Section P
Procurement
There is hardly anything in the world that some man cannot make a little worse and sell a little cheaper and the people who consider price only are this man's lawful prey.
John Ruskin, 1850
For process plants approximately 40% of a major project is spent on the procurement of materials and equipment. It is, therefore, an extremely important area where it is possible to make significant savings in both cost and schedule, thus benefiting the overall project.5
Some companies have subcontract formulation under procurement and their implementation under construction. Others have all the subcontract functions within the construction department.
1 Getting Organized
1.1
Get the right people: see Section D Mobilization, paragraphs 1.1 to 1.5.
1.2
Establish functional links for:
- Quality assurance
- Project audit.
1.3
As already stated, if you have doubts about a particular piece of work, get it checked out by the functional management. You cannot be an expert on every aspect of the work and, in any case, you do not have the time to get involved. If in doubt, get it checked. If in serious doubt, get the functional manager to confirm their approval in writing.
1.4
Prepare procurement procedures and ensure they match contractual requirements. Ensure procedures contain all the necessary safeguards against fraud.
1.4.1
Get owner/client approval to the procedures.
1.4.2
Decide where you want to exercise your prerogative to approve certain parts of the purchasing process – for example, approving the tender lists.
1.5
Ensure owner approval requirements are clearly defined and complied with.
1.6
Are there client requirements for the use of specific suppliers? You must register any objections you may have as soon as possible and in writing.
1.7
Check with the legal or contracts department that your standard conditions of purchase are compatible with the main contract that you have with your client.
1.8
Check financing or contractual restraints on purchasing before design decisions are made. For example, does any financing package dictate the sourcing or location of services or product suppliers?
2 Evaluating Suppliers6
2.1
It is the purchasing department's responsibility to build relationships with suppliers and to collect data concerning their performance. However, many of the factors considered in a supplier rating process are subjective. The following financial ratios (obtained from the suppliers' financial reports) are useful ratios that procurement can use for comparing possible suppliers:
| Ratio | Use |
| Plant and Machinery/Sales turnover | Production efficiency |
| Stocks/sales turnover | Response time |
| Development costs/sales turnover | Development activity |
| Cost of materials/sales turnover | Purchasing efficiency |
| Cost of wages and salaries/sales turnover | Labour efficiency |
| Distribution costs/sales turnover | Distribution efficiency |
| Administrative costs/sales turnover | Administration efficiency |
2.1.1
Check with purchasing to see if they have or are able to make such comparisons and discuss with them what they mean in comparison to the ratios for the industry in which the company operates.
2.2
Make sure that vendors have a proven historical performance record.
3 Expediting and Inspection
3.1
Decide on the expediting policy: none/by telephone/scheduled visits. Use staff from worldwide offices. Make sure that expeditors are aware of items with zero float.
3.1.1
Decide which reports you want to receive, for example: all reports for critical items and major equipment items and only exception reports for the remainder.
3.2
Decide on the inspection policy: during fabrication at suppliers/on delivery/at site.
3.2.1
Inspect items on the critical path on a regular basis. Use site engineers to inspect at suppliers before packing. Only inspect at site those you can afford to put right if problems arise. Use staff from worldwide offices and use an inspection agency (for noncritical items) for those expensive visits. Decide on and fix client involvement.
4 Some Specific Procurement Ideas
4.1
Have strategy memos developed for the purchase of major equipment. Use them for client and management approval.
4.1.1
Fabricators of equipment packages should be selected on the basis of their ability to construct a package, rather than their expertise for the main piece of equipment.
4.1.2
Material suppliers should be prequalified on the basis of the quality of their certification paperwork systems.
4.2
Practical ideas for procurement:
- Wherever possible reduce the procurement cycle.
- If possible reduce the number of different vendors.
- Include a buy‐back provision in the main order for the bulks.
- Include construction spares in the vendor's price.
- Include vendor representatives in the price for equipment.
- Carry out string tests for all rotating machinery at manufacturer's place of business before acceptance.
- Get construction input for installation requirements to be incorporated into any purchase order or subcontract.
- Get the insulation subcontractor to be responsible for doing their own material take‐off prior to awarding the contract.
- Define delivery as ‘deliver onto foundations’ for major equipment.
- Rationalise the transport/shipping arrangements.
4.3
Do not buy bulks too early. Buy the minor bulks from site. However, explore the possibility of using historical data to purchase 50 per cent of the bulks early in the programme before the design is firm.
4.4
Get construction input for a consistent/common set of conditions for all vendor representatives. Include these conditions in any purchase order involving vendor representatives.
4.5
Get vendors (include a requirement in the purchase order) to communicate confirmation of the shipping of major vessels and equipment showing:
- The purchase order number
- The equipment number
- Mode of transport
- Name or number of transport vehicle
- Estimated time of arrival.
4.6
Make sure that the subcontract terms are compatible with the main contract. See Section R Subcontracting, paragraphs 2.2 and 2.2.1.
5 Payment Terms
5.1
On the whole, suppliers' payment terms7 should be 100 per cent upon completion of the order. Explicitly, payment is made when the goods have been delivered, including the various bits of paperwork that you need for your client. No significant payments should be made to suppliers before ownership has been transferred. A basic principle in negotiating is that you never give something away without getting something in return. Consequently, exceptions should be minimal; mobilization advances or payments against drawings (to keep the supplier healthy) may be made, but these must be protected by bank guarantees.
5.1.1
You might consider progress payments if the supplier or subcontractor says they would like to be reimbursed the cost of financing the order. However, make sure that the final payment is disproportionately large in order to give you leverage when you need to obtain the final documentation. If the supplier insists that they need the cash flow of regular payments, then why are you dealing with them?