The Sixth Essential: Suppliers

When I have reviewed projects in the past, “supplier problem” is the most common reason I hear for projects running into difficulty. To some extent, this might be a convenient excuse: it is easy to blame something or someone outwith the project rather than admit failure within the project team. But the PM doesn’t get off the hook that easily, as there are techniques that will improve the chances of project success.

It is really difficult to generalise, as each project situation is different with respect to suppliers. Suppliers range from internal suppliers (such as a test team, office facilities, or HR) through to major sub-contractors supplying multi-millions of equipment and services.

Often, the internal suppliers are the hardest to manage. The problem is lack of accountability to the project manager. If the local IT department can’t provide enough working PCs for your team, what are you going to do about it? If the test team lets you down by rescheduling resources to a higher-priority project, who do you complain to? Best practice here is to establish Service Level Agreements (SLAs) with your internal suppliers. Agree the ground rules up front for critical internal suppliers, so that you know what to expect – and you then have clear grounds for complaint if the SLA is not met. Also, if I ever review your project, I will be more sympathetic to the “poor suppliers” excuse!

External suppliers are more normally governed by a contract, which will include penalty terms for non-conformance. Contracts are usually established by a procurement function – in itself an internal supplier to the project – and in my experience the service that they provide can vary enormously from a simple “standard terms” purchasing function through to taking a real interest in the project and tailoring the terms accordingly. The project manager needs to be fully engaged in procurement activities, to ensure that supplier contracts support the needs of the project.

Some procurement departments believe that their sole function is to buy at lowest price. Beware! If your supplier’s price has been pushed so low as to make the business marginal, then don’t expect to see much engagement from their best people.

The most important factor that a PM needs to think about is the assignment of risk. So in a “time and materials” contract the risk is mostly with the buyer, i.e. the project manager. If timescales slip, it can actually be to the supplier’s financial advantage, as the time and hence the price will increase. The PM needs to manager time & materials suppliers very closely.

At the other extreme, a fixed price contract specifies the deliverables (including quality and time aspects), and the risk of delivery rests with the supplier. If they do not deliver what they promised, on time and to the required quality, then there will be financial penalties to the supplier (usually referred to as “liquidated damages”). In this case, the PM needs to closely involved in defining the contract terms, but once the contract is signed then it is important to take a step back and let the supplier get on with it. Ask questions relating to progress, but leave them to make their own decisions. Changes to requirements may be welcomed by the supplier, as there will be a price tag associated with each change, and you can be sure that they will be looking for a higher profit margin than on the base contract!

Most of all with a fixed price contract, don’t try to interfere. If you, as PM, try to direct the way the supplier acts — no matter how well-intentioned — then in the event of targets being missed the supplier can use the interference as a legal argument to escape penalties.

An interesting and emerging trend is for “open book” contracts. In this approach, once a supplier has been chosen then the risk is shared. It is accepted that the supplier needs to make a profit margin at an agreed rate, and all of their costs are then fully revealed. The PM works with the supplier to agree cost/time/quality decisions with the best project outcome being the primary concern of both parties. If you can get to this situation, it is an ideal way to balance risk.

By | 2015-08-19T10:54:45+00:00 May 13th, 2013|Project Management, Seven Essentials|1 Comment

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  1. Mike Corrigall May 13, 2013 at 18:42 - Reply

    Interesting article and I support all these points. However I would add an additional recommendation for PMs: during project initiation make a conscious effort to assess the health of the relationship with each supplier. If you are using words like engaged, responsive or constructive to describe the relationship then chances are the vendor will deliver or you will jointly find solutions to overcome problems. If the relationship is strained or worse there is a break-down in trust then SLAs and contracts will probably not be enough to save your project.

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