Contracts and Procurement Management

This article discusses the importance of contracts and procurement management for successful project management. It covers the risks involved in contracts and procurement of global projects and how to manage them. The article also provides recommendations for managing financial, construction, operational, supply, and currency risks. It further explains the risk mitigation and negotiation process and areas of accountability for procurement and project managers. The article concludes by emphasizing the importance of systematic risk identification, assessment, and treatment for effective procurement.

Running head: CONTRACTS AND PROCUREMENT MANAGEMENT
CONTRACTS AND PROCUREMENT MANAGEMENT
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CONTRACTS AND PROCUREMENT MANAGEMENT
Contract management involves effective and efficient management of delivery, payment
and performance. Contracts and procurement are both vital elements for managing the project
successfully. There are certain risks involved in contracts and procurement of global projects.
The relationship with the vendor should be smooth and profitable as the global projects involve a
suite of management activities. As high value projects involves greater evaluation, monitoring,
risk management and sound decision making.
Illustration I: Risk Management Fundamental Step
Source: (Carvalho & Rabechini Junior, 2015)
Financial risks involved in the project:
Managing risk is crucial for achieving procurement of goods and services effectively
especially for complex or large projects. Typical risks for the contracts and procurement includes

CONTRACTS AND PROCUREMENT MANAGEMENT
sensitivity study of the financial projections, negotiating contract conditions, creating
contingency plans, analyzing the allowances in a cost estimate. Moreover scenario planning is
necessary for procurement appraisal (Carvalho & Rabechini Junior, 2015).
Construction risk- is one of the major risks involved in the project financing. In contacts
and procurements, the major source of income for the debt repayment is made by the revenue
generated from the project. This is also known as limited resource financing. Therefore timely
and proper construction of the project is a major consideration for all the parties involved.
Recommendation: The vendors and project sponsors are not directly involved for the
repayment of debt. Joint ventures and turnkey construction contract to minimize the construction
risk. The obligation to pay liquidated indemnities, damages or penalties is supported by
performance bonds, letter of credits and parent guarantees.
Operational risks- Once the global project is approved and constructed, the project and
procurement manger must make sure that it is operated efficiently after compliance of all the
obligations of the projects. The project is to be insured typically against property damage. It is
necessary to obtain business interruption or third party liability insurance.
Recommendation: The risks can be managed by applying ratio tests, limiting the size of
the debt, obtaining insurance coverage appropriately. Moreover, it is recommended to limit the
obligation of the company to third parties.
Supply risks-Majority of global projects has to rely on various commodities and raw
materials required for the project to be implemented. The prices of certain commodities can be
volatile and therefore create major financial risks for the project. It is important to execute a

CONTRACTS AND PROCUREMENT MANAGEMENT
supply agreement that is long term in nature (Beuve, Moszoro & Saussier, 2019). Choosing a
qualified supplier for the project is beneficial for the contract.
Currency risk-The primary risks related to currency are interference in converting the
local currency to a foreign currency, especially US dollars. Furthermore, conversion of the
foreign currency out of the nation is another financial risk.
Recommendation: These specific financial risks can be mitigated by the following ways:
 Currency swaps- through currency swaps the project risk can be mitigated to a certain
extent. The lenders are able to protect against the currency transference through hedging
 Offshore reserve accounts- in global projects, where there are currency risks then a
certain portion of the budget is deposited into a reserve account outside the jurisdiction of
the project.
Risk mitigation and negotiation
After the identification and evaluation of the risks, a risk mitigation plan is developed by the
project team. The aim is to reduce the impact of any uncertain or unexpected event. The
procurement team and project team mitigates the risk in the following ways:
 Risk avoidance
 Risk sharing
 Risk reduction
 Risk transfer

CONTRACTS AND PROCUREMENT MANAGEMENT
Illustration II: Risk Mitigation Options
Source: (Beuve, Moszoro & Saussier, 2019)
According to Cagliano, Grimaldi & Rafele, (2015) while negotiating with the vendors, it is
important to clearly list all the essential terms, perquisites and conditions. A standard supplier
evaluation procedure must be developed to organize the contracts smoothly. Identifying priorities
and maintain open communication would ensure strongest supplier relationship.
Areas of accountability for procurement manger and project manager in facilitating effective
outcome of the project are discussed as follows:
Procurement stage Application examples
Objective analysis for the contract Assessment of all the internal skills required to
make the project successful. Such as procurement
of services through outsourcing.
Formulating procurement strategy Developing equipment acquisition strategies by the
project manager.
Fee modeling and incentive contract performances

CONTRACTS AND PROCUREMENT MANAGEMENT
by procurement manager.
Capital evaluation IT system acquisitions, proper selection of capital
equipment’s and infrastructure provisions.
Analysis of options The manger need to explore various market testing
strategies, quantities analysis of options
strategically, scrutiny of alternate technology for
complex plan upgrades
Procurement document preparation Detailed information addressing the risks is to be
mentioned in the tender document.
Negotiations and signature of contracts The negotiation priorities should be reviewed
ensuring proper risk allocation
Implementation and delivery The procurement and project manger should ensure
effective implementation of the project after
managing all risks including technical, budget,
constructions, transition and delivery.
Risk identification, assessment and its treatment in a systematic manner leads to
effective procurement. The risk is to be managed by allocating the responsibility appropriately to
the parties involved. The project financial risks related to budget and funding issue requires
appropriate attention. The risks can be overcome by usage of resources efficiently and
understanding the complexities of the project.

CONTRACTS AND PROCUREMENT MANAGEMENT
References:
Beuve, J., Moszoro, M. W., & Saussier, S. (2019). Political contestability and public contract rigidity: An
analysis of procurement contracts. Journal of Economics & Management Strategy, 28(2), 316-
335.
Cagliano, A. C., Grimaldi, S., & Rafele, C. (2015). Choosing project risk management techniques. A
theoretical framework. Journal of Risk Research, 18(2), 232-248.
Carvalho, M. M. D., & Rabechini Junior, R. (2015). Impact of risk management on project performance:
the importance of soft skills. International Journal of Production Research, 53(2), 321-340.