Contractual issues between organizations performing a project can be costly and time consuming, not to mention embarrassing for a project manager. I hope you’ve never experienced major contract disputes with a subcontractor or subconsultant, but in any case, be sure to heed the following 10 doctrines to make sure your projects stay out of trouble.
Project Management is Even More Important
It’s easy to let vendors manage projects “their own way.” Internal organizations and project culture create many expectations regarding timelines, quality, cost, and other things. If an outside company does things a little differently, many issues with project management can occur such as late delivery, insufficient quality, and different change request procedures. Even if the work is done satisfactorily, differences in expectations can cause friction between the two organizations.
To ensure a strong spirit of collaboration exists between the two organizations, the project manager should do the following things:
- Plan the project effectively
- Get buy-in and commitment on success criteria
- Manage expectations
- Create clear roles and responsibilities
- Manage communications
Technical Knowledge is Valuable
There are four distinct subject areas inherent to effective procurement management, and the project manager, or someone on the team, should possess the technical knowledge in each area:
- Vendor evaluation and selection
- Contract development
- Relationship management
- Delivery management
There are three primary types of contracts:
- Time & Materials: The vendor is paid by the unit – for example, “by the hour”. One variation is to include a cap, i.e. Time & Materials with a cap.
- Fixed Price: A lump sum covers all of the work.
- Cost Reimbursable: The vendor is reimbursed their cost plus a percentage, a fixed fee, or an incentive fee.
The technical knowledge involved with procurement management is a subject in itself, and one distinct knowledge area within the Project Management Institute‘s Project Management Body of Knowledge.
Know the Contract
In the real world, you don’t always read the fine print for every contract you sign. But when you’re managing a project, you need to read the contract and know what’s in it. I can’t emphasize this enough. There’s no substitute, unfortunately, and I have no special advice to make it easier.
Are they all the same? In our sub-contracts with other engineering firms, we sometimes see liability limitation clauses that say the engineers liability is limited to their fees. These usually occur on geotechnical engineering vendors where they do some drilling and analysis with fees of $10,000 – $15,000. If the building fails (or requires repairs) due to foundation problems, you can be on the hook for millions.
This is only one of several examples I just thought of, and I think every contract we get served with is different in its own way. So believe me, they are not all the same.
If something is important, put it in! I’ve seen many situations where, during a project, you wished you had justed talked about something earlier and included it in the contract. It’s usually easy to include items at the contract stage. Once the contract is being executed, small minor things become issues very quickly, and project management time is unnecessarily used to sort it out.
Create Win-Win Outcomes
By definition, there is an expectation of mutual benefit when a vendor enters a business relationship with you. If it didn’t advance their corporate goals, they would not do it. There is almost always an expectation of profit, but don’t forget about the possibility of future work, development of expertise, project experience, or other such factors. A good project manager finds out what is motivating their vendors and helps them to advance their goals. It will probably be reciprocated with good project performance.
Since there are many legal implications with signed contracts, all changes must be in writing and follow protocol. Emails are often satisfactory, but the right people need to be copied (senior management, etc.).
Work should not be started until the change authorizing it has been approved. Again, this is easy to say but it is a common real life issue. Changes usually result in increased costs and someone higher up the food chain must approve it. Project sponsors often put this step on the backburner (oops, I left it in my inbox!) and the resulting fallout is dealt with later.
The Complexity of the Contract should Correspond to the Project Risk
Larger projects inherently contain more risk. This is for two reasons:
- Proportionately larger variances (in dollar terms) will happen than for a small project.
- The amount of work is greater, therefore there are more potential problem points. Simply put, there are more things that can go wrong.
Also, some projects can contain more risk due to their nature. For example, a nuclear power plant design project contains more risk than a highway design project with the same budget.
Ensuring the contract’s complexity corresponds to the project risk makes sure that the proper due diligence is done and all parties are in agreement with their obligations.
Management Commitment is Everything
When two organizations partner to complete a project, management commitment to the relationship is often what keeps the project on the successful path. Often, the very fact that the Contract is dusted off (and thoroughly read) means that there is a problem brewing.
When management is committed to the relationship, it can smooth over many contractual issues that arise.
Contract Terms need to be Clear
Before the contract is executed, ensure that each clause is discussed and everyone is clear on what they mean. Many conflicts result from misunderstandings and clauses that are not clear.
Define Roles and Responsibilities
Throughout the performance of a contract, there will be many interactions between the procurement departments of both companies, as well as the project manager and the project team. All parties need to be clear on where their responsibilities begin and end.
Procedures for contract changes and negotiations should be clearly defined, and responsible persons identified on both sides.