Herding Cats...

Very often a business will contract labor, or specific components of a project to be completed through the use of an outside vendor or subcontractor. If your business does this, the rest of this entry will be to explain the methods I have utilized that provided the needed control to properly manage the subcontractors.  Although some of you will begin reading this only to think to yourself, “this is common sense” and I too had this thought….early in my career.  Over the years however, it has become very noticeable to me that this is not as simplistic as it would seem and many companies seem to be unaware of the tools available to manage subcontractors and prevent needless exposure.  

When it comes time to apply resources to the scheduled activities (if you have been reading along with my blog over the past few days, you know the pre-work that has preceded this step), this refers to both internal and external resources.  Technically, if following the PMP standards, securing subcontracted labor is considered to be part of the procurement phase since it involves the negotiations and securing of contracted resources.  Although procurement is the technical classification, it is still resource allocation.  

For the work packages or activities that your company does not specialize in, you will contract the work through an outside vendor.  Although the preceding sentence makes it seem as a quick and uncomplicated process, there are several steps you should follow to protect yourself, and to make sure the work is done correctly, on time, and at or below budget.  

When estimating a project, it is your responsibility to follow the proper steps in developing an overall project management plan.  This should be no different for each contract level, however if you are the contractor and are hiring a subcontractor, it is your responsibility when taking responses to an RFP to get not just a price quote, but also a project management plan.  

How do you make sure you get a proper project management plan when sending out an RFP to bidders?  Your responsibility is to provide specific requirements, scope, and expectations to your subcontractor, but you must also provide verbiage that stipulates penalties for contract non-performance.  Many industries conduct these functions by requiring bid or performance bonds and liquidated damages.  Bid and performance bonds are specific types of insurance policies that protect the general contractor in the event a subcontractor is unable to perform the work for a bid that was submitted and a contract was awarded for; alternatively the performance bond provides assurance that in the event the subcontractor is unable to complete the scope of work, then monetary damages will be paid.  

Liquidated damages are not widely used, but are one way to help motivate a subcontractor to stay on or ahead of schedule.  In enforcing liquidated damages, the contract stipulates that if the completion date set forth in the contract is missed due to the lack of timely completion by the subcontractor, and it was not caused by changes or project delays out of their control, they are then responsible for paying a fine amount for each hour, day, or week that the schedule is missed by.  Essentially if they miss their agreed upon completion date, their contract amount starts to be diminished by a set and agreed upon rate (this will be a topic I will cover later in this post regarding managing your subcontractor).

Another way to provide a check and balance system is to include any specific requirements that are stipulated by the Client or governing bodies within your RFP to bidders.  There may be certain participation requirements for minority owned businesses, or Union considerations, worksite rules and regulations, and many other possibilities.  If you are awarding a subcontractor contract that is a rider to your contract, the same rules and regulations most likely will apply.  

Once you receive back the bids, the anticipation should be that each bid provided should closely match the others.  Meaning, if there is an outlier in regards to pricing (extremely low or high), then either they misunderstood the scope and came in low because they neglected to include portions of the work to be done, or are pricing themselves out of the market because they either lack the capacity or desire to complete the work.  At first impulse, you may want to eliminate the outliers.  I would offer though that you may be leaving money on the table if you toss out the low bidder, but if you take this path you need to conduct a scope review with the bidder prior to awarding the contract.  During the scope review, a representative from your company and the person responsible for the estimate from the bidder will cover each requirement, scope item, rule, and any other detail that would be the responsibility of the contract awardee.  

If they are utilizing vendors or suppliers it would also be wise to ask for business licenses, references, permits, and past projects that were completed for each supplier and vendor they may use.  You shouldn’t be afraid to use a vendor that is priced relatively low compared to others; they may simply be a smaller company with a lower overhead cost, lower cost to market because of a specific competitive advantage, or simply want to “buy” work for specific projects to gain experience in the particular type of work being completed.  Again, make sure to error on the side of caution and require, and provide an explanation as to why you are asking for the information that the bidder provide adequate information showing their ability to perform.  

If your contract requires you to obtain a performance or bid bond, I would suggest that you make your contract awardees do the same (it may even be stipulated in your contract that all subcontractors obtain them).  This is another way for the bidder to show good faith and their ability to complete the work.  Remember that the specific insurance policies are earned and based upon the insurance company researching the ability to financially and competently complete the work.  

Now you have done it.  You properly researched the winning bidder.  You conducted a scope review, verified the schedule, reviewed and covered their specific project management plan, obtained their bid and/ or performance bonds, and secured a contract that stipulates all details, scheduling, and liquidated damage constraints.  Now it is time to put them to work…now what?

Do you simply turn them loose and let them run free?  Maybe once you have developed a great working relationship through completion of many projects together, but this is where your work should really begin.  Remember that the controls you have put in place (bid and/ or performance bonds, liquidated damages) are only enforceable if you can prove negligence.  In order to properly manage your subcontractor there should be specific methods set forth in their contract that help you do so.  You will need to obtain regular updates (in writing) from your awardee.  In these updates you will want to have copies of all purchase orders and delivery tickets for any goods that they are storing or had delivered to the project site, specific completion updates, projected completion items, and any issues or details that may be pertinent.  

It would also be wise to take progress photos if building a tangible project, or host demonstrations for IT type projects to ensure the progress is being made.  This should fall in line with part of your quality assurance plan, but is also good practice in case you are required to provide documentation providing proof of non-performance.  

Please don’t mistake these efforts as treating a subcontractor as a non-performer that you need to micromanage, but rather means that provide you a way to protect your investment.  There are tactful ways each of these items can be done, and also help build trust.  As you move forward in developing your business, the need for this type of specific oversight will become less and less as you build relationships with vendors.  Make sure you don’t stop conducting these behaviors and practices, although you have a great working relationship, any business is subject to financial or competency hardships and you don’t want to find yourself vulnerable.

Chris Thompson PMP, SSYB