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Contractors, vendors, and suppliers are used on projects to reduce risks.  These external resources have capacity and capability that allows them to complete project tasks better than internal resources would be able to complete them.

Quick reference

Using Contractors and Vendors

Contractors, vendors, and suppliers are used on projects to reduce risks. These external resources have capacity and capability that allows them to complete project tasks better than internal resources would be able to complete them.

When to use

Contractors, vendors, and suppliers are normally used for one of three reasons: 1) they increase the scope and quality options on the project because they have unique skills or processes that the project team can access, 2) they are able to accelerate the project by bringing additional resources to the project beyond the internal resources, or 3) they are required to be used by customers or regulatory bodies.  The tasks done by external resources should be identified during planning so that the appropriate activities and timing for source selection and procurement can be included in the plan.  When a project encounters the need to do a major unplanned activity, it is often best to bring in an outside supplier or vendor to do the work and not disrupt the current planned project activities. 

Instructions

Using external resources will often reduce project risk in some areas, but it adds risk in other areas.  The suppliers must be managed, which takes effort, and often they are not as familiar with people, processes, and procedures which can lead to miscommunication and delays.  However, these risks may be easier to manage than the risks to the project that would occur if the suppliers are not added.

Determine what project tasks can be procured from a supplier

This is done as part of scope and resource planning.  Select project activities from the Work Breakdown Structure that are under-resourced or that require unique skills not found internally.  Review the “Transfer” risk responses to identify other activities that should be contracted for.

Conduct a Make versus Buy analysis

The Make versus Buy analysis considers the cost and schedule impact of doing the work with internal resources and doing the same work with one or more external resources.  Be certain to factor in the cost and schedule impact of procurement management activities to the “buy” options.  Be certain to use realistic estimates on the availability of internal resources. Update the risk register based upon the analysis.

Determine the appropriate contract type

Select the contract type (fixed price, cost reimbursable, or time and material) and penalty and incentive clauses that are appropriate for the nature of the work and the possible risks.  Remember, suppliers will perform in a manner that is best for them.  Structure your contact so that what is best for them aligns with what is best for you.

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  • 00:04 .Hi, I'm Ray Sheen.
  • 00:05 Let's talk about an aspect of project resource planning, which is the use of
  • 00:10 outside contractors and vendors, to do some of the project work.
  • 00:14 External resources can reduce your project risk or increase it.
  • 00:18 External resources will increase your project resource pools.
  • 00:22 There will be more options for assigning project work and activities.
  • 00:26 External resources can be used to reduce some of your project risks within
  • 00:30 the project, triple constraint of scope, schedule and resources.
  • 00:34 Because of their expertise, they can reduce scope risk and
  • 00:37 improve the quality of work done on the project.
  • 00:40 In some cases, the external resources are lower cost than internal resources, so
  • 00:44 they reduce your budget risk.
  • 00:46 And they can reduce the schedule risk because of the increase in the resource
  • 00:51 pool or resource capability is able to do some work faster than just using
  • 00:55 internal resources.
  • 00:57 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.
  • 01:07 You must create a clear and
  • 01:09 concise statement of work in order to keep the external resources focused.
  • 01:13 And if changes occur, it often leads to significant delays and overruns.
  • 01:18 Not to mention that most procurement organizations' policies are not written
  • 01:23 for project work.
  • 01:24 They try to set up long term relationships with firm specifications,
  • 01:27 large quantities, and low costs.
  • 01:29 But projects often want one special item that is not well-defined and
  • 01:34 they need it tomorrow morning.
  • 01:36 As I said, you use external resources to reduce project risk.
  • 01:40 To do this well, you will need to tailor the wording of the contracts.
  • 01:44 Through contract structure, you can reduce or
  • 01:47 increase the risk in scope, schedule, and budget compliance.
  • 01:51 I'll talk more about contracts in a minute.
  • 01:54 But first,
  • 01:55 let's look at some of the considerations when making the make versus buy decision.
  • 01:59 First, try to avoid using external resources for project activities that
  • 02:04 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 best option using external resources,
  • 02:22 don't forget to include the supplier management tasks in your project scope and
  • 02:26 budget.
  • 02:27 Also make sure you allow enough time for the procurement cycle to occur when
  • 02:32 scheduling tasks to be done by external resources.
  • 02:35 You need time to prepare project requirements,
  • 02:38 procurement needs time to find sources and negotiate a contract, then the suppliers
  • 02:42 will probably need some time to get set up before they can actually start the work.
  • 02:47 Another consideration is the expertise of the external resources,
  • 02:51 both with the nature of the work to be done and
  • 02:53 with any of your internal policies, practices, or systems.
  • 02:57 The external resource may be adept at the work and immediately productive, or
  • 03:02 they may need training and time to come up the learning curve.
  • 03:06 While there may be potential problems to consider when using external resources,
  • 03:10 there are also problems with internal resources.
  • 03:13 The biggest one is that most of our internal resources are already
  • 03:17 over allocated.
  • 03:18 If the project priority is not a high one,
  • 03:21 the internal resources may never get to the work.
  • 03:24 Let's now talk about different types of contracts.
  • 03:28 Project risk can be mitigated based upon the structure of the contract, or
  • 03:32 it can be magnified.
  • 03:34 The most commonly used contract type is the fixed price contract.
  • 03:38 It's appropriate when the scope of the work is clear, precise, and
  • 03:41 not likely to change.
  • 03:43 Due to the clearer understanding of what is to be done,
  • 03:46 the supplier can provide a firm price for the work.
  • 03:48 The supplier is paid the negotiated amount upon delivery regardless of the costs they
  • 03:53 incur to complete the work.
  • 03:55 The supplier then assumes all of the risk of overrun or underrun.
  • 03:59 It is appropriate on this type of project to use penalty or
  • 04:02 incentive clauses to manage schedule or quality risk.
  • 04:05 Otherwise the supplier may cut corners to keep costs down.
  • 04:09 The next type of contract is a cost reimbursable or cost plus contract.
  • 04:15 This is appropriate when a fixed scope or deliverable cannot be defined, and
  • 04:19 the project is instead procuring expertise to help them define what should be done.
  • 04:24 In this case,
  • 04:24 the supplier keeps track of all their costs to perform project activities.
  • 04:28 And those costs are reimbursed, usually with pre-negotiated profit or
  • 04:33 fee on the costs.
  • 04:34 So when using this project type, the project that is buying the services
  • 04:38 assumes all of the risks or costs underrun or overrun.
  • 04:42 Again, it's acceptable to use penalty or incentive clauses for quality and
  • 04:46 schedule.
  • 04:46 However, in this case, it is also acceptable to use penalty or
  • 04:51 incentive clauses for the total cost of the supplier's work.
  • 04:55 A special form of the cost reimbursable contract type that is used often
  • 04:59 in projects is the time and material contract.
  • 05:03 This is typically used with suppliers who are providing people to augment
  • 05:07 the project staff.
  • 05:08 A daily or hourly rate is negotiated with the supplier and
  • 05:11 the people working on the project track their time.
  • 05:15 The supplier is then paid weekly or monthly based upon
  • 05:18 the amount of time the supplier's people spent working on the project.
  • 05:23 Cost overruns or underruns are shared between the project and
  • 05:26 the supplier based upon these factors.
  • 05:29 How much time is spent on the project, the negotiated rate the project is paying
  • 05:33 the supplier, and the salary rate the supplier pays their people.
  • 05:37 Again, quality and schedule can be penalized or incentivized.
  • 05:41 The use of external resources can be a great risk reduction technique when
  • 05:46 managed well, but it does take work to structure an appropriate contract and
  • 05:51 supervise the external resources.

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