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PART 3
Applications
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CHAPTER 11
Project procurement
Objectives of this chapter
• To outline the key features of projects
• To understand how procurement adds value in project management
• To examine various success factors and how these impact on the procurement activity
• To examine the issues of project planning
• To appreciate the importance of procurement within project control
• To consider the various types of contract for major contracts such as Wembley football
stadium and the Terminal 5 Building at Heathrow Airport
• To appreciate the issues involved in subcontracting
• To outline network analysis
• To provide an overview of risk management and its benefits
List of Cases, Research Boxes and Figures in this chapter
Mini Case Studies
• Scottish Parliament: the £431m question
• Wembley Stadium
• Terminal 5 London Heathrow
Research Boxes
Nil
Figures
• Figure 11.1 Earned value
• Figure 11.2 Subcontracting
• Figure 11.3 Arrow diagram for project X
• Figure 11.4 Bar charts for project X
• Figure 11.5 The risk management process
Instructor’s Manual
Teaching Notes
This chapter will explore the characteristics of projects and project procurement, identifying
approaches available, and identifying the contribution of procurement.
Comparisons will be made between differing approaches using recent examples of large projects
such as the Scottish Parliament Building, Wembley Stadium, and the Terminal 5 building for
Heathrow airport in London.
Instructors should emphasise the comparisons between the above examples, highlighting the
importance of the correct choice of:
• Contract
• Relationship
• Contract management and project control
Key concepts to be covered in this chapter are as follows:
All projects have common elements
• An objective – definable end result, output or product
• Complexity – large number of different tasks
• Uniqueness – projects are usually ‘one-offs’
• Uncertainty – projects are planned before they are executed, hence they carry an
element of risk
• Temporary nature – defined beginning and end
• Life cycle – resources needs change during the life of the project
Successful project management depends upon various factors:
• Clearly defined goals
• Competent project manager
• Top management support
• Competent project team members
• Sufficient resource allocation
• Adequate communication
• Control mechanisms
• Feedback capabilities
• Responsiveness to clients
Instructor’s Manual
• Trouble shooting mechanisms
• Project staff continuity
• Project control
The process of project control involves three sets of decisions:
• How to monitor the project, check its progress.
• How to assess the performance of the project by comparing monitored progress to the
project plan.
• How to intervene in the project in order to make the changes to bring it back to plan. Earned
Value (EV)
Instructors should highlight the importance of regular control via the ‘earned value’ concept.
EV uses the units of time and money. It provides the basis for cost performance analysis. It is
necessary to know the planned cost at any time and the cost of work completed to date.
The EV concept and method uses a number of initially confusing terms:
Budgeted cost of work scheduled (BCWS) which represents the budget associated with the
planned and scheduled activities.
Actual cost of work performed (ACWP): the actual cost charged to those activities that have
been completed.
Budgeted cost of works performed (BCWP): this is the ‘traditional’ EV – the planned cost of
the activities that have been completed. The distinction between the BCWS and the BCWP is
that the former represents the budget for the activities that were planned to be completed and the
latter represents the budget for those activities that actually have been completed.
Mini case studies
The projects for the Scottish Parliament Building and Wembley Stadium, were plagued with
delays, disputes and cost overruns whilst the open, trusting, partnering relationship contract
used for the Terminal 5 building for Heathrow airport ensured that the project was completed on
time, within budget and in line with the agreed specification.
Risk
Risk can be defined as:
‘The combination of the probability of an event and its consequences’
In all types of undertaking, there is the potential for events and consequences that constitute
opportunities for benefit (upside) or threats to success (downside).
Instructor’s Manual
Risk management
Risk management is a central part of any organisation’s strategic management. It is the process
whereby organisations methodically address the risks attaching to their activities with the goal
of achieving sustained benefit within each activity and across the portfolio of all activities.
The focus of good risk management is the identification and treatment of these risks. Its
objectives are to add maximum sustainable value to all the activities of the organisation. It
marshals the understanding of the potential upside and downside of all those factors which can
affect the organisation. It increases the probability of success and reduces both the probability of
failure and the uncertainty of achieving the organisation’s overall objectives.
Risk management should be a continuous and developing process which runs throughout the
organisation’s strategy and the implementation of that strategy. It should address methodically
all the risks surrounding the organisation’s activities past, present and in particular, future.
Students should prepare a list of the key contract risks from the figures contained in the text.
Risk Identification Techniques – examples
• Brainstorming
• Questionnaires
• Industry benchmarking
• Scenario analysis
• Risk assessment workshops
• Incident investigation
• Auditing and inspection
• HAZOP (Hazard & operability studies)
Risk Analysis Methods and Techniques – examples
• Market survey
• Test marketing
• Research and development
• Business impact analysis SWOT analysis (Strengths, Weaknesses, Opportunities, Threats)
• Event tree analysis
• Business continuity planning
• Real option modelling
• PESTLE (Political Economic Social Technical Legal Environment)
• Threat analysis
• Fault tree analysis
• FMEA (Failure Mode & Effect analysis)