The Money Files

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A blog that looks at all aspects of project and program finances from budgets and accounting to getting a pay rise and managing contracts.

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What you need to know about your project supplier

Categories: procurement

When you are preparing to select a new supplier for your project you want to make sure that they are a good fit for you and your organisation. As well as the cost management aspects of getting a quote and setting up a procurement process to select a vendor, there are some other things to consider when you are making your final choice. These should all be part of your selection criteria – don’t forget that as well as technical requirements for your project you’re also ‘interviewing’ them to gain some confidence that they are actually going to work well with your existing project team.

So what do you need to know about your project supplier? Here are some things to consider.

Solvency

Solvency is important because you want to work with a business that is credible and stable. It’s not fun to be in a situation where you are halfway through a project and you find out that your supplier is on the verge of bankruptcy. Ask your finance or legal team to carry out their standard background checks on the businesses that you are considering working with (they should have access to the information to do this, although they might outsource the checks to a third party).

You’ll get back information about how the company has performed financially and whether or not it is considered a going concern. If you are at all bothered by the results, talk to the supplier. Some things could be explained away but if not, this simple solvency check will help you avoid a lot of problems in the future.

Size of business

How big is the company? It’s a very different experience working with a major multi-national to working with a small design studio that could essentially be one person working from their kitchen. That’s not to say that you shouldn’t engage small and independent firms, but be aware if you are doing so.

Taking on a big contract is also a risk for a small firm. If you decide not to continue to use them (say, after the project has finished) then they will lose a large deal and could potentially struggle. If you do need them for some kind of ongoing support then make this clear.

With a big company you could find the opposite: your project is so small in the grand scheme of things that you don’t get the customer service you expect because they don’t prioritise your problems.

Estimation techniques

Find out how they have prepared their estimates. There should be a list of assumptions somewhere in the proposal document. These should explicitly say if the proposal includes taxes and expenses. Some vendors will also expect per diems for their staff. This is a flat rate to cover the cost of working away from home or on a client site, and is supposed to be used to cover things like lunches, laundry, phone calls and so on. It’s paid directly to the staff member so it is different from expenses and often it’s explicitly excluded from a quoted price.

How do I know? I’ve been caught out with those before.

Working hours

The working hours are particularly relevant if you are working with international partners. They will have different national holidays to you so it’s worth finding out when they are. You can also write into your contract that you expect them to be available on all workings days in your country. Personally I think this is a bit mean and it’s nicer to be able to work around their availability rather than make them skip their local holidays, although I have seen it done.

You might also want to check what hours they are going to be available. While no one would expect the team in New Zealand to stay up all night in case someone calls, it is worth discussing what would happen if there was an urgent problem during your working hours and the overseas office was closed.

Staffing and experience

Talk to them about who is going to be allocated to your project. You’ll want confidence that the consultants they put forward have the relevant experience to be able to complete the work. Everyone, of course, needs to start somewhere and you may find that you also get less experienced contractors allocated to your account. That’s fine, as long as you know they are being adequately supported by more experienced colleagues. You’re paying for someone to do the job and provide expertise in a field that your own company doesn’t have. You’re not paying for someone to learn on the job.

While you are at it, get references of where they have delivered similar projects for other clients. They should be able to evidence the fact that they are experts in this area because that is what you are engaging them for. If they haven’t got a lot of experience in your sector but you still want to use them, talk to them about you can help them build their knowledge quickly.

What else do you consider when selecting and securing a third party to work on your projects? Let us know in the comments.

Posted on: October 11, 2014 05:34 AM | Permalink | Comments (3)

5 Steps for Make or Buy Analysis (video)

Categories: procurement, video

Posted on: July 29, 2014 05:06 AM | Permalink | Comments (0)

Make or Buy? Advantages & Disadvantages (video)

Categories: procurement, video

Posted on: June 23, 2014 05:36 AM | Permalink | Comments (0)

Procurement Management 101: Three Types of Contract

Categories: procurement

You can’t do many projects to change something without spending a bit of cash. And when money is involved, a contract is essential! Generally you’ll come across one of three types of contract on a project: fixed price, cost-reimbursable (also called costs-plus) or time and materials. However, the contract is for the whole deal, so if it makes sense to have some services from a vendor on a fixed price basis and others on time and materials, then the contract would include both these terms. You wouldn’t have a different contract for both elements simply because they were on different terms. There may be other reasons to have contracts for different terms but they are likely to be because the deal was agreed at a different date or similar.

OK, let’s take an example. You want to buy software consultancy and development services from a vendor. They will help you spec out the software so it is fit for use by the users, then they will build it. The requirements gathering part of this deal is on a fixed price basis. They know that it will take them 6 workshops and some prep time to prepare the complete requirements, so they can cost for that in one hit (fixed price). But they don’t know how long it will take to build the software, because they don’t have the requirements yet. If it’s a lot of work they want to be compensated, but they don’t want to overcharge you if it’s not much work, so they’ll price that based on the effort it takes (time and materials). They do know that there is a software licence that they will have to buy on your behalf, and you plan to pay them for this at the purchase price (cost-reimbursable). The one contract between your company and theirs will cover all these elements.

You choose your contract terms based on the best procurement arrangement for your company and theirs depending on what you both want to get out of it and making sure that everyone’s interests are covered. So let’s look at those three contract types in a bit more detail.

Fixed price contracts

With a fixed price contract the buyer (that’s you) doesn’t take on much risk. This is great for the project’s risk register, but not so great for the project budget. As the seller adopts all the risk they normally add a bit to the price to allow for any risks. For example, just because our software consultancy firm thinks it is going to take 6 workshops to define requirements because it has done on the last 10 occasions this doesn’t mean it actually will this time round. They have never worked in your industry before so they add enough into the fixed price proposal to cover them in case they have to do more.

What sometimes happens is that vendors want to win your business so much that they price too low. The problem there is that if something does go wrong and all the risk is on the vendor’s side, they then don’t have enough profit in the deal to make it worth their while, and they may even lose money by working on your project. If this happens then you should watch out – they may start to cut requirements or drop quality to try to claw something back.

However, the advantage for you with a fixed price contract is that you know exactly how much it is going to cost you before you begin the work, and for many project teams this is very valuable.

Cost-reimbursable contracts

With a cost-reimbursable contract you pay the vendor for the actual cost of the work. This could be materials, equipment, whatever and will normally include direct (e.g. salaries) and indirect costs (e.g. electricity for running the office). Indirect costs will be a fixed percentage amount – they won’t send you their electricity bills and ask you to pay a proportion.

So how does the vendor make any money? Obviously they aren’t working for you for nothing, and while you are covering all their expenses they want there to be some kind of financial return. The contract will include a clause that allows them to claim a profit over the cost price, either a fixed fee or some kind of incentive payment. It’s common, but if your vendor proposes this make sure you fully understand what you are signing up to.

Time and materials contracts

Time and materials contracts see the vendor being reimbursed for materials purchased plus a per day or per hour rate for time spent. The developers building the software in this example will charge on a time and materials basis. In this case, there probably won’t be many materials and they will charge their daily rate for time spent writing and testing the new product. They will act pretty much as if they are a salaried member of your project team, and you’ll have a fair amount of control over what they do (as you are paying for it, after all). They might ask you to sign timesheets or at least submit their own timesheets for your approval along with the invoice as proof of the hours spent working on your software.

This sort of contract is great for projects where you don’t know exactly what you want when you start out. Provided you keep a close eye on costs and manage the budget and the work so that you don’t overspend, this can be a really cost effective way to add more resources and skills to the team.

Which of these have you used on your projects? Let us know your experiences in the comments.

Posted on: May 20, 2014 05:26 AM | Permalink | Comments (0)

7 reasons why you need a resource management strategy

PeopleDoes your project or program have a resource management strategy (RMS)? While they are mainly used in program management, you can also find an RMS useful in a project environment. This is especially the case if your project is not affiliated to a program and you have to work it out how to handle resources yourself.

An RMS sets out how the project or program will get and manage the resources it needs to achieve the change required – after all, projects are about delivering change and you need resources to do that. “Resources” is not just an unfriendly word to describe people. Resources can be:

  • Money;
  • Buildings;
  • Equipment;
  • Technology;
  • Services, and of course;
  • People.

The people element can include temporary staff, permanent staff, contractors or part-time employees.
 
An RMS helps you manage the approach to using these. Not convinced? Here are 7 reasons why you need a resource management strategy.
 
1. It describes how the human resources requirements will be managed. This includes internal and external resources. How will you keep their line manager informed? Will they be part of a matrix organisation and if so how will this work in practice? Will you have the people reporting directly to you instead?
 
2. It describes how you will manage the transfer of knowledge and skills back to operations when the project has finished. This part of the RMS can be an input into the training and communications strategies.
 
3. It defines the dispute resolution process for when resource conflicts happen. And they will! Having this documented in advance will help you deal with issues as they arise. You will already have plans for how to fix problems, for example, when resources are called on to business as usual work or other projects. Who will arbitrate? Will it be the program manager or a board member? Can you solve conflicts yourself or do you need someone else to look at the overall priorities of the project portfolio?
 
4. It sets out how you will resource business as usual activity when you are using project staff for your project. The company still needs to operate, even when project resourcing demands are high. The RMS acts as a prompt for discussions with line managers. You can use it as a basis to ensure that they have plans in place for when they need to resource the ongoing commitments for their departments.

5. It defines an approval process for getting people and money.Don’t underestimate this! It really does help to know in advance about how to get resources for your project. It will save a lot of time and negotiation if you have already talked to the process owners and other people involved and already have this written down.
 
6. It defines the accounting and financial reporting procedures for the project. An RMS can also be used to determine how you will get financial resources, how you will spend it and how you will monitor it.

7. It defines the procurement strategy. You might not need an entire procurement strategy for your project or program, so you may find that this section of the RMS just references your corporate procurement process. This explains how you go about buying things and what arrangements or contracts need to be in place.

Remember that resources are not just people! A resource management strategy can help you be a helicopter project manager and see the big picture for all the resource needs on your project or program.

Have you used one or got any tips? Let us know in the comments.

Posted on: August 06, 2011 10:17 AM | Permalink | Comments (1)
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