Figure 7.3 Scheduling: decidingwhen each buy "can be" Awarded
schedule forward as shown from milestone (1) today's date, and isolate each step needed leading up to making the contract award, number (3).
There are a number of important concurrent tasks which must be performed prior to the placement of any new order. The second key required milestone is achieved when there is a formal (2) Request for Proposal (RFP) ready to release to prospective sellers. A typical RFP will contain multiple sections, for example, terms and conditions, statement of work, specifications, data and management requirements, payment provisions, etc.
However, the single most critical part in any RFP will be the tech-nical specification of the new product. If the item to be procured is new, or it doesn't exist, it is imperative that we define precisely what we want done by the seller. Complex procurements require precise specifications.
It sometimes comes as a surprise to many that the critical work of preparing the "procurement specification" will be done, not by the company buyers, but by the technical staff. The end product of the technical staff will typically be drawings, specifications, and perhaps a process description. Any changes to the technical specification after a contract has been awarded, during the seller's performance period, constitutes the number one cause of cost growth: "scope creep."
In addition to the technical description, the business definition must also be prepared by the responsible buyer who will be assigned to support the project by the procurement organization. The designated buyer and the responsible engineer must work closely as a cohesive team to make all major-critical procurements work well.
The buyer will pull together the model contract with the RFP consisting of a number of sections. The responsible engineer will also have a key role in preparing the model contract, but subordinate to that of the buyer. Usually the model contract will come together nicely, it is a fairly routine document. But the RFP will often be delayed pending completion of the technical package, the drawings and specifications.
Once the RFP is ready, it will be released to selected sellers, who must be given a reasonable time to adequately respond. The sellers will respond to the RFP with their formal proposals, which must each
be evaluated, and a final recommended choice be made for approval by management. From the point of issuance of the RFP until a-final recommended choice is made is typically referred to as the "procurement lead-time." Procurement lead-times are a necessary and vital part of source selection. However, a funny thing sometimes happens in this process.
Engineers will sometimes (frequently?) be late on the completion of their critical technical specification. And remember, virtually nothing in procurement is more important to a successful buy than having a quality procurement specification. The engineers will at this point begin to feel the pressure of meeting a schedule release date, and then discover that they are being pressured to allow for procurement lead-time! The engineer's lament:
"What is this thing called procurement lead-time, who needs it!"
Demands will often be made by the same delinquent engineers to shorten the allocated procurement lead-time, to give them more time to work on their procurement specification. And there is another emotional issue which needs to be considered: most engineers didn't go to school and take perhaps the most difficult curriculum to write a "dammed" procurement spec! That is why the critical job of writing the technical procurement definition often falls on the junior staff members. Resentment sets in. The delicate relationship between engineer and buyer often becomes strained.
An important point: procurement lead-times are an essential part of the procurement process. They should never be arbitrarily shortened to compensate for other factors, like the late release of technical specifications.
See Figure 7.4. There are four critical parts of procurement lead-times. The first is to give a seller a reasonable time to respond to the RFP, resulting in a firm proposal. Next is to allow adequate time to evaluate each sellers proposal, and then to make a final source selection, subject to management approval. Lastly, we need to obtain management's approval for the final recommended source. How much time is needed for this procurement lead-time process? It all depends on the complexity of the procurement.
A seller's proposal for a simple (existing) shelf item can be done in minutes. Perhaps the best example of these types of buys are the per
-Figure 7.4 Procurement Lead-Time: essential to the process
sonal computers which can be defined on-line by the consumer, then priced in a matter of seconds. While the final computer product may be complex, it is simply a matter of packaging existing components.
However, a major complexity procurement of a Category (1) variety (discussed in Chapter 2) would likely take a seller anywhere from 1 to 3 months to respond. Not only must the respondent comply with each and every term and condition specified in the RFP, but in a competitive situation would have to decide how much risk they might consider underwriting in an effort to win the job.
Once the proposals are received, how much time will be needed to properly evaluate them, to make a source selection based on specific criteria, then prepare a recommendations for managements consideration.
Once again, depending on the complexity of the item, anywhere from 1 to 3 months will.typically be needed.
Lastly, once a final selection is made, executive management must approve the final choice. Obtaining management approval can take as little as one day (rarely), to a week or even a month, depending on how often senior management formally meets to approve such matters.
Sometimes management doesn't like the recommended seller, or has some concerns with the process, in which case they may reject the entire procurement, and the team must start all over. It all depends.
Procurement lead-times are a necessary part of the orderly procurement process. They must happen in a sequential manner without disruption. Any project procurement which is made by circumventing or arbitrarily shortening the procurement lead-time will likely later experience problems in managing seller performance.
Special Issue: Critical project procurements do not support the master schedule
There is an unfavorable condition sometimes encountered in the scheduling of a project which is referred to as having "negative float." This term means simply that there is not enough time to adequately do the job. It is not uncommon to encounter negative float when a project is first scheduled. Once exposed, it is then up to the project team to finds ways to eliminate the negative condition so that they are in concert with management's expectations of a completion date.
A negative float condition for a major critical procurement is portrayed in Figure 7.5. By scheduling forward to indicate the date when we "can"
award a contract, and then by scheduling backwards to reflect when we
"must" award a contract, a negative schedule condition can be determined.
Issue: how can we get rid of this adverse condition without adding risks to the project?
In order to give a seller adequate time to do their work, and to make a delivery in time to support the master schedule, we sometimes find that we should have awarded the contract . . . last month! Or, conversely, by the time we get our act together and prepare a formal RFP, we will have to cut the seller's required lead-time in half in order to meet the schedule! Either solution would be unacceptable. However, in order to support the project master schedule we must find a way to eliminate any negative schedule condition.
One approach some projects have taken with selected critical sellers in order to shorten their procurement lead-times is to bring selected critical sellers directly into their team, immediately make
Figure 7.5 Procurements sometimes encounter negative float
them a part of the overall project team. True, this approach would essentially eliminate competition for the selected critical items. But quite frankly, some formal competitions are a farce. There are often "preferred"
sellers, qualified suppliers with proven records of prior performance.
Quite often, particularly in the commercial sector, contracts with selected preferred sellers are negotiated directly, with most satisfactory results.
See Figure 7.6. The more traditional competition approach is dis-played across the top of the chart. On tiie bottom of the chart the project negotiates a contract directly with a qualified seller, thus eliminating the competition lead-time, and improving the overall project schedule.
By negotiating directly with a preferred and qualified source, the 2 to 6 months of procurement lead-times can be reduced down to just one or two weeks. Bringing preferred suppliers immediately on one's team, by skillful negotiation, can sometimes eliminate a negative schedule condition. Not everyone would agree with this approach. But it is an approach often done with projects in the commercial sector. Publicly funded projects might have difficulties
Figure 7.6 Teaming Agreements can sometimes shorten a schedule
with this approach, and it is always wise to get your customer involved before trying this approach.
All procurements, particularly major critical buys, must be awarded and performed in time to support the master schedule. The project procurement plan must address the timing of each buy.
Budgeting: Estimating "How Much" Each Procurement Will Cost
The final mandatory component of any viable procurement plan must round out what is commonly referred to as the triple constraint: the costs required to accomplish the defined scope of work within the allotted time-frame or schedule. At the start of each new project every task, every major component, every purchased item will get a budget. COTS items are typically budgeted in broad, bulk categories. Hopefully each authorized budget will be reasonable, achievable, and have some logical basis for the cost estimate.
Cost estimates for a new project become available based on
vari-• Analogy (rule of thumb) relationships
(top-down estimates based on similar work; expert judgment)
• Parametric modeling
(component weight: square feet; lines code; function points)
• Bottom-up estimates
(summary of detailed estimates for individual packages)
• Computerized estimating tools
(incorporating actual historical experience)
• Firm proposals from viable sellers
Figure 7.7 How much will each Procurement cost
ous forecasting models. Displayed in Figure 7.7 are five of the more recognized methods to estimate required costs and subsequently set budgets for a new project.
Each of these methods needs to be understood.
Analogy (expert judgment. . . rule of thumb) relationships
These estimates are sometimes referred to as top-down estimating, or sometimes estimates by expert judgment. They are used initially whenever there is little detailed information on a new project, often in the early stages of the project. They are considered to be the least costly to prepare, but also the least accurate of other estimating methods.
The project estimator will focus on similar work which has been done before, and attempt to establish a relationship to the current new job.
Sometimes when the new work is more complex, or less complex, or other factors such as unknowns come into play, the estimator will add or take away some percentage value from the projected new work.
A similar job which might have cost the organization $400,000
before, might now be estimated at perhaps $450,000 based on acknowledging simply the increased labor costs and inflationary factors.
Or, perhaps it may now be estimated at $495,000, considering both inflation and an additional complexity factor of say 10%.
Parametric modeling
One of the more respected methods to estimate future costs of a new project is with parametric modeling. This method sets parameters based on historical performance, typically by industry, but some performance data will apply to multiple industries. In information technology projects such issues as costs for lines of computer software code, function points analysis, Constructive Cost Model (COCO-MO) and COCOMO II, are commonly used.
On construction projects square footage is often used as the basis for cost estimates before detail drawings become available. Construction square footage estimates can be further broken down into single or double residential home square footage, apartment footage, single story industrial footage, high-rise footage, and other types of buildings.
Assuming comparable labor and materials costs, and site conditions, these preliminary estimates can be quite accurate.
The aircraft industry has used parametric modeling quite well. They have in the past been successful in forecasting future costs based on the expected weight of the aircraft types, separating aircraft into fighter, bomber, transport, unmanned, sea based, etc. Most recently they have had to incorporate other factors into their parametric models such as the use of exotic light weight materials, heat resistant materials, stealth materials, etc.
Since both the analogy and parametric forms of estimating are top-down forms of estimates, they are more difficult to subsequently budget in detail at project implementation.
Bottom-up estimates
This approach to forecasting future costs takes a new job and breaks it down into small pieces. A detailed estimate is then prepared
for each piece or task or segment of work. The costs for the tasks are then summarized to obtain a total cost for the job. The various levels of the project Work Breakdown Structure (WBS) lends itself nicely to this type of estimating. A separate estimate would be prepared for each WBS element displayed.
One drawback to preparing bottoms-up cost estimates is that this method takes considerable time to prepare an estimate for a new job. Also, this type of estimate works best when some design information becomes available providing a basis for the detailed estimates.
Some people have complained that this estimating method takes an inordinate amount of time. That may be true. But they also provide a very detailed cost estimate, by task, and one that can be quickly converted into formal authorized budgets at the point of project implementation. Since neither the Analogy nor the Parametric cost estimates contain bottom-up detail, they are effectively gross top-down estimates, and much time will be eventually required developing detailed budgets at the point of project initiation.
Computerized estimating tools
Through the combination of keeping accurate historical records by industry, and project, and breaking actual performance results down into subordinate pieces, some companies have developed some rather sophis-ticated computer estimating techniques. Such techniques often rely on a combination of internal records and the use of electronic spreadsheets.
Also, some industries have carefully documented their performance actuals, which have allowed for commercial software pricing packages to become available. There are several such cost estimating models available, particularly for use in the aerospace and defense industry.
Firm proposals from viable sellers
The final method to determine a reasonable cost estimate for any procurement is by simply laying out the responses from trusted suppliers, preferably three or more in a competitive bid environment. Assuming that an adequate and complete RFP was issued, and there
is no collusion on the part of the responding sellers, there can be no better source of estimated costs than from analysis of the firm responses received from suppliers who will actually perform the work.
Other Procurement Planning Issues of Importance
In addition to the triple constraint issues covering scope, schedule, and costs, there are a number of other important matters which must be included in any viable procurement plan. In order to be complete, the plan for the