independently, doing so can be impractical and cause you to accrue significant costs and to develop a substandard product, both of which are bad for your company. For this reason, your company should establish a procurement management process to find the best vendors and suppliers and to negotiate beneficial contracts that account for the interests of both parties.
Stakes of Procurement Contracts
Like other contracts, a procurement contract legally binds two or more parties, typically a buyer and a seller. Contracts detail the terms and conditions of a particular project. Forming a contract inaccurately can cost you money over time. If a contract is inadequate, you may need to spend money to get the other party to legally comply or pay extra because you opted for a time and materials procurement contract instead of one with a fixed price.
The procurement manager is responsible for selecting the best contract for a particular project. Procurement contracts are categorized into the following types and subtypes:
- Fixed price contracts
- Firm fixed price
- Fixed price plus incentive
- Fixed price with economic price adjustment
- Cost plus fixed fee
- Cost plus award
- Cost plus incentive
- Time and materials
Fixed Price Contract
With this type of contract, the seller agrees to provide their service or product at a set price, independent of resulting equipment, material, and labor costs. This means that the seller will bear any costs beyond the agreed-upon amount. This type of contract has the least risk for the buyer. A well-defined scope and statement of work and a selection of competitive bidders help control pricing for this type of contract. If you don’t have a clearly defined scope of work, this may not be the best type of contract.
The 10 Steps of the Procurement Cycle
4251.4KBy: Lea NathanManagement in any company must understand the art of obtaining products and services. The procurement cycle follows specific steps for identifying a requirement or need of the company through the final step of the award of the product or contract. Responsible management of public and corporate funds is vital when handling this necessary process, whether in strong or weak economic markets. Following a proven step-by-step technique will help management successfully achieve its goals.
Step 1: Need Recognition
The business must know it needs a new product, whether from internal or external sources. The product may be one that needs to be reordered, or it may be a new item for the company.
Step 2: Specific Need
The right product is critical for the company. Some industries have standards to help determine specifications. Part numbers help identify these for some businesses. Other industries have no point of reference. The company may have ordered the product in the past. If not, then the business must specify the necessary product by using identifiers such as color or weight.
Step 3: Source Options
The business needs to determine where to obtain the product. The company might have an approved vendor list. If not, the business will need to search for a supplier using purchase orders or research a variety of other sources such as magazines, the Internet or sales representatives. The company will qualify the suppliers to determine the best product for the business.
Step 4: Price and Terms
The business will investigate all relevant information to determine the best price and terms for the product. This will depend on if the company needs commodities (readily available products) or specialized materials. Usually the business will look into three suppliers before it makes a final decision.
Step 5: Purchase Order
The purchase order is used to buy materials between a buyer and seller. It specifically defines the price, specifications and terms and conditions of the product or service and any additional obligations.
Step 6: Delivery
The purchase order must be delivered, usually by fax, mail, personally, email or other electronic means. Sometimes the specific delivery method is specified in the purchasing documents. The recipient then acknowledges receipt of the purchase order. Both parties keep a copy on file.
Step 7: Expediting
Expedition of the purchase order addresses the timeliness of the service or materials delivered. It becomes especially important if there are any delays. The issues most often noted include payment dates, delivery times and work completion.
Step 8: Receipt and Inspection of Purchases
Once the sending company delivers the product, the recipient accepts or rejects the items. Acceptance of the items obligates the company to pay for them.
Step 9: Invoice Approval and Payment
Three documents must match when an invoice requests payment – the invoice itself, the receiving document and the original purchase order. The agreement of these documents provides confirmation from both the receiver and supplier. Any discrepancies must be resolved before the recipient pays the bill. Usually, payment is made in the form of cash, check, bank transfers, credit letters or other types of electronic transfers.
Step 10: Record Maintenance
In the case of audits, the company must maintain proper records. These include purchase records to verify any tax information and purchase orders to confirm warranty information. Purchase records reference future purchases as well.
Contract Procurement Process: Everything You Need To Know
The contract procurement process includes the procedures followed by a business when purchasing services or products. 3 min read
The contract procurement process includes the procedures followed by a business when purchasing services or products. The process starts when company managers identify a business need that must be fulfilled and ends when the contract is awarded and signed. Responsible stewardship of business and public funds should be maintained whenever products or services are procured.
Many projects succeed or fail based on the performance of their suppliers in combination with the project team. This makes it all the more essential to managing vendors and procurement carefully so that all deliverables meet your needs and expectations.
The Purpose of Procurement
With an established procurement process in place, your business will be able to manage relationships with suppliers to maintain a high level of service and value. You’ll have a streamlined method of ordering, receiving, approving, and paying for item deliveries.
Ideally, you’ll be able to use the same basic process each and every time you purchase products or services for your business. This will allow you to resolve issues quickly when they arise. Goals of a successful procurement management process include:
- Identifying appropriate products and services.
- Creating and issuing purchase orders.
- Ensuring timely delivery.
- Approving payments.
- Establishing and meeting milestones in supplier contracts.
- Resolving issues with product delivery.
- Communicating issues among the management team.
- Reviewing proper fulfillment of contracts.
Steps in the Procurement Process
Having established guidelines in place will support the procurement goals of your management team.
- External or internal sources illuminate the need for a new product or service for your business. This could be a brand-new item or a reorder of something you’ve purchased in the past.
- Determine the exact features and specs of the product or service you need. This may depend on standards established by your industry. Where available, include specific part or product numbers as well as identifiers such as size and color.
- Consult the approved vendor list for your business to determine if the product you need is available from those suppliers. If not, you may need to research the product online or with the help of sales representatives to create a list of potential suppliers for that item.
- Compare the offerings of at least three vendors to find the best available payment terms and price.
- Create a purchase order, which lists the specific items to be purchased and terms and conditions of the sale, including price. Both parties should sign the purchase order and keep a copy on file.
- If the delivery of the product or service purchased is time-sensitive, the purchase order should include terms for expedition. Clearly list deadlines for work completion, delivery dates, and payment dates.
- When products are delivered, you can accept the items and make payment or reject them if they do not meet the terms of the purchase order.
- Check the invoice against the purchase order and the receipt. Resolve any issues before making payment.
- Keep records of all purchases in case you are subject to an IRS audit. This is also important so that you have warranty information and can reference previous purchases next time you have a similar procurement need.
Public procurement may have additional required steps and usually also comprises contract administration (another term for contract management). In other organizations, procurement ends when the contract is awarded and administration/management is a separate phase. Despite this separation, contract administration is just as important as procurement since it has a substantial impact on supplier relationships.
Steps in public procurement include:
- Identifying requirements.
- Deciding on a method of procurement.
- Conducting strategic planning.
- Processing requisitions.
- Preparing and publicizing solicitation documents.
- Visiting sites.
- Conducting pre-bid proposal meetings.
- Processing and evaluating bids.
- Making award recommendations.
- Negotiating contracts.
- Awarding and signing the contract.
6 Procurement Methods: Obtaining Quality Goods and Services
QUALITY AND PRICE
The procuring department is responsible for acquiring goods and services for a business. This may involve shopping for goods at competitive prices, handling all legal procedures associated with obtaining a contract, budgeting costs for the goods and studying financial trends to ensure that company money is being spent wisely.
Learn accounting to Understand Business is a course that can help you better analyze company financial trends. Choosing which suppliers a business will use isn’t as easy as it sounds. A good sounding product and a good price doesn’t necessarily mean it’s a green light for signing on a new supply customer. So what methods does a procurement team member use during the selection process?
Generally speaking, there are six procurement methods used by the procurement team in a company. The actual names of these could vary depending on your company and industry, but the process remains the same. The six times of procurement are open tendering, restricted tendering, request for proposal, two-stage tendering, request for quotations and single-source procurement.
Open tendering is shorthand for competitive bidding. It allows companies to bid on goods in an open competition or open solicitation manner. Open tendering requirements call for the company to:
- Advertise locally
- Have unbiased and coherent technical specifications
- Have objective evaluation measures
- Be open to all qualified bidders
- Be granted to the least cost provider sans contract negotiations
Arguably, the open tendering method of procurement encourages effective competition to obtain goods with an emphasis on the value for money. However, considering this is a procedures based method a lot of procurement experts feel that this method is not very suitable for large or complex acquisitions due to the intense focus on the output process instead of stringent obedience to standards. In this Quality Management course learn about the ways to evaluate quality products on incoming orders, and to create quality products for sale.
There are course also disadvantages to this kind of procurement method including:
- Complex requirements are typically not suited for this method
- The timeline for needing the goods
- Complications in defining the exact needs of the requirement by the procuring company
Unlike open tendering, restricted tendering only places a limit on the amount of request for tenders that can be sent by a supplier or service provider. Because of this selective process, restricted tendering is also sometimes referred to as selective tendering. Like open tendering, restricted tendering is considered a competitive procurement method, however, the competition is limited to agencies that are invited by the procuring team. The procuring entity should establish a set of guidelines to use when selecting the suppliers and service providers that will be on the invitation list. Randomized selections will not bode well for procuring. This method is selective to find the best-suited and most qualified agencies to procure goods and services from. It’s also employed as a way for the procuring team to save time and money during the selection process.
Request for Proposals (RFP)
Request for Proposal is a term that is used all across the business world. Social media managers receive RFP’s from potential clients all the time when a client is seeking a new manager of their venture. This kind of proposal is a compelling and unique document stating why the business is the best fit for the type of project at and. Similarly, in the procurement world, a RFP is a method used when suppliers or service providers are proposing their good or service to a procurement team for review. If you’re a supplier, understanding the in’s and out’s of quality service management is key to winning your bid. Read more about this in service quality management.
Procurement teams are often on the hunt for the best valued, most marketable items to bring into circulation. A client may feel they have all of the qualifications to fit the needs of fulfilling a specific requirement of a procurement team – but they have to prove it. The agencies writing the RFP’s should submit a two-envelope proposal to the procurement manager. The two-envelope process allows the procurers’ to review the proposal through and through without knowing the financial component. The financial proposal is sealed in the second envelope and should only be opened after the content of the first-envelope proposal is approved or rejected. This eliminates any persuasion by cost and allows an objective lens to look through when analyzing a good fit. The proposal with the best fit qualifications and best price will be selected. If a lesser qualified (yet still qualified) selection has a lesser price, no contract should be negotiated. The most qualified and appropriate proposal, regardless of price, should be selected. Are you a supplier? Learn how to price your goods based on value in the course Value Centric Selling.
Two Stage Tendering
There are two procedures that are used under the two stage tendering method. Each one of the procedures has a two stage process. This can be disadvantageous for some procurement teams if there is a time limit on securing a contract. In the same vein, this option is more flexible for both parties, allowing more room for discussion to meet mutual needs.
The first procedure is very similar to the RFP method as discussed above. The procurement team receives a proposal with two envelopes – one with the proposal itself and one with the associated financial information. The difference is the bidder is required to submit a technical proposal that highlights their solutions to fulfilling the requirements as specified by the procuring department. This proposal is scored according to the relevance of the solution to the needs of the procurer. The highest scored proposal is invited for further discussion in an attempt to reach an agreement. After the final agreement for the technical proposal is reached, the bidder is invited to submit their financial proposal and then further discussions ensue to negotiate a contract.
The second procedure is much like the above, however, instead of the bidder submitting a fully-completed technical proposal, a partial proposal is submitted. The methodology and technical specifications will be included but not to the fullest extent. This allows room for even more customization and discussion. Once the highest qualified bidder is selected, they will be invited to submit a thorough technical proposal along with a financial proposal. The technical proposal will be evaluated and only then will the financial proposal be opened. The combined score of both the technical proposal and the financial proposal are the grounds on which a bidder is contracted.
Request for Quotations
This procurement method is used for small-valued goods or services. Request for quotation is by far the least complex procurement method available. If you have the option, use this method to ensure a fast procurement process and not a lot of paperwork. There is no formal proposal drafted from either party in this method. Essentially, the procurement entity selects a minimum of three suppliers or service providers that they wish to get quotes from. A comparison of quotes is analyzed and the best selection determined by requirement compliance is chosen.
Single source procurement is a non-competitive method that should only be used under specific circumstances. Single source procurement occurs when the procuring entity intends to acquire goods or services from a sole provider. This method should undergo a strict approval process from management before being used. The circumstances which call for this method are:
- If only one supplier is available and qualified to fulfill the requirements
- If the advantages of using a certain supplier are abundantly clear
- If the procurer requires a certain product or service that is only available from one supplier
- For the continuation of work that cannot be reproduced by another supplier
In the end, the type of procurement method you choose to use is highly relative to the conditions of the procurement effort and the type of good or service being acquired. All procurement methods follow tight legal frameworks to ensure all standards are being met and quality in the selection process exists. Learn more about procurement and other business methods in the course an Introduction to Business.Filed Under: Business, Students
Contract management is a continuous procurement process that ensures suppliers adhere to their agreed contractual obligations along with negotiating any future changes that need to take place.
7 STAGES OF CONTRACT MANAGEMENT
All business agreements should be finalized with a contract. To mitigate any risk in those agreements and create strategic relationships, contracts should be managed through seven steps.
Contract management has taken on a bigger role in day-to-day tasks as businesses work towards increasing productivity without increasing their employee numbers. As the amount of contracts in business transactions grow, it’s imperative that contracts save time, not consume more of it. If the contract management process isn’t automated, however, it’s bound to do just that. Having a comprehensive understanding of the contract management process can minimize time spent working on administrative tasks and maximize strategy.
Stage One: Contract Preparation—Identify Your Needs, Establish Goals, Set Expectations, and Define Risk
Contracts are legally binding documents that should not be approached lightly. It’s important to be organized and prepared with the right resources. Properly identifying the needs, reasons, and ultimate goals that require a contract makes any decisions down the line much easier. Contracts should seek to define and mitigate risk in a relationship, looking ahead to any potential scenarios that could occur over the lifetime of the document and accounting for them in the contract. For example, the terms of agreement within a contract should address what happens if the client files for bankruptcy, goes out of business, or sells the company, along with any other contingencies that may arise.
Another example is a contract that is intended to set pricing terms for customers. One goal of this document should be to make sure the business is financially protected despite the scenario, and will be paid once the tasks outlined in an agreement are complete. A contract ensures that even if a business relationship is strong, each side is going to obtain exactly what is expressed in the contract.
Once the reasons for creating a contract are fully established, it’s time to begin drafting the contract.
Stage Two: Author the Contract
Consulting with In-House Counsel or an attorney is wise, especially if there are any uncertainties. Better yet, using a preset template drafted by your legal team to ensure all the information is up-to-date and all required clauses and terms are automatically included.
When authoring the terms of the contract, it’s also important to pay attention to specific wording. Any ambiguity leaves contracts up for interpretation, even down to a comma. State and country laws will also need to be taken into consideration, especially if the two parties are in different locations.
Stage Three: Negotiate the Contract
No matter how much research, planning, and preparation goes into the first draft of a contract, negotiation almost always follows. Negotiation should begin with transparency and trust. Anticipating and researching the other party’s needs before the conversation simplifies the process and creates a strong foundation for a lasting relationship.
As redlining begins, it’s easiest to use a contract management platform so both parties can view the working document to make changes and collaborate in real time. Email and offline documents can be confusing and cause costly mistakes, but a single source of truth for conversations and contracts will result in quicker negotiations and a contract that provides visibility for both sides.
Stage Four: Get Approval Before Finalizing the Contract
After negotiations are complete and both parties agree, next comes approval. In larger companies that need manager approval or have audit procedures, all the requirements for approval will need to be met before finalizing the deal. For example, if a company has specific procurement policies, they will need to be met prior to gaining approval for the contract. In a contract management platform, this is as simple as setting up an approval workflow so that whoever needs to approve the contract receives a notification and can view, edit, and comment on the contract in real time.
Stage Five: Execute the Contract
The signing should be the simplest part of a contract: both parties agree, the wording is exact, and the next step is simply making it official. However, many businesses make agreements across the country or even the globe, and getting signatures isn’t as straightforward as meeting in person. Especially if deadlines are tight or time zones are incompatible, overnight mail or even email may not be the best way to get signatures faster. A legally binding electronic signature can solve all these problems, allowing you to move faster, accelerating signatures and revenue.
Stage Six: Keep Up With Amendments and Revisions
Contracts are rarely stagnant. Revisions and amendments are a common part of the lifecycle of a contract. Tracking changes and the effects for each party can be confusing; however, this is another reason to implement a reliable process, such as a contract lifecycle management platform, to easily record edits and add amendments. It’s important to stay ahead of the changes and make sure both parties are fully aware and in agreement on any revisions.
Stage Seven: Manage After the Signature—Obligations, Auditing, and Renewals
Contract management doesn’t stop once the ink dries. Performing regular audits will ensure obligations are met and value is realized. Alerts should be set for deadlines and renewals. Missed renewals mean lost opportunities to continue a relationship, and most importantly for a company, lost revenue. Being aware and making contact well before the renewal time shows reliability and care for the relationship, and will continue to build trust and loyalty.
Contract management can be a time-consuming task, but if properly managed, can be one of the most lucrative areas for building business relationships and generating revenue. A contract lifecycle management platform simplifies contract management processes, providing the ability to manage and avoid risk and compliance issues through templates and approval workflows, streamline negotiations with online redlining, deliver more revenue and faster with e-signatures, and more easily manage documents after their signed helping organizations grab opportunities that may otherwise have been missed. Forward-thinking companies are turning to contract management platforms to reduce costs, mitigate risks, and increase profitability. Are you?
CONTRACT PROCUREMENT 7:6