5. Issuing a Request for Proposal (RFP) and developing a Project Proposal

As previously discussed, a project is formally selected and authorized using a document referred to as the project charter. In some cases, an organization does not have the ability to plan and execute the project. This can be because the organization does not have the expertise in house or people do not have the capacity and time necessary for the project. In those cases, the organization will have to outsource the project to an external resource called the contractor.

To communicate the requirements of the project to external contractors, the project sponsor/customer prepares a Request for Proposal (RFP). As the name states, the document is used to solicit proposals from qualified contractors to plan and execute the project.

Procurement management follows a logical order. First, you plan what you need to contract; then you plan how you’ll do it. Next, you send out your contract requirements to sellers. They bid for the chance to work with you. You pick the best one, and then you sign the contract with them. Once the work begins, you monitor it to make sure that the contract is being followed. When the work is done, you close out the contract and fill out all the paperwork.

Contract Types

You should know a little bit about the major kinds of contracts available to you (the client) so that you choose the one that creates the most fair and workable deal for you and the contractor. Some contracts are fixed price: no matter how much time or effort goes into them, the client always pay the same. In Figure 5.1 the cost to the client stays the same, but as more effort is exerted the profit to the contractor goes down. Some are cost reimbursable also called cost plus. This is where the seller charges you for the cost of doing the work plus some fee or rate. Figure 5.2 illustrates this by showing that as efforts increase, costs to the client go up but the contractor’s profits stay the same. The third major kind of contract is time and materials. That’s where the client pays a rate for the time spent working on the project and also pays for all the materials used to do the work. Figure 5.3 shows that as costs to the client go up, so does the profit for the contractor.

Fixed-Price Contracts

The fixed-price contract is a legal agreement between the project organization and an entity (person or company) to provide goods or services to the project at an agreed-on price. The contract usually details the quality of the goods or services, the timing needed to support the project, and the price for delivering goods or services. There are several variations of the fixed-price contract. For commodities and goods and services where the scope of work is very clear and not likely to change, the fixed-price contract offers a predictable cost. The responsibility for managing the work to meet the needs of the project is focused on the contractor.

Cost-Reimbursable Contracts

In a cost-reimbursable contract, the organization agrees to pay the contractor for the cost of performing the service or providing the goods. Cost-reimbursable contracts are also known as cost-plus contracts. Cost-reimbursable contracts are most often used when the scope of work or the costs for performing the work are not well known. The project uses a cost-reimbursable contract to pay the contractor for allowable expenses related to performing the work. Since the cost of the project is reimbursable, the contractor has much less risk associated with cost increases. When the costs of the work are not well known, a cost-reimbursable contract reduces the amount of money the bidders place in the bid to account for the risk associated with potential increases in costs. The contractor is also less motivated to find ways to reduce the cost of the project unless there are incentives for supporting the accomplishment of project goals.

Cost-reimbursable contracts require good documentation of the costs that occurred on the project to ensure that the contractor gets paid for all the work performed and to ensure that the organization is not paying for something that was not completed.

Progress Payments and Change Management

Vendors and suppliers usually require payments during the life of the contract. On contracts that last several months, the contractor will incur significant cost and will want the project to pay for these costs as early as possible. Rather than wait until the end of the contract, a schedule of payments is typically developed as part of the contract and is connected to the completion of a defined amount of work or project milestones. These payments made before the end of the project and based on the progress of the work are called progress payments. For example, the contract might develop a payment schedule that pays for the design of the curriculum, then the development of the curriculum, and then a final payment is made when the curriculum is completed and accepted. In this case there would be three payments made. There is a defined amount of work to be accomplished, a time frame for accomplishing that work, and a quality standard the work must achieve before the contractor is paid for the work.

Just as the project has a scope of work that defines what is included in the project and what work is outside the project, vendors and suppliers have a scope of work that defines what they will produce or supply to the company. (Partners typically share the project scope of work and may not have a separate scope of work.) Often changes occur on the project that require changes in the contractor’s scope of work. How these changes will be managed during the life of the project is typically documented in the contract. Capturing these changes early, documenting what changed and how the change impacted the contract, and developing a change order (a change to the contract) are important to maintaining the progress of the project. Conflict among team members may arise when changes are not documented or when the team cannot agree on the change. Developing and implementing an effective change management process for contractors and key suppliers will minimize this conflict and the potential negative effect on the project.

Selecting the Contract Approach

The technical teams typically develop a description of the work that will be outsourced. From this information, the project management team answers the following questions:

• Is the required work or materials a commodity, customized product or service, or unique skill or relationship?
• What type of relationship is needed: supplier, vendor, or partnership?
• How should the supplier, vendor, or potential partner be approached: RFQ, RFP, or personal contact?
• How well known is the scope of work?
• What are the risks and which party should assume which types of risk?
• Does the procurement of the service or goods affect activities on the project schedule’s critical path and how much float is there on those activities?
• How important is it to be sure of the cost in advance?

The procurement team uses the answers to the first three questions listed above to determine the approach to obtaining the goods or services and the remaining questions to determine what type of contract is most appropriate.

A key factor in selecting the contract approach is determining which party will take the most risk. The team determines the level of risk that will be managed by the project and what risks will be transferred to the contractor. Typically, the project management team wants to manage the project risk, but in some cases, contractors have more expertise or control that enable them to better manage the risk associated with the contracted work.

Soliciting Bids

A solicitation is the process of requesting a price and supporting information from bidders. The solicitation usually takes the form of a Request for Proposal (RFP).

Qualifying Bidders

Potential bidders are people or organizations capable of providing the materials or performing the work required for the project. On smaller, less complex projects, the parent company typically has a list of suppliers and vendors that have successfully provided goods and services in the past, and the project has access to the performance record of companies on that list. On unique projects, where no supplier lists exist, the project team develops a list of potential suppliers and then qualifies them to become eligible to bid on project work. Eligible bidders are placed on the bidders list and provided with a schedule of when work on the project will be put out for bid.

The eligibility of a supplier is determined by the ability to perform the work in a way that meets project requirements and demonstrates financial stability. Ability to perform the work includes the ability to meet quality specifications and the project schedule. During times when economic activity is high in a region, many suppliers become busy and stretch their resources. The project team investigates the potential suppliers, before they are included on the bidder’s list, to ensure that they have the capacity and track record to meet deadlines.

The potential supplier must also be financially stable to be included on the bidders list. A credit check or a financial report from Dun and Bradstreet (D&B)—a well-known provider of financial information about individual companies—will provide the project with information about the potential bidder’s financial status. D&B services include the following:

• D&B proprietary rankings and predictive creditworthiness scores
• Public filings, including suits, liens, judgments, and UCC (uniform commercial code) filings—standardized financial disclosure documents that conform to the uniform commercial code
• Company financial statements and history

Request for Proposal (RFP)

An RFP accounts for price but focuses on meeting the project quality or schedule requirements. The process of developing a proposal in response to an RFP can be very expensive for the bidder, and the project team should not issue an RFP to a company that is not eligible to win the bid.

Evaluating Bids

The evaluation of bids based on RFPs is complex. The evaluation of proposals includes the price and also an evaluation of the technical approach chosen by the bidder. The project team evaluating the proposal must include people with the expertise to understand the technical aspects of the various proposal options and the value of each proposal to the project. On more complex projects, the administrative part of the proposal is evaluated and scored by one team, and the technical aspect of the proposal is evaluated by another team. The project team combines the two scores to determine the best proposal for the project.

Awarding the Contract

After the project team has selected the bidder that provides the best value for the project, a project representative validates all conditions of the bid and the contract with the potential contractor. Less complex awards, like contracts for printed materials, require a reading and signing of the contract to ensure that the supplier understands the contract terms and requirements of the project schedule. More complex projects require a detailed discussion of the goals, the potential barriers to accomplishing those goals, the project schedule and critical dates, and the processes for resolving conflicts and improving work processes.

Managing the Contracts

The contract type determines the level of effort and the skills needed to manage the contract. The manager of supplier contracts develops detailed specifications and ensures compliance with these specifications. The manager of vendor contracts ensures that the contractors bidding on the work have the skills and capacity to accomplish the work according to the project schedule and tracks the vendor’s performance against the project needs, supplying support and direction when needed. The manager of partnering arrangements develops alignment around common goals and work processes. Each of these approaches requires different skills and various degrees of effort.

After the contract is awarded, the project team tracks the performance of the contractor against performance criteria in the contract and his or her contribution to the performance of the project. Usually, contractors deliver the product or service that meets the quality expectations and supports the project schedule. Typically, there are also one or two contractors that do not perform to project expectations. Some project managers will refer to the contract and use it to attempt to persuade the contractor to improve performance or be penalized. Other project managers will explore with the contractor creative ways to improve performance and meet project requirements. The contract management allows for both approaches to deal with non`-performing contractors, and the project team must assess what method is most likely to work in each situation.

Managing contractor performance on a project is as important to the overall project outcomes as the work performed by the project team.

Develop a Proposal

While the client has identified the need for a contractor and issues an RFP, the potential contractor needs to evaluate whether to bid on the RFP or not.

Selection criteria on the Bid/No-Bid Checklist include:

• Competition
• Risk
• Consistent with contractor’s mission
• Opportunity to extend expertise
• Reputation with customer
• Availability of funds
• Resources required to prepare quality proposal
• Resources available to perform project
• Contractor’s advantages, strengths, or distinct capabilities
• Contractor’s weaknesses

Once a contractor has concluded to proceed with the proposal development, the work begins.

Attribution

This chapter is based on chapter 13 in Project Management by Adrienne Watt which is adapted from Project Management for Instructional Designers by Geri Clements et. al., published by David Wiley under a CC BY-NC-SA license.