Presentation given by Dr Jon Broome on 23 January 2020 to the Midlands branch in Leeds

1. 1
Project success through
excellent contract
management :
an overview of the ‘APM Guide
to contracts & procurement’
by
Dr Jon Broome,
chair of C&P SIG
1
Why you came ?
§ why (almost) every project manager should have
knowledge & skill in contracts & procurement to be
effective;
§ modern developments in contracts & procurement;
§ the seven stage procurement and contract management
model and the level two activities that sit beneath them
§ (small) things that highly effective project managers and
project procurement professionals should do
consistently, consistently well.
2
Agenda
§ Aims & Agenda + Intros
§ Modern developments & why C&P will affect
you even more
§ The seven-stage model
with stories & vignettes to illustrate some of the stages
§ Summary of things you should do
3
The intended readership
The intended audience for the Guide is :
vProject managers and project procurement
professionals who would like a guide on how P3
procurement & contract management operates
vStakeholders – both internal and external to the
project team - who need to increase their awareness
of project procurement & contract management
e.g. project sponsors finance, engineers, etc
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2. 2
Intro’s : who are you ?
§ Sector ?
– Oil ?
– Construction &/or civil engineering ?
– IT ?
– Heavy engineering ?
– Other ?
§ Role ?
– Project Manager
– Procurement professional
– Legal
– Commercial
– Other ?
5
What is Procurement ?
§ APM Body of Knowledge 5th edition (Section 5.4)
§ "Procurement is the process by which the
resources (goods and services) required by
a project are acquired.
It includes the development of the procurement
strategy, preparation of contracts, selection and
acquisition of suppliers, and management of the
contracts."
6
APM Body of Knowledge 6th edition (definition)
§ “Procurement is the process by which
products and services are acquired from
an external provider for incorporation
into the project, programme or
portfolio.”
7
Why is Procurement Important ?
§ If 80 – 90% of a projects spend is outsourced in some
way, then might having the right organisations and
people on board with good contracts in place be
helpful ?
§ Research shows that good procurement decisions can
have just as much effect on delivering projects to time,
cost and performance as technical decisions.
§ A Project Manager can only manage a sub-project /
contract through the cards he or she is dealt.
Procurement is about the cards you deal yourself.
Contract management is about how you play them.
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3. 3
Developments
in
Contracts & Procurement
of projects, programmes and portfolios
9
Procuring at a higher level.
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The Project Life-Cycle now includes Operation &
arguably Termination.APM Guide to Contracts and Procurement
operate’ concept; more commonly known as the private finance initiative (PFI)
or public private partnership (PPP).
n An increasing need for collaboration in order to deliver projects, as no longer
can a single organisation do it all due to the increasing complexity of both
technology and society, in some sectors.
n Selection of providers, in some cases almost wholly, on the basis of their
cultural and technical capabilities. This is increasing due to the ‘end product’
being not fully defined or being a moving target. What is being bought is
therefore the capability to develop a solution rather than delivery to fixed start
and end points. The procurement cycle is therefore increasingly used to
leverage the know-how of the supply chain to deliver competitive advantage.
n Conditions of contract are being designed to align motivations and be more
Figure 1.3 Expansion of the project life cycle (from APM Body of
Knowledge 6th edition)
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Other developments
§ There is a greater emphasis on outcomes, benefits & wlc’s.
§ The Project Life-Cycle has expanded to include Operation &
Termination.
§ As technology & society get more complex, there is an increasing
need for collaboration to deliver projects.
§ Selection therefore includes culture and capabilities as the end
‘product’ cannot be fully defined.
§ Contracts need to align motivations and be more relationship
based i.e. define how parties work together.
§ Consequently, procurement literature should cover the
procurement of ‘sub-projects’ / Packages with the above
characteristics, not just goods & services.
§ This can be for a Programme or even Portfolio of contracts.
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4. 4
APM Body of Knowledge 6th edition (definition)
§ “Procurement is the process by which
products and services are acquired from
an external provider for incorporation
into the project, programme or
portfolio.”
So, given these developments,
IS THIS DEFINITION FIT FOR PURPOSE ?
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A new definition for Procurement ?
“Procurement is the process by which the benefits, enhanced
capability, functions / performance or resources (goods &
services) required from or by a project or programme are
acquired.
It includes deciding the Package Breakdown Structure (PaBS)
and, for each package, the development & implementation
of the
§ a contracting strategy
§ contract documents, including the specific scope /
requirement
§ process and evaluation criteria for selection and award
leading to the effective management and administration of
the contracts once entered into."
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3
Introduction
n Background: Providing further background for optional reading.
n Inputs: Listing what is needed at the stage start.
n Activities:Taskstobeperformedbasedonthestageprocessdiagramincluded.
n Outputs: What the stage provides when completed.
Where applicable, an additional section summarises the risk aspects that should
be considered during the stage.
It should be noted that we define some specific terms which relate directly to
contracts and procurement (e.g. the provider, the employer). Summary
definitions of these terms are given in section 1.3 below. The guide also includes
the generic definitions from the APM’s Body of Knowledge series 6th edition
and other prior learnt material, where applicable, in text boxes to assist the reader
and provide a route to further research.
In this guide, we describe a generic process which can be followed regardless
of the size of the project or programme. For a small procurement, it may mainly
be a thought process. However, the larger the project or programme, the more
thoughtshouldbeappliedwithmoreformalityintermsofrecordingthedecisions
made and reasons why. Indeed, for a major procurement exercise, this guide
could be used as the starting point for the process of developing the required
contracts and an aid to seeking further detailed advice or guidance if required.
We believe that you will find the following chapters a useful introduction to
each of these activities and it will spur you on to further develop your under-
standing and skills in these areas.
Figure 1.1 The procurement guide life cycle stages
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Why ‘Concept & Feasibility’ ?
§ We are talking about the business case.
§ How much will this change ?
§ If significant / critical parts are going to be
outsourced, how can you not consider the market
and likely packages & their procurement &
commercial arrangements.
Introduction
prevailing environment external to the project, e.g. changes in legislation,
businesscontext,politics,etc.Theconditionsofcontractputinplaceforpackages
should not only accommodate change, but should also allow the employer the
flexibility to influence package outcomes (e.g. to reduce the ultimate cost by the
application of good project management).
Simply having a good provider in place with conditions of contract which
enable the management of change is unlikely to be enough to achieve optimum
The cost influence curve: Prior study10
has pointed out that it is early in
the project that the ability to influence the outcome in terms of cost is the
greatest. Typically, during the initial weeks/months of the project, the
project’s critical elements are shaped, including the involvement patterns
of the project sponsor.
Figure 1.4 Cost influence curve (after Rocque)
Conversely the investment in the project (its cost) rises throughout the
project thus the risk of there being wasted investment also increases (for
example if a provider needs to be changed due to performance or other
issues developing).
§ Shouldn’t PMs and
procurement professionals
be involved at an early stage
then ?
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5. 5
18
6. Assess and Select the best option(s), involving key stakeholders in the
process.
7. Develop a project scope statement for the preferred option(s) including an
initial budget and an overall programme plan with contingencies.
8. Refine/update the SBC, including budget, programme plan and contingencies.
9. Conduct a gateway review in order to obtain a decision on whether to proceed
with the project or not, and if it is a medium or major project for organisation;
(9a) involve the future project board/steering group.
Figure 2.1 Process diagram for the concept and feasibility stage
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A few comments …
Activity 5: Development of the Project Brief.
The Project Brief is a high–level outline specification, in terms of
capability or functions and performance levels, of stakeholders’
(customers/clients) needs and requirements for the project needed
to deliver the agreed Benefits. This would include the Benefits being
refined where possible into tangible or measurable Success Criteria.
Activity 7 : Develop Project Scope Statement
§ What’s in, what’s out and what’s a maybe ?
§ High level boundaries / constraints.
§ High level project breakdown structure for costing & planning.
§ Threats & Opportunities
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Project procurement strategy
3.2 Inputs
In order to decide on the procurement strategy, the outputs from the concept
and feasibility stage (see Chapter 2), as included in the FBC, are required.
n The scope statement is critical in order to develop the package breakdown
structure (PaBS) to an appropriate level of detail to define individual packages.
n The archived SBC and project brief may also give insight into the sourcing and
delivery options considered for the project and the individual work packages
within it. It is the starting point for developing criteria by which contracting
strategies are developed and providers are selected.
3.3 Activities
The key activities of this phase are illustrated in Figure 3.2 and described in the
following sections.
Figure 3.2 Process diagram for the project procurement strategy stage
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Example ‘Make or Buy’ Criteria
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6. 6
Procuring at a higher level.
21
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if EU procurement legislation is not mandated, it is wise to demonstrate fairness
in provider selection to avoid reputational damage.
3.3.2 Activity 1: Determine the high-level PaBS
The PaBS is developed via an iterative process, usually starting as relatively
high-level and then being refined via consultation. The initial PaBS may be formed
by breaking the overall project down into an initial hierarchy by considering the
terms as shown in Table 3.1, which uses a solar power station as an example.
Table 3.1 Example high-level package terms for a solar power station
Example for a solar power station
Business benefits, resulting from the
completed project
Quantified increase in revenue and earnings
from the completed project. Desired ROCE
Success criteria, by which the project can be
judged at the time of its completion
CAPEX (capital expenditure) within budget;
completion on or before planned date; initial
OPEX (operational expenditure) within
budget
Enhanced capabilities that are delivered to the
customer organisation(s)
Total power able to be generated, efficiency in
terms of converting lumens to power
Deliverables that provide this capability The design; main construction works including
foundations, operator facilities, access roads,
solar panels; converters; high-voltage wires
connecting to grid, etc.
Work breakdown structure (WBS) of the
goods and Services that make up each
deliverable.
e.g. For the foundations; holes to be dug,
concrete, reinforcing bar, etc.
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23
Based on a true-life story …
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Project procurement strategy
Figure 3.3 Example package breakdown structure (PaBS)
Figure 3.4 PaBS development for a wind-farm project
Having gone through a number of iterations with all of the potential packages,
the end result should be that every item in the project works hierarchy is in one
of the packages, but in one package only, e.g. in terms of goods and services,
there is a ‘hard’ boundary with no duplication or overlap between packages. This
should be documented in a scope/responsibility matrix that identifies allocation
of ownership for all package components.
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7. 7
You want ‘hard’ boundaries between
Packages …
46
If it is the employer organisation that will manage these boundaries, then for
each package, these interdependencies and interactions must be identified,
along with the necessary management steps to ensure smooth delivery. It is
worth considering what the provider’s tactics may be at these scope boundaries,
in order to devise control measures and strategies to prevent such risks occurring.
Where less is known, then the provider may charge a premium to manage these
risks. Don’t think that all risks can be passed to a provider – many are not
necessarily better placed to manage the risks than the employer – but you end up
paying them for it.
Figure 3.5 illustrates the ‘hard’ and ‘soft’ boundaries for goods and services
that require definition and management.
Figure 3.5 The ‘hard’ and ‘soft’ boundaries for goods and services
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Figure 3.8: Diagram correlating Nature of Relationship with Type of Package
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4
Package contracting
strategy
4.0 Overview
This stage develops the contracting strategy for each individual package to be
procured. During the stage, decisions are made on the main elements of the
strategy for the providers of each of the packages. The strategy should include:
n The basis for how the provider is paid.
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Package contracting strategy
4.4.1 Activity 1: Information gathering
This stage is predominantly about gathering more detailed information regarding
the package and the likely participants within it. This information is equally
valuable for consideration in Stage 5 when selecting the provider. Information
can be gathered under three inter-related main headings as below:
1.The participants’ drivers and constraints: The employer needs to be
Figure 4.1 Process diagram for the package contract strategy stage
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8. 8
Figure 3.8: Diagram correlating Nature of Relationship with Type of Package
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What Sort of Contracting Strategy ?
Input-based
Arrangements
Trans- Short Medium Long Permanent
actional 1 year 2 years 5 years 10 years 25 years
Complexity/
DegreeofUncertainty
Low
High
Joint
Venture
Companies
TIMESCALE
Fixed price contracts
- activity schedule - lump sums
- milestone payments
BOOT / DBFO
(Build, Own,
Operate, Transfer /
Design, Build
Finance, Operate)
Arrangements
Strategic Outsourcing
Project Alliances
Management Contracting
Cost reimbursable
Bill of Quantities
Target cost contract
Frameworks
Price
Based arrangements
Schedule of Rates
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Prepare the contract terms and requirements
packagescopeanditsinteractionsandinterdependencieswithothers.Otherwise,
we have seen, for instance, they may well enthusiastically develop a fully
defined requirement, in terms of goods and services specified when actually the
contract requires a performance specification. Failure to have this initial under-
standing can result in significant wasted professional time being expended,
which not only costs in fees, but delays the overall project. Make sure that the
responsibility for design and specification rests where it best suits the employer’s
requirements. Contract forms or procurement routes can sometimes be inadvert-
Figure 5.1 Process diagram for the prepare contract terms and
requirements stage
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©
2016
©
2016
Hitting the sweet spot in contract drafting
Legally &
contractually .
correct
Technically
correct
Clear & Simple :
well-structured,
concise & sufficiently
precise
Sweet
spot
+44(0)7970 428 929
E: JON@LEADINGEDGEPROJECTS.CO.UK
WWW.JONBROOME.COM
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9. 9
Drafting Philosophy
§ The importance of briefing, so that reality is in
accordance with desired strategies.
§ Transaction based contracts for commodities vs.
Relationship based contracts for projects (where things
do go wrong) leads onto ... ...
§ Contract administration vs. contract management.
§ Use standard forms where possible and limit
amendments to those that are needed.
§ Control the lawyers ! Control the tech specialists !
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What should a contract cover ?
§ Governance, especially in Partnering
Style arrangements
§ Definitions
§ Design development and
implementation
§ Types of liability : reasonable skill and care
(services); fitness for purpose; tort.
§ Existing State / Starting Point
§ The Deliverable
§ Each parties Rights & Obligations during
delivery
§ Constraints during Delivery
§ Subcontracting
§ Testing & Commissioning
§ Correction of defects after completion
§ Time, inc Final Certificate
§ Payment : Certification : when, by what
criteria (foreign currencies) and by whom.
Interest payments for late payment.
§ Approvals / Instructions etc. on behalf of
Employer
§ Risk Allocation / Management of Change
: the need, risk allocation, calculation of time
and cost.
§ Title & ownership rights, inc IPR
§ Insurance : what each party should hold,
indemnity.
§ Termination / Exit procedures
§ Dispute Resolution : options & sequence
(dispute resolution board, adjudication;
mediation; arbitration or litigation).
§ International Factors e.g. multiple
currencies, shipping..
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35
6
Select provider and
award the contract
6.0 Overview
In this stage, the ‘best value’ available provider(s) for the individual contracted-
out project packages are selected and the contract awarded to them. This stage
is particularly key, as once the contract(s) are placed, the legally binding commit-
ments will have been made and external costs will start accruing.
During this stage, a more detailed view is taken of what criteria are used to
shortlist and select the potential provider(s) given what they will be asked to
deliver in the contract, including risks allocated to them and other factors such as
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10. 10
123
n Members from the project board or steering group.
n Those team members who are going to work with the provider (they could
also be in the team who will do the administration and scoring).
n A representative of the ultimate user.
Figure 6.1 Process diagram for the provider selection stage
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Types of Selection Criteria
§ Past Performance : for you & / or others
§ Price * / Cost factors *
§ The End Deliverable : Provider’s Proposals*
vs. what you asked for
§ Means of Delivery * : Hard & Soft factors
Internal vs. External
§ Capability : Organisationally &/or of Individuals *
§ Culture : Generally &/or Compatibility
Organisationally &/or Individually
VfM
* Contractual status must be decided.
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Table 6.1 Characteristics of differing procurement methodologies
Type Characteristics
When to use (See also section 3.3.6
for consideration of the type of
supplier relationship)
Equivalent EU procedure
(2016 guidance)55
Open market (any
organisation can respond)
Advertised to the world.
Large number of bidders
Selection on lowest price
For example, e-Auctions.
When there is an exacting or precise
specification, normally for goods, and a
sufficient number of providers who can
supply it (i.e. commodity type goods).
The Open Procedure
Limited competition (two
stage)
When the employer has significant
knowledge of the market place and
past experience of individual
providers (i.e. where an initial
selection can be done based on
experience).
Initial stage using a PQQ, or only a
short list invited to tender.
The final selection is typically done
on best value criteria (a combination
of price and other factors).
When there is a large number of providers
who could potentially meet the unique
requirement, some filtering for the best ones
is needed prior to a detailed bid.
For the final bid, the employer can define
what it is they want to a level of detail that
ensures they will get it and the constraints
that the bidder must adhere to, yet both of
these give the bidder some leeway to
innovate to give a ‘best value’ bid,
howsoever that is defined.
The Restricted Procedure
Note that there has to be a two-stage
competition to be compliant.
For ‘best value’ read ‘most
economically advantageous tender’
(MEAT).
Ongoing discussion, then
negotiation with a limited
number of providers
Employer cannot define exactly
what they want and/or how it is to
be delivered. They use the market
place to help them define this and,
in doing so, the market better
understands the requirement.
High value adding requirements with a large
risk – both opportunity and threat – element
in it.
The Competitive Dialogue and
Competitive Dialogue with
Negotiation Procedures
A three-stage process of pre-
qualification; invitation to participate
in the dialogue; and invitation to
tender (best and final offer).
Single source Where the solution is very specific
to a known source. Request for
submission of alternative ideas by
providers. Negotiation with new
providers or single source.
When time or quality is paramount.
Ideally, there is an ongoing commercial
relationship which prevents the employer
from being taken advantage of when pricing.
The Innovative Partnership
Procedure
55
Based on the UK Government Guide (UK Crown Commercial Service, 2016).
39
APM Guide to Contracts and Procurement
It is almost inevitable that some more detailed delivery planning will need to
be conducted to firm-up the detail of what the provider(s) need to supply and
how it will integrate with the rest of the solution; including the employer’s work
packages and those of any other providers. The planning/definition stage is
therefore included following Initiation, its depth depending on the level of
planning already conducted during provider selection.
The follow-on implementation stage may include design and build sections,
Figure 7.2 Manage and deliver the contract process
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11. 11
Initiating the contract
APM Guide to Contracts and Procurement
146
desirable that people from all parties need to get to know each other (ideally
during the negotiation phase but certainly at the inaugural meeting).
Responsibilities within the respective organisations should be defined so that
ownership is clear. Stakeholders (all management staff including their names,
seniority, responsibilities and reporting line – organisational chart) within each of
the parties should be identified in order for the employer’s project manager to
develop a stakeholder management plan. Key roles are typically:
For the employer
Project manager: Oversees and has responsibility for the project delivery. Has
ultimate responsibility for the performance of the project and providers.
Contract manager (if not the project manager): A person nominated to manage
the provider, undertaking day-to-day communications and reporting progress
and issues to the project manager.
Commercial/purchasing managers: Persons responsible for the contract and
the drafting of any change orders.
Technicalauthority(TA):Theseniorpersonresponsibleforthetechnicalsolution.
Figure 7.3 Initiation stages
151
Manage and deliver the contract
7.3.3 Activity 3: Implementation
In Figure 7.2 we depict an ‘implementation cycle’: ‘Design, Build, Deliver,
Integrate, Accept’. This is because the implementation; involving one or more
providers as well as the activities of the employer’s internal team is often cyclic in
nature with individual packages being delivered throughout. Significant risk is
introduced due to the need to integrate the works together, which may involve
interdependencies between multiple contracted providers. Such interdepend-
encies, which may be realised well into the overall project, are often cited as the
most frequent cause of issues developing that can significantly impact time, cost
and quality if not accounted for (see Appendix A).
The implementation cycle is affected by:
n The impact of realised risks and the resulting negotiations between parties to
resolve the impact ownership (covered by the risk management activity – see
section 7.3.4).
n The advent of necessary contract changes (covered by the change control
process – see section 7.3.5). Changes may result from risk realisation, or from
changes to the overall requirement.
During implementation, a good management technique for the employer’s
project manager to use is the Deming circle60
(see Figure 7.4).
60
Deming, E.D. Out of the Crisis (Deming, 1986).
Figure 7.4 Deming circle
… and then improving
the operation of it.
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Contract Administration v. Management
Contract administration Contract Management
‘Impartial’ administration based on :
• ‘reasonable’ , not an extreme
interpretation of contract,
• information submitted by Provider &
readily accessible to administrator;
• professional judgement = experience.
Project Management of contract : making
decisions in best interests of the Client.
Applies to :
• Payment
• Acceptance of deliverables
• Assessment of Change
• Other residual matters
Have to :
• be able to project manage;
• know client’s objectives and priorities;
• have information to make informed
decisions;
• a contract which allows you to make
project management decisions;
• be empowered by the client.
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165
Contract closure, handover, operation and support
n contract closure (see section 8.5);
n handover (see section 8.6); and
n ongoing operations, maintenance and support (see section 8.7).
These activities follow-on from the decision to close the contract (see section
7.3.7). The ‘contract closure’ and the ‘handover’ stages may be conducted in
parallel; feeding into the preparation for the ‘operation and support’ activities.
8.4 Activity 1: Assign resources
The resources that you need to achieve the right conditions to close a contract
and to achieve handover are likely to be different from those during delivery; for
example increased financial activity may be required. It is beneficial to estimate
as soon as practicable the resources that will be required and what must be
in place to support the collation of the information needed for efficient use of
those resources. Similarly, if it is known during the manage and deliver the
contract stage (see Chapter 7) what financial information is going to be required
to close the contract, including its format, then this allows gathering of the
Figure 8.1 Contract closure, handover, operation and support process
43
Key points summary
§ The earlier you get involved in procurement,
the more influence you have over the cards
you are dealt;
§ Project manage the pre-contract
procurement phase, inc. your consultants;
§ RTFC and (jointly) develop a project
organisation that is fit for purpose;
§ Administrate and Manage the contract and
don’t confuse the two.
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12. 12
Contact details :
07970 428 929
jon@leadingedgeprojects.co.uk
www.jonbroome.com
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