understanding procurement process

8/6/2019 Understanding Procurement Process

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Understanding Procurement Process Session 1.1

Session 1.1

Understanding Procurement Process

Session Overview

Public Sector departments and agencies spend a major portion of Government budget

on procurement of goods for creating vital infrastructure and providing different

services to the people. Ensuring timely availability of goods of right type, in optimum

quantity at the most economic cost is essential for achievement of key organizational

goals and objectives. Failure to do so, can seriously affect organisations ability todeliver its core services to the citizens and other users. In view of this serious risk, the

Government auditors accord significant importance to the examination of high value

procurements. They are interested in seeking assurance that the procurements have

been made in accordance with financial norms with due regard to propriety and

regularity, and provide best value for tax payers money.

This course on Audit of Procurement Process has been developed for the following

reasons:

- high level of public expenditure on procurement of goods;

- high risk of fraud and corruption in procurements of various types;

- need for providing assurance on efficient use of public funds;

- results of bad procurement may be disastrous for the organisation,

Government and the country;

- requirement of donor agencies to see whether good procurement practices

have been followed in projects funded by them;

- to upgrade knowledge and skills of auditors to undertake and professionally

evaluate complex procurement processes in public sector;

- promote transparency and accountability in procurement activities.

Improved skills in audit of procurements will enable the auditors of member Supreme

Audit Institutions to advise and help the departments and agencies to adopt best

practices and maximize value for money in their procurements. The course on audit of

procurement process derives its significance in this context and attempts to develop

and disseminate a comprehensive checklist on procurement audit for the auditors in

addition to exposing them to the important concepts relating to procurements in the

public sector, their application and risk management.

The scope of this course has been confined to procurement of goods and excludes

services and e-procurement. However a special session on e-procurement will be

organized after scheduled classroom activities during the course. E-procurement andservices procurement are specialized areas of procurement and require course

Audit of Procurement Process Notes 1.1 1/16


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designing and course material development separately for each of them. In this

session, we will discuss principles of good procurement and familiarize ourselves

with the various stages of procurement process. Each of these stages will be discussed

in detail in subsequent sessions.

Learning Objectives

By the end of this session, participants will be able to describe the procurement

process and principles of good procurement to the extent that they conform to the

procurement best practices, policies and national legislations as evaluated by the

Instructor.

Basic ConceptsSome common concepts in understanding procurement process are given in the Hand

out 1.1 which will be given to you during the session.

The terminology may vary from country to country and the auditors must fully

understand their meanings and implications while auditing procurement of goods. A

comprehensive glossary of terms used in procurement is appended with the

participant notes.

1. What is procurement?

Procurement has been defined in various ways e.g.:

- Procurement is the process of obtaining services, supplies and

equipment in conformity with applicable law and regulations.

- Procurement covers every aspect of the process of determining the need for

goods and services, and buying, delivering and storing them to achieve the

department or agencys key objectives and output.

- Procurement is the whole process of acquisition from third parties (including

logistical aspects) and covers goods, services and construction projects. This

process spans the whole life cycle from initial concept and definition of

business needs through to the end of the useful life of an asset or the end of a

services contract:

As per guidelines on Procurement under IBRD Loans and IDA Credits- May

2004 goods include:

- commodities

- raw materials

- machinery

- equipment, and

- industrial plant



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The term Procurement has wider meaning and covers all purchasing

activities whose purpose is to give the buyer the best value for money.

2. Nature of procurement

Nature of procurement can be broadly categorized as follows:

- Strategic Procurement

- Non-Strategic Procurement

- Routine Procurement

2.1 Strategic procurement

Strategic procurement includes those goods that are essential to the achievement of

key outputs/objectives of the procuring agency/department. The characteristics of

strategic procurement are:

- contracts are high value;

- specifications of goods are complex and refined;

- strict adherence to quality and timeline is essential;

- efficient planning is required;

- selection of right source is the key to success of a contract;

- competitive vendor selection process is desirable to get best value for money;

- sharing of risks between both parties is considered;

- a workable relationship for mutual benefit of both parties is vital.

2.2 Non-Strategic procurement

Non-strategic procurement includes those goods that are not especially critical to the

achievement of key objectives of the procuring agency/department. The

characteristics of non-strategic procurement are;

- procurement activities are not so multifaceted;

- specifications of goods are not very complex;

- source selection process is relatively simple;

- value of procurement may not be very high;

2.3 Routine procurement

Routine procurement includes purchase of low value goods. Administrative costs for

routine procurement can be reduced by:



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- streamlining the ordering and payment procedures

- greater use of electronic commerce (reduction in paper work)

- workable arrangement with the contractor for procurement of specified goodsat agreed price

- minimizing contract letting costs by bringing separate procurements into one

contract.

Procurement agencies should make efforts on a continuing basis to promote efficiency

and improvements in procurement procedures to obtain value for money and ensure

delivery of goods on time. The auditors can help the procuring agencies/departments

to achieve maximum value of money in the following ways:

- review the procurement needs and the procurement methods to identify how

this can be done better;

- advise and encourage them to adopt best procurement practices;

- support well managed risk taking and innovative approaches;

- ascertain and report on the procurement agencys capacity gap to undertake

complex and strategic procurements;

- review and recommend appropriate controls to minimize risk of waste,

impropriety and fraud

3. Principles of good procurement

The principal hallmarks of proficient public procurement are:

- value for money;

- competition

- efficiency

- economy

- effectiveness

- ethics

- accountability

- transparency

- documentation

- disclosure

- fairness

- Dealing with complaints

3.1 Value for money

Value for money is the core principle underlying procurement of goods. In a procurement process this principle requires a comparative analysis of all relevant



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costs and benefits of each proposal throughout the whole procurement cycle (work-of-

life costing). Value for money is not about whole life costs and quality. Ensuring

value for money is about the trade off between quality and cost. Value for money

comes from the effective, efficient and economic use of resources. Value of money isenhanced in procurement of goods by:

Encouraging competition by ensuring non-discrimination in procurement;

Using competitive processes;

Promoting the use of resources in an efficient, effective and ethical manner, and

Making decisions in an accountable and transparent manner.

In order to determine value for money in a procurement process, the documentation

needs to (i) specify logical, comprehensive and relevant conditions for participation,and (ii) set appropriate evaluation criteria which will enable the proper identification,

assessment and comparison of the costs and benefits of all submissions on a fair and

common basis over the whole procurement cycle.

Cost is not the only determining factor in assessing value for money. A whole of life

assessment would include considerations of factors such as:

Cost related factors including whole-of life costs and transactions cost associated

with acquisition, use ,holding, maintenance, and disposal;

Non-cost factors such as fitness for purpose, quality, and support;

Flexibility to diverse usage;

Evaluation of contract extensions;

Developed market for the goods produced;

Performance history of each prospective supplier;

Relative risk of each proposal; and

Contribution to advancement of Government priorities.

Procurement officials are required to ensure that procurement complies with allrelevant accounting requirements, authorities, regulations, government policies on

procurement and other relevant legislations.

Procurement agencies can obtain maximum value for money from procurement of

goods in the following ways:

- getting more goods with appropriate quality at the some costs;

- avoiding unnecessary purchases;

- ensuring user needs are met but not exceeded;

- cost effective and innovative solutions to meet requirements;

- better negotiations with the contractor on all elements of contract price;



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- optimising the cost of delivery of goods over the full life of the contract rather

than minimizing the initial cost;

- introducing incentives into the contract;

- getting volume discounts;

- getting best process and better discounts from bulk buying;

- developing better working relationship with the contractor to identify

opportunities to reduce costs and adapt innovative approaches;

- reducing transaction cost by streamlining procurement and finance processes;

- keeping stocks within the requirement limit.

. Hence value for money can be achieved through competition, innovative solutions,optimising use of resources and managing risks effectively. Improvements in value

for money are possible at all the stages of procurement.

3.2 Competition

Competition is a key element of the procurement policy framework and promotes

value for money. Effective competition requires non-discrimination in procurement

and use of competitive procurement process.

All potential suppliers should have equal opportunities to compete for procurementbusiness. All contractors/suppliers should be treated equitably based on their legal,

commercial, technical and financial abilities. The goods offered should be considered

on the basis of their suitability for their intended purpose and not on the basis of their

origin.

The procurement process itself is an important consideration in achieving value for

money. International institutions and Governments in different countries have

developed specific procurement procedures for different situations depending upon

the complexity and volume of the goods being procured, multiple or single source of

supply, extent of interest of local and foreign suppliers in the procurement, and

urgency and risk involved in the procurement. Each situation has a positive or a

negative impact on the competitive process.

3.3 Efficiency

It relates to the productivity of the resources used to conduct an activity in order to

achieve maximum value for the resources. In relation to procurement, it includes the

selection of a procurement process that is consistent with the government policy,

simple and swift, producing positive results without protracted delays, and the most

appropriate to the procurement objective. In addition, efficiency implies practicality,

especially in terms of compatibility with the administrative resources and professional

capabilities of the purchasing entity and its procurement personnel. It is sometimes

expressed as doing things right. It is comparison of output with the input required toproduce it.



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3.4 Economy

Economy relates to acquisition of goods at the minimum cost without compromising

on quality at the right time, right place and in right quantity. It is often equated with

Spending less- But for complex procurement, the lowest initial price may not equate

to lowest cost over the operating life of the item procured. However, the ultimate

purpose of any procurement activity is to obtain maximum value for money.

3.5 Effectiveness

Effectiveness relates to comparison of level of achievement with the planned

outcomes. Effectiveness is sometimes expressed as doing the right things. It is a

measure of the extent to which objectives have been achieved.

In procurement, it can be achieved by ensuring that the goods procured will make the

maximum possible contribution to the planned outcome of an activity. This requires proper procurement needs assessment, accurate specifications and diligently

managing the contract. An effective and comprehensive monitoring at all the stages

of procurement process further contributes to effectiveness.

3.6 Ethics

Procurement officials have to demonstrate the highest standards of ethical behaviour

throughout the procurement process. It encompasses the concept of honesty, integrity,

probity, diligence, fairness, trust, respect and consistency. In this way conflict of

interest and abuse of power is avoided. In procurement process, ethics implies the

following:

Working relationship of buyer and the contract is based on mutual trust;

Procuring officers and management do not use their positions to influence for

personal advantage;

Procurement is conducted fairly, reasonably and with integrity;

Basis of management decisions is known and recorded.

A public officer exercises proper diligence, care and attention when at work

and seeks to achieve high standards of public administration;

Public officer upholds the law and government policies faithfully andimpartially;

Public officer ensures that public resources are not wasted, abused, or used

improperly or extravagantly.

3.7 Accountability

Accountability implies that officials involved in the conduct of procurement of goods

are responsible for the actions and decisions taken by them and for the resulting

outcomes. Delegation of authority and powers is clearly laid down in contract

administration to ensure that all actions in procurement are taken and approved by theofficials competent to do so. Accountability is at once a key inducement to individual



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and institutional probity, a key deterrent to collusion and corruption, and a key

prerequisite for procurement credibility.

3.8 Transparency

Transparency implies that procurement agencies establish and maintain rules and

procedures in procurement process which are appropriate scrutiny of each

procurement activity. Documentation and disclosure are fundamental elements of

transparency and disclosure.

3.9 Documentation

Proper documentation of each activity in procurement process is critical to

accountability and transparency. It provides a complete record of procurement

activities and facilitates scrutiny for procurement to ensure that it provides:- An understanding of the reasons for the procurement;

- Process followed in procurement;

- Decisions taken by competent authority

- Approvals and authorizations.

Documentation relating to a particular procurement is kept in accordance with the

provisions of the rules and regulations, policies of the government and relevant

legislation. Documentation requirements vary throughout the procurement cycle. It is

the responsibility of the procurement agency to ensure that adequate and appropriate

documentation is kept for each stage of procurement.

A sample documentation requirement for each stage is as given below:-

Stage Documentation Requirements

Identify Need Procurement Need Assessment Record

Budget files

Procurement Plan

Risk Assessment File

Determine Procurement Process Procurement Method decision

Selection Criteria file

Procurement budget

Time Schedule for procurement

Advertisements, Tender Notices

Conduct Procurement Process Tenders Received and acknowledgements



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VFM assessment File

Evaluation Report and Recommended

Contract negotiations record and Contract

Advice to unsuccessful tenderers.

Evaluation of Tenders file.

.Manage Contract Relationship Performance indicators

Contract Management Plan

Contractors Performance Reports

Correspondence file between both parties

Contract Variation Record

Evaluation of Contractor Performance

Budget and Expenditure Record

Manage Termination/

Transition/Disposal

Declaration of surplus Assets

Valuation of Assets

Risk Assessment

Disposal Strategy

Advertisement file

Contract documents

Record of deposits

3.10 Disclosure

It is the mechanism by which agencies make their procurement activities visible and

transparent. The aim of disclosure is to:

- provide confidence in the procurement process;

- promote the efficient, effective and ethical use of resources

Procurement officials must provide all information to the potential contractors and

comply with reporting obligations to provide broader visibility of their procurement

as required by procurement rules and regulations.



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3.11 Fairness

It implies procurement is impartial, consistent and therefore reliable. It provides a

level playing field to all competitors to procurement and thereby directly expands the

buyers options and opportunities.

3.12 Dealing with complaints

- Procurement agency should establish a fair, equitable and non-discriminatory

complaint handling procedures. The process should be systematic and

understood by both parties. It should not prejudice potential contractors

participation in future procurement process. The officials independent of the

process should handle complaints and both parties should be given appropriate

time to respond.

The application of principles of good procurement at all the stages of procurementprocess is essential for successful completion of contract.

4. Procurement Related Risks

Some of the common procurement related risks are:

- Supplier not delivering to the right level of quality:

- price do not represent value for money;

- supplier fail to deliver;

- impropriety and fraud;

- unnecessary purchasing;

- lack of accountability and transparency;

- ambiguities about procurement responsibility in project administration;

- absence of sound and well established procurement practices;

- lack of knowledge and experience to handle procurement process;

- propensities for corruption in selection of contractors and subsequent

management of contract performance;

- intended benefits not realized;

- opportunities to improve value for money are missed;

- decisions are not taken at right time or not taken at all;

- goods are purchased in uneconomic quantities;

- excessive stock holdings;

- force majeure factors disrupt delivery;

- purchasers inability to meet their obligations under the contract; and

- Sudden fundamental changes in the customers requirements.



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An important step towards reducing these risks is to make a realistic assessment of

those that are most likely to occur in any procurement. The some of most likely risks

can be avoided or controlled by careful preparation and good information. Others may

be managed by transfer of risk to the contractor or third party. The contractor willwant payment for managing or taking on risks; ideally this will be built into the

contract.

5. Procurement Process

The various stages in procurement process can be broadly categorized as follows;-

Assessing the needs of procurement

Risk assessment in procurement

Specification

Approval mechanism

Selection of Method of procurement

Pre-qualification of bidders

Bidding document preparation

Invitation to Tenders

Issue of bid documents and opening of bids

Evaluation of Bids

Award and signing of contracts

Contract Administration

5.1 Assessing the needs of procurement

Departments and agencies are responsible for realistically determining the goods they

need and the manner in which they will be procured. They devise a mechanism, for

planning in detail all proposed procurements within its available resources, delivery

time or completion date and benefits that are likely to accrue in future. Any unrealistic

assessment of procurement would tend to minimize value for money or result inwastage of resources. Procurement is not viewed in isolation. The outcomes of

previous procurement for similar goods are analyzed and lessons learned from such

procurements are considered in deciding the procurement strategy. The objective is to

avoid earlier mistakes in future. Specifications are broadly defined and all tasks and

deliverables are identified in sufficient detail to allow progress to be tracked and

monitored.

5.2 Risk assessment in procurement

At this stage risks associated with the procurement of goods are identified and a

strategy is developed to manage them contingent plans are also formulated.Sometimes risks are transferred to the contractor when he is considered most



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appropriate to manage them. However, sharing of risks between both the parties in all

the stages of procurement process is considered to be the best possible approach in

managing risks. The extent of risk management will vary from routine procurement

processes to a significant undertaking involving the highest level of planning, analysisand documentation. Procurement departments should monitor terms and conditions

of contract including price, on which risk allocations are determined to ensure that

they reflect value for money.

5.3 Specification

Proper and detailed specification is critical to procurement of goods of right quality

and need. It identifies what is required from the contractor and he is expected to bid

against the specifications given in the bid document. Specifications can be simple or

complex depending on the nature of procurement. In order to ensure fair and

impartial competition the specifications should be defined in such a manner that itallow widest possible competition and should not favour any single contractor or

supplier nor put others at a disadvantage. Specifications should be generic and should

not include references to brand names, model numbers, catalogue numbers or similar

classifications. However, if the procuring agency is convinced that these are essential

to complete the specification then it would be qualified with the words or equivalent

to ensure that good principles of procurement are adhered to in the procurement

process. The success of good procurement depends on accurate specification.

Improper, inaccurate or ambiguous specification may create problems at evaluation

and acceptance stage, and may result in delivery of lower than the expected levels of

performance by the goods procured.

5.4 Approval mechanism

At this stage of the procurement process, the Procurement Agency provides clear

authorization and delegation of powers for different categories of procurement.

Procurements are initiated once approval of the competent authorities, as per

authorization and delegation of powers, is accorded. This delegation of approving

transactions and processes at each level takes into consideration various legislative,

regulatory and business requirements. The level of authority and its corresponding

powers to approve a particular transaction and process will vary from country to

country. The guiding principle is that delegation of authority should ensure smooth

functioning of the procurement process to ensure that value for money is obtained.Clear and unambiguous delegation of authority and power is the key to good contract

administration.

5.5 Selection of Method of procurement

Open competition is considered to be the best basis for efficient public procurement to

ensure that value for money has been obtained. Various methods of procurement are

provided in the relevant manuals, rules and regulations and policy guidelines issued

by the Governments and international institutions. These may include international

competitive bidding, limited international bidding, national competitive bidding,

shopping, direct contracting, force account, procurement from specialized agencies, performance based procurement etc. Procurement Agency selects the most



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appropriate method keeping in view the nature, volume and complexity of the

procurement. However, it has to be ensured that the procurement procedures have

been applied in a transparent manner through competitive bidding.

5.6 Prequalification of bidders

In case of procurement of expensive and technically complex goods, the procurement

agency ensures that only technically and financially capable firms/contractors having

adequate managerial capability are invited to submit bids. This is done prior to

floating of tenders, invitation to proposals or offers in procurement process. Such

pre-qualification is solely based upon the ability of the interested parties to perform

that particular work satisfactorily.

The procurement agency while engaged in pre-qualification usually takes into

consideration relevant experience, past performance, capabilities with respect to

personnel, equipment, financial position, appropriate managerial capability of the

contractors to ensure that contract will be performed successfully. Pre-qualification

process is notified and a set of pre-qualification documents is provided to all

competitors. After pre-qualification process, the pre-qualified contractors are notified

and they become entitled to participate further in the procurement process.

5.7 Bidding Document Preparation

The bidding documents provide all the general and special conditions of contract and

other necessary information to enable the potential bidder to clearly understand the

requirements and submit his responsive bid in time. These documents define the risks

and responsibilities of the buyer and the seller. The bidding documents should be

carefully prepared by skilled professionals to ensure that all the terms and conditions

of the procurement are incorporated in these documents and they are clear, precise

and definite.

5.8 Invitation to bid

The methods of invitation to bid are clearly laid down in the procurement

guidelines/legislation of the procurement agency. Advertisement on website and print

media for procurement above a given threshold is made in the manner and formatrequired by rules and regulations of the Procurement Agency. The guiding principle

about print media is that the procurement should be advertised in newspapers having

wide circulation. Further, the information posted on the website is complete and

remain available on it until the closing date for the submission of bids. Adequate

response time is given to allow the contractors to complete and submit the bid by the

closing date. In some of the countries, the law permits deviation from the requirement

of advertisement in case the proposed procurement is related to national scrutiny and

its publication could jeopardize national security objectives. Advertisement is a key

stage in procurement process to ensure fairness and open competition. In non-

competitive methods of procurement like limited tendering and direct sourcing, the

identified bidders are individually invited to participate in tender by issuing separateinvitation letters to each of them by post.



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5.9 Issue of Bid Documents and opening of Bids

This is post- advertisement stage in which the Procurement Agency issues bid

documents to the prospective contractors to enable them to submit bid for award of

contract. Bid documents form the basis of award of contract to the successful bidder.

Bid documents are very comprehensive and include invitation to bid, instructions to

bidders, form of bid, form of contract, general or specialized conditions of contract,

specifications and drawings or performance criteria (where applicable), delivery time

or delivery schedule, bill of quantities or list of goods, bid evaluation criteria, format

of all securities, details of standards to assess quality of goods and any relevant

information required by the Procurement Agency. Usually standard bidding

documents for each type of procurements are used. It is the responsibility of the

Procurement Agency to notify any change in bidding subsequent to issuance of bids

to all interested parties. Procurement agencies may allow preference to domestic

contractors is accordance with the government policies.Bids received before the closure date and time only are considered. In order to ensure

transparency, the bids are opened publicly in the presence of bidders or their

representatives at the time and place announced prior to bidding. Unit price and the

bid amount are announced and minutes are recorded.

5.10 Evaluation of bids

This is the most important stage in the procurement process that leads to selection of

the successful bidder. The bids are evaluated against the performance criteria

(technical, commercial and financial) already laid in the bid documents. For the

comparison of bids quoted in different currencies, the price is converted into singlecurrency specified in the bidding documents. After the bid is opened, no bidder is

allowed to alter or modify his bid. The procurement agency will not introduce any

condition which may discriminate between bidders. Depending upon the

circumstances of the case, the Procurement Agency can reject all bids and inform

them about the reasons for rejection. Bid evaluation can be a very complex exercise

depending upon the nature of goods being procured. The Bid Evaluation Committee

should consider all factor costs and performance parameters in deciding the most

preferred bid which provides the best value for money.

The results of bid evaluation in the form of a report giving justification for acceptance

or rejection are announced at this stage.

5.11 Award and Signing of contract

On the basis of results of evaluation bid, the bidder with the lowest evaluated bid is

awarded the procurement contract. The successful bidder furnishes the performance

guarantee as per requirements specified in the bid documents. Usually no negotiation

is allowed with the bidder having submitted the lowest evaluated bid or with any other

bidder.



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After announcement of award of contract, the Procurement Agency and the successful

bidder sign a written contract within a reasonable period of time. In order to ensure

transparency and public access, all documents related to evaluation of the bid and

award of contract are made open to public.

5.12 Contract Administration

This is the implementation stage of the procurement process. A good contract

administration is critical to the successful completion of a contract. A working

mechanism is developed to ensure that it facilitates both parties to meet respective

obligations as efficiently and effectively as possible. The framework of contract

administration comprises general arrangements, contract control, contract variations,

performance reporting, processing of payments and receipt of goods as per terms and

conditions of the contract. The role of the contract administrator is very crucial who

has to ensure that principles of transparency, fairness, economy, efficiency, ethicalstandards, openness and integrity are adhered to get maximum value of money

throughout implementation of the contract. Good contract administration requires

dedication and persistence that leads to successful implementation of contract.

Summary

In this session we have discussed the principal hallmarks of proficient public

procurement and how they are linked to various stages in the procurement process.

Good principles of procurement include transparency, economy, efficiency,

effectiveness and fairness, value for money, competition, accountability, professionalethics etc. A sound procurement system is one that combines all the above elements.

The desired impact is that well qualified vendors will be willing to compete in such a

system as it promotes fairness and equal treatment. Such system maximizes value for

money for the buyer, and public and other stakeholders have confidence in it as it

ensures transparency and hold officials accountable for their actions.

At this stage we have introduced various stages of a procurement process which will

be discussed at length in the subsequent sessions.

References:

1. World Bank Financed Procurement Manual

2. ADB Procurement Guidelines

3. UN Procurement Manual

4. Procurement step by step A short Guide to Buying Department of

Trade and Industry (U.K.)

5. The Government Procurement code of Good Practices- Office of

Government commerce UK

6. Common Wealth Procurement Guidelines

7. Getting Value for money from procurement NAO (UK)



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8. Value for money measurement OGC Business Guidelines (UK)
