GPM First
Chapter 10 of Project Management for Supplier Organizations (978-1-4724-1109-9) by Adrian Taggart

How Much to Pay the Supplier Organization?

Chapter 10

A fundamental aspect of any agreement between a Supplier Organization (SO) and an Owner Organization (OO) is how to calculate the amount of consideration the SO is to receive.

Although there are many options, there are two basic approaches which can be considered as being opposites and whose contrast offers valuable insight.

‘Firm Price’ Versus ‘Cost Reimbursable’ Models

A ‘Firm Price’ contract involves both parties agreeing a figure at the outset. Then, regardless of what it actually costs the Supplier Organization (SO) to complete the work, the consideration they will receive is the amount agreed previously. This is the simplest and most popular of mechanisms. Terminology is a bit fluid here but we shall refer to it as a Firm Price contract (though many will refer to it as Fixed Price contract - see below).

In stark contrast to this is a Cost Plus contract. By this, at the completion of the work, the Supplier Organization (SO) lays out its costs and the Owner Organization (OO) reimburses the SO these costs, plus an additional fee to cover profit. Such a fee can be determined as a percentage of the costs, in which case it is known as a ‘Cost Plus Percentage Fee’ basis (CPPF).

The selection has a gross influence on the behaviour of both parties and, to ensure that the SO is incentivized to meet the real objectives of the OO, it is vital that the correct choice is made.

Returning to the scenario depicted in Figure 9.2, and just the contract for the digging of the hole, is it in the best interests of the OO and the SO to favour a Firm Price, or a Cost Plus contract? In reaching a decision, the following should be considered.

Risk and Reward

The ‘knee-jerk’ response of many Owner Organizations (OO) in this scenario is to favour a Firm Price contract, since, on the face of it, it insulates them from risk.

For instance, consider the Supplier Organization (SO) estimates a cost, and hence price, for the work on the assumption that the soil to be dug is sandy. However, when the hole is actually started, an enormous rock is discovered that dramatically increases the cost of the work. If the OO had agreed a Firm Price contract then the additional cost is to the account of the SO, so holding the OO immune from the problem.

By the corollary of this, we would imagine that the SO would favour a Cost Plus arrangement.

However, on closer inspection, we see that a Firm Price contract is not wholly good news for the Owner Organization (OO) since, although it does reduce exposure to the consequences of the risk, it obliges the OO to pay for the privilege. It pays for this mitigation via a margin, between the cost and price, which is determined by any astute SO to cover for such eventualities. This margin is to be paid irrespective of whether the risk actually materializes into an event. Accordingly the OO is paying a fee to reduce its exposure to uncertainty; an insurance policy by another name.

If the OO is risk averse, in its eagerness to transfer the risk, it may be prepared to pay a considerable margin. If, in turn, the risk of the rock does not materialize then the SO can release this margin to its profit; an attractive prospect for all SO. For this reason it may well be worth the SO accepting this risk since a Firm Price contract does actually maximize its opportunity for profit margin.

Adoption of a Firm Price contract will favour the Supplier Organization (SO) only if: the Owner Organization (OO) is risk averse; there is little competition to the SO; and/or, the SO in question is in a good position to manage the risk. Ability to manage the risk may include local knowledge revealing that the likelihood of there being a rock is very small. Alternatively, it may have access to skills and equipment that allow it to deal with any rock better than others.

If the opposite of these exist, the OO may well be better off with a Cost Plus arrangement.

It is worth reflecting here, that, although contracts are usually referred to as an exchange of goods or services for a consideration, at their heart is the trading of risk, and the amount of risk each party carries is dominated by the selection of reimbursement type.

The presence of competition is important because Supplier Organizations (SO) will compete with each other by reducing their prices, which often involves reduction in the margin they deem necessary to cover their risks. The opposite is also true in the absence of competition. Whereas this is often to the benefit of the Owner Organization (OO) there is an element of ‘caveat emptor’ (buyer beware). If the SO incurs risks which ultimately it cannot bear then it will pass into bankruptcy and the work will not be completed, ultimately to the cost of the OO. In reality the OO can never wholly insulate itself from risk and it is advised to ensure, as far as is possible, that it does not impose a risk on a party that is unable to bear it.

In choosing between Firm Price or Cost Plus contracts, both the Supplier Organization (SO) and Owner Organization (OO) are managing the risk by pushing it into the ownership of the other party. A better solution would involve them examining the risk with a view to actually managing it directly, by reduction (or elimination) of likelihood or impact. This may involve the drilling of test bores, for example, by the SO under a separate contract, which could then inform the subsequent decision about the main contract.

Even after this direct management, it is likely that there will still be some latent risk and this should remain with the party best able to bear it, and they should be rewarded financially for doing so.

A final point here relates to the ‘risk averse’ nature of many organizations. For cultural reasons, many organizations find it very difficult to deal with the inherent uncertainty associated with projects. At a fundamental level, they struggle to accept that at the outset of the endeavour, the final cost of a project, or fragment thereof, cannot be predicted with absolute certainty. They put their personnel under great pressure to avoid it and a practical way of dealing with this, when buying, is to favour Firm Price contracts since this does give some (though not absolute) certainty about what the final bill will be. This, of course, is ‘manna from heaven’ for many profit-hungry and risk-seeking SO who are only too happy to assist the risk averse OO. In reality many OO pay a very high price to satiate their risk aversion.

Supervision and Incentivization

Having engaged a Supplier Organization (SO) to dig the hole, what would the concerns of the Owner Organization (OO) be if they had to leave site for a while?

If the SO is engaged on a Firm Price contract then there is little to be concerned about because any time wasted is its own time, and the cost is to its account. Apart from the delay, the OO is not exposed to the cost of tardy performance by the SO.

The opposite is the case when a Cost Plus contract is embraced. In such instances, the OO will pay for the time of the SO regardless of how productive that time is. Indeed, it can be argued that Cost Plus contracts, especially those where the fees are calculated as a percentage of the costs, actually incentivize the SO to delay the work and ramp up the costs, and hence its profit, as much as possible.

The choice of reimbursement type has implications for the incentivization of the Supplier Organization (SO) and, if an Owner Organization (OO) chooses a Cost Plus contract, it may choose to make provision for additional supervision, despite the added administrative and cost burden.

Although a Firm Price contract has an intrinsic incentivization effect, this is not always helpful since there are instances when an OO is anxious that the SO is not encouraged to complete the work as quickly as possible. Imagine, for instance, that as part of the new swimming pool complex you had commissioned a sculptor to create a stunning marble statue as the centrepiece of the facility. Would you really want them to rush the work? This is an instance where a Cost Plus Percentage Fee contract may be appropriate since it would incentivize the sculptor to take every care, regardless of time.

Likelihood of Changes

Imagine having established a Firm Price contract for the digging of the hole for your new rectangular swimming pool whilst your partner was away. Further imagine that on hearing of your news they are distraught since, as they remind you, you had promised them a round swimming pool.

To rectify the situation you ask the Supplier Organization (SO) to fill in the corners of the hole and widen the sides to accommodate the round profile. However, unless special provision is made in the contract, one party is not at liberty to alter the agreed terms of a contract without the consent of the other party and the SO is not obliged to comply with your request.

Being aware of this, an astute SO may use the situation to their advantage, even if the additional cost of the modification is modest, say £2,000.

The Supplier Organization (SO) knows that so long as it is prepared to dig the original hole then, by the terms of the contract, it is entitled to the original price of £10,000. Since the Owner Organization (OO) no longer wants the original hole, it is unlikely that it will want the SO to proceed. A categorical refusal by the SO to make the change will probably result in it being sent off site but with the payment of £10,000. The OO must then find another SO to come and complete the round pool, for a price of, say, £10,000.

The astute SO will know that without its consent to the change, the OO will be faced with a final bill of £20,000. Therefore, it offers to accept the change for a new total contract price of, say, £19,500, resulting in an additional profit of £7,500.

In reality it is unlikely that the situation will be as stark as this. Most Supplier Organizations (SO) like to retain a good reputation in the marketplace so as to facilitate further work and it is unlikely that the Owner Organization (OO) will have offered a contract that does not contain some provision for instructing variations. However, the scenario does serve to illustrate a very important point; namely, a Firm Price contract severely impedes the ability of the OO to vary the work once the contract is agreed.

If there is a strong likelihood of the Owner Organization (OO) wanting to instigate change during a project, the relative attraction of a Cost Plus contract, over a Firm Price contract, increases. If you, as the OO, wanted an architect to work with you to develop a design for the new pool complex, it is likely that you will want them to come up with different ideas and sketches in the first instance, which you could use to help decide how the design should evolve. In this situation the OO would want to reserve the right to change its mind as the process advances and it is inconceivable that the SO would not insist on a Cost Plus contract.

For the Supplier Organization (SO), the practical consideration when contemplating a Firm Price contract is ensuring that it is never in a position of having to vary works without securing additional revenue. Such a scenario in the above situation could have occurred if only the volume of the hole had been specified in the contract, and not the shape. Although the Owner Organization (OO) may be adamant that it did refer to a round pool in earlier discussions, the SO may insist that it had only ever envisaged a rectangular pool. This is a dangerous situation for the SO since, before payment, it is in a very weak negotiating position and in all likelihood will have to fund the change.

Clarity of Scope Definition

In all situations, but especially in those involving Firm Price contracts, the exact scope of the work to be done must be clear to all concerned. For the Supplier Organization (SO) this is important for a number of reasons, including the following.

Firstly, the SO is obliged to cover from its account any amount that the cost exceeds the price and it is a risk that can have catastrophic consequences. To avoid this, prior to agreeing price, it estimates the cost. The estimate must be a good one and this can only be achieved with an accurate and explicit statement of what is to be done. In the example offered, as well as the likelihood of rocks in the earth, the SO will need to consider access routes to site, restrictions on site working hours, the off-site tipping of spoil and many other facets that will impact on the cost and duration.

Secondly, as addressed above, an explicit description protects the Supplier Organization (SO) from the impact of changes since entitlement to additional payment is dependent upon demonstrating that the Owner Organization (OO) is now asking for something different, i.e. that a change has actually taken place. If the original description was not sufficiently explicit to facilitate this demonstration, then the SO is in danger of not being rewarded for the extra work.

Thirdly, an explicit description of scope will reduce likelihood of conflict between the parties and ease final settlement. ‘Scope creep’ describes the habit, often an unconscious habit, of increasing the scope of work during execution. During the life of a contract many OO change their minds as to what they believe they asked for originally. Without an explicit description it can be hard for a SO to demonstrate compliance with original instructions and justify final payment.

Responsibility for drawing up such an explicit description usually lies with the Owner Organization (OO). This can be problematic and not just because it is a very expensive and time-consuming exercise. In many instances, the OO is simply insufficiently experienced to do it properly. Another very real problem is that, especially at the outset of the project, the degree of uncertainty is such that an explicit description of the work scope is just not possible.

A consequence of this is that Firm Price contracts tend to be more prevalent in the later stages of the project lifecycle, when less uncertainty prevails, and Cost Plus contracts tend to dominate earlier on, as in the case of the architect, above.

Administrative Burden

A further drawback to Cost Plus contracts is that sufficient evidence of actual costs must be collated and presented to justify payment. This imposes an administrative burden on the Supplier Organization (SO) to collate it, and the Owner Organization (OO) to endorse it.

Imagine doing the weekly shop at a supermarket and all the goods were to be bought on a Cost Plus basis. Clearly, just the thought of the paperwork involved demonstrates that it would be wholly unworkable. The simplicity of a Firm Price arrangement ensures its appeal.

There is also an aspect of confidentiality here since most commercial organizations prefer not to share with others what they have paid to their suppliers. A Cost Plus arrangement denies the SO such confidentiality and obliges it to operate on an ‘open book’ basis whereby the OO has full sight of its costs.

Other Payment Terms

As discussed, the Firm Price contract and Cost Plus contract have very distinct attractions and detractions. In practice, many parties embrace hybrid arrangements that seek to combine elements of each such that risk is shared more equitably between the contracting parties.

Very many such arrangements exist, many highly evolved for a specific application, but the following are the more common examples. They each represent different risk exposures and can be arranged loosely on a continuum (see Figure 10.1).1[22]

 
Figure 10.1 Risk sharing within differing reimbursement types

graphics/fig10_1.jpg

Costs Plus Fixed Fee (CPFF)

In a Cost Plus Percentage Fee contract the fee to which the SO is entitled is calculated as a percentage of the cost incurred. This is seen to be very favourable to the Supplier Organization (SO) since it will benefit from any increase in cost. A variation of this approach has the fee fixed at an agreed sum. This provides a modest incentive to the SO to limit the costs since, although the SO will not lose money, its profit calculated as a percentage of the whole reimbursement, will reduce as the costs increase.

Cost Plus Incentive Fee (CPIF)

Alternatively, payment of the fee can be contingent upon some measure of satisfactory performance of the Supplier Organization (SO). For instance, imagine a grand opening party is being planned for your pool, on 1 August. For this to happen, the hole must be dug by 1 May. The contract with the SO could provide for the SO to be reimbursed the costs but only to receive a fee if it completes the work by this date. Again the SO will not lose money but clearly it is incentivized to expedite the work.

Time and Materials

This is a very popular approach to adopt, especially when the scope of the works is uncertain. In essence it is a Cost Plus contract.

By this, the Supplier Organization (SO) is reimbursed the costs associated with any material purchases. (In some instances a small handling fee may be added to this to cover administrative costs.) Costs associated with labour are reimbursed at a fixed rate such as a cost per hour, or per day, or per month.

The appeal to the SO is that it exposes it to minimal risk and that the administrative burden is simplified, relying mainly on time sheets.

The appeal to the Owner Organization (OO) is largely in relation to the ease with which it can subsequently vary the work. On the downside, it can prove expensive if the number of hours increases substantially beyond that originally envisaged since the SO tends to ‘over recover’ fixed overheads.

Target Cost Contracts

There are variations on this theme but they all seek to share the burden of excessive costs between the Supplier Organization (SO) and the Owner Organization (OO) in an agreed ratio. This ratio is sometimes known as the ‘pain: gain’ share.

Applying this to the scenario above it may be agreed that the ‘Target Cost’ of digging the pool is £8,000; that the SO would be entitled to reimbursement of the costs; a fee of, say, £2,000; and a share of any savings between the Actual and Target Cost in a ratio of, say 80:20 OO:SO.

If the Actual Costs were £6,000 the SO would receive £8,400 which represents a percentage profit of 28.6 per cent. By contrast if the Actual Costs were £12,000 then the SO would receive £13,200 which represents a percentage profit of 9.9 per cent. The calculation of these is laid out in Table 10.1 on the next page.

The Target Cost is a genuine estimate of what the actual price will be. It is possible to reach this through competition whereby each competing SO offers a Target Cost. Changes can be accommodated, subsequently, by altering the Target Cost figure.

This option promotes close collaboration between the parties since both parties share an incentive to reduce costs. Helpfully, the degree of the risk can be apportioned directly on the basis of what each party is able to bear.

It does, however, incur an administrative burden on both parties since it requires an ‘open book’ policy on behalf of the SO.

 
Table 10.1 Target cost contract reimbursement calculation

Target cost

£8,000

Fee

£2,000

Pain: gain share (OO:SO)

80:20

Scenario

1

2

Actual cost

£6,000

£12,000

Reimbursement

Cost

£6,000

£12,000

Fee

£2,000

£2,000

Pain: gain

20% of £8,000 - £6,000 =£400

20% of £8,000 - £12,000 = -£800

Total

£8,400

£13,200

Profit as a percentage

28.6%

9.9%

Fixed Price Contracts

As mentioned above, many adopt this expression for what has been referred to above as a Firm Price contract. In contrast, some readers will have come across it being reserved to describe the following, slightly different, arrangement.

The contract is essentially a Firm Price contract, however, part or all of the contract price can be varied in accordance with some index that is beyond the control of either party.

The most common example of this is when a provision is made for inflation. If the contract is to last a long time, or alternatively the currency of the consideration is subject to high levels of inflation, it may be appropriate for the Supplier Organization (SO) to be allowed to inflate its prices in accordance with a publicly available rate.

The use of this arrangement is prevalent in the construction industry where a myriad of published indices facilitate its use. Examples of these include the Construction Price and Cost Indices produced by the UK government.

A more exotic use of the method can cater for fluctuations in raw material costs such as the price of copper which grossly affects the buying or selling of electrical equipment with a high copper content. In such instances the copper element of the deliverable can be weighed and the price to be paid is determined by the spot price for copper on the London Metals Exchange at the point of transfer of ownership.

Exotic Contractual Relationship

Another element that can influence decisions over reimbursement relates to the ability of the parties to fund the work. For significant projects, especially public projects, providing the capital to pay for the work is problematic.

Solutions can involve the Owner Organization (OO) paying the Supplier Organization (SO) over a protracted period of time. Simple versions are similar to the credit arrangements offered in many retail situations and can involve a third party to provide funding and to bear the risk of an OO default.

Over recent years more exotic arrangements have come into being that allow the OO to obtain the benefit they seek from a project without actually owning the product or paying the SO directly for it. Instead they pay the SO for the service offered by the product.

There are many combinations and permutations. For instance ‘BOT’ (Build Operate Transfer) contracts have the SO building an asset and then enjoying the operational benefits before transferring the asset over to the OO at some defined point. ‘BOOT’ (Build Own Operate Transfer) is a variation that involves the SO owning the asset.

In these arrangements the Owner Organization (OO) is often a public body and the Supplier Organization (SO) a private body hence expressions such as ‘PPP’ (Public Private Partnership) and ‘PFI’ (Private Finance Initiatives).

Paying for the benefit of ownership rather than the asset is not restricted to public projects. Rolls Royce, for instance, secures half of its revenue and 70 per cent of its profits from its ‘Totalcare’ business model that focuses on a ‘power by the hour’ approach rather than the conventional supply of their aircraft engines (Coates, 2014).

Notes

[1] Usually, the product is the unique element of a project but this is not always the case. For instance a project may be initiated to create a standard product but to do so using a different manufacturing technique, or by using alternative equipment, or in a different location. In each of these cases the challenge is to do something which has not been attempted before and as such the word ‘unique’ is applicable and hence the use of the word ‘project’ justified.

[2] The troubled facility created for the 1976 Olympic Games in Montreal, the chaotic preparation of the stadia for the FIFA World Cup in Brazil in 2014 and the reconstruction of Wembley Stadium in 2007 are notable examples in this respect.

[3] Many readers will be employed by organizations that deliver successive projects and the completion of one project does not lead to termination of employment. These types of organizations are referred to as ‘matrix’ organizations and have special characteristics, some of which they share with organizations engaged in non-project work. They will be addressed in some detail in Chapter 2 but for the purposes of this chapter it is appropriate to consider what may be referred to as a ‘pure project’, like our stadium project, a characteristic of which is its temporary management structures.

[4] In practice, the involvement of individual project team members is even more volatile than the life of the overall project team. Most likely, an individual will be a member of a sub-team which will only exist until the fragment of the project for which the sub-team is responsible, is complete. For this reason the make-up of the overall project team is always changing.

[5] This may stretch the historical knowledge of some of our younger readers but suffice to say that after vinyl records, the favoured medium for storing music was a spool of magnetic tape contained within a plastic case; the cassette tape.

[6] The various levels of project success and the interplay between products and benefits is addressed in detail in Chapter 16.

[7] There are instances where organizations may choose to move in the opposite direction, and for good reason, but this book does seek to address their concerns.

[8] Ultimately, all expenditure is for the engagement of people since all material comes out of the ground (either mined or harvested) and at this point is free of charge.

[9] For the mathematically minded it is the integral of the earlier curve (area under the curve) and its gradient, or steepness is equal to the value of the previous curve, at any individual point in time.

[10] The name derives from ‘S’ being an abbreviation for ‘Summation’, since these curves are most properly referred to as ‘Summation Curves’. This explains why, very often, real ‘S-curves’ do not look much like an ‘S’. The important features are, firstly, that it is always ascending (the cumulative expenditure never reduces) and, secondly, the gradient, on a large scale, is shallow-steep-shallow, even though locally, on a finer scale, there may be some variation in gradient.

[11] The decision made at the gates involves the marginal benefit and marginal cost. Actual expenditure to date is ignored on the basis that it is a ‘sunk cost’ and cannot be recovered in any case. This is a reason why, especially at the later Decision Gates, a project may be continued with, even though the total benefits may be exceeded by the total costs.

[12] Further detailed analysis and comparison of strategic and tactical control is offered in Chapter 16.

[13] There is again an analogy to our own lives. Shakespeare once famously wrote about the ‘Seven Ages of Man’ and yet Hinduism talks about the four stages of man. Each is describing the same life; the same journey from cradle to grave, and yet they choose to decompose it in different ways, each to reflect their own understanding and their own emphasis.

[14] Readers may wish to note that in some countries, most notably the United States, the mandate document that bears the authorizing signatures is a ‘Project Charter’. This is a standalone and separate document that will refer to a Business Case.

[15] Some care is required here because there are some obligations of the SO that may not be explicitly stated in the contract. For instance, in any case, the SO is obliged to provide goods of ‘merchantable quality’ and this will confer ‘implied terms’ on the SO.

[16] The analysis is more straightforward if we assume the contract is of ‘Firm Price’ type (see Chapter 13).

[17] Some OO manage major assets and infrastructure (rail, water and telecommunication networks) and are constantly commissioning projects to create or refurbish assets. For them, projects are an ongoing feature, but they are the exception. For most OO their involvement in projects is sporadic.

[18] Like the lifecycle offered in Chapter 5, the lifecycle offered here is a model. To be useful, models need to be simple, however their principal weakness is always their simplicity. The nature of procurement is such that there are a great many combinations and permutations of payment terms, contract types, and the like that can result in variation in the exact Decision Gates and phases that apply. The model is offered as a generic model to assist in the understanding of what appertains to most SO, most of the time. Real examples may, and will, vary.

[19] Some legal obligations of the SO do live on beyond this point, for instance its obligations for latent defects.

[20] It should be noted, however, that this is not always the case. Acme Pool Services is selected on the basis that, unlike the Owner Organization (OO), it is experienced in the construction of pools. It has skills, equipment, knowledge, expertise and contacts that enable it to manage the building of the pool far better than the OO, such that it may well be able to do the work for a considerably cheaper sum and some of this saving may be passed onto the OO in which case the second scenario is both easier and cheaper for the OO.

[21] There are variants that do not contain such an agreement but are less attractive to the OO.

[22] The exact sharing of risk is determined by the wording and quantifications within each specific contract. The arrangement within a continuum offers an approximate guide only.

[23] Ideally such negotiations should be embraced as early as possible and not wait for the final phase but practicalities often result in them being held to the end.

[24] For example some EU legislation imposes constraints on publicly funded projects.

[25] Discrete probability distributions for time or cost of a project are rarely symmetrical. It is almost always the case that it is more likely to cost more, or last longer, than the ‘most likely’ figure, than less, i.e. the mean is very likely to be greater than the mode. This results in a distorted distribution curve with a longer tail to the right of the mode. It is for this reason that the single estimate derived by the three-point estimating technique is usually greater than the mean and a more representative figure of the overall distribution.

[26] Or other entity such as Work Package.

[27] The use of Product Breakdown Structures and Work Breakdown Structures (WBS) will be addressed comprehensively in Chapter 14.

[28] There is an opportunity to withdraw an offer by the offerer, before the expiry of any validity period, but it is limited and different legal systems have different approaches. It is, for instance, an area of inconsistency between English and Scottish law.

[29] For an OO the ‘why’ is addressed within the Business Case and the ‘Project Background’ section of their PMP is informed by this.

[30] This ‘locking’ of the estimate is sometimes referred to as ‘baselining’.

[31] It is the case for project control as it is for planning. ‘Scope creep’ (doing something that was not intended) impacts upon duration and cost and, without a scope baseline, ‘scope creep’ cannot be recognized and hence project cost and duration cannot be controlled.

[32] For projects with very large physical deliverables, such as machinery, many practitioners choose to draw up a PBS (Product Breakdown Structure) that decomposes the deliverable into discrete parts, as a prelude to creating the WBS.

[33] A Work Breakdown Structure Dictionary is a textual document that supports the WBS by containing additional information about individual Work Packages.

[34] ‘Cost’ is a complex entity and care is required here. Chapter 17 refers.

[35] Such ‘house standards’ will be key elements of the project management method adopted by the SO.

[36] Although presented in the context of management of resource, since time and cost are inextricably linked, they can be thought of as time or cost management techniques, depending upon the context.

[37] To many, this four-part cycle is known as the ‘Deming Cycle’ or the ‘Deming Wheel’ on the understanding that it was originated by W. Edwards Deming. However, in his book Out of the Crisis, Deming (1982) himself attributed the original design to W.A. Shewhart.

Others, such as Ronald D. Moen and Clifford L. Norman (2010) differentiate between ‘Deming’s Wheel’ and the PDCA cycle, attributing the latter to a reworking of Deming’s work by a group of Japanese executives after receiving a presentation by Deming in the 1950s.

[38] This can be considered as an example of the ‘Hawthorne Effect’ (Buchanan and Huczynski, 2004).

[39] As discussed in Chapter 7, through the life of a contract the SO has progressively less influence over the gate decisions than the OO. For example, once the contract is signed the opportunity for the SO to terminate the contract is negligible.

[40] For convenience we will consider a Firm Price contract.

[41] If the estimated cost within the baselines of the PMP is less than that within the pre-contract sales estimate it is inconceivable that SO management would not insist on the former being adopted as the target cost.

[42] Although it is easy to refer to just cost, the real goal of the SO is profit and so there is a pressing need to manage and control revenue, both in terms of expediting payments to which the SO is already entitled, and also maximising the amount of entitlement. The latter will involve the SO’s PM acting as a marketer and salesperson seeking out new opportunities within the context of the existing OO and project. Such activity is akin to the ‘farmer’ aspect of selling as opposed to the more conventional ‘hunter’ aspect, as addressed in Chapter 13.

[43] To some extent this is because this strategic level of control is not as easy to exert within an SO because, once a contract is signed, the SO has no option to withdraw.

[44] It is said that project managers spend upwards of 90 per cent of their time simply communicating with others (Heldman, 2009).

[45] Care is required here since some projects will have their own contractual requirements that may not be adequately serviced by the existing facility.

[46] This also helps to manage the risks associated with the unexpected departure of key project staff.

[47] Some practitioners also include the processes and documents required to manage change as being part of the Configuration Management System (CMS).

[48] For instance, to avoid potential for any contradictions such suites should, ideally, ensure that a requirement (such as a dimension) is only stated once, in one document, which is then referenced by the others.

[49] Or alternatively with a CMS imposed by a SO higher in the supply chain.

[50] Some recipients will receive a ‘Controlled Copy’ in which case they will automatically receive any subsequent updated versions. Recipients of ‘Uncontrolled Copies’ do not atomically receive updated versions.

[51] Further enhancement can be adopted when using a spreadsheet’s logic to colour the cells to indicate status (for instance: Green - Work Package has started/finished before its planned date Amber - Work Package has started/finished but after the planned date; Red - Work Package has not started/finished and it is after the planned date).

[52] The size (and hence number) of the smallest fragment into which the project is decomposed.

[53] Implicit within all these discussions of costs incurred by a SO, and their use in the strategic and tactical control of projects, is the assumption that costs can be attributed to each individual bespoke product. Those SO who currently only produce standard products and are looking to embrace the supply of bespoke products may find this requirement surprisingly onerous. This is because, currently, many will operate a cost collection system that uses only functional departments as cost centres and lack the facility to record costs against individual products. Converting such a system can represent a significant amount of work and may, for instance, include the need for employees to create timesheets. Cultural resistance can be expected as well as significant technical difficulties and additional complexity.

[54] Many SO choose to have a ‘Cost Management Plan’, as a subsidiary management plan within the PMP that contains such definitions and conventions.

[55] The precise point of commencement of the warranty period is defined within the contract in question.

[56] In some instances such access is an element within the original supply contract. It can be a useful negotiating token for the OO.

References

11 

Coates, D., 2014. Growth Champions Rolls Royce. [online] Available at: http:// growthchampions.org/growth-champions/rollsroyce/ [accessed 10 April 2014].

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