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Managing Vendors in Projects By Ben Thorp*

In projects that involve partnering with vendors, the vendor actually becomes a member of the project team in a sense. Such vendors must be managed exactly as you would man- age any resource in your team. Naturally, you don’t have di- rect control over vendors, but then you often don’t have such control over internal resources either.

You also need to manage vendors when you have large capital equipment projects in which the vendor is delivering long-lead capital equipment. Because of the large investments in these projects, it is very important that all efforts between vendor and customer (namely your company) be well managed.

This is by no means meant to suggest that a “command and control” method is advocated, especially in a partnering

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24C H A P T E R

Owner: The organization doing the project.

* Former Vice President, Chesapeake Corporation, now retired.

Copyright © 2008 by James P. Lewis. Click here for terms of use.

C o p y r i g h t 2 0 0 8 . M c G r a w - H i l l P r o f e s s i o n a l .

A l l r i g h t s r e s e r v e d . M a y n o t b e r e p r o d u c e d i n a n y f o r m w i t h o u t p e r m i s s i o n f r o m t h e p u b l i s h e r , e x c e p t f a i r u s e s p e r m i t t e d u n d e r U . S . o r a p p l i c a b l e c o p y r i g h t l a w .

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arrangement. A good partnering arrangement is only achieved by clearly defining goals, roles, and processes, and that is the focus of this chapter.

There are two points that need to be made. First, the ac- countability for all projects resides totally with the owner.

Second, the most typical form of re- lationship between owner and supplier is contractual. This c o n t r a c t u a l a r-

rangement must be well understood by the project manager and owner alike.

The message to new project managers or sponsors is that the owner must take control of the process, which is shown in Figure 24–1. He must define the decision-making process and stakeholder roles. Major stakeholders include

p r o d u c t i o n , f i- nance, engineering, technical, and ven- dors. Each of these stakeholder groups has its own culture

and each needs to be addressed uniquely. Owners must take control by clearly and completely defining their needs and desires (musts and wants) and ensuring that they are in spec- ifications, bid packages, orders, contracts, and the like. This will require owners to take control of agenda-setting in meet- ings so that the required output is obtained. Partnering or teaming is a preferred method of working, but it cannot take precedence over managing the project.

RESOURCE DOCUMENTS

There are three primary resource documents that need to be prepared as early as possible. The first is an internal docu- ment, which defines the level of approval, the time required

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To manage vendors does not mean to adopt a “command and control” approach.

Sponsor: The person in the organization who “drives” the project.

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325

F I G U R E 24–1

Owner Controls Process

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for approval, and the level of documentation needed for an approval to be granted. This simple document can save hun- dreds, even thousands, of hours of hunting down the right person for approval and in expediting delivery because the purchase order could not be issued in a timely manner. It can also save rework caused by the approving individual want- ing to see more (or less) in order to sign. Does the approver want to see three bids, or just know that three bids have been obtained? Or is it satisfactory to know that the supplier has been the low bidder for the required quality on the last two jobs and the unit prices are the same for this job?

The second document identifies resources for the ven- dor management function, by name, either inside or outside of the owner’s firm. Typical resources include individuals dealing with the issues shown in Figure 24–2.

Every purchase order can have issues requiring input from one or all of these resources. Therefore, the resource needs to be defined and available.

The final document needed is a material coordination plan. This plan can be started early—around permitting—but can only be completed after all of the components are known. It can be a detailed description or a simple spreadsheet where each function (e.g., air permit), service (soil reports), or

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Performance specification author Safety Purchasing Transportation Legal Tax Risk management/insurance Fixed asset accounting

F I G U R E 24–2

Issues That Must Be Addressed in a Project

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component (storm sewer) is listed. Columns would then be created for who will request, purchase, ship, expedite, in- spect, construct, and approve. Where multiple ship-to sites are involved, another column will need to be added. See the example in Figure 24–3.

SPECIFICATIONS

The project team will need to discuss three very different types of specifications, namely:

Structural specifications Life specifications Performance specifications, including training

Historically, we have put emphasis on the structural specifications—typically type of material and strength or

CHAPTER 24 Managing Vendors in Projects 327

F I G U R E 24–3

Sample Spreadsheet

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rigidity of the structure. Many firms have a comprehensive specification “library” for these. Those are still very appropri- ate. We are now adding to that certain life criteria for the product being delivered by the vendor. In automotive, we are talking about seven-year warranties on the drivetrain and 100,000 miles between tune-ups. There are industrial equiva- lents, which must be converted into specifications. Figure 24–4 shows some life issues which need to be considered.

However, the most critical specification for production machinery is performance itself. Specifications are normally written by engineers, but performance requirements are usu- ally best understood by operations personnel, so this is an area that requires a team effort. Throughput models and run-rate models are sometimes helpful. That is, given certain

input raw materials a n d c o n d i t i o n s , what is the output and what is the tol- erance around that output? What are

the sustained and peak output rates? What is the average uptime? What training is required? What are the outcomes of the training (e.g., what do operators and mechanics need to do to run the facility?). These conditions will become part of the bid package and eventually part of the purchase order or

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� Life of machinery � Life of components � Repair frequency � Interchangability of spares � Minimum spare inventory

F I G U R E 24–4

Life Issues for Deliverables

Contracts without remedies are often without value.

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contract. When preparing any specification, it helps to think about how well the contract will reflect it. The contract should answer these questions:

What are the performance specifications? How will they be measured? What are the criteria and conditions? What is the remedy when something is out of spec- ification?

Contracts without remedies are often without value, except to the lawyers who will use the legal system to write what you forgot.

Specifications may also apply to intermediate steps, in- cluding, but not limited to, issues such as those shown in Fig- ure 24–5.

Remember, each needs a definition of how performance will be measured and what the remedy will be if vendor per- formance is unsatisfactory. The consequences of a missed milestone date can often have large project consequences, even if the final ship date is met. For example, equipment that re- quires cavities or special mountings in a building might re- quire certified drawings before the building drawings

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� Drawing submittal � Certified drawings � Shipment date � Percent complete shipment � Inspection � Installation � Startup � Dates for full compliance to specification

F I G U R E 24–5

Issues That Must Be Covered

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can/should be certified. A delay in equipment drawings could delay the whole building or the entire project. What, then, is the appropriate remedy? This can be determined through competitive bidding and negotiation, if it is in the bid package.

SUPPLIER QUALITY

There has been more written on this subject than perhaps any other subject addressed in this chapter. I will keep it short though, and deal only with a few principles. The first princi- ple is that good projects have good suppliers. The second

p r i n c i p l e i s t h a t you need a system to define what is

important to you and to do so in the most objective way pos- sible. If this has been previously done by your corporation and you have preferred suppliers, selected suppliers, or part- nerships, then you can proceed to the supplier selection section of this chapter. If not, you need to develop supplier evalua- tion mechanisms for at least equipment, engineering, and construction. Some of the evaluations will be for products (hard or soft), and some will be for services. These evalua- tions can be quite different.

In setting up evaluation mechanisms, you need to deter- mine whether they will be made on the content of presenta- tions (often future expected results) or on the evaluation of past performance. For example, will contractor safety be judged by promised safety programs or will it be judged by the contractor’s experience modifier rate (EMR) to his Workers Compensation Insurance Premium?

For equipment, typical areas that can be evaluated are shown in Figure 24–6.

For the engineering activity, typical areas that can be evaluated include those shown in Figure 24–7.

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Good projects have good suppliers.

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To evaluate contracting work, consider the list shown in Figure 24–8.

A uniform system of evaluation will result in at least three positive outcomes. First, the team will have a more con- sistent evaluation process. Second, unqualified suppliers will be eliminated. Finally, there will be a way to objectively evalu- ate “favorite suppliers” who are recommended by some party, including management.

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� Quality � Cost of use (price is a default) � Delivery � Service � Business practices � Ethics � Technology/development � Training

F I G U R E 24–6

Equipment Evaluation Areas

� Process expertise � Design expertise � Drawing quality (errors per drawing) � Custom design expertise � Modules design capability � Long-term operation and maintenance � Alignment with owner � Ethics � Design safety � Standards & procedures � Timeliness

F I G U R E 24–7

Engineering Areas to Evaluate

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REQUEST FOR PROPOSALS

When RFPs are issued, they should be complete and should only go to qualified suppliers. A qualified supplier is one that you would buy from if they provide the best response to the RFP. There is a lot of debate over this issue. In some instances

suppliers are asked to bid on a job even t h o u g h t h e c o m- pany knows that they will never be awarded the con- t r a c t , s i m p l y b e-

cause they aren’t qualified. However, they are almost certain to bid lower than anyone else. That low bid is then held up to qualified suppliers as an incentive to bid lower. The bidder who initially gave the lowest bid is called a “stalking horse.” Most leading companies have concluded that the wasted ef- fort of including stalking horses is not worth the value of the time spent.

A request for proposal should include the items shown in Figure 24–9.

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� Safety (EMR, etc.) � Quality control � Ethics � Planning/scheduling � Billing accuracy, backup, and timeliness � Financial stability � Craftsman training � Supervisors’ skills � Dispute resolution � Relationship with subcontractors

F I G U R E 24–8

Contracting Evaluation Areas

The effort of including stalking horses in your bid system is probably not worthwhile.

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There will always be questions from bidders about RFPs. A list of these should be compiled, and the same an- swer given to all bidders. One method used to shorten this process is to invite all bidders to a single meeting. An advan- tage of this approach is that the number and quality of ques- tions improves. One potential disadvantage is that all bidders are known to each other.

SUPPLIER SELECTION

A well-prepared RFP can make this process relatively straightforward. If the evaluation criteria have been stated objectively and weighted, each bid can be scored and totaled. If one uses a Kepner-Tregoe (1965) process (in which you list musts, wants, and nice-to-haves), the musts should be scored and totaled first. It is always a good idea to decide up front what range of totals will be considered equal. For example, if there are 10 factors of 10 points each, then one knows that an 87 is the same as an 88. Another method is to require that all musts need to be fully met, and anyone falling below 100 is a candidate for elimination. It is typical for the evaluation pro- cess to sort leaders from average responses and to identify

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� Outline of total project � Scope of work for the RFP � Structural specifications � Life specifications � Performance specifications � Measurement of specification � Remedies � Delivery of information � Delivery of materials/services � Shipment methods

� Installation services � Startup services � Payment schedule � Recommended spares � Insurance coverage � Evaluation criteria � Notification procedures � Names of key personnel � Confidentiality agreements

F I G U R E 24–9

Items to Include in RFPs

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clear candidates for elimination. Assuming there are several bidders that warrant further consideration, a ranking of the wants is in order. Experience shows that it is wise to keep more than one bidder before entering into the next process, which is negotiation. There are technical and commercial in- sights that can be obtained from the negotiation process. These can change the evaluation. Furthermore, changes can sometimes unseat the leading bidder. For example, their de- livery can change due to a new order, or critical personnel can be assigned to other projects.

Negative things can happen during this process. Com- petitive bids can show that specifications were incorrect or missing. The delivery dates or estimated cost can be grossly in error. If the deviation is small, amended bids can be re- quested. If the deviation changes the scope, new RFPs may be needed. If the deviation changes project economics, the project may need to be changed or even canceled. Project managers or teams might be disappointed by a canceled pro- ject, but experienced project managers know this is a better outcome than having to manage a bad project.

NEGOTIATION

This is the point at which an owner’s wants and musts have to be reconciled with the bidders’ capabilities and desires. Everyone agrees that at this phase in the project, the owner

has the advantage. Wise use of power w i l l c r e a t e a win-win situation. U n w i s e u s e o f power is likely to

create a win-lose situation or even a lose-lose situation. The key questions should be resolved in favor of what’s best for the pro- ject. What’s best is usually that all project wants are met by a

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Key questions should be resolved in favor of what’s best for the project.

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strong supplier who is capable of dedicating the resources needed to make the project a success. Too many times, bid- ders accept conditions that cannot be met in order to secure an order. When this condition becomes apparent, the project is headed for trouble. The project mission and vision must in- clude vendor success and eliminate “get something for noth- ing” thinking.

There are many approaches to negotiation. One success- ful approach is to break the negotiations into “technical” and “commercial” parts. The specifications should be negotiated first, because their resolution could change the price. If special materials or construction are needed, the price may increase. If an owner is willing to accept a standard offering, the price may decrease. Once all of the specification issues have been re- solved, the commercial negotiations can begin. Here, all items that will appear in the purchase order must be discussed and agreed to, especially performance specifications, test condi- tions, and remedies. After negotiations are complete, there should be no surprises for the owner or the successful bidder.

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The remedy deserves some special discussion because of the realities that occur when performance is not met. At this point, the project can be practically over. Usually, the budget has been spent. The same is true for the suppliers’ budget. These forces can “seduce” both the owner’s project team and the bidder to try a series of “low-cost” fixes that can take weeks, and usually months. When performance specs are missed, it is usually wise to invite upper levels of manage- ment on both sides to the solution meeting. Ideally, the time allowed to implement the remedy is addressed in the pur- chase order or contract. If the bidder is unwilling or unable to resolve the performance issue, then the owner can implement and charge back all or a percentage of the costs to the bidder. Some contracts have a liquidated-damages clause whereby the cost of the equipment or service is discounted until the owner achieves their original financial returns. Most bidders will insist on a limitation-of-liability clause. These conditions are all resolved through negotiation with the goal of creating a win-win situation. One form of a win-win is to negotiate penalty clauses for late delivery, poor performance, and so on. In return, there are incentive clauses for perfect delivery (early delivery can sometimes cause staging problems), good startup, above-average performance, or outstanding safety performance. The owner typically benefits from all of these, and sharing an unplanned benefit is easier than many would expect.

There are a number of negotiating processes that can be used, and most are satisfactory if the process is fair, ethical, and well understood by all stakeholders. Getting everyone at the same office on the same day is not in itself brutal. It may be very time efficient. Getting everyone there to “shop the low price” is at least unfair. Most experienced teams like to devote a half day to a day per major bidder and to separate close competitors by at least an evening. This is because there are usually many items to resolve, and it takes intense focus to get through the major issues.

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THE PURCHASE ORDER/PURCHASE CONTRACT

There are numerous contract forms, and it takes an experi- enced project team to know what form to use and why. There are two general recommendations. First, the owner should have his contract forms reviewed and modified by expert out- side legal counsel with experience in litigating contracts. This is a special skill that may require a slightly higher fee—once. However, it could save millions over time. Second, the owner should use his stationery and his contract as a starting point.

It is beyond the scope of this book to delve into contract law. It is not beyond the scope of this book to note that the owner has the responsibility and accountability that dictates he be good at contract negotiation and contract implementa- tion. An experienced project manager will know the contracts better than the process or the equipment being purchased.

The major types of purchase contracts include those com- ponents listed in Figure 24–10. The elements to be addressed

CHAPTER 24 Managing Vendors in Projects 337

� Acceptance Certificate � Affidavit and Release of Liens � Construction Agreement, Cost

Plus Fixed Fee � Construction Agreement, Cost

Plus Percentage Fee � Construction Agreement, Lump

Sum � Contractor’s Performance

Incentive Fee � Contractor’s Safety Incentive Fee � Corporation Consultation � General Conditions, Cost Plus

Fixed Fee � General Conditions, Cost Plus

Percentage Fee

� General Conditions, Lump Sum � Individual Consultant � Letter of Intent � On-Site Work Addendum � Purchase Order (Cost Reimburs-

able Construction) � Purchase Order (Equipment

Supplier) � Purchase Order (Firm Price

Construction) � Renewable Construction

Agreement � Renewable Engineering

Agreement � Request for Contractor’s Affidavit

F I G U R E 24–10

Components of Purchase Contracts

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include those listed in Part 5. Your most critical projects should have your best contracts personnel, who can typically be shared across a number of projects.

INFORMATION EXCHANGE

There are two forms of information exchange, one external and one internal. External exchange of information requires that the owner examine the project, the location of the pro- ject, and the types of information that will be exchanged. The key questions are: What information is confidential? and How confidential? On the one hand is a completely public project, like building a park. On the other hand is a project requiring high levels of security and in-depth security clear- ance for all workers. In most projects there is considerable in- formation that the owner wants to keep confidential. This means that confidentiality agreements need to be signed with each company receiving this information. For very sensitive information, it is worth considering agreements for each per- son receiving the information. These agreements should state how confidential information will be identified and marked. Restrictions on copying the information need to be included in the contract and on the markings. Verbal confidential in- formation is usually confirmed in memo or noted in meeting minutes. All official meeting administrators need to be aware of the policies established. The owner needs to keep a log of all confidential information distributed, and at the end of the project may want to reclaim all of it. The owner’s IT (infor- mation technology) or IS (information systems) person should be consulted for the best way to handle confidential information that may be transmitted electronically.

Internal document distribution is usually the larger job. This is actually a communications function and should be ap- proached in that fashion. The most common document con- trol device is a spreadsheet with the documents listed in the first column and potential recipients listed in subsequent col-

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umns. Facility files and central files are critical recipients. Correspondence and meeting notes are critical documents.

Figure 24–11 shows a typical document distribution ma- trix. This matrix should be reviewed with all stakeholders up front and decisions agreed to by the project manager. Once this is done, each document can be coded as to its type (e.g., bill of material) and a process can be put in place for support personnel to make immediate distribution.

There should never be a bottleneck in communications, especially document distribution. E-mail facilitates distribu- tion, but it is necessary to make sure that all recipients, and the server, have the capability to receive documents created by all kinds of software. This is particularly true for e-mail at- tachments. It is frustrating to receive files that cannot be opened.

Project review meetings are a critical communication mechanism. They are best when the meeting forum is open and critical stakeholders are present. See Chapter 25 on con- ducting project reviews. Typically, the project plan is the yardstick against which various groups track and report

CHAPTER 24 Managing Vendors in Projects 339

F I G U R E 24–11

Document Distribution Matrix

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project status. These meetings should be scheduled in ad- vance, and the agenda well planned. If the project manager does all the talking, she learns very little. The agenda should be structured so that the meeting is a status report and coor- dination meeting with problems identified and well defined but not necessarily solved in the meeting. Separate meetings can be established for problem solving. Status of safety, schedule, cost, and coordination are typical agenda items. Using earned value analysis to measure project status is a very useful approach. Minutes should be taken, issued promptly, and reflect action items with responsibility and timetables. Projects have a relatively short life, and action items take on particular urgency.

EXPEDITING

It is best to start with the premise that there is always some- thing on the critical path, and that events could change the critical path. Therefore, expediting skills are needed. Once critical path items are known, it can be determined if expedit- ing will be done by the owner, the supplier, or a third party. Early decisions and arrangements will allow this function the lead time it needs to be successful. It is sometimes necessary to book special trucks, trains, boats, or planes. It is sometimes expeditious to use a port of entry familiar to the expediter. It may also be necessary to obtain state permits to haul “over- sized” loads. All of this takes time to plan and execute. The worst time to engage expediting service is after a critical date is missed.

DISPUTE RESOLUTION

Disputes can occur at many levels. This needs to be acknowl- edged up front, and procedures put in place so that disputes are identified and resolved in a professional manner. In no

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event should a dispute become disruptive to the project. Dispute resolution procedures should be included in every purchase order and in every contract.

There are a number of procedures that can be used, but two important principles should always be observed. First, the problem must b e a c c u r a t e l y stated and docu- m e n t e d . E x p e r i- e n c e h a s s h o w n that many disputes arise from an inaccurate or unclear de- scription of the problem. Second, all parties should agree ahead of time on the dispute resolution process and agree to follow it.

One process will be outlined here, but as previously stated, there are others. The first step is to establish a detailed definition of the problem, which all parties can support. The easy first step is frequently overlooked. The second step is to apply the principles of the purchase order or contract to the problem. This shows the importance of including quantifi- able definitions of the three types of specifications in each purchase order or contract.

The third step is to negotiate a resolution of the prob- lem. Use of established negotiating techniques can be of value at this step. The fourth step is to delegate the resolution to higher levels of management on each side. As you can see, it is helpful if the contract specifies the exact level of higher management by title or name. Typically, this will be someone who can approve a scope or funding change. The final step is to take the dispute to an “independent third party.” Some choose arbitration. Others have noted that arbitration has a leveling or averaging impact and have specifically deleted this from all contracts. Their reasoning is that significant ef- fort should be put into developing good contracts and select- ing good suppliers, which results in few disputes. In the instance of an unresolved dispute, the legal system can be used to achieve an equitable resolution.

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A dispute should never become disruptive to the project.

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