Projects involving subcontracts have their own special kinds of risks and problems. In this column, Peter Clark offers advice on how to use leverage and visibility to minimize the risks and help ensure the successful delivery of the required scope when working with subcontractors.
John sat in his office chair and thought about how well the new warehouse management system was going with the subcontractor. Because of this, John was able to promise the division head that the product would be ready by the first of the year. All of the testing to date had been successful, and there were just a couple of pieces that needed to be integrated.
His phone rang. On the other end was Paul from Applied Robotic Dynamic Decisions (ARDD), the subcontractor that was supplying the interface module to the legacy conveyor equipment. While the prototype testing at ARDD's facility had been successful, they were a week late delivering the final product. John was expecting delivery that day.
"John, I'm afraid I have some bad news. We're going to miss our delivery date by at least three months," said Paul.
John sat bolt upright, and his eyes went wide. He had been receiving weekly schedule updates from ARDD, and there was no hint that a delay of this magnitude could occur. "What the heck happened? When I talked to you last week, you said you could deliver today!" John said.
John listened in shocked disbelief while Paul told him how the person working on the project had quit the previous Friday. Examination of his files found that, rather than "wrapping up a few loose ends," he had been at least a month away from completing the coding.
Paul was apologetic, but said that there was nothing he could do about it. All of his people were working on other projects, and there was no one available at ARDD to pick up John's project. John's mind reeled. What was he going to do?
Business relationships with subcontractors are very different from the relationship between you and your coworkers. Your company's team strives to meet the business goals of your organization. It is easy to lose sight of the fact that your subcontractors are looking to maximize their business goals. If their goals line up with yours (and most often they do), then everything works out fine. Occasionally they don't, and the problems that result can make typical project problems look like molehills by comparison.
The relationship between you and the subcontractor is defined by the contract. A successful contract will cover many areas: scope, schedule, cost, warranty, payment terms, change management, and intellectual property rights. Clearly defining all these terms at contract time will prevent many problems later.
When constructing your contract, you should keep two things in mind: visibility and leverage. Visibility determines how transparent the subcontractor's work process and products are to you. Leverage defines the amount of influence that you have over your subcontractors. Visibility and leverage are needed to manage your contract. Without visibility, you will have no warning of any developing problems. Without leverage, you may be unable to get the subcontractor to take corrective action.
Regularly scheduled updates are the most common visibility tool written into contracts. Unfortunately, a schedule is often worthless without additional information. All too often, you will receive schedule updates indicating that everything is going fine and then get hit with a six-month schedule delay the day before the delivery is due. Without corroborating evidence to support progress claims, a schedule isn't worth the paper it's printed on.
As with work done in house, proper visibility requires you to understand your subcontractor's process, progress on scope, and quality of work products. Subcontractors are often reluctant (to say the least!) to give you that kind of access. Mechanisms for inspecting these areas should be written into the terms of the contract.
You should require that the subcontractor prepare a detailed acceptance test plan as one of the first deliverables. Reviewing the acceptance test plan will give you a good indication whether your subcontractor understands the scope of what he is to deliver. It will also establish objective criteria for completing a major portion of the work.
You should ask for access to his change-management and defect-tracking systems. You should also ask to participate in code and design reviews. These items will give you a good idea of the quality of the intermediate work products.
A Factory Acceptance Test (FAT) should be a key milestone. A FAT typically occurs in the sub's facility prior to delivery and is designed to show that the deliverable product meets all of the key objectives of the project scope. It should be scheduled with enough time remaining in the project to correct any defects found during the FAT.
There is a natural tendency to just assume that everything is progressing nicely, and to skip the hard work of monitoring progress. You probably hired the subcontractor because you didn't have the resources to do the work yourself or because he had technical expertise that you lack. All of the visibility contract terms in the world are worthless if you neglect to do your due diligence while managing your subcontractor. Make sure that proper effort is being spent by your own people to monitor intermediate deliverables.
You have several areas of leverage over your subcontractor. For example, a good subcontractor is concerned about his reputation in the industry. News that he blew up your project will spread quickly. He should also be interested in doing subsequent work for you, be it change orders for the current project or new projects.
The most obvious form of leverage that you have is monetary. The payment terms of the contract should be constructed so that your subcontractor will have "skin in the game" until the successful completion of the project. You should hold back at least 10 percent of the payment until final acceptance of the deliverables.
You should avoid progress payments that are not tied to deliverables that can be objectively evaluated. For example, avoid payment terms where 25 percent of the contract is payable when 25 percent of the project is done by the schedule, or where 10 percent is due each month on a ten-month contract.
A key metric that you should be aware of is walk-away cost. What will it cost your subcontractor to just "walk away" from the contract? What will it take him to complete the project? If the completion costs exceed walk-away costs, you have lost most of your financial leverage. At this point, your leverage is mostly his business reputation and chances for future business. Construct your contracts so that walk-away costs are high.
While contracts are enforceable in a court of law, the cost of doing so can easily far exceed any restitution that you might receive. Any contractual relationship that comes to this point is a failure. Proper construction of the contract, diligence in monitoring progress, and the correct application of leverage can help prevent catastrophes that can only be solved by lawyers.