SURVIVOR’S GUIDE to PROJECT OUTSOURCING
BY MICHAEL D. TAYLOR VERSION 2.0
CONTENTS
CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5 CHAPTER 6 CHAPTER 7 CHAPTER 8 CHAPTER 9 CHAPTER 10
INTRODUCTION .......................................................4 THE TEAM APPROACH...............................................8 PLANNING THE SUBCONTRACT...............................16 USING THE RIGHT TYPE OF CONTRACT ..................23 GETTING BIDDER PROPOSALS ...............................32 ANALYZING BIDDER PROPOSALS ...........................38 BIDDER SELECTION TECHNIQUES ..........................41 MONITORING & CONTROLLING SELLERS................45 KEEPING SELLERS MOTIVATED ..............................54 COMPLETING THE SUBCONTRACT...........................57
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In this booklet, readers will learn how to: 1. Become familiar with modern outsourcing methods. 2. Form procurement management teams. 3. How to plan for an outsourced project. 4. Select and use the right type of contract. 5. Obtain effective bidder proposals. 6. Analyze bidder proposals. 7. Select the best bidder. 8. Successfully negotiate with the bidder. 9. Monitor and control sellers 10. Keep your sellers motivated. 11. Closeout the subcontract.
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Copyright Notice Copyright © 1998-2005 Michael D. Taylor (831-335-1902). All Rights Reserved. No part of this work covered by the copyright hereon may be reproduced or used in any form or by any means -- graphic, electronic, or mechanical, including photocopying, recording, taping, or information storage and retrieval system -- without written permission of Michael D. Taylor Liability Notice This manual is presented as is, without warranty of any kind, either express or implied, respecting the contents of this manual, including but not limited to implied warranties for the manual’s quality, performance, or fitness for any particular purpose. Michael D. Taylor shall not be liable to the reader of this manual or any other person or entity with respect to liability, loss, or damage caused by, or alleged to have been caused directly or indirectly by this manual.
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Chapter 1 Introduction
COMPANIES WORKING ALONE WILL SOON BE OUTNUMBERED
BY OUTSOURCING YOU WILL... Improve time-to-market Add specialized skills quickly Reduce project costs Minimize project risks Have a quick way out Expand your market opportunity OUTSOURCING REQUIRES... A knowledge of how to find and select the best bidder Exceptional planning skills Skills in organizing subcontract teams An understanding of contract types Negotiating skills An ability to monitor and control a seller WHY THE NEED FOR OUTSOURCING IS GROWING Organizational flexibility and adaptability It adds specialized resources quickly It minimizes in-house “learning curve” effects It allows for an expedient way out It enables companies to increase their market field
It is often more cost effective BEFORE OUTSOURCING ASK THE FOLLOWING QUESTIONS What major benefit will outsourcing bring? Will it dilute corporate strengths? Is it cost effective? Needed skills? Will it lower project risks? Can we build it?
OUTSOURCING PRESENTS UNIQUE CHALLENGES, SUCH AS: Managing through a written contract Being susceptible to unauthorized direction Extensive travel Diverse company and geographical cultures Legal and administrative aspects Regulations and laws Proper handling of proprietary information
SIX REASONS WHY OUTSOURCING CAN FAIL 1. Unclear outsourcing goals. 2. No procurement management plan. 3. No seller control criteria. 4. Not recognizing “low-ball” bids.1 5. Poorly written contracts. 6. Not using the team approach.
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Lowball bids are those where the bidder intentionally bids below the cost of a project in order to get selected. Once selected, the bidder attempts to recover costs through contract changes.
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Make/Buy Project Decision Conception
Team SCMT Organization Organization
Outsource Subcontract Planning Planning
Developing the Developing the RFP RFP
Bidder Subcontractor Selection Selection
Monitoring Monitoring & Directing & Directing
Measuring Measuring Performance Performance
Contract Subcontract Closure Completion
Controlling Controlling
Figure 1 - The Lifecycle of a Subcontract
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Chapter 2 The Team Approach
THE PROCUREMENT MANAGEMENT TEAM (PMT)... Defines subcontract scope Develops the Request for Proposals (RFP) Selects the best bidder Negotiates the best price Becomes the project point of contact for the seller Monitors and tracks the seller’s progress Reviews/approves contract changes Integrates the seller’s activities with the buyer’s project activities WHY THE TEAM APPROACH WORKS BEST The seller does not become confused from “multiple voices” All necessary disciplines are represented Resolution of seller problems is more efficient as a team Control of seller performance is more efficient Problems are detected earlier
TEAMS MAY BE SMALL... Technical Lead Administrator Technical Specialist, as needed …OR LARGE
SUBCONTRACT MANAGER
Subcontract Technical Leader
Subcontract Administrator
Subcontract Coordinator
On-Site Representative
Technical Specialist Technical Specialist Technical Specialist
Data Manager
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SUBCONTRACT TEAM COMPOSITION
Team Member
PMT Manager (Mgr.) Administrator (Adm.) Technical Lead (TL) Coordinator (CO.) On-Site Rep. (Rep) Specialists (Spec) Data Manager (DM) Small (<$1M) Moderate ($1M - $5M) Large (>$5M)
Not Required
Partial Support
Full Time
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RESPONSIBILITY ALLOCATION MATRIX EXAMPLE
Mgr Maintain Overall Subcontract Responsibility Maintain Overall Technical Responsibility Provide Company Legal Authority Contractual Interface Establish Subcontract Milestones Establish Cost/Schedule Control Criteria Provide liaison support Monitor & Track Subcontract Documents Develop Subcontract Specifications Develop the Subcontract Statement of Work Identify Subcontract Terms & Conditions Identify & Minimize Subcontract Risks Monitor & Track Seller Activities Conduct Regular Seller Status Calls Conduct Seller Status Reviews Develop the Procurement Plan Ensure the PMT follows the Procurement Plan Recognize and Reward Exceptional Work Determine the Best Contract Type Establish Appropriate Subcontract Incentives Identify Needed Subcontract Documents Monitor & Track Subcontract Schedules Conduct Subcontract Technical Reviews Establish Subcontract Goals Review and Approve Specifications Review and Approve Drawings Review and Approve Subcontract Changes P= Primary Responsibility S= Supportive P S P P P P P P P P P P P P S P P P P S S S S S P P S S S S S S S P P S S S S S S S S S S S S S S S S P S P P S S S S S P S P TL S P P P S S S S P S S S S S S S S S S S S S S S S S S S S S S S S S S S S S S S S S P S S S S P S S S S S ADM CO Spec REP. DM
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WHAT THE PMT MANAGER DOES... Has overall technical, cost, and schedule responsibility Organizes and directs the subcontract team Single point-of-contact Reports to the project manager Reviews and approves all subcontract changes WHAT THE PMT TECHNICAL LEADER DOES... Has overall technical responsibility Defines subcontract product requirements Approves all seller technical documents and drawings Acts as the subcontract manager in small subcontracts Approves subcontract product design WHAT THE PMT ADMINISTRATOR DOES... Provides corporate legal authority Maintains contractual responsibility Handles all written communications Issues approved changes in writing Manages contract incentives Shares negotiation authority WHAT THE PMT COORDINATOR DOES... Examines seller schedules for realism Tracks seller progress Project/subcontract schedule integration Coordinates Subcontract team activities Looks proactively for potential schedule problems WHAT AN ON-SITE REPRESENTATIVE DOES... Resides at seller’s facility Monitors seller’s activities Provides liaison support 12
Gives insights on seller status Reports to the Subcontract Team Manager Provides permanent or itinerant support WHAT THE SUBCONTRACT DATA MANAGER DOES... Document coordination Document reviews and approvals Document status records SUBCONTRACT DATA MANAGEMENT
Subcontractor Customer-Subcontractor Interface Subcontractor
Subcontract Administrator
Subcontract Administrator
Data Manager
Logs & Files
SCMT
Data Manager
Logs & Files
Reference Documents
DATA MANAGEMENT CENTER
Figure 2 - Subcontract Data Management Flow POOR PMT MEMBERS ARE... Excessively bossy Excessively passive Without proven team skills Overly cynical about loss of control In a conflict-of-interest situation
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THE BEST PMT MEMBERS HAVE A... Broad technical background Willingness to assist sellers when needed Positive attitude about the remoteness of the work location Balanced level of “ownership” Background of working with the seller company
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Chapter 3 Planning The Subcontract
KEY PLANNING DECISIONS What is the best team structure and function for this subcontract? What is the overall scope of the subcontract? When must the subcontract product be delivered to meet our project needs? Should the subcontract be given to one company or competed? KEY PLANNING DECISIONS Can I anticipate and abate any risk areas before selecting a bidder? To what degree do I want to monitor and track the seller’s progress? Should I use a fixed-price or cost reimbursable contract? Do I need any information from potential bidders before issuing a request-for-proposal? Can incentives be used effectively for this subcontract? What is the best payment method for this subcontract? What control criteria do I want to imbed in this subcontract? SUBCONTRACT GOAL SETTING Smart Measurable Achievable Relevant Time-lined
THE SUBCONTRACT WBS Develop the subcontract to WBS level 2 Permit the seller to decompose the WBS to lower levels Review and approve the SWBS
WBS Level I
WBS Level II
WBS Level II
WBS Level II
PC METHOD OF RISK IDENTIFICATION
P R O B A B IL IT Y O F O C C U R R IN G (P )
CONSEQUENCES IF IT O C C U R S (C )
P O IN T V A L U E S
Low M in o r M o d e ra te S ig n ific a n t H ig h
Low M in o r M o d e ra te S ig n ific a n t H ig h
0 .1 to 0 .2 0 .3 to 0 .4 0 .5 to 0 .6 0 .7 to 0 .8 0 .9 to 1 .0
Risk Factor (RF) =(P+C) - (PxC)
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THE SUBCONTRACT MILESTONE SCHEDULE Major milestones only Include MARGIN Include major product deliveries Let seller expand to include details Require seller to identify critical path on all schedules
J
START PRELIM DESIGN FINAL DESIGN BUILD & TEST FINISH
F M A
M
J J
A
S
O N
D
J
PDR FDR FQR
SOLE SOURCE OUTSOURCING Advantages − it’s quick − bidder can support your proposal − minimizes your need to use your company’s bid & proposal money Disadvantages − more difficult to negotiate − no backup bidders
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COMPETITIVE OUTSOURCING Advantages − you have a stronger negotiating position − bidders are more motivated − increases the probability of getting a better product Disadvantages − time consuming acquisition − potential for “saber-rattling” − encourages low bidding SOURCES FOR FINDING POTENTIAL BIDDERS Approved seller/supplier list Dunn & Bradstreet (SIC Search) Hoover Business Database Thomas Register Library searches, trade journals Internet Similar in-house projects
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GETTING COST ESTIMATES RFI Request for Information Type of Cost Estimate OOM Estimate RFQ Request for Quote Budgetary Estimate Preliminary RFP Request for Proposal Detailed Estimate Detailed
Information Provided Purpose
Conceptual
• Make-or-buy decisions • Initial long list development
• Make-or-buy decisions • Down selection to short list • Long-range planning
• Short list • Bidder selection
CHOOSING A BIDDER SELECTION TOOL It must minimize personal biases It must be capable of standing up to potential “saber rattling” It must be easy to use It must be based on a predefined set of scoring criteria It must be weighted to match subcontract goals DECIDING HOW TO MONITOR & CONTROL What reports are needed? How much reporting detail do I need? How often should we conduct seller status meetings? How often should we hold status calls with the seller? How will problems be identified and corrected?
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DECIDING HOW TO MANAGE SUBCONTRACT CHANGES How should changes be identified? How review and approve changes? How determine if change is out-of-scope? Which changes can seller make with no approval? Who will track the status of each change? DECIDING HOW TO MEASURE PERFORMANCE Metrics for measuring performance? Administrative load? Variance thresholds? Seller response to out-of-variance conditions? FIFTEEN THINGS A PMT PLAN SHOULD DO 1. It should clearly state the subcontract goal(s) and overall scope. 2. It should provide a general description of the product or service. 3. It should describe the role of each subcontract team member. 4. It should identify major subcontract risk areas and provide preliminary plans. 5. It should reveal the subcontract start and completion dates, along with any critical milestones. 6. It should describe the method(s) to be used for selecting the best seller. 7. It should identify the methods to be taken by the team for monitoring and controlling the seller. 8. It should describe how the seller’s performance will be measured. 9. It should identify any incentives to be used. 10. It should disclose payment plans. 11. It should describe which type of contract is going to be used and why. 12. It should describe how subcontract changes will be reviewed and approved.
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13. It should list potential bidders and why they have been put on the bidders list. 14. It should provide the rationale for either competing or sole-sourcing the subcontract. 15. It should be a mechanism for obtaining the project manager’s approval before making commitments.
PROCUREMENT MANAGEMENT PLAN APPROVAL Have the Project Manager review and approve the PMT Plan
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Chapter 4 Using The Right Type Of Contract
FOUR KEY FACTS ABOUT CONTRACTS 1. Some popular contracts can get you in trouble. 2. Selecting the right contract depends on the degree of risk involved. 3. The contract type determines the level of seller reporting. 4. Cost uncertainties will greatly influence the type of contract to use.
CONTRACT FAMILIES
Fixed Price Contracts Cost Reimbursable Contracts Other Contracts
Firm Fixed Price (FFP) Fixed Price Incentive (FPI)
Cost Plus Incentive Fee (CPIF) Cost Plus Fixed Fee (CPFF) Cost Plus Percentage Fee (CPPF) Cost Plus Award Fee (CPAF)
Time & Material
Letter Contracts
Figure 3 - Contract Families FIXED-PRICE CONTRACT FAMILY Funding beyond a firm fixed price is legally impossible The contractor is obligated to deliver regardless of the actual cost Technical risk is minimal
FIRM FIXED-PRICE (FFP) CONTRACTS
Profit ($)
Target Profit
Also called “Lump Sum” Contracts
Contract Price ($)
Effective Profit = Actual Profit/Actual Cost
Figure 4 - FFP Contract Cost vs. Profit Relationship
Table 1- FFP Contract Characteristics
Project Risks Cost Estimating Uncertainty Potential risks to customer Potential risks to contractor Motivators Cost reporting Schedule reporting Low (RF<0.3) < 5% Low, if penalty clauses are included and changes are minimized Low, if price was based on accurate cost estimating Increased profit if cost is below FFP Usually not required Varies; Master Schedule only
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QUANTIFYING PROJECT RISKS
Probability of Failure (P f) Low risks Minor Risks Moderate Risks Significant Risks High Risks Consequences of Failure (C f) Low risks Minor Risks Moderate Risks Significant Risks High Risks Point Values 0.1 to 0.2 0.3 to 0.4 0.5 to 0.6 0.7 to 0.8 0.9 to 1.0
Risk Factor = (Pf + Cf) - (Pf x Cf) Risk Factor = (0.2 + 0.5) - (0.2 x 0.5) = 0.6
FIXED-PRICE INCENTIVE (FPI) CONTRACTS Profit
Cost Risk Target Point of Total Profit = ceiling cost Ceiling Targe t Cost
Figure 5- FPI Contract Cost vs. Profit Relationship
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Table 2 - FPI Contract Characteristics
Project Risks Cost Estimating Accuracy Potential risks to customer Potential risks to contractor Motivators Cost reporting Schedule reporting Low to moderate (RF = 0.3 to 0.5) 5% to 10% Low, if penalty clauses are included and changes are minimal Low, if risk areas are defined Allows contractor to be paid for cost overruns up to PTA Top level planned vs. actual reports Master Schedule
COST-RISK SHARING RATIOS A 70/30 SR means that for every $1 the contractor saves in actual cost under the target cost, the contractor’s target fee will be increased by $0.30 For every $1 in actual cost that the contractor exceeds the target cost, the contractor’s fee will be decreased by $0.30. SHARE RATIO EXAMPLE Profit Profit = (Target cost – Actual cost) x Sub share + Share ratio $11,000 Target Case1 Targe t Profit =ceiling priceGiven: Target cost = $100,000 Target profit = $7,000 Share ratio = 80/20 Ceiling price = $110,000 PTA =Ceiling Price – Customer = $103,750 Case 2 Ceiling price ($110 000) $108,000 +Target
$2,000
Cost
$80,000
(not to scale)
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COST REIMBURSABLE CONTRACTS All allowable costs are reimbursed If funds run out the contractor must stop work Substantial uncertainties in: • requirements • • • work scope end-product performance schedule outcomes
COST PLUS INCENTIVE FEE (CPIF) CONTRACTS
Maximum Fee Share Ratio (e.g. 70/30) Fee($)
Target Fee Target Cost
Minimum Fee Costs ($)
RIE Range of Incentive Effectiveness
Figure 6- CPIF Contract Cost vs. Fee Relationship
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Table 3 - CPIF Contract Characteristics
Project Risks Cost Estimating Uncertainty Potential risks to customer Potential risks to contractor Motivators Cost reporting Schedule reporting Moderate to high (RF=0.4 to 0.6) 10% to 25% Moderate if customer requires extensive cost control requirements Moderate if contractor goes above target cost Increased final fee if project is completed below target cost Extensive planned vs. actual reports Extensive
COST PLUS FIXED FEE (CPFF) CONTRACTS
Fee ($)
Fixed Fee Estimated Cost Range >25% Target Cost
Figure 7 -CPFF Contract Cost vs. Fee Relationship
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COST PLUS PERCENTAGE FEE (CPPF) CONTRACTS
Fixed % of cost Fee ($) Fee Ceiling Target Fee Fee Floor Estimated Cost Uncertainty Range Target Cost ($)
Figure 8 - CPPF Contract Cost vs. Fee Relationship
COST PLUS AWARD FEE (CPAF) CONTRACT
Total Possible Award Fee Fee ($)
Award Fee Base Fee
Time
Figure 9 - CPAF Contract Cost vs. Fee Relationship
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TIME AND MATERIAL CONTRACTS All labor and material costs Similar to CPPF with an NTE limit Generally used in low cost-risk situations Cost-to-estimate costs > than cost to do job Usually poorly monitored and managed Susceptible to “surprises” LETTER CONTRACTS Authorization to begin work Preliminary contract Legally binding but viewed as temporary Valid for a specified number of days or when a level of authorized funding is reached − e. g. valid for 45 days or 25% of approved funding Constraints should expedite definitization CONTRACT SELECTION GUIDELINES CONTRACT TYPE FFP FPI CPIF CPFF CPPF CPAF COST UNCERT. <5% <5% 5% - 10% 10% - 25% >25% >25% RISK FACTOR <0.3 0.3 - 0.5 0.3 - 0.5 0.4 - 0.6 >0.5 >0.5 ADMIN LOAD Low Low Moderate Moderate High High
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SUMMARY Share ratios incentivize cost control Incentives must be measurable and achievable Cost estimating uncertainties greatly influence contract type Use fixed-price contracts when RF < 0.5 Use cost-plus contracts when RF >0.5
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Chapter 5 Getting Bidder Proposals
TYPES OF PROPOSALS Letter proposals • brief enough to be put in a single letter • product or service is familiar Preliminary proposals • large enough to be put into a bound volume • • usually contains “budgetary” estimates conceptual in content
Detailed proposals • detailed bound proposals • • detailed cost estimates organization is predefined
Presentations • oral qualification proposals • • used for preliminary screening & selecting can be from 1 hour to a full day
A REQUEST FOR PROPOSAL (RFP) SHOULD... Describe all work to be performed (SOW) Describe all product or service requirements (SOR/Specifications) Disclose product acceptance criteria Identify subcontract period of performance Identify any critical milestones Define the proposal structure and content List all documents to be prepared and submitted by the seller Disclose any interface requirements Describe any required internal control methods: • cost control 32
• • •
schedule control change control key personnel control
List all subcontract terms and conditions Indicate the contract type and incentives Reveal how payments will be made Ask for a statement of commitment from upper management Provide a list of deliverables Include a Subcontract WBS Give a proposal due date
THE STATEMENT OF WORK Defines scope of work Organized around the SWBS “Points to” specifications Definition of terminology (e.g. “cable” means 50-ohm coaxial) Contains product/service acceptance criteria
COMMON STATEMENT OF WORK MISTAKES Using ambiguous language (e.g. “approximately”) Using terms which are esoteric Omitting work Defining work in a manner which makes it difficult to know when it is completed Poor structure or organization Inserting technical requirements
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WHAT’S WRONG WITH THIS SOW? “The seller shall design the product in such a way that it is clear and understandable to non-technical personnel. The design approach shall be clearly disclosed and documented. The delivered product shall be capable of future expansion and shall be user friendly. The final product shall be of high quality.” TYPICAL SELLER DOCUMENTS
Status Reports Problem Reports Corrective Action Reports User Manuals Drawings Contract Change Requests Design Plans Test Plans Test Procedures Prototype Test Report Product Test Data Red Flag Notices Maintenance Manuals Design Disclosure Data
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SUBCONTRACT DOCUMENT REQUIREMENTS DESCRIPTIONS
SUBCONTRACT STATUS REPORT Description/Purpose The purpose of the SSR is to report on subcontract progress, problem areas, and proposed resolutions. Instructions The SSR shall include, but not be limited to, the following topics: Major Milestones Accomplished Top Concerns/Problems Risk Abatements Open Action Items Documents Submitted for Approval Documents Submitted Previously - Waiting for Approval The SSR may be submitted in the subcontractor’s format provided it contains the above elements. Number: MGT-2 Approvals:
Figure 10 - Data Item Description STATEMENT OF REQUIREMENTS (SOR) & SPECIFICATIONS Identifies product requirements Establishes quantitative acceptance criteria Ambiguous requirements can create serious cost/schedule vulnerabilities The SOR/Spec should always state how a requirement is to be verified by the seller TEN COMMON SPECIFICATION MISTAKES 1. 2. 3. 4. 5. 6. Using ambiguous language (e.g. “about”). Making them too wordy. Making them open to wide interpretation. Using esoteric jargon. Using language unique to one bidder. Daisy chaining to other specs. 35
7. 8. 9.
Including unachievable requirements. Neglecting to include “design margin.” Including restrictive design information.
10. Neglecting to specify how a requirement is to be verified. INCLUDE A REQUIREMENTS VERIFICATION TABLE
TEST INSPECT DEMONSTRATE ANALYSIS
Requirement Requirement Requirement Requirement Requirement Requirement Requirement Requirement Requirement Requirement
X X X X X X X X X X X
DELIVERABLE ITEMS LIST
Item 1 2 3 4 5 6 7 Description Drawing No. Specification Make/Buy Design Status Type Quantity D elivery 9/ 15/ 96 Message Receiver P12501-02 77721A Make New Prototype 2 3/ 22/ 97 Message Receiver Q12501-02 77721A Make New Qual. 2 11/ 15/ 97 Message Receiver F12501-02 77721A Make New Final 17 3/ 22/ 97 Demux Unit Q12502-01 77723B Buy Exist-modified Qual 2 3/ 22/ 97 Demux Unit Q12502-01 77723B Buy Exist-modified Qual 2 9/ 15/ 96 Demux Driver P12503-02 77724A Make New Prototype 2 3/ 22/ 97 Qual. 2 Demux Driver Q12503-02 77724A Make New
CONTRACT TERMS AND CONDITIONS Most companies have a “boilerplate” Modified to specific needs Usually negotiated with bidder Requires corporate approval if changed Protects you from potential liabilities
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TYPICAL TERMS AND CONDITIONS INCLUDE: Period of performance Contract type Incentives Conditions for payment Latent defects Breakages Proprietary data Liability limitations Seller key personnel Non-disclosure statement Contract authority hierarchy Warranties and guarantees Patent indemnifications Lower-tier supplier liens (“Mechanics liens”) PROPOSAL PREPARATION INSTRUCTIONS
Identifies the type of proposal needed Proposal contents are structured around the scoring criteria Dictates proposal outlines Limits proposal length States how many copies are needed Identifies when the proposal is due
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Chapter 6 Analyzing Bidder Proposals
THE COMPETITIVE PROCESS
Proposal Proposal Evaluation Evaluation Teams Teams Develop Develop Scoring Scoring Criteria Criteria Develop and Develop and Issue Issue Subcontract Subcontract RFPs RFPs Develop Develop “Should-Cost “Should-Cost Estimate” Estimate” Receive & Review Receive & Review Subcontractor Subcontractor Proposals Proposals
Fact-find Fact-find Proposals Proposals
Subs Subs Prepare Prepare Proposals Proposals
Score Score Subcontractors Subcontractors
Select Select Subcontractor Subcontractor
USING A “SHOULD-COST” Generated by your subcontract team Provides an accurate cost reference point Reveals bidder misunderstandings Used to identify “ buy-ins” Reveals hidden assumptions Ensures familiarity with the RFP
ANALYZING BIDDER PROPOSALS Compare proposals to your “should cost” Normalize bidder costs Look for over-stated labor categories Evaluate the Bill-of-Material (BOM)
Examine proposed fee/profit for reasonability Look for exceptions Look for hidden assumptions ANALYZING TECHNICAL PROPOSALS Look for evidence of clear understanding Clarify any bidder esoteric jargon or acronyms Examine design heritage data Evaluate design realism and reliability Evaluate manufacturing and producibility Interview key technical people Evaluate identified risk abatements ANALYZING MANAGEMENT PROPOSALS Upper management’s commitment Organizational lines of authority PM’s background & experience Cost/schedule control methods Change control methods Evaluate schedule for realism ANALYZING PROPOSED SCHEDULES Disclosure of the critical path Project slack Measurable milestones Developed from a PERT Network? Were lead-lag times used? Probability of being “bumped” ANALYZING PROPOSED COSTS Was the estimate based on a guess? Were the calculations used to estimate costs included? Proposed labor categories?
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Was estimate based on similar tasks from another project? Are lower-tier supplier estimates included? Did the bidder use their correct burdening rates? TYPICAL PROBLEMS WITH BIDDER COST DATA No basis-of-estimate data provided Failure to disclose costing assumptions Using a labor category which is too high Double dipping Adding in extra hours to compensate for unknowns (fear factor) 8 STEPS TO EFFECTIVE FACT-FINDING 1. Conduct fact-finding at bidder’s facilities. 2. Submit fact-finding questions in writing before visiting bidders. 3. Document each fact-finding question and answer in writing. 4. View bidder fact-finding responses just as important as their proposal. 5. Distribute all bidder responses to each proposal evaluation team member. 6. Use bidder fact-finding responses to score bidders. 7. Do not use fact-finding as a negotiation forum. 8. Use fact-finding responses during negotiations
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Chapter 7 Bidder Selection Techniques
SUBCONTRACT SELECTION FACTORS Their prior experience with the product or service Their corporate track record Previous success with your organization Location and size Corporate financial state Organizational stability How your subcontract fits in CONTRACT VALUE/COMPANY SALES RATIO
Risk
0
0.1
0.9
1.0
SIX “MUSTS” FOR A BIDDER SELECTION METHOD 1. It must protect against unfair, personal prejudice 2. It must ensure fairness and honesty 3. It must be defendable 4. It must be measurable 5. It must be easy to use 6. It must be based on the subcontract goal(s) DEVELOPING SCORING CRITERIA
SUBCONTRACT GOALS SUBCONTRACT GOALS
DECISION STATEMENT DECISION STATEMENT
Technical Technical Weight Weight Schedule Schedule Weight Weight Cost Cost Weight Weight
SCORING CRITERIA SCORING CRITERIA
TYPICAL BIDDER SELECTION TECHNIQUES Decision Trees Sealed-Bid Approach Analytic Hierarchy Process Delphi Consensus Method Kepner-Tregoe Decision Making
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ANALYTIC HIERARCHY PROCESS
DECISION STATEMENT
TECHNICAL CRITERIA
SCHEDULE CRITERIA
COST CRITERIA
Multiple Levels
Bidder A Bidder B Bidder C
Bidder A Bidder B Bidder C
Bidder A Bidder B Bidder C
Pair-wise comparisons
KEPNER-TREGOE DECISION MAKING MUSTS Must meet specs WANTS Design Design Margins Reliability Producibility Testing Approach Total Go/No Go WEIGHT 30 5 20 25 20 100 BIDDER A Go BIDDER B Go
Score (1 - 5) 5 2 3 3 3 Subtotal
Weighted Score 150 10 60 75 60 355
Score (1 - 5) 4 5 2 3 3 Subtotal
Weighted Score 120 25 40 75 60 320
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DELPHI METHOD
Funneling effect Opinion Range Final consensus range
1
2 3 Discussion Rounds
KTA SCORING RANGE Scoring range of zero to five has been found to be the best range − 5 = Exceptional − 4 = Exceeds Requirements − 3 = Meets Requirements − 2 = Fails to Meet Requirements − 1 = Unacceptable − 0 = No Response ABSOLUTE VS. RELATIVE SCORING SCORE 5 4 3 2 1 ABSOLUTE Less than 2 lbs 2.0 to 4.0 lbs 4.1 to 7.0 lbs 7.1 to 12 lbs More than 12 lbs Bidder with highest weight. RELATIVE Bidder with lowest weight.
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Chapter 8 Monitoring & Controlling Sellers
CONTROL THROUGH REGULAR STATUS CALLS Accomplishments Concerns/problem areas Project/product status Headcount status Schedule/cost status Open action items review Fax or e-mail report within 24 hours Control Through Seller Reporting Status Reports Telephone Contact Report Procurements Report Meeting Summary Report Problem Report “Red Flag” Report (Problems) Problem = any variance from the baseline which exceeds a given threshold Stipulate problem reporting level (WBS) Keeps problem resolution responsibility on seller
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PROBLEM REPORT EXAMPLE
SUBCONTRACTOR PROBLEM REPORT
Problem Description: Cause: Impact Corrective Actions
Subcontract Name: Subcontract No.
Originator:
Date:
CONTROL THROUGH SELLER MEETINGS They must be regular They must be in the contract Too many can interfere with the seller’s efforts Too few can fail to disclose problem areas Periodically evaluating meetings can be very effective
HOLDING EFFECTIVE SELLER MEETINGS State purpose and desired outcome at the beginning Minimize participants Remind attendees just before meeting Prescribe agenda in the SOW
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Visuals can reduce meeting time by 28% Capture action items Summarize and record conclusions Have seller issue a meeting summary SUBCONTRACT REQUIREMENTS REVIEW Subcontract kick-off meeting Presented by the seller Requirements optimized Feedback session Change control process reviewed Risk identification & abatement PRELIMINARY DESIGN REVIEW Review the top level design concepts for each major subcontract element Preliminary specifications Risk abatement plans Test plans reviewed Interfaces definitions FINAL DESIGN REVIEW Review all final designs and specifications All subsequent changes require approval Completion authorizes: • parts procurements • • software coding manufacturing
TECHNICAL INTERCHANGE MEETINGS Less formal than design reviews Technical issues and resolution review Open technical action items
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Pending technical changes TEST READINESS REVIEW Evaluate seller’s readiness for formal testing Precede with a “dry-run” test Evaluate results of preliminary test data Confirm acceptance of test procedures Verify test equipment is calibrated and ready for use CONTROL THROUGH AUDITS
Configuration control Safety practices audit Property accountability Quality control process audit Physical configuration audits Functional configuration audits
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WATCH OUT FOR THIS!
Contract Scope
Unauthorized Personnel
Subcontractor
FOUR BASIC CONTROL SYSTEM ELEMENTS 1. An accurate contract baseline. 2. A means of measuring actual progress. 3. Variance identification between 1 & 2. 4. Corrective action.
USING THE RIGHT TYPE OF CONTRACT
VARIANCE THRESHOLDS
Variance Threshold Performance Units Variance Actuals
lin ase B e
Time
Figure 11 - Time vs. Performance Tracking
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USING THE RIGHT TYPE OF CONTRACT SUBCONTRACT CHANGE CONTROL
CONFIGURATION CONFIGURATION MANAGEMENT MANAGEMENT
CONFIGURATION CONFIGURATION IDENTIFICATION IDENTIFICATION CONFIGURATION CONFIGURATION CONTROL CONTROL CONFIGURATION CONFIGURATION STATUS STATUS ACCOUNTING ACCOUNTING
CHANGE CONTROL BOARD Nature of the change? Cost of the change? Delivery date impacted? Is it fee bearing? Necessary? Impact to other activities? Reduce the “quality gap”? CONFIGURATION STATUS ACCOUNTING Database for all changes Description of change Why it was approved Who approved it In-scope or out-of-scope Scope document updates Fee recovery status
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Chapter 9 Keeping Sellers Motivated
The difference between mediocre and superior subcontract performance lies in the use of prudent motivating incentives!
FEW WORKERS ARE REALLY MOTIVATED Most workers feel they are not rewarded for improving performance Many feel that management treats them disrespectfully Only 5% of base salaries separate average from outstanding employees 80% of American managers do not receive rewards for increasing productivity WHY USE INCENTIVES? They create positive motivators They create definable rewards Negative incentives protect the customer They have high leverage
INCENTIVE LEVERAGE
PE
S
R
M OR F
C AN
E
INC
E
E TIV N
Figure 12 - Incentive Leverage • arket reputation
SIX WAYS TO DE-MOTIVATE A SELLER 1. Micro-manage them. 2. Give them an ambiguous contract. 3. Issue unclear objectives and product requirements. 4. Place a low value on the working relationship. 5. Use incentives that are out of their control. 6. Rely on hierarchical referral to correct problems. POTENTIAL AREAS TO INCENTIVIZE Project Cost Delivery dates Completion of key milestones Cost control Schedule control Personnel --initial ramp-up Responsiveness Documentation Product quality Design margins 55
SUBCONTRACT COMPLETION INCENTIVE
(+) Fee $ (-)
Early completion Late completion
Completion Date
Time
PERFORMANCE INCENTIVES
($) (+) Fee $ (-) Below spec
Better than spec
Time Specification
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Chapter 10 Completing The Subcontract
PHYSICAL CONFIGURATION AUDIT Confirms physical dimensions Verifies physical quantities Verifies product is per drawings Validates and verifies manuals Confirms that product is physically acceptable FUNCTIONAL CONFIGURATION AUDIT Verifies all test data has been taken Examines test data against specifications Verifies all discrepancies have been closed Confirms that product is technically acceptable REASONS FOR STOPPING A SUBCONTRACT Final achievement of the objectives Poor initial planning or market prognosis A better alternative has been found A change in company interest and strategy Allocated time having been exceeded Budgeted costs having been exceeded Key personnel having left the seller’s organization Personal whims of management Problems and risks become untenable STOP WORK DIRECTION Purpose: to reduce costs while a decision to terminate or change scope is made Seller is directed to stop work
Partial or specified period (time) Partial or complete (work) Formal, written direction and response required TYPES OF TERMINATIONS Default • seller fails to perform in accordance with the contract • reasonable period to correct a problem is unfruitful Breach of Contract • used when a “default clause” is not in contract • may be used under Uniform Commercial Code Convenience • used when both parties agree to terminate • • • cancellation of prime contracts radical change in requirements usually allows repricing or recompetition
Work Completion • all work has been completed and accepted
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SETTLEMENT ALTERNATIVES Definitized Settlement • defined and negotiated into subcontract Settlement by Negotiation • labor • • • • continued costs lower-tier subcontracts expenses fee/profit
LESSONS LEARNED Overall performance rating Quality of product Strengths/weaknesses Negotiation results
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Note
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Appendix A - Case Studies
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CASE STUDY NO 1: TECHNO-MEDIA, INC. “PROJECT 2001”
You’ve just been selected as the Subcontract Manager for Techno-Media’s Project 2001, which will involve three major subcontracts. These subcontracts are to be completed in two years. The scope of work for each subcontract is defined as follows: SCOPE STATEMENT SUMMARY COMPUTER SOFTWARE DEVELOPMENT SUBCONTRACT • Develop and test software needed to meet TMI's Project 2001 requirements. • This software must be compatible with a modified commercial-type computer system to be provided by the Computer Hardware Development Seller • Provide software user manuals • Debug and test the software • Support the integrated software/hardware testing performed by TMI • Estimated Subcontract value is $2.5M Computer Hardware Development Subcontract • Provide 25 commercial-type computer systems, modified to meet TMI’s Project 2001 requirements • Set up and test these systems in a staging area provided by the Facilities & Staging Seller • Provide hardware user manuals • Support the integrated software/hardware testing performed by TMI • Estimated Subcontract value is $3.5M Facilities & Staging Subcontract • Locate and setup a staging facility, near TMI, for the 25 computer systems • Modify all electrical, air conditioning, lighting, etc., needed for the staging and testing of these 25 systems • Provide staging area maintenance and upkeep for two years • Estimated Subcontract value is $4.5M
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ACTIONS Fill out the RAM on the following page showing how you would organize the Procurement Management Team(s), along with corresponding responsibilities for each team member.
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RESPONSIBILITY ALLOCATION MATRIX Members Responsibiliti
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B. Draw an organization structure diagram of your proposed Subcontract Team.
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CASE STUDY NO 2: SELECTING THE BEST BIDDER
Using a blank KTA form, determine which of the following three potential bidders is best. Select your own “weights.” Your “should-cost” estimate for this subcontract is $1 Million. “Musts” • The bidders must meet your specification requirements
“Wants” • • • • • • Lowest price Best Schedule Favorable Contract Value/Company Sales Ratio Track record with this product Basis-of-estimate data Design Approach
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BIDDER A “Musts”
•
• • • •
“Wants”
• • • • • •
Takes exception with two of your specifications Proposed Price: $1.0 Million Proposed Schedule: 9.5 Months Contract Value/Company Sales Ratio: 0.50 Track record with this product: Excellent Basis-of-estimate data: Excellent Design Approach: Good
Contract Value/Company Sales Ratio: 0.85 Track record with this product: Favorable Basis-of-estimate data: Not clear in several cases Design Approach: Good
BIDDER C “Musts”
•
“Wants”
• • • • • •
Takes no exceptions to your specifications Proposed Price: $900K Proposed Schedule: 11 Months Contract Value/Company Sales Ratio: 0.15 Track record with this product: Modest Basis-of-estimate data: Favorable Design Approach: Excellent
BIDDER B “Musts”
•
“Wants”
• •
Takes no exceptions to your specifications Proposed Price: $1.1 Million Proposed Schedule: 9 Months
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INDEX
CASE STUDY NO 3: DWYER & COMPANY2
The office needed a facelift and the office manager, Joanna, had asked several builders to give her a quotation. She wanted to use Dwyer & Co., the company that looked after the normal maintenance, but she always made a point of shopping around among suppliers. When the estimates arrived, the maintenance company’s was for $10,000, while the others were between $7,900 and $9,000. However, she arranged a meeting with Dwyer & Co. to discuss the matter. She explained she would like to appoint them but had anticipated a cost of not more than $8,000, and did have other estimates in line with that. The contract manager looked a bit shocked and responded that the company could not possibly do the job for that price. Joanna had thought she was pushing her luck a bit, but responded: “Well, if you can’t do it for $8,000, what could you do it for?” The contracts manager spent some time prodding his calculator and replied that he could probably manage $9,300 if the job were guaranteed for that month. Joanna tried again to reduce the price. She said that she could award them the contract for work to start immediately but, given that other quotations had been in line with her expected price level, could he not bring his price down to a similar level? The contracts manager replied that their materials and workmanship were of high quality and those small repairs, which came to light during the work, would be included in the price. When Joanna still looked worried and said nothing, he finally said that for an existing client, he supposed he could really trim the price say to $9,000. Joanna smiled and said that she really would like to use Dwyer’s, but it was still considerably more than she had expected to pay. She would have to talk to the management committee, but asked that he also try to think of ways to bring the price down.
2
HRD Press, “One Day Workshop on Negotiation,” Amherst, MA 1991. ISBN 0-87425-217-2. Used by permission for educational events.
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INDEX The contracts manager agreed and added: “Give me a ring after you’ve talked to them; they know our work is good, of course, and I expect they’d prefer to be dealing with one good supplier to look after the maintenance aspects. People usually find it’s like that. Maybe we can space out the payments, or something.” Joanna telephoned Dwyer & Co. the next day. She said that she had been authorized to pay half the fee in advance, and the balance within 30 days, if they could do the job for $8,500. The contracts manager said he had had a really good look at his figures and he could give a little, but $8,500 just wouldn’t do. Joanna thought for a moment, and then said: “Well, I could give an immediate go ahead, of course. What shall we do?” The Dwyer’s manager also paused for thought, then he said that if they used good, but not the very best quality, paint he would be willing to split the difference and make it $8,750. Joanna responded that she thought that was a good idea—she knew she could still rely on the quality of their materials. She appreciated the effort he had gone to and she thought they could probably agree to the contract and go ahead. She had also been trying to think through a few options, however. What she had been thinking was that perhaps Dwyer’s would also include in the work the painting of the front door and porch—“It’s only a little porch, as you know.” After a brief hesitation, and a wry smile, the manager agreed. a) How did Joanna use the four dynamics?
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INDEX
b) How did the contracts manager use the four dynamics?
c) Evaluate the approach each used.
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INDEX
acceptance criteria ....................33, 35 Administrator .................................. 9 Analyzing Management Proposals ..... 39 Analyzing Proposed COSTS.............. 39 Analyzing Proposed Schedules ......... 39 Analyzing Technical Proposals .......... 39 Audits .......................................... 48 basis-of-estimate data .................... 40 Bidder Selection............................ 42 Bidder selection ............................... 8 BIDDER SELECTION ....................... 20 Bidder Selection Techniques ............ 42 Bill-of-Material (BOM) ..................... 38 Breach of Contract ......................... 58 buy-ins......................................... 38 Change Control.............................. 52 Change Control Board..................... 52 changes........................................ 47 Competitive Process ....................... 38 Competitive Subcontracting ............. 19 Configuration control ...................... 48 Configuration Status Accounting....... 52 conflict-of-interest.......................... 13 Contract Families ........................... 23 Contract Type................................ 11 Contract Value/Company Sales Ratio 41 Contracts ...................................... 23 Contractual Interface...................... 11 Control ......................................... 50 Convenience ................................. 58 Cost ........................................20, 40 Cost Plus Fixed Fee (CPFF) Contracts 28 Cost Plus Incentive Fee (CPIF) Contracts ................................................. 27 Cost Plus Percentage Fee (CPPF) Contracts .................................... 29 Cost Reimbursable Contracts ........... 27 Cost-Risk Sharing Ratios ................. 26 Data Item Description..................... 35 Decision Trees ............................... 42 Default ......................................... 58 Definitized Settlement .................... 59 Deliverable Items List ..................... 36 deliverables................................... 33 Delphi Method ............................... 44 Detailed proposals.......................... 32 Dunn & Bradstreet ......................... 19 Fact-finding................................... 40 Final Design Review ....................... 47 Firm Fixed-Price (FFP) Contracts ...... 24
INDEX
Fixed-Price Contract Family ............. 23 Fixed-Price Incentive (FPI) Contracts 25 Functional Configuration Audit ......... 57 Functional configuration audits......... 48 Hoover Business Database .............. 19 Incentive Leverage......................... 55 incentives .......................... 12, 16, 21 Incentives..................................... 54 legal authority ............................... 12 Legal Authority .............................. 11 Lessons Learned ............................ 59 Letter Contracts............................. 30 Letter proposals............................. 32 Lifecycle of a Subcontract.................. 6 lower-tier supplier .......................... 40 Milestone Schedule......................... 18 milestones ...............................32, 39 Negotiate........................................ 8 negotiation...............................12, 40 Negotiation ................................... 59 On-Site Representative ................... 12 payment plans............................... 21 payments ..................................... 33 PERT Network................................ 39 Physical Configuration Audit ............ 57 Physical configuration audits............ 48 potential bidders ............................ 22 Preliminary Design Review .............. 47 Preliminary proposals ..................... 32 Presentations ................................ 32 Problem Report.............................. 46 product acceptance criteria.............. 32 Proposal Preparation Instructions ..... 37 Proposals ...................................... 38 proprietary information ..................... 5 request for proposal ....................... 32 Request for Proposals ....................... 8 Requirements Verification Table ....... 36 RFP.......................................... 8, 32 risk .........................................16, 23 Risk .................................. 17, 25, 47 RISK ............................................ 30 schedule ....................................... 39 schedule integration ....................... 12 SCM Plan ...................................... 11 Scoring Criteria.............................. 42 Settlement Alternatives .................. 59 Settlement by Negotiation ............... 59 should cost ................................... 38 Should-Cost .................................. 38
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INDEX
small subcontracts ......................... 12 Sole Source Subcontracting ............. 18 sor............................................... 35 SOR ........................................32, 35 SOW ................................. 32, 34, 46 Specification.................................. 35 specifications............................47, 57 Specifications ................................ 35 STATEMENT OF REQUIREMENTS ...... 35 Statement of Work ....................11, 33 Status Calls................................... 45 Stop Work Direction ....................... 57 Stopping a Subcontract................... 57 Subcontract Administrator............... 12 subcontract changes................... 8, 21 Subcontract Changes.................11, 21 Subcontract Completion Incentive .... 56 Subcontract Coordinator ................. 12 Subcontract Data Management ........ 13 Subcontract Data Manager .............. 13 Subcontract Document Requirements Descriptions ................................ 35 Subcontract Goal Setting ................ 16 Subcontract Goals .......................... 11 Subcontract Incentives ................... 11 subcontract Management Plan ......... 22 Subcontract Manager...................... 12 Subcontract Milestones ................... 11 subcontract period of performance ... 32 subcontract product requirements .... 12 Subcontract Requirements Review.... 47 subcontract scope ............................ 8 Subcontract Selection ..................... 41 Subcontract Team ...................... 8, 10 Subcontract Team Plan ................... 21 Subcontract Technical Leader .......... 12 Subcontractor Meetings .................. 46 subcontractor performance................ 8 Subcontractor Reporting ................. 45 subcontractor schedules.................. 12 Technical Interchange Meetings ....... 47 Technical Lead................................. 9 Technical Specialist .......................... 9 Terms & Conditions ........................ 11 terms and conditions ...................... 33 Terms and Conditions ................36, 37 Test Readiness Review.................... 48 Thomas Register ............................ 19 Types of Proposals ......................... 32 Types of Terminations .................... 58 unauthorized direction ...................... 5 Variance Thresholds ....................... 51 WBS .......................................17, 33 Why the Need for Subcontracting is Growing........................................ 4 Work Completion ........................... 58
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