Contractor Vendor Planning

Quick reference

• 00:05 Hi, I'm Ray Sheen.
• 00:06 Let's talk about an aspect of project resource planning, which is the use of
• 00:11 outside contractors and vendors to do some of the project work.
• 00:15 External resources can reduce your project risk or increase it.
• 00:21 External resources will increase your resource pool.
• 00:25 There will be more options for assigning project work and activities.
• 00:28 An external resources can be used to reduce at least some of your risks
• 00:32 within the project triple constraint of scope, schedule, and resource.
• 00:35 Because of their expertise, they can reduce scope risk and
• 00:39 improve the quality of work done on the project.
• 00:41 In some cases, the external resources are lower cost than internal resources, so
• 00:46 they'll reduce your budget risk.
• 00:47 And they can reduce the schedule risk because the increase in the resource pool
• 00:51 or resource capacity is able to do some work faster
• 00:54 than just the internal resources by themselves.
• 00:58 However the use of external resources can increase your project management risks.
• 01:02 There are more people involved that must be coordinated.
• 01:05 There's extra work to manage the contracting.
• 01:08 You must create a clear and
• 01:09 concise statement of work in order to keep the external resources focused and
• 01:13 if changes occur, it often leads to significant delays or overruns.
• 01:18 Not to mention that most procurement organizations' policies
• 01:21 are not written for project work.
• 01:23 The procurement department is trying to set up long term relationships
• 01:27 with firm specifications, large quantities and low costs.
• 01:30 But projects often wants just one specialty item and
• 01:34 that is not very well defined and all by the way, they need it tomorrow morning.
• 01:39 As I said, you use external resources to reduce project risk.
• 01:43 To do this well, you will need to tailor the wording of the contracts.
• 01:47 Through contract structure, you can reduce or increase risk in scope schedule and
• 01:52 budget compliance.
• 01:54 I'll talk more about contracts in a minute.
• 01:56 But first, let's look at some considerations when making the make versus
• 02:00 buy decision.
• 02:01 First, try to avoid using external resources for project activities
• 02:05 that are based upon proprietary knowledge or unique corporate relationships.
• 02:09 Use internal resources for those activities so
• 02:12 as to protect any competitive knowledge or advantage that the project is creating.
• 02:17 When determining the total cost of the buy option using external resources, don't
• 02:21 forget to include the supplier management tasks in your project scope and budget.
• 02:26 Also make sure you allow enough time for the procurement cycle to occur when
• 02:30 scheduling tasks to be done by external resources.
• 02:33 You need time to prepare your project requirements,
• 02:36 procurement needs time to find sources and negotiate a contract.
• 02:39 Then the supplier will probably need some time to get up to speed untill
• 02:43 they can start the work.
• 02:45 Another consideration is the expertise to the external resources,
• 02:48 both with the nature of the work to be done and
• 02:51 with any of your internal policies, practices or systems.
• 02:54 The external resource may be adapted to work and immediately productive, or
• 02:59 they may need training and time to come up the learning curve.
• 03:03 While there may be potential problems to consider when using external resources,
• 03:07 there are also problems with internal resources.
• 03:10 And of course the biggest one is that most of our internal resources are already
• 03:14 over allocated.
• 03:15 Now if the project priority is not high enough,
• 03:17 the internal resource may never get to the work.
• 03:21 Let's now talk about the different contract types.
• 03:24 Project risk can be mitigated based upon the structure of the project, or
• 03:28 it can be magnified.
• 03:30 The most commonly used contract type is the fixed price contract.
• 03:34 It's appropriate when the scope of work is clear, precise, and not likely to change.
• 03:39 Due to the clear understanding of what is to be done,
• 03:42 the supplier can provide a firm price for the work.
• 03:44 The supplier is paid the negotiated amount upon delivery regardless of the cost they
• 03:48 incur to complete the work.
• 03:50 The supplier then assumes all the risks of overrun or underrun.
• 03:54 It is appropriate on this type or project to use penalty or
• 03:57 incentive clauses to manage schedule or quality risk.
• 04:00 Otherwise, the supplier may cut corners to keep cost down.
• 04:04 The next type of the contract is the cost reimbursable or cost plus contract.
• 04:09 This is appropriate when a fixed scope or deliverable cannot be defined and
• 04:13 the project is procuring expertise to help them define what should be done.
• 04:18 In this case,
• 04:19 the supplier keeps track of all their cost to perform the project activities and
• 04:23 those costs are reimbursed, usually with a pre-negotiated profit or fee on the costs.
• 04:29 In this case, the project that is buying the services assumes all the risk of cost
• 04:33 underrun or overrun.
• 04:35 Again, it's acceptable to use penalty or incentive clauses for
• 04:38 quality and schedule.
• 04:39 However, in this case it's also acceptable to use penalty or incentive clauses for
• 04:43 the total cost of the supplier's work.
• 04:47 A special form of the cost reimbursable contract type is often used in projects,
• 04:51 and that is time and material.
• 04:54 This is typically used with suppliers who are providing people
• 04:57 to augment the project staff.
• 04:59 A daily or hourly rate is negotiated with the supplier, and
• 05:02 the people working on the project track their time.
• 05:05 The supplier is then paid weekly or monthly based upon the amount of time
• 05:09 the supplier's people spent working on the project.
• 05:12 Cost overruns or underrruns are shared between the project and
• 05:16 the supplier based upon three factors.
• 05:18 How much time was spent on the project, the negotiated rate that the project is
• 05:22 paying the supplier, and the salary rate that the supplier pays their people.
• 05:27 Again, quality and schedule can be penalized or incentivized.
• 05:32 The use of external resources can be a great risk reduction technique when
• 05:36 managed well.
• 05:37 But it does take work to structure an appropriate contract and
• 05:41 supervise the external resources.

Lesson notes are only available for subscribers.