PROJECT

MANAGEMENT
BITS Pilani Dr. ARUN MAITY
Pilani Campus
 BITS Pilani
Pilani Campus

OUTSOURCING AND CONTRACTS

MANAGEMENT
Chapter No. 12 T 1
OUTSOURCING

• Transferring of business functions or processes to

others, often foreign companies
• Outsourced projects operate in a virtual environment in
which people are linked by computers, video-
teleconferencing
• In some projects, participants from different
organizations work closely together but they are not
formal members of one organization, just technical
experts who form temporary alliance with an
organization for fulfilling their contractual obligations.

BITS Pilani, Pilani Campus

ADVANTAGES

• COST REDUCTION

• Competitive prices for contracted services

• Overhead costs are reduced as the company does not require to
maintain the contracted services

• FASTER PROJECT COMPLETION

• Work can be done cheaply at a faster pace. Competitive pricing

means more resources for the dollar

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• HIGH LEVEL OF EXPERTISE
• Company no longer has to keep up with technological advances
• It can focus on developing its core competencies
• Hire firms with the know-how to work on relevant segments of
the project

• FLEXIBILITY
• Pursue wide range of projects by combining resources with
talents of other companies
• Small companies can go global by working with foreign partners

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DISADVANTAGES

• COORDINATION BREAKDOWNS
• Challenging
• Physical separation

• LOSS OF CONTROL
• Core team depends on other organizations that they have no
direct authority over

• CONFLICT
• Prone to interpersonal conflict
• Trust can be difficult to forge

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• SECURITY ISSUES

• Trade and business secrets may be revealed

• Contractors working with your competitor

• POLITICAL HOT POTATO

• Underemployment and increased pressure to keep jobs local

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Partnering Vs. Traditional
Approach
PARTNERING
MUTUAL TRUST
SHARED GOALS AND OBJECTIVES ENSURE
COMMON DIRECTION
JOINT PROJECT TEAM EXISTS WITH HIGH
LEVEL OF INTERACTION
OPEN COMMUNICATION AVOID
MISDIRECTION AND BOLSTER EFFECTIVE
WORKING RELATIONSHIPS
LONG TERM COMMITMENT
OBJECTIVE CRITIQUES IS GEARED TO
CANDID ASSESSMENT OF PERFORMANCE
ACCESS TO EACH OTHER RESOURCES ARE
AVAILABLE
RISK IS SHARED
TRADITIONAL APPROACH
SUSPICION AND DISTRUST
EACH PARTY’S GOALS AND OBJECTIVES
ARE GEARED TO WHAT IS BEST FOR THEM
INDEPENDENT PROJECT TEAMS
COMMUNICATION ARE STRUCTURED AND
GUARDED
SINGLE PROJECT CONTRACTING IS
NORMAL
OBJECTIVITY IS LIMITED AND LACK OF
CONTINUOUS IMPROVEMENT
ACCESS IS LIMITED
RISK IS TRANSFERRED TO THE OTHER
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BEST PRACTICES

• Well defined requirements and procedures

• clearly defined deliverables and measurable outcomes

• Different firm’s project management need to be integrated

• Common procedures and terminology need to be established so

that different parties can work together

• Establish project communication systems to support effective

collaboration
• Security: Robust safeguards to prevent information access

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• EXTENSIVE TRAINING AND TEAM-BUILDING
ACTIVITIES

• Train people to work effectively with people from other

organizations and countries

• Team building workshops

• Partnering charter: common goals for their projects as well as

procedures

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• WELL ESTABLISHED CONFLICT MANAGEMENT
PROCESSES IN PLACE

• Escalation: Primary control mechanism for dealing with resolving

problems
• Problems should be resolved at the lowest level within a set time limit

• FREQUENT REVIEWS AND STATUS UPDATES

• Assess time, cost and performance
• Teamwork, communication and timely problem resolution are
evaluated

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• CO-LOCATION WHEN NEEDED

• Co-location is critical and well-worth the added expenses and

inconvenience

• FAIR AND INCENTIVE – LADEN CONTRACTS

• Fair deal for all involved

• Performance based contracts
• Treat Contractors as partners

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LONG TERM OUTSOURCING
RELATIONSHIPS
• Reduced administrative costs

• More efficient utilization of resources

• Improved communication

• Improved innovation

• Improved performance

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Negotiations : Scope

• Support and Funding from Top Management

• Staff and Technical Input from Functional Managers

• Coordinate with other project managers and negotiate project

priorities and commitments

• Project team to determine assignments, deadlines, standards and

priorities

• Negotiate price and standards with contractors, vendors and suppliers

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Best Practices in
Negotiation
• People working on the project are not enemies or
competitors but are allies and partners

• If conflicts escalate to the point the negotiation breaks

down then every one loses

• People have to continue to work together

• Conflict can be good as it may bring innovation, better

decisions and more creative problem solving

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Negotiation Process

• Reaching an agreement

• Implementation of that agreement

• Principled Negotiation

• Separate the people from the problem

• Focus on Interests, not positions
• Invent Options for mutual gain
• When possible, use objective criteria

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Separate the People from
the Problem
• Personal relations become entangled

• Instead of attacking problems, people attack each other

• Friendly rapport with the other person prior to negotiating

• Let angry fly out the window: Don’t react to the emotional
outburst and try to solve the problem

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Focus on Interests, Not
Positions
• Focus on interests behind your positions

• Drive your interests and identify the interests of other

party

• Revealing both parties interest , conflicts get minimized

• Seek first to understand, then to be understood

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Invent Options for Mutual
Gain
• Collaborating brainstorming in which people work
together to solve the problem in a way that lead to win-
win situation

• Clarifying interests and exploring mutual options create

the opportunity for dovetailing interests

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When Possible, Use
Objective Criteria
• Develop Standards and Rules to help deal with common
areas of dispute

• Use external, objective criteria to settle disagreement

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BATNA

• BATNA : Best Alternative to a negotiated agreement

• STRONG BATNA: If you are negotiating price and

delivery dates and can choose from a number of
reputable suppliers, then you have a strong BATNA

• WEAK BATNA: If there is only one vendor who can

supply you with specific, critical material on time, then
you have weak BATNA

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MANAGING CUSTOMER
RELATIONS
MET EXPECTATION

• Ratio of perceived performance to expected

performance

• This should be greater than 1.0 for very satisfied

customer

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CONTRACTS

• A contract is a formal agreement between two parties

wherein one party (the contractor) obligates itself to
perform a service and the other party (the client)
obligates itself to do something in return usually in the
form of payment to the contractor

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• Defines the responsibilities
• Spells out the conditions of its operations
• Defines the rights of the parties in relationship to each
other
• Grants remedies to a party if the other party breaches its
obligations
• Spells out transactional obligations of the parties
involved as well as contingencies associated with the
execution of the contract

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ENTERPRISE CONTRACT
MANAGEMENT
• Process of managing all stages – conception,
collaboration, execution, administration, closeout and
analysis – in the life cycle of enterprise-wide contracts
with the goal of minimizing costs and risks, maximizing
revenues, streamlining operations and improving
compliance with policies, procedures, regulations and
negotiated terms and conditions

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CONTRACT LIFE CYCLE

Contract Conceptual and Creation

• Goal / Objective
• Letter Of Intent / Memorandum of Understanding
• Preparation of document with the purest and optimal
wording to describe the relationship between the parties,
including the nature and scope of products and / or
services to be exchanged and all other related aspects
involved with the contemplated transactions and their
consequences

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CONTRACT COLLABORATION

• Contract to be reviewed and approved by individuals

within, as well as outside the organization
• Internal Review, External Review, Authorization

CONTRACT EXECUTION

• Formal Execution of a contract operationally defines the

effective start and end dates of the contractual
relationships

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CONTRACT ADMINISTRATION
• Tracking and auditing of contracting terms – pricing,
rebates, service-level compliance, amendments and
performance

CONTRACT CLOSEOUT AND ANALYSIS

• Contract performance and attributes are analyzed
• Determine best methods to address future procurement
sales, budgeting, outsourcing, supplier management,
risk strategies

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TYPES OF CONTRACTS

• FIXED PRICE CONTRACTS

• COST – PLUS CONTRACTS

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FIXED PRICE CONTRACTS

• A price is agreed upon in advance and remains fixed as long as

there are no changes to scope of provisions of the agreement

• Contractor agrees to perform all work specified in the contract at

fixed price

• Fixed price contracts are preferred by both owners and contractors

when the scope is well-defined with predictable costs and low
implementation risks

• Used for long duration projects with fairly predictable cost-estimates

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ADVANTAGES

• Clients do not have to be concerned with project costs

and can focus on monitoring work progress and
performance specifications

• Client is less likely to request changes or additions to the

contract

• Fewer potential changes reduce uncertainty and allow

the contractors to more efficiently manage their
resources across multiple projects

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DISADVANTAGES

• Owners find it more difficult and more costly to prepare

the contract

• Contractors run a risk of under-estimating

• Cost overrun may make the project unprofitable and may

lead to bankruptcy

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REDETERMINATION
CONTRACTS
• Redetermination contracts are appropriate where engineering and
design efforts are difficult to estimate one where final price cannot
be estimated for lack of accurate cost data

• A contractor may win an initial low bid contract, initiate the

contracted work and then discover that the costs are much higher
than expected

• The contractor can take advantage of redetermination provisions

and clients ignorance to justify increasing the actual cost for the
contract

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MEASURES

• Incentive clauses designed to motivate contractors to

reduce costs and improve efficiency

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COST- PLUS CONTRACTS

• Contractor is reimbursed for all or some of the expenses

incurred during the performance of the contract

• Final price is not known until the project is completed

• Contractor is reimbursed for all direct allowable costs

plus an additional fee to cover overhead and profit

• Fee is negotiated in advance and usually involves a

percentage to total costs

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• It puts more burden on the client as the contract does
not indicate what the project is going to cost until the end
of the project

• Little incentive for the contractors to control costs or

finish on time because they get paid regardless of the
final cost

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CONTRACT CHANGE
CONTROL SYSTEM
• Need For Change

• Client wishes to alter the original design or scope of the project

• Market changes may dictate adding new features or increasing

the performance requirements of equipment

• Declining financial resources forcing to cut the scope of project

• Contractor may initiate changes in response to unforeseen

legitimate problems

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Course for Comprehensive
Examination
• Development of Project Network (CPM/PERT)
• Resource Scheduling, Leveling and Allocation
• Managing Project Risks
• Reducing Project Duration
• Project Monitoring, Performance Evaluation and Earned
Value Analysis
• Project Audit and Closure
• Outsourcing and Contracts Management
• International Project Management

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