In my previous blogs, I describe the framework around how to manage a project, the process groups and we have discussed the knowledge areas from Scope to Risk. Next on the list is Procurement.
This is an often-overlooked knowledge area. The reason for this is that the procurement of suppliers is usually handled at an organisational level and above the seniority of the project manager. Nevertheless, the project manager needs to understand how each of their suppliers is managed in terms of contract so that the risk to the project can be estimated and an appropriate monitor and control process put in place.
Types of Contract
There are several types of contract and the appropriate selection should be motivated by the work to be procured and its risk to the project. Different contracts will give the majority of the risk to different parties.
- Time & Material (T&M) – The risk is all on the customer. The supplier bills for the amount of work and all of the material that is necessary to complete the project. If the amount of work is greater than estimated and cost/schedule overruns occur, then the customer will pay more for the work. To mitigate the risk of this, a capped T&M contract can be used. In this scenario when the cap is reached, a commercial renegotiation will occur, and a new contract can be written, or the work brought back in-house.
- Cost Plus – Similar to T&M in that the customer pays for the cost of the work and materials but there is also a fixed or a variable incentive fee added on top. If the supplier manages to complete the work on or for less budget, then they also received the incentive fee. However, if the work overruns then they would lose all or some of that incentive fee. In this way, the supplier is incentivised to complete the work to budget. Note, that with a T&M contract it’s in the supplier’s interest to overrun!
- Fixed Price – The risk is all on the supplier. The cost of the contract is the same whatever happens. If the work is under-estimated, then the supplier would bear the extra cost and lose profit. Similarly, if the work is over-estimated they would gain extra profit. It is worth noting that in these projects the requirements need to be very well specified and changes tightly controlled otherwise arguments between customer and supplier can easily develop over the scope of the project.
If the estimation of the work is deterministic then the customer would wish to use a T&M contract as they only pay for what is actually done. However, if it’s non-deterministic then it would be advisable to use a fixed price contract as they wouldn’t be paying if a problem arises. Looking from a supplier perspective, the choice switches around. You would want to use a T&M contract for non-deterministic projects and fixed price for deterministic projects as you maximise your revenue.
Monitoring and Controlling the Supplier
The task of the supplier needs to be monitored and controlled just like any other task within the project. When a significant amount of work is outsourced, this entails a significant amount of associated risk. If you are lucky then the supplier will have a project management methodology which will detail how their communication to you will happen. For example, they may run PRINCE2 and you would sit on their Project Board as a Senior User. Whatever their methodology, you should ensure that it integrates well with your own project’s monitoring and control methods. This is best achieved through a ramp-up meeting where processes can be aligned.
This is an insight into the knowledge area of Procurement. Whilst the average project manager will have limited control over this knowledge area, they should use the knowledge above to understand the associated risks and ensure appropriate controls are created with the supplier. In the next blog, I will continue our examination of the knowledge areas with the Stakeholder knowledge area.
Andrew Miles PMP
Andrew Miles is a physical implementation engineer turned project manager. He is PMP certified and has led many projects for a number of tier one companies. He helps to run the Sondrel Project Management Office (PMO). If you'd like to know how Sondrel's project managers can help your project then please contact firstname.lastname@example.org