Project Management

MMZG 523
Contract Management & Outsourcing

BITS Pilani
Pilani Campus

Sunil P R

BITS Pilani
Pilani Campus

Course Outline
MMZG 523

Outline
Course name:

Project Management

Course code:

MMZG 523

Number of modules:

Number of lectures:

SECOND SEMESTER 2014-2015

Textbook:

Project Management The Managerial Process

Clifford F. Grey, Erik W. Larson, Gautam V. Desai

Pedagogy:

Interactive

Work integration:

WILe exercises

Evaluation components: Assignment / Quiz, Mid-sem (C/B), Compre (O/B)

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BITS Pilani
Pilani Campus

MODULE 5 : PROJECT CONTRACT MANAGEMENT

SESSION 16: CONTRACT MANAGEMENT & OUTSOURCING

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Learning Outcomes Session 16

INTRODUCTION: CONTRACT MANAGEMENT
CONTRACT MANAGEMENT PROCESS: FOUR STEPS
CONTRACT TYPES & PURCHASE DOCUMENTS

NEGOTIATING CONTRACTS
NEGOTIATING FRAMEWORK
9 PREPARATION STEPS FOR NEGOTIATION

OUTSOURCING
ADVANTAGES & DISADVANTAGES
GLOBAL COLLABORATION & CULTURE
NEGOTIATIONS AMID CULTURAL DIFFRENCES

BEST PRACTICES
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What is a Contract?
A contract is any agreement between two or more parties where
one party agrees to provide certain deliveries or services, and the
other party agrees to pay for those deliveries or services.
Contract management or contract administration is the
management of contracts made with customers, vendors,
partners, or employees.
Contract management is a continuous process, starting with
analysis and evaluation of the customers inquiry, and carrying on
until contract closure, upon fulfilment of all contractual
obligations.

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Contract Management
Planning purchases & contracts:
Describing the requirements for products or services, Build-versus-buy?
Determination of the type of contract to use.
Identifying potential suppliers or sellers list
Procurement documents such as a (RFP) as well as selection criteria.
Conducting purchases:
Obtaining information, quotes, bids, or proposals
Outputs of this process include a qualified sellers list & specific proposals.
Evaluating potential providers and negotiating a contract.
Administering the contract:
Governance & Managing the relationship
Performance Review with the selected seller or provider.
Change control
Closing the contract involves completion and settlement of the contract. 7
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How Do We Manage
Procurement?
Four processes
Plan Procurements
Conduct Procurements
Administer Procurements
Close Procurements
Plan
Procurements

Conduct
Procurements

Administer
Procurements

Close
Procurements

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Procurement Documents
Request for Proposal (RFP)
Asks for the price and how/who will do the work
An RFP is a request for a price from a buyer but the buyer would also
expect suggestions and ideas on how the project work should be
done. RFPs are thus focused on more than just pricing/cost, they entail
a bit of consulting from the contractor or vendor (technology, quality).

Invitation for Bid (IFB)

One simple price to do the work
An invitation for bid (IFB) or invitation to bid (ITB) is an invitation to
contractors or equipment suppliers, through a bidding process, to
submit a proposal on a specific project to be realized or product or
service to be furnished. IFB is generally the same thing as Request for
Quotation (RFQ).

Request for Quotation (RFQ)

Price per unit quote
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Contract Types
Fixed Price (Lump Sum) Contracts
Cost-Reimbursable Contracts
Cost Plus Fee (CPF)
Cost Plus Percentage of Cost (CPPC)
Cost Plus Fixed Fee (CPFF)
Time and Material (T&M) Contracts
Which type of the contract is the highest risk for the
Buyer? Seller?
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Fixed Price
Under a fixed-price (FP) or lump-sum agreement, the contractor
agrees to perform all work specified in the contract at a fixed
price.
Clients are able to get a minimum price by putting out the contract
to competitive bid.

With fixed-price contract bids, the contractor has to be very

careful in estimating target cost and completion schedule
because once agreed upon, the price cannot be adjusted.
If contractors overestimate the target cost in the bidding stage, they
may lose the contract to a lower-priced competitor; if the estimate
is too low, they may win the job but make little or no profit.
For Clients, this model may cost more than anticipated, if the job is
completed early or if materials cost less than estimated.

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Fixed Price
Advantages:
Fixed-price contracts are preferred by both owners and contractors when the
scope of the project is well defined with predictable costs and low
implementation risks.
The most significant benefit of a fixed price model is that it allows the buyer to set
in advance an exact budget.
With fixed-price contracts, clients do not have to be concerned with project costs
and can focus on monitoring work progress and performance specifications.
Likewise, contractors prefer fixed price contracts because the client is less likely to
request changes or additions to the contract.

Disadvantages:
Fixed price contracts tend to be less flexible for managing changes or requests.
Requirements that arise during implementation may lead to price renegotiation & changes to the projects schedule.
Excessive focus on maintaining a fixed price may come at the expense of
quality, creativity and timeliness.
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Cost Plus
Under a cost-plus contract the contractor is reimbursed for all
direct allowable costs (materials, labour, travel) plus an additional
fee to cover overhead and profit.
Cost Plus gives the owner, labour at the prevailing wage rate for
labour and materials at actual cost.
This fee is negotiated in advance and usually involves a percentage
of the total costs.

Time and materials contract: Variations of Cost Plus & Fixed Price
Labour costs are based on an hourly or daily rate, which includes
direct and indirect costs as well as profit.
One other variation would be cost plus fixed fee, where the owner
would get labor and materials at cost, plus an agreed upon fee to
cover overhead, profit, etc.
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Cost Plus
Advantages:
The primary benefit of cost plus pricing is the ease of calculation.
A business that uses cost plus pricing can justify price increases
when costs rise. Cost plus pricing ensures the business, the seller,
against unexpected costs.
Disadvantages:
Accuracy is a critical component in cost plus pricing. This model
relies on variable cost and sales estimates.
Unlike fixed-price contracts, cost-plus contracts put the burden of
risk on the client. Businesses have little incentive to reduce or
control prices because as prices rise, profits increase.
The contract does not indicate what the project is going to cost
until the end of the project.
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Negotiating Contracts

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Negotiating Contracts
Negotiation is the process by which people deal with
their differences.
Whether those differences involve the purchase of a
new automobile, a labour contract dispute, the terms of
a sale, or a complex alliance between two companies,
resolutions are typically sought through negotiations. To
negotiate is to seek mutual agreement through
dialogue.
There are essentially two kinds of negotiation:
distributive negotiation and integrative negotiation.
Most negotiations combine elements of both types
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Negotiating
Distributive Versus Integrative Negotiations
Characteristic

Distributive

Integrative

Outcome

Win-lose

Win-win

Motivation

Individual gain

Joint gain

Interests

Opposed

Congruent

Relationship

Short-term

Long-term

Issues involved

Single

Multiple

Ability to make
trade-offs

Not flexible

Flexible

Solution

Not creative

Creative
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Distributive or Integrative?
Samson is negotiating with a local car dealer to buy a used car.
The sticker on the window shows the final price with a disclaimer
that says, "As-is." Samson wants to talk the salesperson into
reducing the price.
Does this scenario call for a distributive or integrative
approach?
Sonali would like to assign a long-term, complex project to
Kumar, despite knowing that Kumar is already over loaded.
Sonali trusts Kumar implicitly and knows that he is very
capable of this type of work. Does this scenario call for a
distributive or integrative approach?

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Negotiation Framework
Four concepts are especially important for establishing
this framework:
The first is BATNA or best alternative to a negotiated
agreement. Your BATNA is what you will do if you do not
reach an agreement during a negotiation.
The second is reservation price or "walk away." Your
reservation price is the least favourable point at which you'll
accept a negotiated deal.
The third is ZOPA or zone of possible agreement. Your ZOPA is
the range (overlap) in which a potential deal can take place.
And the fourth is Value Creation through trades. This occurs
when goods/services are traded that have only modest value
to their holders, but exceptional value to the other party.
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BATNA Question
You're negotiating a leasing agreement on some office
equipment with Ravi, the salesperson for the supplier,
Which of the following could be your BATNA?
1. Accept the deal only if Ravi meets or is lower than the
highest monthly fee you're willing to pay
2. Meet with another office equipment supplier to see
what their leasing arrangements cost
3. Buy used office equipment instead of leasing new
equipment
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9 Preparatory Steps

Step 1: Determine satisfactory outcomes

Step 2: Identify opportunities to create value
Step 3: Identify your BATNA and reservation price
Step 4: Improve your BATNA
Step 5: Assess who has authority
Step 6: Study the other side
Step 7: Prepare for flexibility in the process
Step 8: Gather objective criteria to establish fairness
Step 9: Alter the process in your favour
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Outsourcing & Global

Collaboration

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Outsourcing
In business, Outsourcing involves the contracting out of
a business process/functions to another party (compare
business process outsourcing). The term "outsourcing"
dates back to at least 1981.
The term outsourcing has traditionally been applied to
the transferring of business functions or processes like
customer support, IT, accounting to other, often foreign
companies.

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Advantages of Outsourcing
1. Cost reduction. Companies can secure competitive prices for
contracted services, especially if the work can be outsourced
offshore. Overhead costs are dramatically cut since the company
no longer has to internally maintain the contracted services.
2. Faster project completion. Not only can work be done more
cheaply, but it can also be done faster.
3. High level of expertise. A high level of expertise and technology
can be brought to bear on the project. A company no longer has
to keep up with technological advances. Instead, it can focus on
developing its core competencies.
4. Flexibility. Organizations are no longer constrained by their own
resources but can pursue a wide range of projects by combining
their resources with talents of other companies.
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Disadvantages of Outsourcing
1. Coordination breakdowns. Coordination of professionals from
different organizations can be challenging, especially if the
project work requires close collaboration and mutual adjustment.
2. Loss of control. There is potential loss of control over the project.
The core team depends on other organizations that they have no
direct authority over.
3. Conflict. Projects are more prone to interpersonal conflict since
the different participants do not share the same values, priorities,
and culture.
4. Lack of Trust: Trust is essential to project success, can be difficult
to forge when teams are limited by language & distance barriers.
5. Security issues. Depending on the nature of the project, business
secrets may be revealed, especially when contractor also works
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for your competitor.

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Global Collaboration
Start by understanding the cultural differences that can
jeopardize even the most carefully planned Projects:
Establishing trust
Negotiating
Communicating
Interacting with others over long distances
Building team identity and alignment
Global collaboration is challenging for most managers
because of the cultural differences they encounter when
they work with people from other countries.
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What is Culture?
Experts have defined Culture in several ways, including:
Culture is a shared system of meaning, ideas, and
thought that guides a groups perceptions and
understanding of the world and that shapes group
members behaviour.
Culture is that which distinguishes the people of one
country from those of another.
Culture is an Expression of our Values, Culture is
Reflected in our Behaviors, Symbols , Stories,
Routines, Rituals,
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Individualism Vs Collectivism

Individualism

Collectivism

Focus on
personal
achievement,
individual
rights, and
independence.

Focus on the
group, harmony,
and obligation
and duty to
group members.

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Authority: Power Distance

Low Power
Distance

High Power
Distance

Perceive little or
no gap between
people at different
hierarchy levels.
Managers allow
participation;
employees speak
out.

Perceive wide
gap between
people at
different
hierarchy levels.
Managers issue
directives;
employees
follow them.

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Uncertainty (Risk avoidance)

Low Uncertainty
Avoidance

High Uncertainty
Avoidance

Readily embrace
change, show
initiative, and
accept new ideas.

Hesitate to try new

ways of doing
things, start new
companies, change
jobs, or welcome
Defined
Restraint
Structure
outsiders.
Emphasize
continuity and
stability over
innovation and
change

Africa

Brazil,
India

Risk
US,
Australia

UK

Middle Japan
France,
East
Germany,
Spain,
Mexico,
Russia
Southeast Asia

China

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Communication

Direct

Germany,
US

More direct and to

the point.
Openly confront
Australia
difficulties.
Constructive
feedback.
Low Context.

Indirect
Africa

France
UK

India

Spain

Mexico

Russia
China,
Japan,
Middle East,
Southeast Asia,
Brazil

Take care with how

something is said.
Avoid discussing
difficulties.
Personal
dignity/saving face
issues.
High Context

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Time

Short-Term
Demonstrate
immediate
results
US,
Efficiency and Mexico
speed important
in decisionmaking process
Brazil,
UK
Time is Linear

Africa

Middle East,
Spain
Southeast Asia

Australia

France

India

Russia,
China

Japan

Long-Term
Emphasize big
picture and longterm results
Thoroughness,
consensus building
and discussion of
possible outcomes
Time is elastic

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Best Practices

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Question Session

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