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Purchasing and Contracting Generally Accepted Good Business Practices

Links to Specific Topics:

Materials Management & Procurement Group Assessment & Revamping. 2

Overall Program Development & Implementation Processes. 2

Procurement Policies and Procedures Manuals. 2

Federal Acquisition Regulatory Reviews. 3

Standard Terms & Conditions Documents. 4

Major Equipment & Capital Projects Procurement Planning. 4

Inquiry, Evaluation, & Award Processes. 5

Documenting, Formalizing, and Administration of Contractual Agreements. 7

Shop Inspection, Expediting, & Tracking Services. 7


Procurement and Materials Management Services

By integrating proven “Back-to-the-Basics” processes into today’s e-commerce business world, organizations can realize significant cost savings.

Technology sometimes outpaces the process being enhanced. In many instances technology has minimized basic requirements in the procurement process. While trying to analyze overall best value for the next gazillion years, costs for the task at hand can severely escalate. We all want what is best for the overall long-term success of the organization, but most real life performance measures are focused on current and short-term bottom lines.

Best practices that will work well for a manufacturing or service organization are not necessarily going to work well for engineering or construction organization. Manufacturing and service organizations typically buy the same construction items over and over again, whereas the majority of engineering and construction organizations’ requirements are defined by the specific projects being executed.

As a general rule, the “3 Bids and a Buy” method of procurement should be considered for all requirements.

Companies are many times surprised at the results when this process is used to verify both the competitiveness of long-term purchase agreements that have been in place for a number of years. Establishing and implementing a written Purchasing and Contracting Policy will provide the tools and methods required to fairly evaluate existing procurement agreements and practices to maximize both current and future profits.

Some of the Procurement and Materials Management Activities that should be closely monitored include:

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style='margin-top:0in'>Materials Management & Procurement Group Assessment & Revamping

Regular Senior Management operational assessment and revamping provides a self-regulating review over and above the regular internal checks and reviews of an organization. The review’s purpose should be to ensure quality and integrity of material operations. Regular assessments verify, interfaces, system applications, reporting, analysis, communications and coordination to ensure that they are performed in a timely and efficient manner. At the end of the assessment, Senior Management should provide an overall report on the conditions found and recommended enhancements and corrective actions along with the expected results.

After Group Management has reviewed the initial assessment reports, Senior Management should provide whatever level of assistance is required to implement the enhancements and corrective actions selected

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style='margin-top:0in'>Overall Program Development & Implementation Processes

Many successful organizations have operated for extended periods of time without defined Procurement and Material Management Policies and Procedures. Typically, management focuses on processes within the organization that make the profit. Not a lot of time or attention is focused on managing the materials and procurement processes.

Developing and implementing an effective Procurement and Materials Management Program can result in significant bottom line savings. What would saving 10% of your organization’s materials and services costs mean to your bottom line?

Program development begins with reviewing existing operations and then methodically developing a plan to meet the organization’s specific objectives. Senior Management should provide any level of assistance required for developing and implementing an effective and cost efficient Procurement and Materials Management Program.

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style='margin-top:0in'>Procurement Policies and Procedures Manuals

The purpose of Procurement Policies and Procedures Manuals is to facilitate the implementation and use of applicable procedures by all members of an organization involved in procurement activities. The manuals should reflect the intent of applicable laws, statues and good business practices during the entire procurement process.

The importance of the procurement function to the overall success of the organization cannot be overemphasized. Obtaining goods and services through prudent procurement practices adds to the success of an organization by ensuring quality products at competitive prices.

An effective manual provides buyers with guidelines pertaining to their authority and responsibilities regarding the solicitation, receipt, and evaluation of proposals, as well as the subsequent award and administration of the resulting procurement agreements. The manual should also specify responsibilities of other non-procurement personnel regarding procedural requirements and the fundamental principles of the procurement process.

The templates offered on are written policy and procedural outlines that include generally accepted good business practices. After reviewing and identifying specific organizational objectives a fully comprehensive manual can be customized to convey the unique requirements of any organization.

Drafts of the manuals and procedures should be submitted to all users and managers for review and comment during the development cycle. Once completed and accepted, all documents should be provided in both electronic and hardcopy form so that future revisions can be made and distributed by internal personnel.

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style='margin-top:0in'>Federal Acquisition Regulatory Reviews

Subpart 3.101-1 of the Federal Acquisition Regulation (FAR) begins with the following statement:

Government business shall be conducted in a manner above reproach and, except as authorized by statute or regulation, with complete impartiality and with preferential treatment for none. Transactions relating to the expenditure of public funds require the highest degree of public trust and an impeccable standard of conduct. The general rule is to strictly avoid any conflict of interest or even the appearance of a conflict of interest in Government-contractor relationships.

There are thousands of pages of Federal Acquisition Regulations that are constantly being updated as a result of the government’s efforts to enforce this statement.

Organizations may unintentionally violate FAR without ever being aware of their need to comply. Many times an organization agrees to comply with FAR by accepting another firm’s purchase order terms and conditions requiring FAR compliance. Senior Management should provide the assistance necessary to review current agreements and processes to verify FAR compliance and proper government reporting of its activities. Becoming comfortable dealing with government contacts and agreements can greatly broaden an organization’s market base while at the same time protecting it from unknowingly accepting uncalculated risks.

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style='margin-top:0in'>Standard Terms & Conditions Documents

The purpose of developing Standard Purchase Order and Contract Terms and Conditions is to ensure that adequate language is included in every contractual agreement issued that protects the organization against unnecessary liabilities. Standard terms and conditions should reflect requirements such as; integration, controlling terms, conflicting requirements, inspection, expediting, documentation, time of performance, title, risk of loss, the intent of applicable laws, statutes and good business practices during the entire procurement process.

A comprehensive set of standard terms and conditions provides buyers with the basic contractual language necessary to protect the organization against unnecessary liabilities. The templates offered on include standard terms and conditions outlines for both purchase orders and subcontracts. After reviewing and identifying specific organizational objectives to include. These terms and conditions can be customized to convey the unique requirements of the organization.

Drafts of the terms and conditions should be submitted to all users and managers for review and comments during the development cycle. During these review cycles the organization’s legal representative should also review and comment to ensure compatibility, applicable laws, regulations and established legal strategies.

Once accepted, all documents should be provided in both electronic and hardcopy form so that future revisions can be made and distributed by internal personnel. Caution: Electronic versions of Standard Terms and Conditions should be copy protected and only revised by authorized personnel who can evaluate the legal ramifications of any proposed changes.

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style='margin-top:0in'>Major Equipment & Capital Projects Procurement Planning

Purchasing of major equipment and contracting with Architects, Engineers, and Construction. Contractors can put a strain on a Procurement Staff that is geared toward taking care of day-to-day organizational needs. To stay competitive, most procurement groups do not maintain staff personnel trained to take care of major capital project procurement activities.

Developing a Procurement Plan and Schedule before making any major commitments is essential to the ultimate success of a special project. A realistic review of the organization’s available resources to manage the project’s procurement activities is the first step in determining procurement strategy. Increased involvement usually means an increased potential for savings by eliminating markups. The procurement strategy should be based on the organization’s available resource and its acceptable level of risk.

Senior Management should meet with project management and assist in the development of the procurement plan tailored to utilize project personnel as much as possible without sacrificing operational support. Senior Management should provide any level of support required to successfully achieve the project’s procurement objectives. Following a systematic process of planning, scheduling, and executing procurement activities will ensure that efficient, properly executed agreements are issued to achieve on-time delivery of required materials, equipment and services at a fair and reasonable price.

Once the Procurement Strategy is selected a Procurement Plan and Schedule is developed which includes, but is not limited to, items such as:

·        A list of Major and Minor Procurement packages divided by types of equipment and services required.

·       Preliminary descriptions and requirements for each package including remaining technical descriptions required.

·       Proposed Bidder Qualification Criteria

·       Preliminary Bidders List w/contacts for each package

·       Baseline Procurement Schedule and Budget

·       Preliminary Acceptance Criteria

·       Required Delivery Dates by Package

·       Responsibilities and Obligations of the Owner

·       Inquiry, Evaluation, & Award Assistance

Generally accepted “good business practices” say that it is best to only solicit bids from firms that are responsible and demonstrate technical expertise and financial stability. It is also essential that every inquiry issued clearly and accurately describes the materials, equipment, and/or services to be delivered.

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style='margin-top:0in'>Inquiry, Evaluation, & Award Processes

Inquiry, Evaluation, & Award Processes includes, but is not limited to, activities such as:

·       Finalization of Bidders Lists for each package based on available information demonstrating each Bidder’s ability to:

o   Have adequate financial resources or the ability to obtain them

o   Comply with the completion schedule

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o   Have the necessary organization, quality, accounting and operational controls

o   Have staff with required technical skills or the ability to obtain them

o   Have the necessary facilities

o   Be otherwise qualified and eligible to deliver quality products on schedule

Note: The complexity and value of the product or service being purchased should be used as a gauge to decide how much time is spent pre-qualifying Bidders. Buying items stocked locally with immediate delivery requires minimal time while selecting a contractor to build a million dollar building requires all of the above.

·       Creation of an Inquiry Package for submittal to the Bidders that contains, as a minimum, the following:

o   Cover letters conveying overall project information and objectives

o   Instruction to Bidders specifying contact information, submittal schedules, format and price breakdown structures in sufficient detail to conduct “apples-to-apples” evaluations

o   Defined requirements and acceptable criteria

o   Contractual Terms and Conditions

o   Site Safety Rules and Standards for on-site contracted services

o   Insurance Requirements for on-site contracted services

o   Progress and Delivery Requirements

o   Reporting Requirements

o   Backcharge agreement to protect the Organization’s right to corrective action

o   Applicable Drawings and Specifications

·       Communications with Bidders and others to ensure that clarifications are issued to all Bidders in writing.

·       Receiving of proposals and making distribution to Senior Management for review.

·       Developing commercial evaluations for each procurement package containing the following:

o   Total price and cost analysis

o   Exceptions to the defined requirements

o   Exceptions to the contractual terms and conditions

o   Schedule compliance analysis

o   Safety performance analysis

o   Discounts and Payment Terms

o   Bid Validity Date

o   Bonds and Insurance Requirements

o   Technical acceptability of the proposal

·       Negotiating with Bidders as required to clarify their proposals

·       Making an Award Recommendations to Owner

·       Negotiating with successful Bidder to ensure that all clarifications and exceptions have been properly addressed

·       Making award after authorization by Owner and preparing contract documents for execution

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style='margin-top:0in'>Documenting, Formalizing, and Administration of Contractual Agreements

Documenting and formalizing contractual agreements will help ensure that both the Vendor and the Owner fulfill their contractual obligations. Purchase Order and Contract Administration begins after award and ends with purchase order or contract closeout.

The following services are typically provided during the administration phase:

·       Expediting execution of all purchasing documents by Bidder and Owner

·       Securing Insurance and Bond Certifications if required

·       Contractor Mobilization and Demobilization coordination

·       Establishing and maintaining a purchase order/contract filing system that retains all documents generated relating to the purchase order or contract

·       Coordinating communications between the vendor, the owner and others involved in the project

·       Monitoring Vendor and Contractor performance and schedule compliance

·       Monitoring Contractor on-site safety performance and documenting safety incidents

·       Validating Progress Payment Requests based on actual progress

·       Tracking Vendor’s invoices and payments

·       Mitigating claims in a manner that minimizes added costs without compromising quality

·       Documenting Purchase Order and Contract Close Outs

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style='margin-top:0in'>Shop Inspection, Expediting, & Tracking Services

Expediting is a function of Procurement that is sometimes perceived as unnecessary and thereby neglected when in reality it is an essential part of any capital procurement effort. Many times a project’s completion schedule is missed because a critical piece of equipment does not arrive as scheduled. If the Owner agreed to supply a contractor with materials or equipment by a certain date and does not, the contractor has grounds for extra compensation if this disrupts his execution plans and adds to his costs.

All purchase orders and contracts should be expedited on a regular basis to ensure on-time delivery of an acceptable quality product. The level of expediting required for a specific purchase order or contract should be decided upon award and adjusted as required based on the supplier’s performance and the importance of delivery.

The following are expediting functions that are required to ensure successful on-time completion of a capital project:

·       Constant contact with the vendors and suppliers to ensure the on-time delivery of the purchased materials and equipment

·       Performing shop inspections and audits as required to verify progress

·       Expediting the submittal of vendor data and drawings as required to complete detailed design and engineering

·       Constantly confirming promised data submission dates and delivery dates

·       Meeting with project management to compare real “Field Need Dates” with scheduled delivery dates

·       Preparing and distributing equipment and material status reports to project personnel

·       Furnishing Project Personnel with information regarding a vendor’s inability to perform for such reasons as labor problems, supply problems, shutdowns, or other situations that could affect a vendor’s ability to comply with its contractual obligations

·       Developing practical and economical methods of improving schedules as required to support the overall completion of the project

·       Establishing an expediting file for each purchase order while reviewing and analyzing all of its provisions

·       Expediting written purchase order acknowledgements and written schedule commitments

·       Determining the supplier’s planned method of delivering the products, i.e. from present stock, special factory order, fabricating, lower-tier purchase, etc.

·       Obtaining supplier’s internal control numbers and lower-tier purchase order numbers as required to support the monitoring process

·       Determining shipping points

·       Resolving overage, shortage, and damage claims

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