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!