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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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5 Considerations for Your Project Procurement Strategy

Categories: procurement

A project procurement strategy is drawn up at the very beginning of a project at a high level because it’s useful for the business case.

Then you’ll put together a more detailed level procurement plan during Definition, when you are specifying exactly what is going to happen on the project. The procurement plan is part of your overall project management plan (remember: your plan is more than the schedule alone).

Here are 5 things to take into account when you are putting your procurement approach together.

1. Make or Buy

Make or buy decisions happen all the time on projects because you need to get your hands on stuff to make your project happen.

A make or buy decision is where you decide whether the deliverables will be made in-house or bought in. For example, you might do some IT developments in-house as you have developers with  those skills, and then buy in Software-as-a-Service products for other software items where you don’t have the skills (or the inclination) to build them yourself.

‘Make’ is a good choice where you have internal capacity, resources, time and funding and a as way of building expertise in the team for long term support.

‘Buy’ can be more expensive but is also normally faster and does not require the project manager to recruit or backfill specialist permanent roles.

Do you want more tips for make or buy decisions? This video sets out 5 steps to consider.

2. Single or Multiple Suppliers

You also have to decide if you want a main contractor or are prepared to manage multiple suppliers.

Using a single supplier streamlines communication and devolves the project management requirement to the lead contractor. But it can cost more as it introduces another layer or management and there may be disputes.

Also: watch out for communication problems as your message might be lost or diluted as it is passed down.

Multiple suppliers are common on projects because there are often a variety of deliverables. It might make sense to group these together under a lead contractor – it often does on construction projects, for example – but it is going to really depend on your project and the type of suppliers you have.

3. Method of Reimbursement

You should think about what method of reimbursement you are going to use on your project and this might be mandated by your finance team or company policy. It’s really about the types of contract you are prepared to enter into: cost plus, cost, fixed price, firm price and so on.

Think about how much of your costs should be fixed and how much you are prepared to have as variable. The legal team are likely to get involved here to offer advice as you write your strategy. It’s not something that you can decide alone, although you might be in a position to make a recommendation. However, it’s important that you know what you are authorised to offer to a vendor, so it’s best to be clear at the beginning.

4. Supplier Selection

This involves:

  • Looking at where you are going to find qualified suppliers
  • What your minimum criteria are (useful for the pre-qualification questionnaire)
  • How you will rank suppliers
  • The process for tendering
  • Relevant internal policies

Think it through, take advice and then document your approach in your procurement strategy. You may already have this process for supplier selection formalised as part of your company policies, so there might not be much to do here except reference the existing procurement process. Check before you invent a supplier selection approach from scratch!

5. Contract conditions

Finally, contract conditions are worth covering in your strategy. You’ll need to ensure that your contract meets company standards and has a signatory at the appropriate level of authority. Your Finance team can advise on this.

Review any specifications that must be included like a break clause, intellectual property clause or force majeure.

What else would you consider in your procurement strategy? Let us know in the comments below.

Posted on: October 04, 2016 03:20 PM | Permalink | Comments (4)

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 (5)
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