How To Tender
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Monday, November 21, 2011
SUBCONTRACT AND CONTRACT MANAGEMENT
Sub-contractor and Contract Management
MANAGEMENT
21-Nov-11
SOS International Mechanical equipments
CHANDRA
Why, What, How?
Many projects rely on the supply of hardware, software, facilities and services by various vendors or sub-contractors. The Project Manager may need to:
• select the best suppliers,
• negotiate terms and conditions,
• agree contracts,
• ensure the goods or services supplied are acceptable,
• deal with disputes,
• negotiate changes where the client requires new or changed deliverables from the vendor,
• ensure the vendor or sub-contractor is paid in accordance with the agreement,
• manage the relationship to maintain a good working relationship.
The Project Manager has an important part to play - but remember what you are not...
• You are not the right person to enter into contractual relationships on behalf of the organisation. It will usually be a senior manager who is most appropriate and is authorised to agree the terms and sign the contract.
• You are not a lawyer. Although it is in your interest to see that the deal meets your needs, use lawyers or other specialists to determine the precise wording of the contract.
There are many different situations requiring contracts. Your approach may vary considerably. In terms of scale, take a look at these examples:
• complete outsourcing of facilities and business functions,
• outsourcing the development of a new IT system,
• sub-contracting the development of a specific component of your new system,
• purchase of packaged software and on-going support,
• using consultants from a major consultancy firm,
• hiring a freelance programmer working as a contractor,
• additional licences for standard desktop software.
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!
At the start of the project
Selecting suppliers
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:
• In the public sector, the emphasis tends to be on completeness and fairness. All potential vendors should be identified and given an equal chance to win. Various rules, norms, standards and legal requirements apply to regulate the process. Certain types of purchase can be made from standard approved suppliers without the need to enter into a full selection process. Rules are also relaxed for low-value contracts.
• In the private sector, the objective is usually to gain maximum benefit. That might be achievable by making a rapid choice from a small number of leading suppliers. It might also be possible to partner with a single reliable supplier. Selection exercises are used only where there is a genuine need to search the marketplace for the best supplier.
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 the others.)
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.
Negotiating Terms
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:
• specifications,
• identification of all necessary components and work packages,
• delivery dates,
• quality/acceptance criteria,
• guaranteed functionality,
• staffing levels,
• training provision,
• support arrangements,
• adequate resilience,
• guaranteed performance (speed),
• service levels.
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.
Case Study
"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."
- 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.
Bargaining Power - Buyer vs Supplier
Contract Terms and Conditions
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 supplier will provide everything the customer wants or needs, whether or not they thought of it or subsequently change their minds. The supplier will ensure all things work perfectly, whether or not they were provided by the supplier, and that the overall solution will do everything the customer wants or needs both now and for an indefinite period into the future. All employees of the supplier are available 24 hours a day to provide assistance and advice on any matter at no additional charge. Unlimited training will be available from the supplier for an indefinite period. The supplier hereby assigns full ownership and intellectual property rights in all items provided during the course of this relationship. The customer may make copies of all materials supplied and provide these to anyone as they see fit. Any initial limits on usage cease to apply after the contract is signed. The customer need only pay what they want to at whatever time they feel is appropriate, and only when every element of the contract has been accomplished to perfection. The supplier undertakes to make some effort to meet the customer's needs but cannot commit to anything. Items supplied are not necessarily fit for purpose or of merchantable quality. The customer accepts that an undefined number of faults will inevitably be contained in the delivered items, and that the supplier can in no way accept responsibility for these. The supplier is not obliged to remedy any faults nor provide any compensation for anything whatsoever. Prices charged for the initial items delivered may be increased at any time. Any discount offered only applies to the initial items delivered. Further purchases and recurring charges for licences, services and maintenance etc will be charged at the full list price at the date of renewal. Charges for any item the customer forgot to specify or requires in the future which cannot be obtained anywhere else will be charged at a special surcharge above standard list price. The customer is hereby deemed to be happy and will be featured in marketing and publicity materials.
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)
Contract Checklist
Contract Attachments - various pre-contractual documents and statements may be explicitly or implicitly included in the contract (make sure their status is clear)
• Vendor correspondence
• Vendor literature and advertising
• Notes of meetings between vendor and client
• Materials from vendor demonstrations, such as output reports
• Systems specifications
• The vendor’s financial statements
• All responses and other materials completed from the Request for Proposal (RFP), including the completed system requirements
• An Implementation Plan identifying the tasks to be completed, the assigned responsibilities and the scheduled completion dates
• Stated usage of named sub-contractors and specific named employees
• Other vendor representations
Terms of Agreement
• Initial terms
• Optional terms
• Renewal terms
• Relationship with vendor's sub-contractors
• Terms and conditions for transfer of personnel (eg with outsourcing contract)
Deliverables
• Design
• Hardware
• Networking provision, connectivity, ISP, portal connectivity
• Access to servers and facilities not owned by the client
• Software / programs
• Source code
• Programming and data standards (eg language, database, XML)
• Modifications
• Custom programming
• Application / transaction / business process outsourcing / facilities management services
• Supply of data and information
• Consultancy
• Support services
• Introduction of trading partners, suppliers, customers etc
• Documentation
• Training
• Enhancements and updates
• Initial support and maintenance
• Continuing support and maintenance
• Backup, recovery and disaster recovery provision
• Access to information and electronic support services
Delivery
• Timetable
• Delays (constituting contract default)
• Price reduction or penalty for delays (liquidated damages)
• Actual-cost damages for defaults (and any limit applied thereto)
• Trial period
Acceptance Criteria
• Thorough test data
• Functional tests
• User Acceptance Tests and criteria
• Integration tests and compatibility with connected systems including those of other partner organisations, customers and suppliers
• Performance tests
• Reliability tests
• Throughput / transaction times
• Run time
• Computer resources required
• Efficiency
• Standards of continuing performance
• Acceptance period
• Terms for operation where there are outstanding problems and no user final acceptance
Use and Ownership of Software, Hardware and Services
• Unlimited use
• Use by or extension to associated companies in same group, outsourcers, sub-contractors, customers, suppliers, other third parties
• Use and ownership of software on transfer of the business to new owners
• Ability to assign rental, maintenance and service contracts to new owners
• Continuing use of systems and provision of services if the business is placed into administration due to insolvency
• Upgrades and portability of software for client's future use
• Ownership of software customised to client's specifications
• Client's right to modify software package
• Effect of refusal of future modifications if unacceptable
Source Programs
• Access by client and sub-contractors to source programs
• Undertaking to maintain open source
• Source code and program documentation in escrow
Installation and Training
• Timeframe of installation
• Amount of disruption to client's operations
• Minimum hardware and software configuration to be provided by client for vendor's hardware and software to operate upon or in conjunction with
• All appropriate education required by client to successfully implement and operate system
• Period of time that training will be available
• Training location
• Training costs
• Training curriculum
• Facilities required to provide training
Support and Maintenance
• Amount and nature of implementation support at no additional cost
• Cost of annual maintenance
• Guaranteed prices and nature for specified period
• Starting time for maintenance (eg after warranty period)
• Support the vendor can provide in the event of a disaster
Warranties of Vendor
• Commencement event of warranty period (installation, acceptance, etc.)
• Suitability of software for client's requirements
• Compliance with legislation and regulatory requirements (eg accounting standards, employment legislation, data privacy / protection, use by the disabled, access to data by authorised public bodies)
• Capacity to handle stated volume of transactions
• Ownership of software and hardware
• Vendor's right to license software
• Assurances regarding infringement
• Period of time vendor will keep software operational
• Correction of malfunctions
• Willingness to allow changes in the specifications or deliver additional items (subject to agreed terms and charges)
• Equipment configuration required for software
• Vendor's commitment to software and/or hardware maintenance
• Guarantee of support availability
• Service levels
• Call out times
• Escalation procedures
• Items explicitly or implicitly included or excluded from warranties (does itemisation of included items imply exclusion of anything else - "reverse limitation")
• Definition of basis for compensation and limits applied (eg contract price, actual damages, liquidated damages, capped limits, fault / no-fault, force majeure, opportunity to cure, time and notice requirements)
• Definition of limits of accountability where parts of the overall solution are provided by the client or by other parties
Client's Rights and Safeguards
• Right to reproduce or otherwise make available reference documentation
• Right to disclose software to others
• Right to rescind agreement at any time prior to acceptance of system
• Right to terminate agreement, optionally with agreed notice period or at defined break points
• Right to transfer software with sale of computer
• Right to modify software
• Right to merge software into other program material
• Right of assignment
• Right to outsource
• Product liability insurance
• Performance bond
Confidentiality
• Client data
• Client's business methods and trade secrets
• Vendor-related information that is subject to non-disclosure
Infringement Provisions
• Vendor defends any suit brought against client
• Vendor pays costs and damages
• Vendor replaces infringing software
• Vendor indemnifies client for loss
Events Constituting Default
• Failure to deliver
• Failure of software or hardware to perform according to specifications
• Unreliability of software or hardware
• Failure of vendor to correct malfunctions within an agreed-on time period
• Failure of vendor to provide support services
• Bankruptcy of vendor
Default and Malfunction Remedies
• Termination of agreement
• Recovery of damages for costs incurred
• Liquidation of damages
• Refund of money paid and costs incurred
• Replacement of software or hardware by vendor
• Repair of software or hardware by vendor
• Payment by vendor for cost of repairing or replacing software or hardware by others
• Downtime credits
• Backup facility in the event of malfunction
• Time to correct malfunctions, which extends the warranty period
Price
• Fixed cost
• Time and material costs
• Rental basis
• Pricing basis and parameters eg per "seat" / by processor size / per transaction or event
• Optional and call off-charges (eg consultancy advice per day)
• Pricing of subsequent variations to the contracted specification and other additional work
• Renewal costs
• Other charges
• Quantity discounts (eg multiple or subsequent installations, reduced day rates after given number of days)
• Agreed discounts apply to which prices and charges (eg all elements discounted by agreed amount, or only the basic price is discounted with other charges based on full standard price)
• Price protection for future enhancements and support
• Pass through of future price reductions
• Pricing for upgrades or trade-in's
• Lease payments applied to purchase
• Charges or penalties for early termination (in the absence of default)
Payments
• Fixed dates
• Progress payments based on defined acceptance criteria
• Credit for delays
• Refund of money if agreed-on situation occurs
• Holdback
• Periodic payments and royalties
• Maintenance fees
Taxes
• Liability for taxes
• Place of contract - country / state taxes that apply
• Tax credits
Client-Vendor Relationship
• Vendor's status (eg independent contractor, not employee of client)
• Risk and reward sharing
• Vendor and/or third-party funding of capital requirements
• Creation of new legal entities to manage joint-venture relationships and partnerships
• Prohibition against assignment by vendor
• Prohibition against sub-contracting by vendor without client's consent
• Continuity during dispute
• Personnel recruitment policy - anti-poaching agreement
• Use of client's resources by vendor - eg office facilities, access to site, computers, software
Other Considerations
• Free trials or demonstrations
• Compensation for assisting vendor in developing or testing software
• Intellectual Property Rights - who owns anything created for the client (eg source code, text, images, information)
• Publicity and endorsements, eg right to refer to other party's name or situation in published materials
• Confidentiality during disputes / commitment not to make derogatory public statements
• Arbitration
• Termination procedures
• Terms and conditions for subsequent transfer or return of outsourced systems, personnel and services on termination of contract
• Inclusion of all side agreements in contract
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.
At the start of each phase
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:
• make sure they are lined up to arrive as required
• provide appropriate briefings and induction
• make sure they feel part of the team and share your enthusiasm for success.
Where external components are being delivered, make sure your internal resources are prepared to receive them in a timely manner.
During the project
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.
At the end of a phase
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
At the end of the project you need to finalise the relationship with your sub-contractors:
• Inform the supplier about the people who will represent your organisation once the project team is demobilised - eg the operational management, support and technical contacts.
• Make sure all final deliverables have been completed acceptably.
• Make sure any on-going support, maintenance and warranties are in place.
• Make any final payments.
• Communicate that the project has finished.
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!
MANAGEMENT
21-Nov-11
SOS International Mechanical equipments
CHANDRA
Why, What, How?
Many projects rely on the supply of hardware, software, facilities and services by various vendors or sub-contractors. The Project Manager may need to:
• select the best suppliers,
• negotiate terms and conditions,
• agree contracts,
• ensure the goods or services supplied are acceptable,
• deal with disputes,
• negotiate changes where the client requires new or changed deliverables from the vendor,
• ensure the vendor or sub-contractor is paid in accordance with the agreement,
• manage the relationship to maintain a good working relationship.
The Project Manager has an important part to play - but remember what you are not...
• You are not the right person to enter into contractual relationships on behalf of the organisation. It will usually be a senior manager who is most appropriate and is authorised to agree the terms and sign the contract.
• You are not a lawyer. Although it is in your interest to see that the deal meets your needs, use lawyers or other specialists to determine the precise wording of the contract.
There are many different situations requiring contracts. Your approach may vary considerably. In terms of scale, take a look at these examples:
• complete outsourcing of facilities and business functions,
• outsourcing the development of a new IT system,
• sub-contracting the development of a specific component of your new system,
• purchase of packaged software and on-going support,
• using consultants from a major consultancy firm,
• hiring a freelance programmer working as a contractor,
• additional licences for standard desktop software.
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!
At the start of the project
Selecting suppliers
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:
• In the public sector, the emphasis tends to be on completeness and fairness. All potential vendors should be identified and given an equal chance to win. Various rules, norms, standards and legal requirements apply to regulate the process. Certain types of purchase can be made from standard approved suppliers without the need to enter into a full selection process. Rules are also relaxed for low-value contracts.
• In the private sector, the objective is usually to gain maximum benefit. That might be achievable by making a rapid choice from a small number of leading suppliers. It might also be possible to partner with a single reliable supplier. Selection exercises are used only where there is a genuine need to search the marketplace for the best supplier.
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 the others.)
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.
Negotiating Terms
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:
• specifications,
• identification of all necessary components and work packages,
• delivery dates,
• quality/acceptance criteria,
• guaranteed functionality,
• staffing levels,
• training provision,
• support arrangements,
• adequate resilience,
• guaranteed performance (speed),
• service levels.
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.
Case Study
"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."
- 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.
Bargaining Power - Buyer vs Supplier
Contract Terms and Conditions
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 supplier will provide everything the customer wants or needs, whether or not they thought of it or subsequently change their minds. The supplier will ensure all things work perfectly, whether or not they were provided by the supplier, and that the overall solution will do everything the customer wants or needs both now and for an indefinite period into the future. All employees of the supplier are available 24 hours a day to provide assistance and advice on any matter at no additional charge. Unlimited training will be available from the supplier for an indefinite period. The supplier hereby assigns full ownership and intellectual property rights in all items provided during the course of this relationship. The customer may make copies of all materials supplied and provide these to anyone as they see fit. Any initial limits on usage cease to apply after the contract is signed. The customer need only pay what they want to at whatever time they feel is appropriate, and only when every element of the contract has been accomplished to perfection. The supplier undertakes to make some effort to meet the customer's needs but cannot commit to anything. Items supplied are not necessarily fit for purpose or of merchantable quality. The customer accepts that an undefined number of faults will inevitably be contained in the delivered items, and that the supplier can in no way accept responsibility for these. The supplier is not obliged to remedy any faults nor provide any compensation for anything whatsoever. Prices charged for the initial items delivered may be increased at any time. Any discount offered only applies to the initial items delivered. Further purchases and recurring charges for licences, services and maintenance etc will be charged at the full list price at the date of renewal. Charges for any item the customer forgot to specify or requires in the future which cannot be obtained anywhere else will be charged at a special surcharge above standard list price. The customer is hereby deemed to be happy and will be featured in marketing and publicity materials.
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)
Contract Checklist
Contract Attachments - various pre-contractual documents and statements may be explicitly or implicitly included in the contract (make sure their status is clear)
• Vendor correspondence
• Vendor literature and advertising
• Notes of meetings between vendor and client
• Materials from vendor demonstrations, such as output reports
• Systems specifications
• The vendor’s financial statements
• All responses and other materials completed from the Request for Proposal (RFP), including the completed system requirements
• An Implementation Plan identifying the tasks to be completed, the assigned responsibilities and the scheduled completion dates
• Stated usage of named sub-contractors and specific named employees
• Other vendor representations
Terms of Agreement
• Initial terms
• Optional terms
• Renewal terms
• Relationship with vendor's sub-contractors
• Terms and conditions for transfer of personnel (eg with outsourcing contract)
Deliverables
• Design
• Hardware
• Networking provision, connectivity, ISP, portal connectivity
• Access to servers and facilities not owned by the client
• Software / programs
• Source code
• Programming and data standards (eg language, database, XML)
• Modifications
• Custom programming
• Application / transaction / business process outsourcing / facilities management services
• Supply of data and information
• Consultancy
• Support services
• Introduction of trading partners, suppliers, customers etc
• Documentation
• Training
• Enhancements and updates
• Initial support and maintenance
• Continuing support and maintenance
• Backup, recovery and disaster recovery provision
• Access to information and electronic support services
Delivery
• Timetable
• Delays (constituting contract default)
• Price reduction or penalty for delays (liquidated damages)
• Actual-cost damages for defaults (and any limit applied thereto)
• Trial period
Acceptance Criteria
• Thorough test data
• Functional tests
• User Acceptance Tests and criteria
• Integration tests and compatibility with connected systems including those of other partner organisations, customers and suppliers
• Performance tests
• Reliability tests
• Throughput / transaction times
• Run time
• Computer resources required
• Efficiency
• Standards of continuing performance
• Acceptance period
• Terms for operation where there are outstanding problems and no user final acceptance
Use and Ownership of Software, Hardware and Services
• Unlimited use
• Use by or extension to associated companies in same group, outsourcers, sub-contractors, customers, suppliers, other third parties
• Use and ownership of software on transfer of the business to new owners
• Ability to assign rental, maintenance and service contracts to new owners
• Continuing use of systems and provision of services if the business is placed into administration due to insolvency
• Upgrades and portability of software for client's future use
• Ownership of software customised to client's specifications
• Client's right to modify software package
• Effect of refusal of future modifications if unacceptable
Source Programs
• Access by client and sub-contractors to source programs
• Undertaking to maintain open source
• Source code and program documentation in escrow
Installation and Training
• Timeframe of installation
• Amount of disruption to client's operations
• Minimum hardware and software configuration to be provided by client for vendor's hardware and software to operate upon or in conjunction with
• All appropriate education required by client to successfully implement and operate system
• Period of time that training will be available
• Training location
• Training costs
• Training curriculum
• Facilities required to provide training
Support and Maintenance
• Amount and nature of implementation support at no additional cost
• Cost of annual maintenance
• Guaranteed prices and nature for specified period
• Starting time for maintenance (eg after warranty period)
• Support the vendor can provide in the event of a disaster
Warranties of Vendor
• Commencement event of warranty period (installation, acceptance, etc.)
• Suitability of software for client's requirements
• Compliance with legislation and regulatory requirements (eg accounting standards, employment legislation, data privacy / protection, use by the disabled, access to data by authorised public bodies)
• Capacity to handle stated volume of transactions
• Ownership of software and hardware
• Vendor's right to license software
• Assurances regarding infringement
• Period of time vendor will keep software operational
• Correction of malfunctions
• Willingness to allow changes in the specifications or deliver additional items (subject to agreed terms and charges)
• Equipment configuration required for software
• Vendor's commitment to software and/or hardware maintenance
• Guarantee of support availability
• Service levels
• Call out times
• Escalation procedures
• Items explicitly or implicitly included or excluded from warranties (does itemisation of included items imply exclusion of anything else - "reverse limitation")
• Definition of basis for compensation and limits applied (eg contract price, actual damages, liquidated damages, capped limits, fault / no-fault, force majeure, opportunity to cure, time and notice requirements)
• Definition of limits of accountability where parts of the overall solution are provided by the client or by other parties
Client's Rights and Safeguards
• Right to reproduce or otherwise make available reference documentation
• Right to disclose software to others
• Right to rescind agreement at any time prior to acceptance of system
• Right to terminate agreement, optionally with agreed notice period or at defined break points
• Right to transfer software with sale of computer
• Right to modify software
• Right to merge software into other program material
• Right of assignment
• Right to outsource
• Product liability insurance
• Performance bond
Confidentiality
• Client data
• Client's business methods and trade secrets
• Vendor-related information that is subject to non-disclosure
Infringement Provisions
• Vendor defends any suit brought against client
• Vendor pays costs and damages
• Vendor replaces infringing software
• Vendor indemnifies client for loss
Events Constituting Default
• Failure to deliver
• Failure of software or hardware to perform according to specifications
• Unreliability of software or hardware
• Failure of vendor to correct malfunctions within an agreed-on time period
• Failure of vendor to provide support services
• Bankruptcy of vendor
Default and Malfunction Remedies
• Termination of agreement
• Recovery of damages for costs incurred
• Liquidation of damages
• Refund of money paid and costs incurred
• Replacement of software or hardware by vendor
• Repair of software or hardware by vendor
• Payment by vendor for cost of repairing or replacing software or hardware by others
• Downtime credits
• Backup facility in the event of malfunction
• Time to correct malfunctions, which extends the warranty period
Price
• Fixed cost
• Time and material costs
• Rental basis
• Pricing basis and parameters eg per "seat" / by processor size / per transaction or event
• Optional and call off-charges (eg consultancy advice per day)
• Pricing of subsequent variations to the contracted specification and other additional work
• Renewal costs
• Other charges
• Quantity discounts (eg multiple or subsequent installations, reduced day rates after given number of days)
• Agreed discounts apply to which prices and charges (eg all elements discounted by agreed amount, or only the basic price is discounted with other charges based on full standard price)
• Price protection for future enhancements and support
• Pass through of future price reductions
• Pricing for upgrades or trade-in's
• Lease payments applied to purchase
• Charges or penalties for early termination (in the absence of default)
Payments
• Fixed dates
• Progress payments based on defined acceptance criteria
• Credit for delays
• Refund of money if agreed-on situation occurs
• Holdback
• Periodic payments and royalties
• Maintenance fees
Taxes
• Liability for taxes
• Place of contract - country / state taxes that apply
• Tax credits
Client-Vendor Relationship
• Vendor's status (eg independent contractor, not employee of client)
• Risk and reward sharing
• Vendor and/or third-party funding of capital requirements
• Creation of new legal entities to manage joint-venture relationships and partnerships
• Prohibition against assignment by vendor
• Prohibition against sub-contracting by vendor without client's consent
• Continuity during dispute
• Personnel recruitment policy - anti-poaching agreement
• Use of client's resources by vendor - eg office facilities, access to site, computers, software
Other Considerations
• Free trials or demonstrations
• Compensation for assisting vendor in developing or testing software
• Intellectual Property Rights - who owns anything created for the client (eg source code, text, images, information)
• Publicity and endorsements, eg right to refer to other party's name or situation in published materials
• Confidentiality during disputes / commitment not to make derogatory public statements
• Arbitration
• Termination procedures
• Terms and conditions for subsequent transfer or return of outsourced systems, personnel and services on termination of contract
• Inclusion of all side agreements in contract
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.
At the start of each phase
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:
• make sure they are lined up to arrive as required
• provide appropriate briefings and induction
• make sure they feel part of the team and share your enthusiasm for success.
Where external components are being delivered, make sure your internal resources are prepared to receive them in a timely manner.
During the project
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.
At the end of a phase
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
At the end of the project you need to finalise the relationship with your sub-contractors:
• Inform the supplier about the people who will represent your organisation once the project team is demobilised - eg the operational management, support and technical contacts.
• Make sure all final deliverables have been completed acceptably.
• Make sure any on-going support, maintenance and warranties are in place.
• Make any final payments.
• Communicate that the project has finished.
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!
Saturday, July 30, 2011
Organizing for Project Management
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2.1 What is Project Management?
The management of construction projects requires knowledge of modern management as well as an understanding of the design and construction process. Construction projects have a specific set of objectives and constraints such as a required time frame for completion. While the relevant technology, institutional arrangements or processes will differ, the management of such projects has much in common with the management of similar types of projects in other specialty or technology domains such as aerospace, pharmaceutical and energy developments.
Generally, project management is distinguished from the general management of corporations by the mission-oriented nature of a project. A project organization will generally be terminated when the mission is accomplished. According to the Project Management Institute, the discipline of project management can be defined as follows: [1]
Project management is the art of directing and coordinating human and material resources throughout the life of a project by using modern management techniques to achieve predetermined objectives of scope, cost, time, quality and participation satisfaction.
By contrast, the general management of business and industrial corporations assumes a broader outlook with greater continuity of operations. Nevertheless, there are sufficient similarities as well as differences between the two so that modern management techniques developed for general management may be adapted for project management.
The basic ingredients for a project management framework [2] may be represented schematically in Figure 2-1. A working knowledge of general management and familiarity with the special knowledge domain related to the project are indispensable. Supporting disciplines such as computer science and decision science may also play an important role. In fact, modern management practices and various special knowledge domains have absorbed various techniques or tools which were once identified only with the supporting disciplines. For example, computer-based information systems and decision support systems are now common-place tools for general management. Similarly, many operations research techniques such as linear programming and network analysis are now widely used in many knowledge or application domains. Hence, the representation in Figure 2-1 reflects only the sources from which the project management framework evolves.
Figure 2-1: Basic Ingredients in Project Management
Specifically, project management in construction encompasses a set of objectives which may be accomplished by implementing a series of operations subject to resource constraints. There are potential conflicts between the stated objectives with regard to scope, cost, time and quality, and the constraints imposed on human material and financial resources. These conflicts should be resolved at the onset of a project by making the necessary tradeoffs or creating new alternatives. Subsequently, the functions of project management for construction generally include the following:
- Specification of project objectives and plans including delineation of scope, budgeting, scheduling, setting performance requirements, and selecting project participants.
- Maximization of efficient resource utilization through procurement of labor, materials and equipment according to the prescribed schedule and plan.
- Implementation of various operations through proper coordination and control of planning, design, estimating, contracting and construction in the entire process.
- Development of effective communications and mechanisms for resolving conflicts among the various participants.
The Project Management Institute focuses on nine distinct areas requiring project manager knowledge and attention:
- Project integration management to ensure that the various project elements are effectively coordinated.
- Project scope management to ensure that all the work required (and only the required work) is included.
- Project time management to provide an effective project schedule.
- Project cost management to identify needed resources and maintain budget control.
- Project quality management to ensure functional requirements are met.
- Project human resource management to development and effectively employ project personnel.
- Project communications management to ensure effective internal and external communications.
- Project risk management to analyze and mitigate potential risks.
- Project procurement management to obtain necessary resources from external sources.
These nine areas form the basis of the Project Management Institute's certification program for project managers in any industry. Back to top
2.2 Trends in Modern Management
In recent years, major developments in management reflect the acceptance to various degrees of the following elements: (1) the management process approach, (2) the management science and decision support approach, (3) the behavioral science approach for human resource development, and (4) sustainable competitive advantage. These four approaches complement each other in current practice, and provide a useful groundwork for project management.
The management process approach emphasizes the systematic study of management by identifying management functions in an organization and then examining each in detail. There is general agreement regarding the functions of planning, organizing and controlling. A major tenet is that by analyzing management along functional lines, a framework can be constructed into which all new management activities can be placed. Thus, the manager's job is regarded as coordinating a process of interrelated functions, which are neither totally random nor rigidly predetermined, but are dynamic as the process evolves. Another tenet is that management principles can be derived from an intellectual analysis of management functions. By dividing the manager's job into functional components, principles based upon each function can be extracted. Hence, management functions can be organized into a hierarchical structure designed to improve operational efficiency, such as the example of the organization for a manufacturing company shown in Figure 2-2. The basic management functions are performed by all managers, regardless of enterprise, activity or hierarchical levels. Finally, the development of a management philosophy results in helping the manager to establish relationships between human and material resources. The outcome of following an established philosophy of operation helps the manager win the support of the subordinates in achieving organizational objectives.
Figure 2-2: Illustrative Hierarchical Structure of Management Functions
The management science and decision support approach contributes to the development of a body of quantitative methods designed to aid managers in making complex decisions related to operations and production. In decision support systems, emphasis is placed on providing managers with relevant information. In management science, a great deal of attention is given to defining objectives and constraints, and to constructing mathematical analysis models in solving complex problems of inventory, materials and production control, among others. A topic of major interest in management science is the maximization of profit, or in the absence of a workable model for the operation of the entire system, the suboptimization of the operations of its components. The optimization or suboptimization is often achieved by the use of operations research techniques, such as linear programming, quadratic programming, graph theory, queuing theory and Monte Carlo simulation. In addition to the increasing use of computers accompanied by the development of sophisticated mathematical models and information systems, management science and decision support systems have played an important role by looking more carefully at problem inputs and relationships and by promoting goal formulation and measurement of performance. Artificial intelligence has also begun to be applied to provide decision support systems for solving ill-structured problems in management.
The behavioral science approach for human resource development is important because management entails getting things done through the actions of people. An effective manager must understand the importance of human factors such as needs, drives, motivation, leadership, personality, behavior, and work groups. Within this context, some place more emphasis on interpersonal behavior which focuses on the individual and his/her motivations as a socio-psychological being; others emphasize more group behavior in recognition of the organized enterprise as a social organism, subject to all the attitudes, habits, pressures and conflicts of the cultural environment of people. The major contributions made by the behavioral scientists to the field of management include: (1) the formulation of concepts and explanations about individual and group behavior in the organization, (2) the empirical testing of these concepts methodically in many different experimental and field settings, and (3) the establishment of actual managerial policies and decisions for operation based on the conceptual and methodical frameworks.
Sustainable competitive advantage stems primarily from good management strategy. As Michael Porter of the Harvard Business School argues:
Strategy is creating fit among a company's activities. The success of a strategy depends on doing many things well - not just a few - and integrating among them. If there is no fit among activites, there is no distinctive strategy and little sustainability.
In this view, successful firms must improve and align the many processes underway to their strategic vision. Strategic positioning in this fashion requires:
- Creating a unique and valuable position.
- Making trade-offs compared to competitors
- Creating a "fit" among a company's activities.
Project managers should be aware of the strategic position of their own organization and the other organizations involved in the project. The project manager faces the difficult task of trying to align the goals and strategies of these various organizations to accomplish the project goals. For example, the owner of an industrial project may define a strategic goal as being first to market with new products. In this case, facilities development must be oriented to fast-track, rapid construction. As another example, a contracting firm may see their strategic advantage in new technologies and emphasize profit opportunities from value engineering (as described in Chapter 3).
2.3 Strategic Planning and Project Programming
The programming of capital projects is shaped by the strategic plan of an organization, which is influenced by market demands and resources constraints. The programming process associated with planning and feasibility studies sets the priorities and timing for initiating various projects to meet the overall objectives of the organizations. However, once this decision is made to initiate a project, market pressure may dictate early and timely completion of the facility.
Among various types of construction, the influence of market pressure on the timing of initiating a facility is most obvious in industrial construction. [3] Demand for an industrial product may be short-lived, and if a company does not hit the market first, there may not be demand for its product later. With intensive competition for national and international markets, the trend of industrial construction moves toward shorter project life cycles, particularly in technology intensive industries.
In order to gain time, some owners are willing to forego thorough planning and feasibility study so as to proceed on a project with inadequate definition of the project scope. Invariably, subsequent changes in project scope will increase construction costs; however, profits derived from earlier facility operation often justify the increase in construction costs. Generally, if the owner can derive reasonable profits from the operation of a completed facility, the project is considered a success even if construction costs far exceed the estimate based on an inadequate scope definition. This attitude may be attributed in large part to the uncertainties inherent in construction projects. It is difficult to argue that profits might be even higher if construction costs could be reduced without increasing the project duration. However, some projects, notably some nuclear power plants, are clearly unsuccessful and abandoned before completion, and their demise must be attributed at least in part to inadequate planning and poor feasibility studies.
The owner or facility sponsor holds the key to influence the construction costs of a project because any decision made at the beginning stage of a project life cycle has far greater influence than those made at later stages, as shown schematically in Figure 2-3. Moreover, the design and construction decisions will influence the continuing operating costs and, in many cases, the revenues over the facility lifetime. Therefore, an owner should obtain the expertise of professionals to provide adequate planning and feasibility studies. Many owners do not maintain an in-house engineering and construction management capability, and they should consider the establishment of an ongoing relationship with outside consultants in order to respond quickly to requests. Even among those owners who maintain engineering and construction divisions, many treat these divisions as reimbursable, independent organizations. Such an arrangement should not discourage their legitimate use as false economies in reimbursable costs from such divisions can indeed be very costly to the overall organization.
Figure 2-3: Ability to Influence Construction Cost Over Time
Finally, the initiation and execution of capital projects places demands on the resources of the owner and the professionals and contractors to be engaged by the owner. For very large projects, it may bid up the price of engineering services as well as the costs of materials and equipment and the contract prices of all types. Consequently, such factors should be taken into consideration in determining the timing of a project.
Example 2-1: Setting priorities for projects
A department store planned to expand its operation by acquiring 20 acres of land in the southeast of a metropolitan area which consists of well established suburbs for middle income families. An architectural/engineering (A/E) firm was engaged to design a shopping center on the 20-acre plot with the department store as its flagship plus a large number of storefronts for tenants. One year later, the department store owner purchased 2,000 acres of farm land in the northwest outskirts of the same metropolitan area and designated 20 acres of this land for a shopping center. The A/E firm was again engaged to design a shopping center at this new location.
The A/E firm was kept completely in the dark while the assemblage of the 2,000 acres of land in the northwest quietly took place. When the plans and specifications for the southeast shopping center were completed, the owner informed the A/E firm that it would not proceed with the construction of the southeast shopping center for the time being. Instead, the owner urged the A/E firm to produce a new set of similar plans and specifications for the northwest shopping center as soon as possible, even at the sacrifice of cost saving measures. When the plans and specifications for the northwest shopping center were ready, the owner immediately authorized its construction. However, it took another three years before the southeast shopping center was finally built.
The reason behind the change of plan was that the owner discovered the availability of the farm land in the northwest which could be developed into residential real estate properties for upper middle income families. The immediate construction of the northwest shopping center would make the land development parcels more attractive to home buyers. Thus, the owner was able to recoup enough cash flow in three years to construct the southeast shopping center in addition to financing the construction of the northeast shopping center, as well as the land development in its vicinity.
While the owner did not want the construction cost of the northwest shopping center to run wild, it apparently was satisfied with the cost estimate based on the detailed plans of the southeast shopping center. Thus, the owner had a general idea of what the construction cost of the northwest shopping center would be, and did not wish to wait for a more refined cost estimate until the detailed plans for that center were ready. To the owner, the timeliness of completing the construction of the northwest shopping center was far more important than reducing the construction cost in fulfilling its investment objectives.
Example 2-2: Resource Constraints for Mega Projects
A major problem with mega projects is the severe strain placed on the environment, particularly on the resources in the immediate area of a construction project. "Mega" or "macro" projects involve construction of very large facilities such as the Alaska pipeline constructed in the 1970's or the Panama Canal constructed in the 1900's. The limitations in some or all of the basic elements required for the successful completion of a mega project include:
- engineering design professionals to provide sufficient manpower to complete the design within a reasonable time limit.
- construction supervisors with capacity and experience to direct large projects.
- the number of construction workers with proper skills to do the work.
- the market to supply materials in sufficient quantities and of required quality on time.
- the ability of the local infrastructure to support the large number of workers over an extended period of time, including housing, transportation and other services.
To compound the problem, mega projects are often constructed in remote environments away from major population centers and subject to severe climate conditions. Consequently, special features of each mega project must be evaluated carefully.
2.4 Effects of Project Risks on Organization
The uncertainty in undertaking a construction project comes from many sources and often involves many participants in the project. Since each participant tries to minimize its own risk, the conflicts among various participants can be detrimental to the project. Only the owner has the power to moderate such conflicts as it alone holds the key to risk assignment through proper contractual relations with other participants. Failure to recognize this responsibility by the owner often leads to undesirable results. In recent years, the concept of "risk sharing/risk assignment" contracts has gained acceptance by the federal government. [4] Since this type of contract acknowledges the responsibilities of the owners, the contract prices are expected to be lower than those in which all risks are assigned to contractors.
In approaching the problem of uncertainty, it is important to recognize that incentives must be provided if any of the participants is expected to take a greater risk. The willingness of a participant to accept risks often reflects the professional competence of that participant as well as its propensity to risk. However, society's perception of the potential liabilities of the participant can affect the attitude of risk-taking for all participants. When a claim is made against one of the participants, it is difficult for the public to know whether a fraud has been committed, or simply that an accident has occurred.
Risks in construction projects may be classified in a number of ways. [5] One form of classification is as follows:
- Socioeconomic factors
- Environmental protection
- Public safety regulation
- Economic instability
- Exchange rate fluctuation
- Environmental protection
- Organizational relationships
- Contractual relations
- Attitudes of participants
- Communication
- Contractual relations
- Technological problems
- Design assumptions
- Site conditions
- Construction procedures
- Construction occupational safety
- Design assumptions
The environmental protection movement has contributed to the uncertainty for construction because of the inability to know what will be required and how long it will take to obtain approval from the regulatory agencies. The requirements of continued re-evaluation of problems and the lack of definitive criteria which are practical have also resulted in added costs. Public safety regulations have similar effects, which have been most noticeable in the energy field involving nuclear power plants and coal mining. The situation has created constantly shifting guidelines for engineers, constructors and owners as projects move through the stages of planning to construction. These moving targets add a significant new dimension of uncertainty which can make it virtually impossible to schedule and complete work at budgeted cost. Economic conditions of the past decade have further reinforced the climate of uncertainty with high inflation and interest rates. The deregulation of financial institutions has also generated unanticipated problems related to the financing of construction.
Uncertainty stemming from regulatory agencies, environmental issues and financial aspects of construction should be at least mitigated or ideally eliminated. Owners are keenly interested in achieving some form of breakthrough that will lower the costs of projects and mitigate or eliminate lengthy delays. Such breakthroughs are seldom planned. Generally, they happen when the right conditions exist, such as when innovation is permitted or when a basis for incentive or reward exists. However, there is a long way to go before a true partnership of all parties involved can be forged.
During periods of economic expansion, major capital expenditures are made by industries and bid up the cost of construction. In order to control costs, some owners attempt to use fixed price contracts so that the risks of unforeseen contingencies related to an overheated economy are passed on to contractors. However, contractors will raise their prices to compensate for the additional risks.
The risks related to organizational relationships may appear to be unnecessary but are quite real. Strained relationships may develop between various organizations involved in the design/construct process. When problems occur, discussions often center on responsibilities rather than project needs at a time when the focus should be on solving the problems. Cooperation and communication between the parties are discouraged for fear of the effects of impending litigation. This barrier to communication results from the ill-conceived notion that uncertainties resulting from technological problems can be eliminated by appropriate contract terms. The net result has been an increase in the costs of constructed facilities.
The risks related to technological problems are familiar to the design/construct professions which have some degree of control over this category. However, because of rapid advances in new technologies which present new problems to designers and constructors, technological risk has become greater in many instances. Certain design assumptions which have served the professions well in the past may become obsolete in dealing with new types of facilities which may have greater complexity or scale or both. Site conditions, particularly subsurface conditions which always present some degree of uncertainty, can create an even greater degree of uncertainty for facilities with heretofore unknown characteristics during operation. Because construction procedures may not have been fully anticipated, the design may have to be modified after construction has begun. An example of facilities which have encountered such uncertainty is the nuclear power plant, and many owners, designers and contractors have suffered for undertaking such projects.
If each of the problems cited above can cause uncertainty, the combination of such problems is often regarded by all parties as being out of control and inherently risky. Thus, the issue of liability has taken on major proportions and has influenced the practices of engineers and constructors, who in turn have influenced the actions of the owners.
Many owners have begun to understand the problems of risks and are seeking to address some of these problems. For example, some owners are turning to those organizations that offer complete capabilities in planning, design, and construction, and tend to avoid breaking the project into major components to be undertaken individually by specialty participants. Proper coordination throughout the project duration and good organizational communication can avoid delays and costs resulting from fragmentation of services, even though the components from various services are eventually integrated.
Attitudes of cooperation can be readily applied to the private sector, but only in special circumstances can they be applied to the public sector. The ability to deal with complex issues is often precluded in the competitive bidding which is usually required in the public sector. The situation becomes more difficult with the proliferation of regulatory requirements and resulting delays in design and construction while awaiting approvals from government officials who do not participate in the risks of the project.
2.5 Organization of Project Participants
The top management of the owner sets the overall policy and selects the appropriate organization to take charge of a proposed project. Its policy will dictate how the project life cycle is divided among organizations and which professionals should be engaged. Decisions by the top management of the owner will also influence the organization to be adopted for project management. In general, there are many ways to decompose a project into stages. The most typical ways are:
- Sequential processing whereby the project is divided into separate stages and each stage is carried out successively in sequence.
- Parallel processing whereby the project is divided into independent parts such that all stages are carried out simultaneously.
- Staggered processing whereby the stages may be overlapping, such as the use of phased design-construct procedures for fast track operation.
It should be pointed out that some decompositions may work out better than others, depending on the circumstances. In any case, the prevalence of decomposition makes the subsequent integration particularly important. The critical issues involved in organization for project management are:
- How many organizations are involved?
- What are the relationships among the organizations?
- When are the various organizations brought into the project?
There are two basic approaches to organize for project implementation, even though many variations may exist as a result of different contractual relationships adopted by the owner and builder. These basic approaches are divided along the following lines:
- Separation of organizations. Numerous organizations serve as consultants or contractors to the owner, with different organizations handling design and construction functions. Typical examples which involve different degrees of separation are:
- Traditional sequence of design and construction
- Professional construction management
- Traditional sequence of design and construction
- Integration of organizations. A single or joint venture consisting of a number of organizations with a single command undertakes both design and construction functions. Two extremes may be cited as examples:
- Owner-builder operation in which all work will be handled in house by force account.
- Turnkey operation in which all work is contracted to a vendor which is responsible for delivering the completed project
- Owner-builder operation in which all work will be handled in house by force account.
Since construction projects may be managed by a spectrum of participants in a variety of combinations, the organization for the management of such projects may vary from case to case. On one extreme, each project may be staffed by existing personnel in the functional divisions of the organization on an ad-hoc basis as shown in Figure 2-4 until the project is completed. This arrangement is referred to as the matrix organization as each project manager must negotiate all resources for the project from the existing organizational framework. On the other hand, the organization may consist of a small central functional staff for the exclusive purpose of supporting various projects, each of which has its functional divisions as shown in Figure 2-5. This decentralized set-up is referred to as the project oriented organization as each project manager has autonomy in managing the project. There are many variations of management style between these two extremes, depending on the objectives of the organization and the nature of the construction project. For example, a large chemical company with in-house staff for planning, design and construction of facilities for new product lines will naturally adopt the matrix organization. On the other hand, a construction company whose existence depends entirely on the management of certain types of construction projects may find the project-oriented organization particularly attractive. While organizations may differ, the same basic principles of management structure are applicable to most situations.
Figure 2-4: A Matrix Organization
Figure 2-5: A Project-Oriented Organization
To illustrate various types of organizations for project management, we shall consider two examples, the first one representing an owner organization while the second one representing the organization of a construction management consultant under the direct supervision of the owner.
Example 2-3: Matrix Organization of an Engineering Division
The Engineering Division of an Electric Power and Light Company has functional departments as shown in Figure 2-6. When small scale projects such as the addition of a transmission tower or a sub-station are authorized, a matrix organization is used to carry out such projects. For example, in the design of a transmission tower, the professional skill of a structural engineer is most important. Consequently, the leader of the project team will be selected from the Structural Engineering Department while the remaining team members are selected from all departments as dictated by the manpower requirements. On the other hand, in the design of a new sub-station, the professional skill of an electrical engineer is most important. Hence, the leader of the project team will be selected from the Electrical Engineering Department.
Figure 2-6: The Matrix Organization in an Engineering Division
Example 2-4: Example of Construction Management Consultant Organization
When the same Electric Power and Light Company in the previous example decided to build a new nuclear power plant, it engaged a construction management consultant to take charge of the design and construction completely. However, the company also assigned a project team to coordinate with the construction management consultant as shown in Figure 2-7.
Figure 2-7: Coordination between Owner and Consultant
Since the company eventually will operate the power plant upon its completion, it is highly important for its staff to monitor the design and construction of the plant. Such coordination allows the owner not only to assure the quality of construction but also to be familiar with the design to facilitate future operation and maintenance. Note the close direct relationships of various departments of the owner and the consultant. Since the project will last for many years before its completion, the staff members assigned to the project team are not expected to rejoin the Engineering Department but will probably be involved in the future operation of the new plant. Thus, the project team can act independently toward its designated mission.
2.6 Traditional Designer-Constructor Sequence
For ordinary projects of moderate size and complexity, the owner often employs a designer (an architectural/engineering firm) which prepares the detailed plans and specifications for the constructor (a general contractor). The designer also acts on behalf of the owner to oversee the project implementation during construction. The general contractor is responsible for the construction itself even though the work may actually be undertaken by a number of specialty subcontractors.
The owner usually negotiates the fee for service with the architectural/engineering (A/E) firm. In addition to the responsibilities of designing the facility, the A/E firm also exercises to some degree supervision of the construction as stipulated by the owner. Traditionally, the A/E firm regards itself as design professionals representing the owner who should not communicate with potential contractors to avoid collusion or conflict of interest. Field inspectors working for an A/E firm usually follow through the implementation of a project after the design is completed and seldom have extensive input in the design itself. Because of the litigation climate in the last two decades, most A/E firms only provide observers rather than inspectors in the field. Even the shop drawings of fabrication or construction schemes submitted by the contractors for approval are reviewed with a disclaimer of responsibility by the A/E firms.
The owner may select a general constructor either through competitive bidding or through negotiation. Public agencies are required to use the competitive bidding mode, while private organizations may choose either mode of operation. In using competitive bidding, the owner is forced to use the designer-constructor sequence since detailed plans and specifications must be ready before inviting bidders to submit their bids. If the owner chooses to use a negotiated contract, it is free to use phased construction if it so desires.
The general contractor may choose to perform all or part of the construction work, or act only as a manager by subcontracting all the construction to subcontractors. The general contractor may also select the subcontractors through competitive bidding or negotiated contracts. The general contractor may ask a number of subcontractors to quote prices for the subcontracts before submitting its bid to the owner. However, the subcontractors often cannot force the winning general contractor to use them on the project. This situation may lead to practices known as bid shopping and bid peddling. Bid shopping refers to the situation when the general contractor approaches subcontractors other than those whose quoted prices were used in the winning contract in order to seek lower priced subcontracts. Bid peddling refers to the actions of subcontractors who offer lower priced subcontracts to the winning general subcontractors in order to dislodge the subcontractors who originally quoted prices to the general contractor prior to its bid submittal. In both cases, the quality of construction may be sacrificed, and some state statutes forbid these practices for public projects.
Although the designer-constructor sequence is still widely used because of the public perception of fairness in competitive bidding, many private owners recognize the disadvantages of using this approach when the project is large and complex and when market pressures require a shorter project duration than that which can be accomplished by using this traditional method.
2.7 Professional Construction Management
Professional construction management refers to a project management team consisting of a professional construction manager and other participants who will carry out the tasks of project planning, design and construction in an integrated manner. Contractual relationships among members of the team are intended to minimize adversarial relationships and contribute to greater response within the management group. A professional construction manager is a firm specialized in the practice of professional construction management which includes:
- Work with owner and the A/E firms from the beginning and make recommendations on design improvements, construction technology, schedules and construction economy.
- Propose design and construction alternatives if appropriate, and analyze the effects of the alternatives on the project cost and schedule.
- Monitor subsequent development of the project in order that these targets are not exceeded without the knowledge of the owner.
- Coordinate procurement of material and equipment and the work of all construction contractors, and monthly payments to contractors, changes, claims and inspection for conforming design requirements.
- Perform other project related services as required by owners.
Professional construction management is usually used when a project is very large or complex. The organizational features that are characteristics of mega-projects can be summarized as follows:[6]
- The overall organizational approach for the project will change as the project advances. The "functional" organization may change to a "matrix" which may change to a "project" organization (not necessarily in this order).
- Within the overall organization, there will probably be functional, project, and matrix suborganizations all at the same time. This feature greatly complicates the theory and the practice of management, yet is essential for overall cost effectiveness.
- Successful giant, complex organizations usually have a strong matrix-type suborganization at the level where basic cost and schedule control responsibility is assigned. This suborganization is referred to as a "cost center" or as a "project" and is headed by a project manager. The cost center matrix may have participants assigned from many different functional groups. In turn, these functional groups may have technical reporting responsibilities to several different and higher tiers in the organization. The key to a cost effective effort is the development of this project suborganization into a single team under the leadership of a strong project manager.
- The extent to which decision-making will be centralized or decentralized is crucial to the organization of the mega-project.
Consequently, it is important to recognize the changing nature of the organizational structure as a project is carried out in various stages.
Example 2-5: Managing of the Alaska Pipeline Project
The Alaska Pipeline Project was the largest, most expensive private construction project in the 1970's, which encompassed 800 miles, thousands of employees, and 10 billion dollars.
At the planning stage, the owner (a consortium) employed a Construction Management Contractor (CMC) to direct the pipeline portion, but retained centralized decision making to assure single direction and to integrate the effort of the CMC with the pump stations and the terminals performed by another contractor. The CMC also centralized its decision making in directing over 400 subcontractors and thousands of vendors. Because there were 19 different construction camps and hundreds of different construction sites, this centralization caused delays in decision making.
At about the 15% point of physical completion, the owner decided to reorganize the decision making process and change the role of the CMC. The new organization was a combination of owner and CMC personnel assigned within an integrated organization. The objective was to develop a single project team responsible for controlling all subcontractors. Instead of having nine tiers of organization from the General Manager of the CMC to the subcontractors, the new organization had only four tiers from the Senior Project Manager of the owner to subcontractors. Besides unified direction and coordination, this reduction in tiers of organization greatly improved communications and the ability to make and implement decisions. The new organization also allowed decentralization of decision making by treating five sections of the pipeline at different geographic locations as separate projects, with a section manager responsible for all functions of the section as a profit center.
At about 98% point of physical completion, all remaining activities were to be consolidated to identify single bottom-line responsibility, to reduce duplication in management staff, and to unify coordination of remaining work. Thus, the project was first handled by separate organizations but later was run by an integrated organization with decentralized profit centers. Finally, the organization in effect became small and was ready to be phased out of operation.
Example 2-6: Managing the Channel Tunnel Construction from Britain to France
The underground railroad tunnel from Britain to France is commonly called the Channel Tunnel or Chunnel. It was built by tunneling from each side. Starting in 1987, the tunnels had a breakthough in 1990.
Management turmoil dogged the project from the start. In 1989, seven of the eight top people in the construction organization left. There was a built in conflict between the contractors and government overseers: "The fundamental thing wrong is that the constractors own less than 6% of Eurotunnel. Their interest is to build and sell the project at a profit. (Eurotunnel's) interest is for it to operate economically, safely and reliably for the next 50 years." (Alastair Morton, Eurotunnel CEO, quoted in ENR, 12/10/90, p. 56).
2.8 Owner-Builder Operation
In this approach an owner must have a steady flow of on-going projects in order to maintain a large work force for in-house operation. However, the owner may choose to subcontract a substantial portion of the project to outside consultants and contractors for both design and construction, even though it retains centralized decision making to integrate all efforts in project implementation.
Example 2-7: U.S. Army Corps of Engineers Organization
The District Engineer's Office of the U.S. Army Corps of Engineers may be viewed as a typical example of an owner-builder approach as shown in Figure 2-8.
Figure 2-8: Organization of a District of Corps of Engineers
In the District Engineer's Office of the U.S. Corps of Engineers, there usually exist an Engineering Division and an Operations Division, and, in a large district, a Construction Division. Under each division, there are several branches. Since the authorization of a project is usually initiated by the U.S. Congress, the planning and design functions are separated in order to facilitate operations. Since the authorization of the feasibility study of a project may precede the authorization of the design by many years, each stage can best be handled by a different branch in the Engineering Division. If construction is ultimately authorized, the work may be handled by the Construction Division or by outside contractors. The Operations Division handles the operation of locks and other facilities which require routine attention and maintenance.
When a project is authorized, a project manager is selected from the most appropriate branch to head the project, together with a group of staff drawn from various branches to form the project team. When the project is completed, all members of the team including the project manager will return to their regular posts in various branches and divisions until the next project assignment. Thus, a matrix organization is used in managing each project.
2.9 Turnkey Operation
Some owners wish to delegate all responsibilities of design and construction to outside consultants in a turnkey project arrangement. A contractor agrees to provide the completed facility on the basis of performance specifications set forth by the owner. The contractor may even assume the responsibility of operating the project if the owner so desires. In order for a turnkey operation to succeed, the owner must be able to provide a set of unambiguous performance specifications to the contractor and must have complete confidence in the capability of the contractor to carry out the mission.
This approach is the direct opposite of the owner-builder approach in which the owner wishes to retain the maximum amount of control for the design-construction process.
Example 2-8: An Example of a Turnkey Organization
A 150-Mw power plant was proposed in 1985 by the Texas-New Mexico Power Company of Fort Worth, Texas, which would make use of the turnkey operation. [7] Upon approval by the Texas Utility Commission, a consortium consisting of H.B. Zachry Co., Westinghouse Electric Co., and Combustion Engineering, Inc. would design, build and finance the power plant for completion in 1990 for an estimated construction cost of $200 million in 1990 dollars. The consortium would assume total liability during construction, including debt service costs, and thereby eliminate the risks of cost escalation to rate payers, stockholders and the utility company management.
2.10 Leadership and Motivation for the Project Team
The project manager, in the broadest sense of the term, is the most important person for the success or failure of a project. The project manager is responsible for planning, organizing and controlling the project. In turn, the project manager receives authority from the management of the organization to mobilize the necessary resources to complete a project.
The project manager must be able to exert interpersonal influence in order to lead the project team. The project manager often gains the support of his/her team through a combination of the following:
- Formal authority resulting from an official capacity which is empowered to issue orders.
- Reward and/or penalty power resulting from his/her capacity to dispense directly or indirectly valued organization rewards or penalties.
- Expert power when the project manager is perceived as possessing special knowledge or expertise for the job.
- Attractive power because the project manager has a personality or other characteristics to convince others.
In a matrix organization, the members of the functional departments may be accustomed to a single reporting line in a hierarchical structure, but the project manager coordinates the activities of the team members drawn from functional departments. The functional structure within the matrix organization is responsible for priorities, coordination, administration and final decisions pertaining to project implementation. Thus, there are potential conflicts between functional divisions and project teams. The project manager must be given the responsibility and authority to resolve various conflicts such that the established project policy and quality standards will not be jeopardized. When contending issues of a more fundamental nature are developed, they must be brought to the attention of a high level in the management and be resolved expeditiously.
In general, the project manager's authority must be clearly documented as well as defined, particularly in a matrix organization where the functional division managers often retain certain authority over the personnel temporarily assigned to a project. The following principles should be observed:
- The interface between the project manager and the functional division managers should be kept as simple as possible.
- The project manager must gain control over those elements of the project which may overlap with functional division managers.
- The project manager should encourage problem solving rather than role playing of team members drawn from various functional divisions.
2.11 Interpersonal Behavior in Project Organizations
While a successful project manager must be a good leader, other members of the project team must also learn to work together, whether they are assembled from different divisions of the same organization or even from different organizations. Some problems of interaction may arise initially when the team members are unfamiliar with their own roles in the project team, particularly for a large and complex project. These problems must be resolved quickly in order to develop an effective, functioning team.
Many of the major issues in construction projects require effective interventions by individuals, groups and organizations. The fundamental challenge is to enhance communication among individuals, groups and organizations so that obstacles in the way of improving interpersonal relations may be removed. Some behavior science concepts are helpful in overcoming communication difficulties that block cooperation and coordination. In very large projects, professional behavior scientists may be necessary in diagnosing the problems and advising the personnel working on the project. The power of the organization should be used judiciously in resolving conflicts.
The major symptoms of interpersonal behavior problems can be detected by experienced observers, and they are often the sources of serious communication difficulties among participants in a project. For example, members of a project team may avoid each other and withdraw from active interactions about differences that need to be dealt with. They may attempt to criticize and blame other individuals or groups when things go wrong. They may resent suggestions for improvement, and become defensive to minimize culpability rather than take the initiative to maximize achievements. All these actions are detrimental to the project organization.
While these symptoms can occur to individuals at any organization, they are compounded if the project team consists of individuals who are put together from different organizations. Invariably, different organizations have different cultures or modes of operation. Individuals from different groups may not have a common loyalty and may prefer to expand their energy in the directions most advantageous to themselves instead of the project team. Therefore, no one should take it for granted that a project team will work together harmoniously just because its members are placed physically together in one location. On the contrary, it must be assumed that good communication can be achieved only through the deliberate effort of the top management of each organization contributing to the joint venture.
2.12 Perceptions of Owners and Contractors
Although owners and contractors may have different perceptions on project management for construction, they have a common interest in creating an environment leading to successful projects in which performance quality, completion time and final costs are within prescribed limits and tolerances. It is interesting therefore to note the opinions of some leading contractors and owners who were interviewed in 1984. [8]
From the responses of six contractors, the key factors cited for successful projects are:
- well defined scope
- extensive early planning
- good leadership, management and first line supervision
- positive client relationship with client involvement
- proper project team chemistry
- quick response to changes
- engineering managers concerned with the total project, not just the engineering elements.
Conversely, the key factors cited for unsuccessful projects are:
- ill-defined scope
- poor management
- poor planning
- breakdown in communication between engineering and construction
- unrealistic scope, schedules and budgets
- many changes at various stages of progress
- lack of good project control
The responses of eight owners indicated that they did not always understand the concerns of the contractors although they generally agreed with some of the key factors for successful and unsuccessful projects cited by the contractors. The significant findings of the interviews with owners are summarized as follows:
- All owners have the same perception of their own role, but they differ significantly in assuming that role in practice.
- The owners also differ dramatically in the amount of early planning and in providing information in bid packages.
- There is a trend toward breaking a project into several smaller projects as the projects become larger and more complex.
- Most owners recognize the importance of schedule, but they adopt different requirements in controlling the schedule.
- All agree that people are the key to project success.
From the results of these interviews, it is obvious that owners must be more aware and involved in the process in order to generate favorable conditions for successful projects. Design professionals and construction contractors must provide better communication with each other and with the owner in project implementation.
2.13 References
- Barrie, Donald S. and Boyd C. Paulson, Jr., Professional Construction Management, McGraw-Hill Book Company, 2nd Ed., 1984.
- Halpin, Daniel W. and Ronald W. Woodhead, Construction Management, John Wiley and Sons, 1980.
- Hodgetts, R.M., Management: Theory, Process and Practice, W.B. Saunders Co., Philadelphia, PA, 1979.
- Kerzner, H. Project Management: A Systems Approach to Planning, Scheduling and Controlling. 2nd. Ed., Van Nostrand Reinhold, New York, 1984.
- Levitt, R.E., R.D. Logcher and N.H. Quaddumi, "Impact of Owner-Engineer Risk Sharing on Design Conservatism," ASCE Journal of Professional Issues in Engineering, Vol. 110, 1984, pp. 157-167.
- Moolin, F.P., Jr., and F.A. McCoy: "Managing the Alaska Pipeline Project," Civil Engineering, November 1981, pp. 51-54.
- Murray, L., E. Gallardo, S. Aggarwal and R. Waywitka, "Marketing Construction Management Services," ASCE Journal of Construction Division, Vol. 107, 1981, pp. 665-677.
- Project Management Institute, A Guide to the Project Management Body of Knowledge, Newtown Square, Pennsylvania, 2000.
2.14 Footnotes
- See R. M. Wideman, "The PMBOK Report -- PMI Body of Knowledge Standard," Project Management Journal, Vol. 17, No. 3, August l986, pp. l5-24. Back
- See L. C. Stuckenbruck, "Project Management Framework," Project Management Journal, Vol. 17, No. 3, August 1986, pp. 25-30. Back
- See, for example, O'Connor, J.T., and Vickory, C.G., Control of Construction Project Scope, A Report to the Construction Industry Institute, The University of Texas at Austin, December 1985. Back
- See, for example, Federal Form 23-A and EPA's Appendix C-2 clauses. Back
- See E. D'Appolonia, "Coping with Uncertainty in Geotechnical Engineering and Construction," Special Proceedings of the 9th International Conference on Soil Mechanics and Foundation Engineering, Tokyo, Japan, Vol. 4, 1979, pp. 1-18. Back
- These features and the following example are described in F.P. Moolin, Jr. and F.A. McCoy, "Managing the Alaska Pipeline Project," Civil Engineering, November 1981, pp. 51-54. Back
- "Private Money Finances Texas Utility's Power Plant" Engineering News Record: July 25, 1985, p. 13. Back
- See J.E. Diekmann and K.B. Thrush, Project Control in Design Engineering, A Report to the Construction Industry Institute, The University of Texas at Austin, Texas, May 1986. Back
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