Chapter 6Chapter 6Organisation and procurementOrganisation and procurement

Learning objectives• compare and contrast different organisational structures and their

impact on projects• discuss the procurement choices available in project management• identify and describe the main parts of a procurement plan• identify the key features of common contract types and explain the

differences between them• select appropriate contracts and justify their use in a range of

situations• explain what is meant by incentive contracting and perform basic

financial calculations• differentiate between common partnering arrangements, their merits

and pitfalls

The relevance of organisation structure

• The internal environment of a project consists of the people, groups and organisations that are directly involved in the project

• The project’s organisation structure defines the reporting structures, processes, systems and procedures of the project.

2 basic organisation structures:

1) mechanistic structures – command and control based

2) organic structures – open and less rigid; value is placed on using special knowledge with open communication

Functional structure• Also referred to as the traditional or classical structure• By far the most common organisational form used by companies• Main characteristics:

– deep structures with many levels and bosses with impressive titles– relatively weak coordination and communication between functions– no customer focal point– allegiance and commitment are to the function and not to the projects

passing through the function

Product (or projectised) structure• People are organised according to the product line,

programme or project they belong to• The characteristics are:

– employees on a particular product or project are generally collocated

– the participants work directly for the product or programme manager

– strong communication channels– loyalty to the product– rapid reaction time to problems and issues

Matrix structure• Combination of both the functional and product structures• Designed to dispel the disadvantages of each while

retaining their advantages• Vertically organised functions still exist, but these are

overlaid with a cross structure of projects and project managers

• Aims to provide strong customer focus and resource efficiency

• There are strong and weak forms depending on the level of authority vested in the project manager; it is sometimes seen as unstable and conflictual.

Virtual organisations• Comprises several project groups producing output

based on a common understanding of business rules• Characteristics include:

– The relinquishment of central management functions– Use of IT systems to connect project partners

• Benefits are:– support for solving complex problems through

group communication– allowing internal members and external partners

to get involved in the early project phases– support by varied computer technologies.

Supply chain management

• Managing the external relationships in the supply of goods and services, by integrating strategy, purchasing and quality management

• A fully integrated process extending from the supplier’s supplier to the customer’s customer

• An increasing focus of project operations

Contract terms of payment

• There are numerous ways to structure the amount to be paid for work performed as required in a contract

• 2 principle payment methods are– Fixed price contracts– Cost reimbursement contracts

Some variations within the types of contract pricing

• Fixed price contracts– Firm fixed price (FFP)– Fixed price with economic price adjustment

• Cost reimbursement contracts– Cost plus fixed fee (CPFF)– Cost plus percentage of cost

• Other contracts– Time and materials and labour hours

How to choose a contract payment method

• The selection of a contract type is dependent upon the following factors:– Capabilities of the sponsor’s project team– Level of detail available describing the project’s

scope– Firmness of the project’s scope– Amount of risk the sponsor is willing to assume– Amount of time available to execute the project– Control the sponsor has over other divisions and

departments in the organisation– Driving force or payout of the project