Understanding Procurement Process Session 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 organisation’s ability to
deliver 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 and
services procurement are specialized areas of procurement and require course

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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 Concepts
Some 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 agency’s 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 goods
at 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 agency’s 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 is
enhanced 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 all
relevant 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 procurement
business. 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 to
produce 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 and
impartially;
• 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 the
officials 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

Contractor’s Performance Reports

Correspondence file between both parties

Contract Variation Record

Evaluation of Contractor Performance

Budget and Expenditure Record

Manage Termination/ Declaration of surplus Assets

Transition/Disposal

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
buyer’s 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 contractor’s
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 procurement
process 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;
- purchaser’s inability to meet their obligations under the contract; and
- Sudden fundamental changes in the customer’s 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 will
want 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 in
wastage 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, analysis
and 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 it
allow 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 format
required 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 separate
invitation 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 single
currency 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, ethical
standards, 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, professional
ethics 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)

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