special lecture l2

BITS Pilani Pilani Campus

Project Management MMZG 523

Contract Management & Outsourcing

Sunil P R


Course Outline MMZG 523

BITS Pilani, Pilani Campus

Outline

• Course name: Project Management

• Course code: MMZG 523

• Number of modules: 7

• Number of lectures: SECOND SEMESTER 2014-2015

• Textbook: “Project Management The Managerial Process”

Clifford F. Grey, Erik W. Larson, Gautam V. Desai

• Pedagogy: Interactive

• Work integration: WILe exercises

• Evaluation components: Assignment / Quiz, Mid-sem (C/B), Compre (O/B)

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MODULE 5 : PROJECT CONTRACT MANAGEMENT

SESSION 16: CONTRACT MANAGEMENT & OUTSOURCING


Learning Outcomes – Session 16

• INTRODUCTION: CONTRACT MANAGEMENT

– CONTRACT MANAGEMENT PROCESS: FOUR STEPS

– CONTRACT TYPES & PURCHASE DOCUMENTS

• NEGOTIATING CONTRACTS

– NEGOTIATING FRAMEWORK

– 9 PREPARATION STEPS FOR NEGOTIATION

• OUTSOURCING

– ADVANTAGES & DISADVANTAGES

– GLOBAL COLLABORATION & CULTURE

– NEGOTIATIONS AMID CULTURAL DIFFRENCES

• BEST PRACTICES

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What is a Contract?

• A contract is any agreement between two or more parties where one party agrees to provide certain deliveries or services, and the other party agrees to pay for those deliveries or services.

• Contract management or contract administration is the management of contracts made with customers, vendors, partners, or employees.

• Contract management is a continuous process, starting with analysis and evaluation of the customer’s inquiry, and carrying on until contract closure, upon fulfilment of all contractual obligations.

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Contract Management • Planning purchases & contracts:

– Describing the requirements for products or services, Build-versus-buy?

– Determination of the type of contract to use.

– Identifying potential suppliers or sellers list

– Procurement documents such as a (RFP) as well as selection criteria.

• Conducting purchases:

– Obtaining information, quotes, bids, or proposals

– Outputs of this process include a qualified sellers list & specific proposals.

– Evaluating potential providers and negotiating a contract.

• Administering the contract:

– Governance & Managing the relationship

– Performance Review with the selected seller or provider.

– Change control

• Closing the contract involves completion and settlement of the contract. 7


How Do We Manage Procurement?

• Four processes

– Plan Procurements

– Conduct Procurements

– Administer Procurements

– Close Procurements

Conduct Procurements

Administer

Procurements

Plan Procurements

Close Procurements


Procurement Documents

• Request for Proposal (RFP) – Asks for the price and how/who will do the work

– An RFP is a request for a price from a buyer but the buyer would also expect suggestions and ideas on how the project work should be done. RFPs are thus focused on more than just pricing/cost, they entail a bit of consulting from the contractor or vendor (technology, quality).

• Invitation for Bid (IFB) – One simple price to do the work

– An invitation for bid (IFB) or invitation to bid (ITB) is an invitation to contractors or equipment suppliers, through a bidding process, to submit a proposal on a specific project to be realized or product or service to be furnished. IFB is generally the same thing as Request for Quotation (RFQ).

• Request for Quotation (RFQ) – Price per unit quote


Contract Types

• Fixed Price (Lump Sum) Contracts

• Cost-Reimbursable Contracts

– Cost Plus Fee (CPF)

– Cost Plus Percentage of Cost (CPPC)

– Cost Plus Fixed Fee (CPFF)

• Time and Material (T&M) Contracts

• Which type of the contract is the highest risk for the Buyer? Seller?


Fixed Price

• Under a fixed-price (FP) or lump-sum agreement, the contractor agrees to perform all work specified in the contract at a fixed price.

– Clients are able to get a minimum price by putting out the contract to competitive bid.

• With fixed-price contract bids, the contractor has to be very careful in estimating target cost and completion schedule because once agreed upon, the price cannot be adjusted.

– If contractors overestimate the target cost in the bidding stage, they may lose the contract to a lower-priced competitor; if the estimate is too low, they may win the job but make little or no profit.

– For Clients, this model may cost more than anticipated, if the job is completed early or if materials cost less than estimated.

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Fixed Price Advantages:

• Fixed-price contracts are preferred by both owners and contractors when the scope of the project is well defined with predictable costs and low implementation risks.

– The most significant benefit of a fixed price model is that it allows the buyer to set in advance an exact budget.

– With fixed-price contracts, clients do not have to be concerned with project costs and can focus on monitoring work progress and performance specifications.

– Likewise, contractors prefer fixed price contracts because the client is less likely to request changes or additions to the contract.

Disadvantages:

• Fixed price contracts tend to be less flexible for managing changes or requests. Requirements that arise during implementation may lead to price re-negotiation & changes to the project’s schedule.

• Excessive focus on maintaining a fixed price may come at the expense of quality, creativity and timeliness.

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Cost Plus • Under a cost-plus contract the contractor is reimbursed for all

direct allowable costs (materials, labour, travel) plus an additional fee to cover overhead and profit.

– Cost Plus gives the owner, labour at the prevailing wage rate for labour and materials at actual cost.

– This fee is negotiated in advance and usually involves a percentage of the total costs.

• Time and materials contract: Variations of Cost Plus & Fixed Price

– Labour costs are based on an hourly or daily rate, which includes direct and indirect costs as well as profit.

– One other variation would be cost plus fixed fee, where the owner would get labor and materials at cost, plus an agreed upon fee to cover overhead, profit, etc.

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Cost Plus Advantages:

• The primary benefit of cost plus pricing is the ease of calculation.

• A business that uses cost plus pricing can justify price increases when costs rise. Cost plus pricing ensures the business, the seller, against unexpected costs.

Disadvantages:

• Accuracy is a critical component in cost plus pricing. This model relies on variable cost and sales estimates.

• Unlike fixed-price contracts, cost-plus contracts put the burden of risk on the client. Businesses have little incentive to reduce or control prices because as prices rise, profits increase.

• The contract does not indicate what the project is going to cost until the end of the project. 14


Negotiating Contracts


• Negotiation is the process by which people deal with their differences.

• Whether those differences involve the purchase of a new automobile, a labour contract dispute, the terms of a sale, or a complex alliance between two companies, resolutions are typically sought through negotiations. To negotiate is to seek mutual agreement through dialogue.

• There are essentially two kinds of negotiation: distributive negotiation and integrative negotiation. Most negotiations combine elements of both types

Negotiating Contracts…


Negotiating…

Distributive Versus Integrative Negotiations

Characteristic Distributive Integrative

Outcome Win-lose Win-win

Motivation Individual gain Joint gain

Interests Opposed Congruent

Relationship Short-term Long-term

Issues involved Single Multiple

Ability to make trade-offs

Not flexible Flexible

Solution Not creative Creative


• Samson is negotiating with a local car dealer to buy a used car. The sticker on the window shows the final price with a disclaimer that says, "As-is." Samson wants to talk the salesperson into reducing the price.

– Does this scenario call for a distributive or integrative approach?

• Sonali would like to assign a long-term, complex project to Kumar, despite knowing that Kumar is already over loaded.

– Sonali trusts Kumar implicitly and knows that he is very capable of this type of work. Does this scenario call for a distributive or integrative approach?

Distributive or Integrative?


• Four concepts are especially important for establishing this framework:

– The first is BATNA or best alternative to a negotiated agreement. Your BATNA is what you will do if you do not reach an agreement during a negotiation.

– The second is reservation price or "walk away." Your reservation price is the least favourable point at which you'll accept a negotiated deal.

– The third is ZOPA or zone of possible agreement. Your ZOPA is the range (overlap) in which a potential deal can take place.

– And the fourth is Value Creation through trades. This occurs when goods/services are traded that have only modest value to their holders, but exceptional value to the other party.

Negotiation Framework


You're negotiating a leasing agreement on some office equipment with Ravi, the salesperson for the supplier, Which of the following could be your BATNA?

1. Accept the deal only if Ravi meets or is lower than the highest monthly fee you're willing to pay

2. Meet with another office equipment supplier to see what their leasing arrangements cost

3. Buy used office equipment instead of leasing new equipment

BATNA Question


• Step 1: Determine satisfactory outcomes

• Step 2: Identify opportunities to create value

• Step 3: Identify your BATNA and reservation price

• Step 4: Improve your BATNA

• Step 5: Assess who has authority

• Step 6: Study the other side

• Step 7: Prepare for flexibility in the process

• Step 8: Gather objective criteria to establish fairness

• Step 9: Alter the process in your favour

9 Preparatory Steps…


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Outsourcing & Global

Collaboration


Outsourcing

• In business, Outsourcing involves the contracting out of a business process/functions to another party (compare business process outsourcing). The term "outsourcing" dates back to at least 1981.

• The term outsourcing has traditionally been applied to the transferring of business functions or processes like customer support, IT, accounting to other, often foreign companies.

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Advantages of Outsourcing 1. Cost reduction. Companies can secure competitive prices for

contracted services, especially if the work can be outsourced offshore. Overhead costs are dramatically cut since the company no longer has to internally maintain the contracted services.

2. Faster project completion. Not only can work be done more cheaply, but it can also be done faster.

3. High level of expertise. A high level of expertise and technology can be brought to bear on the project. A company no longer has to keep up with technological advances. Instead, it can focus on developing its core competencies.

4. Flexibility. Organizations are no longer constrained by their own resources but can pursue a wide range of projects by combining their resources with talents of other companies.

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Disadvantages of Outsourcing

1. Coordination breakdowns. Coordination of professionals from different organizations can be challenging, especially if the project work requires close collaboration and mutual adjustment.

2. Loss of control. There is potential loss of control over the project. The core team depends on other organizations that they have no direct authority over.

3. Conflict. Projects are more prone to interpersonal conflict since the different participants do not share the same values, priorities, and culture.

4. Lack of Trust: Trust is essential to project success, can be difficult to forge when teams are limited by language & distance barriers.

5. Security issues. Depending on the nature of the project, business secrets may be revealed, especially when contractor also works for your competitor. 25


Global Collaboration

Start by understanding the cultural differences that can jeopardize even the most carefully planned Projects:

• Establishing trust

• Negotiating

• Communicating

• Interacting with others over long distances

• Building team identity and alignment

Global collaboration is challenging for most managers because of the cultural differences they encounter when they work with people from other countries.

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What is Culture?

• Experts have defined Culture in several ways, including:

– Culture is a shared system of meaning, ideas, and thought that guides a group’s perceptions and understanding of the world and that shapes group member’s behaviour.

– Culture is that which distinguishes the people of one country from those of another.

– Culture is an Expression of our Values, Culture is Reflected in our Behaviors, Symbols , Stories, Routines, Rituals, …

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Individualism Vs Collectivism

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Individualism Collectivism

Focus on personal achievement, individual rights, and independence.

Focus on the group, harmony, and obligation and duty to group members.


Authority: Power Distance

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Low Power Distance

High Power Distance

Perceive little or no gap between people at different hierarchy levels. Managers allow participation; employees speak out.

Perceive wide gap between people at different hierarchy levels. Managers issue directives; employees follow them.


Uncertainty (Risk avoidance)

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Risk Defined Structure

Brazil, India

France, Germany, Spain, Russia

Mexico, Southeast Asia

Restraint

US, Australia

UK Japan China Middle East

Africa

Low Uncertainty Avoidance

High Uncertainty Avoidance

Readily embrace change, show initiative, and accept new ideas.

Hesitate to try new ways of doing things, start new companies, change jobs, or welcome outsiders. Emphasize continuity and stability over innovation and change


Communication

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Direct Indirect

More direct and to the point. Openly confront difficulties. Constructive feedback. Low Context.

Take care with how something is said. Avoid discussing difficulties. Personal dignity/’saving face’ issues. High Context

Germany, US

Australia Russia Spain

India Mexico

China, Japan, Middle East, Southeast Asia, Brazil

France UK

Africa


Time

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Short-Term Long-Term

Demonstrate immediate results

Emphasize big picture and long-term results

Efficiency and speed important in decision-making process

Thoroughness, consensus building and discussion of possible outcomes

Time is Linear Time is elastic

Middle East, Spain

Australia

US, Mexico

France Japan Russia,

China

Southeast Asia

Brazil,

UK

India Africa


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Best Practices

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Question Session

special lecture l2

Documents

contract administration

contract closure

type of contract

pilani campus outline

management of contracts

project management course

project work

specific project