Procurement Definitions

PROCUREMENT DEFINITIONS

Definitions help us understand one another, by agreeing on the same meaning for the defined words. These definitions will be useful in your conversations about Procurement. They are listed in alphabetical order for easy reference.

Agreement: any document or communication that defines the initial intentions of a project. This can take the form of a contract, a memorandum of understanding (MOU), letter of agreement, verbal agreement, e-mail, etc.

Bid: a response to an invitation for bid or request for tender. Not to be confused with a proposal, a bid is based on detailed specifications or plans provided by the Purchaser. Vendor selection is primarily based on price. A respondent is a Bidder.

Bidders' Conference (Pre-bid Meeting): the meeting with prospective sellers prior to the submission of bids, to ensure prospective sellers have a clear and common understanding of the anticipated procurement.

Breach of Contract: when any party in the contract fails to perform any promise in the contract, without legal reason.

Ceiling Price: the maximum price a Seller is allowed to charge.

Contract: a mutually binding agreement that obligates the Seller to provide the specified product, or service, or result and obligates the Buyer to pay for it.

Fait accompli: means 'already done' and is a negotiating tactic of taking action before the other affected party is aware of it, thereby altering the bargaining position.

Fee: profit as a component of compensation to a Seller.

Frustration: when an unforeseen event makes it impossible for one party to fulfill its contractual obligations, the contract is said to be frustrated or in a state of frustration

IFX (IFB, IFN, IFSR): The letter 'I' stands for Invitation, and 'F' is for. Invitation for "X" where X can be Bid, Negotiation, Sellers' Responses.

Letter of Intent (LOI): a document declaring the intentions of the writers. It is used to indicate agreement between parties to enter into a contract before the contract is signed. The LOI is not legally binding and after contract signing the LOI becomes void.

Memorandum of Understanding (MOU): a formal agreement between parties expressing convergence of will and an intended common line of action. More detailed than an LOI, an MOU expresses key points of the intended contract, before the contract is signed. The MOU is not legally binding and after contract signing the MOU becomes void.

Point of Total Assumption (and calculation): The point of increasing cost at which the Buyer pays the Ceiling Price, and the Seller continues to pay 100% of further costs. The calculation is:

PTA = ((Ceiling Price - Target price) / Buyer's Share) + Target Cost

More information and an interesting graph can be found here:

https://en.wikipedia.org/wiki/Point_of_total_assumption

Precedence: the order of governing priority when parts of a contract are in conflict. This must be spelled out in the contract so the order of precedence is clear to all parties. For example, "Drawings will take precedence over specifications. In the event of a conflict between drawings and specifications, the drawings shall govern."

Privy: Sharing in the knowledge of something.

Privity: the doctrine stating that only the parties who signed the contract have the rights provided by the contract

Procure: the process which includes soliciting offers, selecting vendors, establishing payment terms, negotiation of contracts. The outcome could be a purchase, a rental, a lease, or other.

Proposal: a written offer from a prospective Seller (Proponent) to a Buyer but it is not the same as a Bid. While a bid is based on detailed specifications or plans provided by the Purchaser, a Proponent offers significant creativity in their Proposal.

Purchase: to place an order. To buy. Purchasing is part of Procurement.

Quotation: an offer for common or standard products or services. Scope is simple and well defined. Price (Firm Fixed Price) and Timing are specified. Examples: a quotation for sewing machine repair, a quotation for purchase of a new automobile.

RFX (RFP, RFQ, RFT): 'RF' is "Request for". This document is issued by the Buyer to solicit an offer from a Vendor. RFP is Request for Proposal. 'Q' is Quotation; 'T' is Tender (Bid).

RFI: Request for information. This document can be used by any party at any time, either pre-bid or after vendor selection.

Selection Criteria: when more than one Vendor is considered, selection criteria will be needed to select the successful Bidder or Proponent. Selection criteria normally go out with the Invitation For Bid or the Request For Proposal so the Vendors know how they will be evaluated.

Single Source: when more than one capable Vendor is available but the Buyer chooses to select one Vendor without a competition.

Sole Source: when there is only one capable Vendor, so the Buyer must select that one without a competition.

Split: the percentages, always expressed as Buyer / Seller, by which savings or overruns from the Target Cost will be shared.

Supply Chain Management: the complete flow of goods and services including movement and storage of raw materials, work in process, and of finished goods from point of origin to point of consumption. Procurement is one part of Supply Chain Management.

Target Cost: the final agreed-upon cost which serves a basis for computing cost saving or cost overrun.

Tender: an offer in which the offering party is bound to perform that which is offered. There are specific laws of the land (Tendering Rules) regarding the process of Tendering. Can also mean to issue an Invitation For Bid.

Tender Notice: a process to call vendors to provide bids. Usually found on line. Can refer to the notification itself. A Tender Notice will contain critical elements such as Scope of Work and Bid closing date and time.

"Time is of the Essence": places the other party on notice that failure to complete a performance by a date set in the contract will constitute an incurable breach of contract.

Work for Hire: the 'work' is the goods or services an employee produces. Normally an employer owns the work of its employees; so the work was made for hire and is called work for hire. It is important as Buyer to ensure the work you purchase from another company is not owned by their employee, but was done as work for hire so can be legally sold by that company.

The table below will clear some of the confusion around the terms 'purchasing' and 'procurement'. It is not provided as advertising, only as a handy table.