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

The main factors considered while choosing a contracting/procurement strategy to revolve around cost, time and quality. Some of the external factors include the political, technological, social, economic, commercial and legal factors. Characteristics of client, project, changes, cost issues, time management in the form of deadlines in a project and risk factors are other factors considered while choosing a procurement strategy. The procurement method is an iterative process to identify the priorities in tasks involved and the above factors constantly change in the dynamic setting of the project.
The division of work strategy has the following advantages including defined skill sets, growth in particular division, induces competitive spirit between divisions, defines excellence and quality, enhances trust, develops pride, improves productivity, cuts costs on wastage and scrap, increased revenue, higher employability, group solidarity and harder to replace or differentiate. The disadvantages of the division of work strategy include becomes obsolete over time, becomes routine and boring, multitasking not possible, company suffers, apply restrictions, limited skill sets, no breaks, absenteeism increases among employees and in some cases the client requirements are not met by the final end user product.
In a fixed price contract, the known scope is high while in a cost reimbursable contract, the known scope is medium and in a time and material contract, the known scope is low. In a fixed price contract, the share of risk is high for supplier while in a cost reimbursable contract, the share of risk is high for the buyer and in a time and material contract, the share of risk is medium. In a fixed price contract, the incentive for the meeting is low while in a cost reimbursable contract, the incentive for the meeting is high and in a time and material contract, the incentive for the meeting is low. In a fixed price contract, the predictability of cost is high while in a cost reimbursable contract, the predictability of cost is medium or low and in a time and material contract, the predictability of cost is low.
The fixed price contract is one in which the buyer and seller agree on a price for the entire project. This type of contract is riskier for the seller as the buyer enjoys the least amount of cost risk. Cost reimbursable contract is one in which seller costs are reimbursed for some extra amount in addition. The buyer clearly states the project requirements and accordingly, the seller quotes the price of the project and writes a detailed contract. This type of contract is risky for a buyer as they bear most of the cost risk since the costs of the entire project is unknown. Time and material contract is used for pricing projects on an hourly basis and is mostly for small amount based projects. The risk is medium for a buyer in this contract.

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