There is a growing trend among capital project owners to order materials and equipment required for their capital construction projects directly and then supply those materials and equipment to their contractors. Not only this will enable those project owners to get discount on bulk purchase but also ensure that the used material and installed equipment are as per specified quality standards. In addition, this direct procurement of material and equipment will address the risks associated with delayed deliveries for long lead procurement items. Finally, this approach is recommended in countries where they have volatile currency exchange rates which is a risk that contractors will try to pass it to the project owner by inflating the material and equipment prices.
Managing, monitoring, evaluating and reporting the performance of the material procurement requires implementing a number of interrelated business processes. Those are the processes for having a repository of all material and equipment items that could be procured on projects, purchase request, proposals solicitation, award of purchase order and finally supply of material.
Usually, the project owners reporting on owner-supplied materials and equipment should address a number of critical points. For example, for each procured material or equipment item, there is a need to identify the supplier name, purchase order number, unit of measure, unit price, total ordered quantity, total supplied to date, total price of supplied material and equipment to date, and location of the supplied material and equipment. In addition, for each material item the report should provide the quantities released to the contractor to date, location where the material and equipment was delivered to and the current material and equipment status stock status for which those that will have zero stock will have “Red” icon while others with stock will have “Green” icon. Further, for each material item, the report will include the name of the contractor, contract number, material unit price as per the contractor, total price of the released material and equipment to date and variance between the cost paid by the owner for the ordered material and quantity and the amount deducted from the contractor’s interim progress invoice certificate for the supplied material and equipment.
Using a Project Management Information System (PMIS) solution like PMWeb, all those business processes are readily available out of the box. The first requirement is to have a centralized database of all material and equipment that could be procured on the projects that the project owner has. PMWeb items module will be used to create this database which will be appended with new material and equipment items when needed. For each item, the database should include the product name, unit of measure, current unit price which can be updated, manufacturer name if the material or equipment is done by a specific manufacturer, the cost account or cost breakdown structure (CBS) level that this item belongs to and any other details that can best describe the material or equipment item.
The second business process will be the Purchase Request (PR) which will issued by the project that requires purchasing the material and equipment items for the project. PMWeb estimating module will be used to create purchase requests for which there is no limit on the number of purchase requests that could be issued on a project and the number of items included in the PR. Nevertheless, all material and equipment items included in the PR must be selected from the items database. For any new items that do not exist in the items database, those need to be added first before issuing the PR. The PR will automatically pick the unit of measure of each item, current unit price and the associated cost account or cost breakdown structure (CBS) level. The issuer of the PR needs to required quantities of each item.
When the PR is approved, PMWeb procurement package will be generated that will automatically capture the line items of the PR. This third business process will enable selecting the suppliers or vendors for the qualified list of vendors from PMWeb companies’ module. In addition, the procurement module allows setting the date for which the bids will be due for submission. This will automatically create the date submission counter. There is also the option of implementing PMWeb vendor prequalification business process to enable all vendors to submit their details online and for the project owner to review, score and qualify vendors.
From the procurement package, an invitation to bid will be sent to each selected supplier or vendor to provide their best offers. Those suppliers will provide their proposals using PMWeb online bid module. The online bid will include both technical and financial submission of the invited bidder. This data captured in the online bids will enable comparing the offered prices with the estimated cost as per approved the PR.
The last business process is the purchase order (PO) which will be generated and issued to the successful vendor to include all items requested in the approved PR and a proposal received for. The purchase order will be issued using PMWeb commitment module with the option of Unit Price contract selected. It should be noted that there is the option to have each purchase request, online bid and purchase order line items in different currencies should this be a requirement for materials and equipment procured from outside the country. Any changes to the approved purchase order will be managed using PMWeb Commitment Change Order module for which all approved and pending change orders details will be captured.
As the vendor starts executing the purchase order by delivering of the ordered material, the vendor will issue interim payment certificates for those approved material deliveries. Those invoices can be issued at end of each month or when any actual material delivery has taken place. Those payment terms and conditions will be agreed on when the purchase order was awarded. Those progress invoices will be the actual cost incurred for the procured materials and equipment. In addition, PMWeb allows capturing the actual payment made against each progress invoice with amount details, mode of payment, bank details, etc.
In addition, PMWeb will be used to create the contracts with the contractors who will be consuming and installing the owner’s procured and supplied materials and equipment. Those unit price contracts will have separate line items for the material and equipment supply and their workmanship line items. It should be noted the unit price for those materials and equipment could be different to what the project owner has with the suppliers. Nevertheless, the material and equipment items will be identical for all.
As the work progresses, the project owner and contractors will use PMWeb production module to capture the released material and equipment to the contractors. Those production records will be associated with the contractors’ contract agreements and not the material supply purchase orders. The actual material and equipment released to contractors and captured in PMWeb production module will become the basis for calculating the quantities of materials and equipment which will appear in the interim payment certificates for those contractors. Nevertheless, the actual payment to be made to the contractor will exclude the calculated value for the material and equipment in place as those were supplied by the project owner.
If the project owner is interested in have a template that shows all material and equipment supply contracts issued to a single vendor or supplier for each program of projects, PMWeb master commitment allows consolidating all those contracts and summarize the status of each. The summary information will include the purchase order reference number, project name, effective date, status, original value, approved changes and revised purchase order value. The master commitment header will recap the details of all those contracts including amounts invoiced to date or actual cost, approved and pending changes and other details.
While carrying out all those material procurement business processes, PMWeb will automatically update the purchase history of each material or equipment item defined in the material and equipment database. The purchase history will capture the value of each item in each awarded purchase agreement. PMWeb will automatically color the lowest prices in Green, highest prices in Red and average price in Yellow. For each entry, PMWeb will display the project name, purchase order number, date, status, unit of measure, price and other details that could relate to Tax, Discount and others.
Similar to all other business processes managed in PMWeb, supportive documents that are usually associated or required for each material procurement business processes’ transaction can be attached to the template. It is highly recommended to add details to each attached document to better explain to the reader what is being attached and viewed. In addition, links to other relevant records of other business processes managed in PMWeb can be also linked to the records of those change order related business processes.
It is highly recommended that all those supportive documents, regardless of their type or source, get uploaded and stored on PMWeb document management repository. PMWeb allows creating folders and subfolders to match the physical filing structure used to store hardcopies of those documents. Permission rights can be set to those folders to restrict access to only those users who have access to do so. In addition, PMWeb users can subscribe to each folder so they can be notified when new documents are uploaded or downloaded.
To ensure that the submit, review and approve dates of each the material procurement business processes’ transaction submission are captured, a workflow will be assigned to each one of those business processes. The assigned workflow will map the submit, review and approve tasks, role or roles assigned to each task, task duration, task type and actions available for task.
When any of the material procurement business processes’ transaction is initiated, the workflow tab available on the relevant template will capture the planned review and approve workflow tasks for each transaction as well as the actual history of those review and approval tasks. The captured workflow data will include the actual action data and time, done by who, action taken, comments made and whether team input was requested.
About the Author
Bassam Samman, PMP, PSP, EVP, GPM is a Senior Project Management Consultant with 40-year service record providing project management, project controls services and project management information system to over than 200 projects with a total value in excess of US $100 Billion. Those projects included Commercial, Residential, Education and Healthcare Buildings and Infrastructure, Entertainment, Hospitality and shopping malls, Oil and Gas Plants and Refineries, Telecommunication and Information Technology projects. He is thoroughly experienced in complete project management including project management control systems, computerized project control software, claims analysis/prevention, risk analysis/management (contingency planning), design, supervision, training and business development.
Bassam is a frequent speaker in topics relating to Project Management, Strategic Project Management and Project Management Personal Skills. Over the past 40 years he has lectured at more than 350 events and courses at different locations in the Middle East, North Africa, Europe and South America. He has written more than 550 articles on project management and project management information systems that were featured in international and regional magazines and newspapers. He is a co-founder of the Project Management Institute- Arabian Gulf Chapter (PMI-AGC) and has served on its board of directors for more than 6 years. He is a certified Project Management Professional (PMP) from the Project Management Institute (PMI), a certified Planning and Scheduling Professional (PSP) and Earned Value Professional (EVP) from the Association for the Advancement of Cost Engineering (AACE) and Green Project Management (GPM).
Bassam holds a Masters in Engineering Administration (Construction Management) with Faculty Commendation, George Washington University, Washington, D.C., USA, Bachelor in Civil Engineering – Kuwait University, Kuwait and has attended many executive management programs at Harvard Business School, Boston, USA and London Business School, London, UK.