PROJECT PLANNING – Managerial Challenges(Part 3)
Project Initiation – Contractor
This post is the third in a series of discussions regarding managerial challenges in project management situations. In this series, we focus heavily on the managerial aspects of program / project planning and management. This post addresses the starting point or initiation of the project. Part 2 discussed Project Initiation in general. This post [Part 3] addresses considerations that are unique to contractors.
Owners often view contractors as a homogenous group or homogenous within the contractor’s own organization. This perception is not correct, at least for contractors of any size or diversity.
Why does the same contractor behave differently on one job relative to another? Why does a contractor bid differently relative to past practices or experiences? Why is the contractor’s price so high on this bid when it was so low on another bid? We expected the contractor to be competitive and they are not. Another scenario, we expected the contractor to not be competitive; but, they have the best proposal and bid. There are many potential reasons. The answer may reside in the project initiation process.
For a contractor, project initiation occurs twice. The initiation points are:
- Bidding – Decision to bid or propose on the work
- Award – Award of the contract, job and/or work.
Each initation point has differing considerations. A few are summarized below.
Bidding – Decision to bid or propose on the work – Assuming that contractors are in business to make a profit, the business development function must be managed in a disciplined manner. Typically, the annual budgeting process results in:
- Budget for all proposals for the year [bidding large international engineering and construction jobs can cost the contractor millions]
- Assumptions regarding the amount of bidding that is needed to generate the business that forms the basis for the contractor’s business plan
- Basis for pricing (markup or gross margin) and use of assets (human resources, personnel, construction equipment, fabrication facilities, etc.)
- Capture ratio (or number of bids needed to be awarded the target amount of business for the year or going forward)
- Competition and competitive posture of the contractor relative to others that are or might bid
- Types of business or target markets.
If a contractor has the amount of business established by their business plan, this contractor may bid abnormally high to avoid being selected. Further, the same contractor may try to minimize the cost of the bid for the same reason.
Hence, one initiation point is at the decision to bid.
Contract Award – The second initiation point occurs if and when the contractor is successful in winning the job [sometimes referred to as contract award].
At contract award (or similar point), the job is transferred (or handoff occurs) from the business development function to the project execution organization. This handoff, turnover or transfer represents another project initiation point.
Many contractors have a formal process and procedure. Clearly, it is the best interest of all stakeholders that this project initiation is done with professionalism. However, in practice, many execution problems have their origin in this initiation point or interface.
Key issues are:
- What did the two parties (usually contractor and owner) agree to do?
- What is the scope of work or services?
- What is the schedule for delivery and interim review points?
- What are the price and payment terms? [this is not uncommon in large, complex and protracted bid review processes]
- What are the terms and conditions? [this is a problem when the award is not made by execution of a fully conformed contract]
- What additional promises were made during the bid review and negotiations? [this is a constant battle between commissioned sales personnel and the execution group]
- What is the total baseline for the project [technical, pricing, time, and other]?
Additionally, the execution team must determine the correct baseline for management of the work. Simple (or not so simple) matters as the budget or cost estimate are problematic. Has all of the scope been priced into the budget?
Contractors can be the low price bidder because the estimator missed pricing some of the scope. If this is the case, the resulting problems can be enormous for all stakeholders. Often, construction disputes and claims have their origins in scope of work that was missed by the contractor’s estimator. A high percentage of engineering and construction claims (80-90%) have their origins in scope of work definition disputes.
Professional project management requires a successful project initiation process. Lacking that, problems are sure to emerge. Happy reading and good luck in your project initiation challenges and endeavors…
It is important to note that McLaughlin and McLaughlin [M&M] is not a law firm and is not intending to provide legal advice. M&M is a consulting firm providing (among other services) non-legal expertise in dispute resolution and litigation support. The Resource Center is for the convenience of blog visitors and M&M does not offer this for commercial purposes. For further information on M&M services, please see www.McLaughlinandMcLaughlin.com.