Many projects rely on the supply of hardware, software, facilities and services by various vendors or sub-contractors. The Project Manager may need to:
The Project Manager has an important part to play - but remember what you are not...
There are many different situations requiring contracts. Your approach may vary considerably. In terms of scale, take a look at these examples:
Most people and businesses are reasonably honest. They need satisfied customers to build their reputation and gain future work. But some of them will bend the truth a bit if they feel it is legitimate. We call such people "salesmen".
For example, in a selection exercise if you ask the question "is your system user friendly", you can guarantee they will say "yes". It was not worth asking the question. Worse than that, some vendors will use the word "yes" to mean "yes - it could be done ... if we modify the system for you". You need to probe for the truth and make sure you leave no room for them to mislead you.
Watch out for the hidden extras. If the contract does not say something is included you can guarantee an additional charge for it. By then you will be tied into the relationship. You will find you have a poor bargaining position when negotiating those charges.
Beware of the sharks!
The process of selecting suppliers is the subject of detailed methodologies. In the ePMbook we will only summarise the considerations.
The style of selection will vary according to your needs and environment. We saw above that there is a large range of contractual situations to consider. The more significant the contract, the more attention you are likely to pay to the selection and procurement processes.
Styles also vary noticeably between the public and private sector:
Start by defining what you need. Try to limit this to the genuine business requirements. Do not make assumptions about the solution nor add in unnecessary detail. To do so would restrict the vendors' ability to propose the best overall solution to meet your needs.
Make sure it is clear (both to yourself and to potential bidders) which requirements are so vital that you could not consider any proposal that failed to address them . If the vendor can see that their proposal will be rejected, there is no point in the bidder wasting their time or yours by responding to a Request For Proposal. Be very careful, however, to restrict this to absolute needs that could not be addressed some other way. It is common for people preparing requirements documents to claim many things are mandatory - only to change the rules when they realise no vendor can do everything.
|In a classic selection process, these
requirements are used to formulate a Request For Proposal
(RFP) which will be issued to potential vendors. (Organisations
use many different
names for this concept - find out what language is
used in your organisation.) Each vendor will consider
their response. They will often need further interaction
with you to explore your precise requirements or explore
possible directions. (In the public sector scenario,
anything you tell a competing vendor must be relayed to
After a reasonable period of time the vendors submit the proposals to you for evaluation. Before they arrive you should have taken the time to define how you will assess the responses. Develop a balanced view of the relative importance of various requirements. Just because you asked 100 questions about accounting and only 10 about the electronic storefront does not mean the accounting issues outweigh the customer perspective.
You will probably want to perform other investigations to complement the information in the formal proposal. For example, you might ask for demonstrations, interview existing customers, investigate the vendor's financial status and check their track record.
With a large number of potential vendors, it is common to narrow the field in stages, maybe starting with a Request for Information to arrive at a short list, followed by the Request for Proposal, and then narrow the field again before conducting detailed investigations.
Where it is not necessary to make a selection decision on the basis of formal tenders received, it may be more efficient to study the vendors, services and products available then make a straightforward purchase decision. To do so, you would need access to sufficient knowledge or information about the competing options.
You might still approach several vendors and request information, prices etc. The key difference is that you collect the information you need, then make a decision. You do not ask them to submit formal bids against a specially prepared RFQ document.
Following your decision in principle, typically you would still enter into negotiations with the vendor to ensure you get a good deal that meets your needs and avoids any contractual pitfalls.
The great advantage would be the time saving. Preparing a formal RFP can often take several weeks. It will take a further period of weeks for it to be received by the vendors, studied, queried, and responded to. On receipt of the vendors' proposals you might then spend weeks reading, querying, investigating and evaluating the detail.
This style of procurement is also the typical way you would hire individuals as sub-contractors - for example contract programmers. You would evaluate the individuals' career histories and capabilities, interview them, then attempt to come to mutually agreed terms with those that you consider the most appropriate.
Where the contract concerns a commodity item, you might pay even less attention to the choice of item and vendor. If you need a projector, you might simply find the nearest supplier and buy or hire one.
In some cases, significant contracts can be handled in this way, provided the content is subject to pre-existing, approved purchase lists. For example, you might be able to buy 100 PCs directly from an approved supplier or you might be able to hire consultants through a framework contract.
Even in such cases, you may need to consider the detail of the contractual relationship. Unless the transaction is a simple consumer purchase, you will need to check the small print for warranties, terms and conditions etc.
Be particularly careful if the minor components are essential to your overall solution. For example, if your design is based on a particular type of mobile device you would not want to find that it ceases production shortly after you have finished.
The role of the Project Manager is to ensure that the negotiated deal best meets the project's needs. You should be checking such things as:
There will also be the commercial arrangements to deal with. You could try to negotiate a good deal on your own, but you will probably do better if you use an experienced Purchasing Manager or Buyer from your organisation.
|"There are two types of customer -
those who pay the full price and those who know they can
ask for a discount. If they don't ask, we don't mention
- IT salesman
In commercial deals it is common to agree a discount against the vendor's standard price. Strangely, not all purchasers realise they can ask. There are some vendors who never discount prices - but their salesmen will not think it strange of you to ask. Often, the vendor will have a target price to achieve, a standard price that is say 25% higher, but be willing to discount say 25% lower to get the sale. That means you might get 40% off the price you were originally told. The larger your organisation and the larger your potential contract, the more bargaining power you have. Even the strongest suppliers are willing to barter if the deal is big enough.
The flexibility to discount will depend on what is being sold. If it is software (excluding support and maintenance) the marginal cost to the vendor might be the cost of a CD. Their pricing will be designed to achieve a reasonable return on their original investment overall, but a sale at any price will increase their profit. If they are selling services, they could discount down to the cost of service for their employees' time. If they are selling hardware or selling on someone else's product, they cannot go below cost price.
When discussing discounts, check what the discount applies to. A good discount may be offered to the basic price, but that same level of discounting might not be applied to other charges such as training, consultancy, or maintenance. The non-discounted elements might well be far more significant over a period of time. Watch out for such other charges being expressed as a percentage of the basic price. If annual maintenance is a percentage of the standard purchase price it will cost you the full amount even if the seller gives you a big discount off the price.
It may be unwise to negotiate too low a price. If the vendor is not getting value from the relationship you might not get good service and priority. If you are competing for optional resources (eg a change in the specification or additional consultancy advice), you might find that the vendor prefers to deploy resources on other more-profitable customers.
You should anticipate the need to negotiate with your suppliers at future points in the lifecycle. Where a key element of your solution is involved you may find that your bargaining power becomes progressively weaker the harder it would be to change suppliers. Try to anticipate these needs and agree favourable terms in advance - when your power is at its greatest.
You should ensure that appropriate specialists deal with the detailed terms and conditions. You should either be using contract lawyers or a specialist unit within the organisation. They should have experience of the type of relationship you are dealing with - for example, not all lawyers will be familiar with the pitfalls in contracting for packaged software.
Buyers and sellers usually have differing views on what makes a good deal.
The buyer's dream deal?
The seller's dream deal?
The detailed negotiation of contractual terms can be unexpectedly frustrating and time consuming. It is easy to underestimate the time and resources required. With significant contracts it is important to get it right. You might take a softer view for minor contracts, eg hiring a contract programmer for three months, but, even then, you need to make sure the contract is sound. Would you want that contractor to claim that he owns the software he wrote?
Vendors often have standard contracts. If you wish to negotiate different terms it often involves lawyers from both sides. Your organisation may have standard purchase contracts. This can be the recipe for the most frustrating and time-consuming legal negotiation.
The list below illustrates some of the types of issue which should be considered when negotiating contracts for the supply of computer hardware, software and services. It is not intended to be a definitive or complete list. Parties negotiating contracts should always consider the terms and conditions in depth and obtain appropriate legal advice. No liability whatsoever can be accepted for any errors or omissions in this list nor for any adverse consequences of using it.
(Download in Word format)
Attachments - various pre-contractual documents and
statements may be explicitly or implicitly included in
the contract (make sure their status is clear)
|Terms of Agreement
|Use and Ownership
of Software, Hardware and Services
|Client's Rights and
How do legal contracts (and checklists) get to be so complicated? Every time someone trips over a new problem they write a new condition to make sure it will not go wrong next time. If you have any other contractual issues to add - please send us your feedback.
Sub-contracted work and the delivery of specific components often relate to specific phases of the project. At the start of each phase, check the relevant components and contracts are in place and will meet your impending needs.
The detailed planning for the phase may be impacted by the specific choices you have made. Ensure that the plan reflects the final decisions about purchased components, sub-contractors and contracts.
External sub-contractors need to be mobilised in much the same way as the internal project staff:
Where external components are being delivered, make sure your internal resources are prepared to receive them in a timely manner.
During the project, the team needs to monitor the compliance of vendors and sub-contractors. They must ensure the goods or services supplied are acceptable. This needs to feed into the controls in the procurement process. Where sub-contracted project personnel are involved, conduct a regular review of performance and compliance. With supplied items, conduct the appropriate degree of testing and check that they meet the agreed specifications.
Changes in the project's needs are inevitable. The Project Manager will often need to negotiate changes when the organisation requires new or changed deliverables from the vendor. This may be the situation the vendor has been hoping for. They might make up for a low initial bid price by charging large amounts for changes to the specified deliverables at a time when you have little alternative but to agree. Hopefully, you will have anticipated this and agreed appropriate terms and charges in the original contract.
Throughout the project you should maintain a good working relationship with your suppliers and sub-contractors. Your success will depend on their continuing co-operation. A vendor or sub-contractor will expect to be paid in accordance with the agreement. Ensure that they are paid promptly, provided they have performed in accordance with the agreement.
In almost all relationships there will be disputes & wrangles. The Project Manager should have developed a good relationship with the management of major suppliers so that problems can be settled rapidly without becoming contractual disputes. There is a natural tension between you, the customer, wishing to get the most benefit from the deal and the supplier who will wish to maximise profits. Normally you can agree a reasonable compromise before calling the lawyers.
Some relationships deteriorate into a "cash-back" mentality. The parties focus on faults and contractual compensation payments instead of the well-being of the business solution. Ideally, all parties should make the success of the solution their top priority.
If the dispute does need to be escalated, you would normally look to your senior management raising the issue with the senior management of the vendor. Most vendors will have an escalation process - try to accelerate your priority in it. Only as a last resort should you threaten a legal dispute. It usually costs far more than it is worth, can cause huge delays, may lead to the withdrawal of key elements of your solution, and may lead to sour relationships during subsequent operation and enhancements of the system.
There may sometimes be a problem identifying who is to blame for a problem. Where several parties and components are involved it is common to find each vendor points the blame at the others. If, for example, data on a customer's screen was wrong, was that our data, our software, our hardware, the operating system we bought, our communications network, the purchased communications management software, the Internet Service Provider (ISP), the public telecommunications system, the user's ISP, the user's modem, their PC or their software? Where possible, try to route sub-contracted elements through a prime contractor so that it is clear (from your perspective) that the problem is their problem.
The project's quality management processes should ensure that sub-contracted work and deliverables meet the agreed standards. These controls should be tied into the contractual payment terms.
The contract should have defined the procedures and terms for any remedial work that is required in the event of non-compliance.
Provided the deliverables are accepted, ensure the vendor is paid promptly, and, where appropriate, thanked for their contribution.
At the end of the project you need to finalise the relationship with your sub-contractors:
In many cases you might have completed the project and started live operations but still have a list of minor problems or concerns that need to be addressed. You might agree to retain some of the final payment pending full satisfaction.
You may agree to provide customer references for a vendor or sub-contractor. Many suppliers will wish to publicise their success, publicly naming your organisation and describing your project. They might wish to publish quotes from named individuals. They might seek permission for you to be contacted if other prospective customers want to speak to previous clients. In general it is useful to maintain good mutual relationships with your suppliers, but be sure anything you agree is in line with your organisation's policies. You do not have to co-operate if you feel it is inappropriate. Be careful not to give any opinions, advice, endorsements or information that might make you or your organisation legally liable for damages should it prove to be false. If you say a sub-contractor was good - you could be sued by someone who relied on that opinion and found them to be bad. If you say a sub-contractor was bad - you could be sued by the sub-contractor for damage to their business. Stick to the facts!