Tuesday, 25 March 2014

Supplier Contracts

One of the many pre-project, or early tasks for a project manager is to arrange the supplier contracts.  In the last two client assignments, I have had to find and secure contracts with a multitude of vendors for various provisions.  Some vendors have been used for consulting, others have supplied software and a few have supplied hardware.  Often, a client will have a preferred supplier list that you have to work with.  Sometimes the supplier list is constrictive and cannot deliver the required service or product, so you have to take a recommendation to the project steering committee to gain permission to pursue a new supplier.  This can cause delays, as the on-boarding process can take considerable time and effort, especially in larger companies and corporations.

The PMBoK guide, indicates that there are 5 types of contract, but I will mention just 3 types here.
• The fixed term contract is usually the less risky contract for the customer and is the one that I try to secure, this is where the customer negotiates a fixed price for a service or product and the supplier will deliver with no cost alterations.
• The second type of contract is the cost reimbursable, which is where the supplier will invoice for their costs, with an additional cost for profit.  These types of contract can include bonuses for the supplier, if they deliver on time, or early, or may include a penalty if they are late.  There are three specific types of this contract, but I will not go into detail for now.
• The final type of contract is a time and materials contract.   This is a hybrid of the two other contract types and will include any supplier profit in their costs.  A rate card for personnel and a shopping list quote would be provided and would include a percentage of profit for the supplier, which means that there is risk in no knowing how long the project may take, how many materials will be used and many many resources will be required.  Where possible, it is good to avoid these contracts.

The first step in securing a contract is to find the right vendor.  Usually, the consultants, or experienced team leaders will have some recommendations for the project manager.  The project manager must create a document, defining the scope, including definitions of quality, time and cost expectations and must also include the required deliverables.  At this point, the Request for Proposal can be sent to the supplier list.  One point to note here, is that each supplier may require a None Disclosure Agreement, prior to any information being sent to them.

Once the suppliers respond, the responses can be evaluated.  Usually, I would create a list of scope, deliverables, wishes and organizational aspects (such as trust, credit worthiness, previous engagements etc..), then for each response I would score each vendor.  The evaluation list would be weighted and scored.  The vendor with the highest score is usually awarded the contract.  There may be specific reasons to select a different supplier, such as business to business relationships, but for ethical reasons, the supplier with the highest score should be awarded the contract - in situations like this, the business to business weighting may be set quite high.

Once the vendor is selected, the project manager can start building a relationship.  As a consultant, I tend to work with the account manager, explaining the purpose of the project, explaining why they were specifically selected and to build a relationship that will enhance the outcome of the deliverables.  It is very important to build a relationship, as if, or when, things start to go wrong, this is the person within the supplier organisation to escalate issues to.  In this phase of the relationship building, the project manager will start negotiating on the contract.  Contract points such as costs, resource time, deliver time and quality will be discussed.

Once the negotiations have progressed, it is usually time to bring in the procurement and legal teams, who will finalize the deal.  The project manager should be involved, as they have the detailed knowledge of the scope, deliverables and expectations of the supplier.  These points must all be included into the contract, along with the legal terms and conditions, such as any awards or penalties, termination rights, notice periods, licensing terms, confidentiality agreements, security requirements etc...

Finally, to comes to the signing of the contracts.  Many companies have different processes and signature authorities, so depending on the size and type of contract, the project manager may sign, or the signature will need to be planned and obtained by a member of senior management.  As long as the project manager plans for any delays and expectations, the project should get off to a good start.

1 comment:

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