Procuring resources for a project is inherently risky especially when using exte

Question

Procuring resources for a project is inherently risky especially when using external sources and suppliers. Project success is significantly influenced by the contracting strategy that is chosen and the specific contract types that are used to engage vendors. Project managers play an important role in procurement management in ensuring that procurement practices align with the objectives of the project and the requirements of project stakeholders.

What are some of the factors that should be considered when choosing a procurement / contracting strategy for a project?

What is a division of work strategy? What are the advantages and disadvantages of this approach?

What is the difference between fixed price, cost reimbursable, and time and materials contracts?

Which of the three contract types imposes more risk on the buyer? The seller? Why?

Explanation / Answer

a)The importance of contracting or procurement strategy is to ensure that the right resources are received at the right time in right quality and right amounts within the specified budget in order to ensure the delivery of the project on time.

The factors to be considered while choosing a procurement strategy are:

b) Division of work is the breaking down of a task into smaller tasks and assigning it to different groups of workers according to their specialized skills in a particular area. This division helps in the maximum utilization of resources in the areas they are specialized in.

c) Fixed Price, Cost reimbursement and Time and Material Contracts:

i.Fixed Price Contracts:

In this type of contract, the rates of the project are fixed irrespective of the hours, days, or months they work for it. Here the risk for a seller is more, i.e. if the costs exceed above the fixed price the seller has to bare it.

ii.Cost Reimbursement Contracts:

In this type of contract, the expenses of the project are unknown to the buyer until the project is completed and here the buyer will only convey the end result they needed.

iii.Time and Material contract:

In this type of contract, the rates are fixed on an hourly basis and this type of contract is chosen for small projects.

d) Risk for the Buyer:

Of the three above mentioned projects, the major risk for buyers is on Cost-reimbursement contracts, because here the buyer only passes on the end result they want from the project and does not mention any cost constraints. So only at the end of the project, the buyer knows the cost of the project.

Risk for the Seller:

Of the three above mentioned contract types, the major risk for sellers is from Fixed price contracts because here the buyer fixes a certain sum for completing a project and if the seller exceeds that amount to complete the particular project that should be borne by the seller irrespective of the final amount.

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