We mentioned earlier that contract knowledge is a key project management skill for procurement and vendor management. So, what exactly do we mean by contract knowledge? Although there is no substitution for actual experience, in-depth study, and formal training, here is a quick synopsis of the key contract facts that you need to understand to improve your effectiveness in this area of project management.
Conditions for Legal Contract
The four conditions that make a contract a legally binding agreement are
Key Contract Elements
Not every contract is the same, and not every contract will contain all of these sections (they may not apply), but the common contract components include the following:
Primary Contract Types
The three common contract types are as follows:
The three variations of cost-reimbursable contracts are as follows:
A common variation of T&M contracts is to cap the top end.
The Impact of Each Contract Type
In the previous section, we mentioned the three key contract types. In this section, we will review the points you need to understand about each type. The key categories include the following:
Table 21.1 summarizes these key facts about each contract type.
Quick to create.
Good choice when hiring "people" to augment your staff.
Less work for buyer to manage.
Seller has strong incentive to control costs.
Buyer knows total project price.
Companies are familiar with this type.
Can include incentives.
Simpler scope of work.
SOW is easier than an FP one.
Lower cost than FP because the seller does not need to add as much for the risk..
Can include incentives.
Profit in every hour billed.
Seller has no incentive to control costs.
Good only for small projects.
Requires most day-to-day oversight by the buyer.
Seller may underquote and make up profits with change orders.
Seller may reduce work scope if it is losing money.
More work for the buyer to write the SOW.
Can be more costly than CR if the SOW is incomplete.
Seller will increase the price to cover risk
Must audit seller's invoices.
More work for buyer to manage.
Seller has only moderate incentive to control costs.
Total project price is unknown.
Best to use when…
You need work to begin right away.
You need to augment staff.
You know exactly what needs to be done.
You don't have time to audit invoices.
You want to buy expertise in determining what needs to be done.
Who has the risk?
The seller (cost), or both the buyer and seller if not well defined.
Table 21.2 summarizes these key facts about each contract type.
Scope of work detail
Limited functional, performance, or design requirements.
Seller needs to know all the work.
Describes only performance or requirements.
"How to do it."
Project management tasks
Providing daily direction to seller.
Striving for concrete deliverables.
Close monitoring of project schedule.
Looking for a situation to switch the contract type.
Establish clear acceptance criteria of deliverables.
Managing change requests.
Monitoring project task dependencies.
Monitoring project assumptions.
Auditing seller's costs.
Monitoring seller work progress.
Ensuring added resources add value to the project.
Watching for shifting resources.
Watching for un-planned seller charges.
The Absolute Minimum
At this point, you should have a solid understanding of the following:
The map in Figure 21.1 summarizes the main points we reviewed in this chapter.
Figure 21.1. Overview of managing vendors.
Part i. Project Management Jumpstart
Project Management Overview
The Project Manager
Essential Elements for any Successful Project
Part ii. Project Planning
Defining a Project
Planning a Project
Developing the Work Breakdown Structure
Estimating the Work
Developing the Project Schedule
Determining the Project Budget
Part iii. Project Control
Controlling a Project
Managing Project Changes
Managing Project Deliverables
Managing Project Issues
Managing Project Risks
Managing Project Quality
Part iv. Project Execution
Leading a Project
Managing Project Communications
Keys to Better Project Team Performance
Ending a Project