3 Types of Vendor Payment
From the The Money Files Blog
by Elizabeth Harrin
A blog that looks at all aspects of project and program finances from budgets, estimating and accounting to getting a pay rise and managing contracts.
Written by Elizabeth Harrin from RebelsGuideToPM.com.
Recent Posts
Managing stakeholder expectations during year-end chaos
Remote project management: Navigating the holiday period
Proactive and reactive project management
Do you have your head in the sand about these project challenges?
Project initiation: Tips for starting off right
Categories
accounting,
agile,
ai,
appraisals,
Artificial Intelligence,
audit,
Backlog,
Benchmarking,
benefits,
Benefits Management,
Benefits Realization,
books,
budget,
Business Case,
business case,
carnival,
case study,
Change Management,
checklist,
collaboration tools,
Communication,
communication,
competition,
complex projects,
config management,
consultancy,
contingency,
contracts,
corporate finance,
Cost,
cost,
cost management,
credit crunch,
CRM,
data,
debate,
Decision Making,
delegating,
digite,
earned value,
Energy and Utilities,
Estimating,
events,
FAQ,
financial management,
forecasting,
future,
GDPR,
general,
Goals,
Governance,
green,
Human Resources PM,
Innovation,
insurance,
interviews,
it,
IT Strategy,
Knowledge Management,
Leadership,
Lessons Learned,
measuring performance,
merger,
methods,
metrics,
multiple projects,
negotiating,
news,
Olympics,
organization,
Organizational Culture,
outsourcing,
personal finance,
Planning,
pmi,
PMO,
portfolio management,
Portfolios (PPM),
presentations,
process,
procurement,
productivity,
Program Management,
Programs (PMO),
project closure,
project data,
project delivery,
project testing,
prototyping,
qualifications,
Quality,
quality,
Quarterly Review,
records,
recruitment,
reports,
requirements,
research,
resilience,
resources,
Risk,
risk,
ROI,
salaries,
Scheduling,
Scope,
scope,
small projects,
social media,
software,
Stakeholder,
stakeholders,
success factors,
supplier management,
team,
Teams,
Time,
timesheets,
tips,
training,
transparency,
trends,
value management,
vendors,
video,
virtual teams,
workflow
Date
Last time we looked at the different times in a contract where you would be scheduling payments. Today, I wanted to write a bit about the different types of payment you could factor into your work with vendors to give you some variety with how you structure payments.
Before we start, make sure to discuss any payment plans with your procurement and finance teams, so you don’t end up committing your company to something that you really shouldn’t! In my experience, contracting and procurement are really outside a project manager’s pay grade – organisations generally want the specialists involved, and most project managers would not have authority to sign contracts.
However, it’s worth knowing about the different payment options out there, so you can mention them in conversations with the right people if they are relevant to how you think your project would be best served.
Here are some options to consider for your next project procurement activity.
1. Uptime/availability payments
This is something to build into service level agreements. In the past, my projects have needed to set up SLAs, and uptime payments were built into those.
In essence, vendors get an incentive payment for keeping the service available instead of penalty clauses for downtime.
You could use this principle to build in payments for services or support being available, and you could have various thresholds that trigger different payments. Or you could put penalty clauses in for downtime, but that’s not so good for relationship building. The management at my last company was very much against punitive clauses as they believed it did not incentivise a partnership relationship and was too much centred on blame.
If you do put these clauses in your contracts, make sure you also document how you claim the payments. For example, for uptime incentives, if I remember rightly, we had to claim them, and sometimes for the value offered, it wasn’t really worth the admin… so think that through before you write them into contracts.
2. Performance payments
I haven’t used these personally in projects, but I believe they are common in construction (are they? Let me know in the comments).
This would be a payment related to hitting a particular performance threshold, perhaps delivering early on a particular milestone, or reaching some kind of target. When we pay for services, there are often performance-based payments built into the schedule. You’ll have seen these, too if you do any kind of online transaction processing. For example, I signed up for a service linked to my personal website that allows me to have up to 10k of transactions per month at a flat rate fee, and then if I go over that, the next tier of payment-based payments kick in. Payment is based on how many transactions you put through the system.
That could be relevant for your project if you are launching a service where volume or number of transactions or units processed would trigger an additional payment or an additional discount.
3. Incentives
You could find any number of ways to incentivise vendors. For example:
- Productivity savings
- Process improvements
- Staff savings
- Time per transaction saving
- Decrease in number of complaints or increase in staff satisfaction as measured by a survey
In addition to the ones I’ve already mentioned above. Anything that reduces overall cost of the service or product could be passed on to the client (your project), and there could be an incentive payment linked to that – ideally something that is beneficial to you both, not just cost-cutting for cost-cutting’s sake.
Have you used any of these payment methods on your projects? Let us know in the comments!
Posted on: September 13, 2023 08:00 AM |
Permalink
Comments (7)
Please login or join to subscribe to this item
Truly said - In my experience, contracting and procurement are really outside a project manager’s pay grade – organization', but in the interest of project delivery PM should be allowed to directly procure project necessities instead of going through the tiresome process of supply chain
Kaiser Shahzad
Senior Commercial and Project Manager| Emirates Document Centre (EDC)
United Arab Emirates
very insightful and as customers should consider rewarding instead of pushing vendors to the wall
Precious post, Elizabeth, thanks!
I am going to discuss a payment type this week with a potential Client and the first type of payment that you mention will turn to be very useful in this context.
Personally, I heard about the second way, but never applied.
For the third method, let's say that it is not so easy to apply, due to possible regulatory elements to consider, which might make the agreement difficult to set
Thank you for sharing Elizabeth. A valuable insight to the subject.
I neither used performance payments, but it could make sense in software development projects managed in an agile way. Regardless the results (which may or may not be satisfactory for the customer), a vendor would receive payment for keeping the pace of iteration or keeping performance at required level.
Though I would see a need of having additional penalty clause or incentive for delivering a solution/results.
These types of payments correspond with the types of contracts used. The common one is the lump sum price with milestone payments.
There are also a volume discount and revised work unit rates for renewable contracts.
These are great suggestions and additions, thank you for the feedback.
Please Login/Register to leave a comment.
|
"I'm not afraid to die, I just don't want to be there when it happens."
- Woody Allen
|
