PROCUREMENT CONTRACTS/AGREEMENTS
1.0 INTRODUCTION
1.1 Procurement of assets, materials and services is an important daily activity for every individual, organization, company, or Government and its agencies. While financial implications differ from smallest amounts to millions and billions of dollars, the important aspects for all procurements are same. The majority of individuals practice these principles unconsciously and without realization. However, those graced with wealth or whose procurement costs are borne by others, may not apply the good practices and recommended principles of procurement.
1.2 This article is specifically directed to those responsible for procurement activities in trust on behalf of others. This category will include individuals who are assigned to plan, design, approve, implement, supervise and monitor the procurement activities. These individuals are generally professionals within Government & its agencies, companies, NGOs and many other organizations who are trustees and assigned to manage others’ funds. They are required to be honest, ethical, transparent and accountable in discharging their responsibilities in a fair and just manner. These professionals deal in tens/hundreds of millions for procurement of goods and services and in billions in case of procurement of capital assets.
1.3 The procurement principles are generally applicable to all types of procurement but the degree of importance and aspects can differ. Further, the extent of monitoring will also vary according to the quantum of monitory value involved. This is important as the opportunities and possibilities for mismanagement and fraudulent instances will increase in tandem with the cost of the procurement.
1.4 It is the objective of this article to provide guidelines and create awareness of the best practices in the procurement industry. Another equally important objective is to provide knowledge on methods of ensuring prevention, prevention of mismanagement and prevention and early detection of fraudulent situations. This would ensure that the procurement is done in a cost-effective and cost-efficient manner, positively contributing to the client’s benefit.
1.5 Another objective is to present information in a practical and structured format to assist buyers in carrying out their responsibilities in a professional way that is cost-effective and cost-efficient. It provides guidance on best commercial practices and procedures. This article relates to procurement of goods and services only.
2.0 DEFINITION
2.1 Procurement means acquisition of assets, materials and services whether legal or illegal. The method of procurement could be by acquisition through purchasing, bartering, hiring, leasing, borrowing, stealing or any other fraudulent means.
3.0 POLICY
3.1 It should be a Company's procurement policy that is based on principles some of which are mandatory of compliance. These are:
[a] Company Regulations and Procedures
[b] Ethical Standards
[c] Fairness, Transparency and Accountability
[d] Overriding Aim for Value for Money (VFM)
3.2 However, the practical application of these principles will need to be tailored to suit the particular circumstance of each type of procurement and compatible with the core functions of the Company. Relationships with other procedures and instructions are applicable as relevant. These would include financial approvals, regulations and procedures.
4.0 STRATEGY
4.1 Every Company should have procurement strategy which should be implemented or operated by an organization referred to as Centralized Procurement Department [CPD]. The Company should also be guided by the procurement policy that should be widely understood by all within the Company and also those who have any dealings with the Company. The important strategy of any procurement should be that the items are procured on cost-effective and cost-efficient method. This means that the items should be procured at the best price, approved standards and prescribed specifications and delivery location and timing that is to be compatible with need and ultimately usage of the item to be procured.
5.0 ROLES OF PROFESSIONALS IN PROCUREMENT FUNCTIONS
5.1 Procurement decision responsibility rests within two main departments. These are the designated CPD and User Department or Budget Controllers [UD/BC]. It is important that both departments’ procurements comply with the above strategies.
5.2 The CPD provides a full range of procurement services to all departments of the Company. The services would include practical procurement advice pertaining to terms and conditions for contacts/agreements, research, alternative options, appraisals, specification drafting, contractors/suppliers and tender evaluation, negotiation, advice on contract/supply management, internal controls and monitoring methodology.
A – Director of Procurement Department [DPD]
5.3 The Director of Procurement Department [DPD] is head of CPD and responsible for purchasing activities including monitoring the activities. DPD is also responsible for commercial direction and strategy approved by the Company [or Board of Directors]. The role of DPD is summarized below:
[a] Advises on the procurement aspects
[b] Issues and receives all contractual documentation
[c] Advises the evaluation and selection process
[d] Negotiates the terms and conditions of contract and any later variations
[e] Attends contract review and other meetings as required
5.4 In addition there are other department officials with specific roles which can be identified within the procurement process. Some of the commonly used roles are listed below with a brief description of their responsibilities. The need for any specific role will vary according to the value, complexity or strategic importance of the project and the items to be procured.
B - User Department:
5.5 All procurements are initiated by the user departments. Thus they have a crucial role to play in any procurement process. Their advise would be critical and should be taken into account and given due importance by the DPD in the procurement. Some of the responsibilities of the user department are listed below.
Provides guidance in decision making selection process
[b] Participates in specification and evaluation process
[c] Ensures objectives relevant to usage of the item are achieved
[d] Authorizes expenditure
[e] Examines and approves the acceptance/rejection of the procured item
C - Budget Holder - Financial Approval
5.6 All procurement is subject to prior financial approval. Expenditure should take place only after approval, except in cases of urgencies where written approval cannot be obtained. However, covering approval should be obtained subsequently by providing justification and need for procurement without prior budgetary approval. Financial approval procedures should be referred for guidance.
[a] Estimates of required resources
[b] Budget approval
[c] Ensure best value for money [Cost-Effectiveness & Cost-Efficiencies]
[d] Status Reports - Monitors Expenditure
D – Project/Contract Manager
5.7 Procurement should be under the responsibility of a Project/Contract Manager who should be appointed and held accountable for all aspects of the procurement where the procurement is of capital nature, the financial outlay is substantial or of a continuous nature. Some of the more important aspects are listed below.
[a] Prepares Board Paper for Justification of item to be procured
[b] Prepares Economic Appraisal Report
[c] Prepares Specification with DPD input as required
[d] Agrees selection criteria with DPD input as required
[e] Shortlists suppliers with DPD input as required
[f] Acts as focal point of authority and responsibility
[g] Acts as Approving Authority for any variations to contract
[h] Enforces the agreed terms and conditions of the contract
[i] Monitors and measures suppliers’ progress and performance
[j] Leads the contract management team
E - Supplier or Contractor - Provider of the service:
5.8 The selected supplier of the items to be procured has specific functions that are detailed in terms and conditions as prescribed in the contract or requisition order.
[a] Delivers the procured item/service as prescribed
[b] Monitors the performance and delivery until accepted and taken over by the user
[c] Provides information to contract manager and others as applicable
F – Consultants
5.9 In case of procurement of specialist services where relevant expertise is crucial, such as in the case of services pertaining to financial, legal, technical or that is commercial in nature, it is appropriate that the relevant input is procured. Procurement should be implemented only after prior consultation and advise of these relevant experts who may be in-house professionals or may be obtained from outside.
6.0 VALUE FOR MONEY [VFM]
6.1 The overriding aim of any procurement is to meet the consumer’s/user’s requirement in full while achieving best VFM as the optimum combination of whole life cost and quality. VFM is often defined as buying at the following ‘rights’:
[a] the right price [
b] the right quality
[c] the right quantity
[d] the right time
[e] the right place
6.2 Professional use of commercial opportunity and purchasing leverage will increase the opportunity to obtain VFM. The DPD should possess current and relevant knowledge that should include the following:
[a] Have a thorough understanding of the requirement of the purpose of the item to be procured
[b] Ensure the correct specifications
[c] Have up to date market knowledge, industry and standards
[d] Have access to specialist advice
6.3 An accurate statement of requirements is vital as mistakes, ambiguities or misinterpretations may lead to the provision of unsatisfactory products or services and higher costs. Buyers should compare the cost of the procurement process and the effort expended to ensure that it is commensurate with the risk and potential benefit taking into account the cost and/or the strategic importance of the procurement.
6.4 DPD should be aware of some of the more important methods that can be used to achieve VFM objectives:
[a] Combining requirements that increase quantities in order to achieve lower prices
[b] Formulating centralized contracts for stronger negotiating positions
[c] Having a comprehensive current database of suppliers, constantly reviewing to ensure that it is updated with new suppliers and products, improvements, changes in rates and laws in the industry
[d] Ensuring existing suppliers retain the best rates, terms and conditions by encouraging competition
[e] User oriented specifications to maintain open competition by avoiding targeted suppliers
[f] Ensuring standardization without variations to approved goods and services for negotiations from position of strength
[g] Analyzing whole life usage costs including post delivery/completion/installation/utilization costs
[h] Enquiries and responses on any aspect of terms, conditions, specifications, etc. to be informed to all bidders to ensure fairness and transparency
[i] Trusting, discussing and co-operating with existing and future suppliers for mutual benefit to obtain improvement in qualities, better rates, delivery terms, etc.
7.0 COLLABORATION AND TRAINING
7.1 The above referred procurement objectives can best be achieved by continued collaboration and networking with all the departments within the company. Thus it is important that all relevant departments are aware of the each others roles, functions and responsibilities. This collaboration should be expanded by providing relevant training on various aspects of procurement to all other departments.
7.2 It is appropriate for the DPD to provide a direct contact line [phone/fax/e-mail] that should be accessible to all who may wish to seek clarifications, advice or provide suggestions to improve the procurement processes or procedures. Similar facilities may also be extended to suppliers of goods and services.
8.0 RECOMMENDATIONS
8.1 It must be noted that procurement is a multi-million/billion dollar industry throughout the world and it is substantially based on trust, ethics, integrity and honesty. While there are procedures, internal controls, regulations and laws to prevent mismanagement and fraudulent practices it is still not exempt from fraud. This is due to common perception that it is financially rewarding due to low penalties that are not commensurate with the rewards that can be achieved.
Effective Management of Procurement can Result in Substantially Savings
Auditors have an Important Role provided they have the Relevant Knowledge & Expertise
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