Monthly Archives: August 2014

PM Principle No. 5 – Project Governance

Formal project governance arrangements need to be established and agreed between the Project Sponsor and the appropriate senior management representative of the project management organisation.  These governance arrangements will be specific to the project and will normally comprise:

  • A project steering committee which will normally comprise representatives of the Project Sponsor organisation and the project management organisation
  • A higher management representative within the project management organisation
  • The Project Sponsor

The purpose of the project governance arrangements is:

  • To provide support to the Project Manager and a level of escalation for major issues
  • To authorise matters not delegated to the Project Manager
  • To ensure there is wide understanding and acceptance of key project issues within the project’s sponsoring and delivery organisations.

The terms of reference of the steering committee and the levels of delegation given to the Project Sponsor, steering committee, Project Manager and higher management representatives will be documented.  The governance arrangements may involve formal review and approval at key stages (“Stage Gates”).

PM Principle No. 4 – The Project Charter

It is essential that there be an agreement between the Sponsor and the Project Manager as to what the PM will deliver.  The Project Sponsor’s requirements must be set out in a document which forms an agreement between the Project Sponsor and the Project Manager. This agreement, which can be called the “project Charter” will contain sufficient information to ensure that fulfilment by the Project Manager will satisfy the requirements of the investment case. The Project Charter should only be amended by formal agreement between the Project Sponsor and the Project Manager.

The Project Charter will also specify any services to be provided by the Project Sponsor’s organisation.  Putting this in writing and signing it off will help ensure nothing is missed.

Best Practice for Clients – Contract Close-out

Avoid an extended commercial closeout

There must be an agreed set of criteria for plant acceptance and process for commercial handover.  As the plant approaches completion, snagging lists should be developed with both parties aiming to identify all items required for the plant to meet the specification.  This can be facilitated by joint walk-downs.  Avoid as far as possible “creeping” lists.   New items that arise once the plant has been taken into commercial operation are warranty items and should be dealt with under the warranty provisions of the contract.

Clients should not withhold money properly payable to the contractor on completion.  Contractors however should realise that clients often have difficulty retaining the attention of the contractor once the plant has been taken over. They may exercise their entitlement under the contract to retain money to ensure that the contractor finishes the work even if the contractor considers the retention to be disproportionate to the value of the remaining work.

Best Practice for Clients – Contract Implementation

Ensure excellent safety performance

There are several reasons why poor safety performance is associated with poor project performance. Poor safety performance is associated with poor site management (lack of clarity of who should do what, where and how; poor housekeeping; poor access or lighting for example); poor safety performance indicates a lack of awareness and attention to detail by managers, supervisors and craft workforce; safety management that does not meet the expectations of the site workforce leads to poor industrial relations. So whilst this document is not primarily about safety management, good safety management is a relevant factor in achieving good productivity

Clients need to be aware that the standards and expectations they set will have a major effect on the safety performance of contractors on their sites.

Ensure that safety provisions in contracts are followed. Do not allow safety to be used as a tool to gain commercial advantage. Senior management on both sides should be visibly committed to high standards of safety performance and should be seen to rise above any commercial differences in order to promote these.

Visible senior management involvement in safety on site and regular engagement with suppliers and all personnel on site usually has a remarkable effect in improving safety performance

Avoid late or slow start-up

Both the client and supplier senior personnel that negotiate the contract should be the ones to deliver the contract. This ensures maximum continuity of understanding of the contract and maximises the accountability that runs through the entire contract award and implementation phase.

Give the contractor space to perform. The site and interfaces must be made available when contractually required in such a way that the contractor’s access is unimpeded

Time extension during construction

The client should make available a competent and empowered team who can deal with technical matters such as design approvals quickly and efficiently.

The client should promote good communications and good industrial relations on site but should remember that he is not the employer of the construction workforce. He should simply ensure that the industrial relations management practices agreed in the contract are being followed.

Clients should recognise that the contractor has the right to organise and schedule the work as he wishes except where explicitly stated in the contract.

Having contracted with the supplier to deliver something, the client should not then start to do it himself. In particular, the client should not start directing the site workforce. Not only is this disruptive but it can blur safety responsibilities.

Cost escalation

Apply the contract and its mechanisms for payment, changes etc.

Even if the contract is “lump sum” the client should aim to be well informed about the health of the contract from the supplier’s viewpoint. This helps eliminate surprises. It is human nature to hide problems in the hope that they can be fixed before they become apparent to senior management. Problems need to be identified early and the most appropriate resources brought to bear in order that they do not become magnified. Once a problem exists, the first reaction will be for each party to fall back on the contract as a means of limiting their exposure to it and this rarely leads to constructive problem solving.

Poor change management

Minimise changes. Clients frequently underestimate the disruptive implications of changes on project cost and schedule. Even small changes can require significant re-work from design through to site. They are almost always more expensive for the supplier to carry out than clients estimate. In addition, suppliers will negotiate the best price they can for variations and will be in a strong position to do this.

Clear lines of accountability in the client organisation will minimise change and help eliminate the “nice-to-haves” because someone (the project manager) will provide robust challenge in order to safeguard schedule and budget.

Where changes are unavoidable, best efforts must be made to negotiate the price and programme implications before going ahead.

Ensure that it is clear who in the client organisation has the authority to administer the contract and give decisions. Ensure that the entire client team is aware of this and adheres to it.

Keep good records of activities on site to ensure that evidence exists that can allow changes and claims to be dealt with efficiently.

Deal with changes and claims as soon as possible.

Project controls

Clients must have contract management processes that are aligned to the nature of the contract. Processes for lump sum contracts will be different from those involving schedules of rates or where the contractor is paid cost plus fee. Remember, however, that even in a more “hands off” arrangement such as lump sum, the client can never have too much information about what is happening on the project.

Conflict management

Understand the contract. Ensure that the rights and obligations of both parties are understood and adhered to.

The relationship between client and contractor should be one of mutual respect and both should work constructively in the interests of the project. It should be borne in mind, however, that the parties each have their own commercial objectives so there is a limit to how closely they can collaborate.

Good, trustful working relationships, particularly on site, can lead to a constructive “give and take” approach on small issues that help the project and do not harm the commercial interests of either party. There is a balance to be struck here between insisting on strict application of the contract and allowing local problem solving and relationships to flourish.

Do not interfere in the relationship between contractor and sub-contractor. Do not get drawn into disputes between them.

Have effective lines of escalation within both the client and supplier organisations. Use these to support the respective project managers but only when agreement at their level is not possible. Higher-level management should provide a “safety valve” when relationships become adversarial.

Time extension during commissioning and handover

The team who are eventually to operate the plant should be appointed at an early enough stage to allow them to become familiar with the plant so that they can take a full and effective part in the handover and commissioning process. If the plant operator is not organisationally ready to take the plant over or is not “bought into” the plant that is being offered they will concentrate on finding reasons why the plant is not ready for commercial operation.

Clients must ensure they nominate effective persons who can partner with the supplier’s engineers to agree snagging lists and accept plant into commissioning and commercial operation.

Clients should point out non-conformances as soon as possible: there should be no surprises at the end of the contract.


Best Practice for Clients – Contract Award

Make sure your chosen contractor has made a realistic estimate of cost and schedule

Clients should ensure that suppliers do not over-commit, this includes timescales and performance as well as price.

The pressure within a client organisation to choose the lowest compliant bid is often irresistible. Projects are often at the limit of the required economic rate of return and the tendency within a client’s organisation can be to make optimistic, even heroic, assumptions. Clients need to judge as best they can whether a supplier has committed to something they cannot deliver (cost, timescales, performance).

It can seem that every time the tenderer is pressed on a particular point, the price goes up, which damages the predicted project economics. If clients are tempted to go ahead on the assumption that a supplier who has underestimated a risk will still be bound by contract to deliver, he must factor-in the risk.

Clients should be conscious of how timescales for the project are developing during the contract placing phase and the implications of slippages. There is particular danger when the start date slips but the completion date is fixed by factors such as regulatory requirements. There is danger when there is pressure from the client’s board to delay commitment in the expectation of better information without recognising the increasing pressure on the project. Suppliers will still be in sales mode and will be reluctant to say “stop”. A strong project management function within the client’s organisation will help with the appreciation of this risk.

Run a good contractor selection process

A realistic appraisal of the supplier’s capability is required. In particular, has the supplier relevant experience in the location in which the plant is to be built? Productivity factors and industrial relations management can deviate significantly from country to country.

The supplier’s preparedness to undertake the work should be rigorously tested before a contract is placed.

Good communications

Ensure appropriate level of contact with suppliers during the tender period. Be available to answer queries (recognising that any information supplied will need to be given to all tenderers). Be clear about the approvals process within the client organisation and the timescales required for this. If delays are anticipated, communicate these pro-actively so as to retain confidence and reduce the risk of suppliers dropping out.

Competent contractor personnel

Ensure that the supplier has personnel who are competent to do the work. For complex projects, the quality of leadership at senior level within the project is critical to success.   Highly effective project and site managers are in short supply. Ensure that the persons put forward in the tender phase are the ones who will deliver the project.

Make sure key project risks are understood

Clients must ensure they have comprehensively evaluated the project risks and the ability of a contractor to handle those risks. It is also in the client’s interests to ensure that the contractor understands those risks at time of tender and is realistic about his own capabilities. Site-specific conditions such as the sub-supplier availabilities and local industrial relations practices must be understood.

Ensure you have the right team in place to manage the contract

The client must have a team who are competent to manage the contract. They should understand the client’s obligations and what clients should and should not do to ensure the smooth running of the contract. Having a professional and experienced team on the client side will encourage the contractor to provide the same. It takes time and experience and people with the right attitudes to manage complex contracts and projects and these competences should be recognised and nurtured in a client organisation.


Best Practice for Clients – Pre-Contract Award

Clients must have realistic expectations

The client needs to be an informed buyer and if the relevant knowledge is not available in the client’s own organisation, appropriate independent experts should be engaged. Being an informed buyer will ensure that expectations are realistic and will establish the client as a credible customer with whom suppliers should engage.

Clients should ensure that suitably experienced project management and commercial personnel are involved in the project from the beginning of the pre-contract phase. Decisions made at this stage can have profound implications for the successful delivery of the project.

Clients need to ensure that they know who the credible suppliers are and what their capabilities and limitations are. This will help to avoid inappropriate breakdown of work into packages, time wasting and lack of credibility on the part of the client.

Understand whether it is a buyer’s market or a seller’s market. If it is a buyer’s market, good deals can be done but be realistic that suppliers may be tempted to over-commit and then seek to recover their position downstream, or may fail to deliver. Lack of suitable resources (people, money) in the execution phase will lead to poor productivity, spiralling delays and cost overruns.

Clients need to be realistic about the commercial terms that are achievable. Whilst it is appropriate to “aim high” in a commercial negotiation, be realistic about the level of liquidated damages, bonding etc.

Be realistic about the time needed to tender and the time needed to complete the work. Suppliers will rarely say “no” at this stage because their sales teams are managing the process and they do not want to rule themselves out of the competition.

Avoid a protracted pre-qualification process

Clients need to engage early with suppliers and explain the process, timescales that will be involved in getting to contract award. This will generate confidence and help suppliers to put appropriate resources in place to respond.

Clients must make sure a pre-qualification process is efficient. It therefore needs to be targeted at relevant suppliers and to have criteria that are relevant to the project. Early relationship building at an appropriately senior level will help ensure that a scattergun approach is avoided.

Regular communication between people at an appropriate level of seniority in both organisations is essential, particularly during the pre-contract award and contract award phases.

Make sure your enquiry packages are complete when seeking bids

Project definition must be sufficiently advance that clients can be clear about what they want, at least closely enough that an enquiry specification will not contain numerous options. Options can be expensive to price and damage project credibility.

Whilst the bid process should allow suppliers some scope to be able to make their best offer to meet the client’s requirements and to make some design proposals, it should not be treated by the client as a means of getting free engineering consultancy from suppliers.

Technical specifications need to be clear and complete. Interfaces between packages need to be clear and back-to-back. Errors or ambiguities will be expensive to correct later.

Make sure you specify the right level of equipment and services

Clients should not over- or under-specify. The level of detail needs to be such as to define what is required and the appropriate quality. If the client over-specifies, the cost may be unnecessarily high, if he under-specifies the supplier will be able to provide the cheapest solution, which may not give the best through-life economics.

Undertake a risk analysis. Try to establish where the problems are likely to occur on a contract. For example, are suppliers likely to source components from non-traditional markets? To what extent is the plant being offered “new technology”? Be realistic about the problems this is likely to cause, especially if the price appears compelling.

Make sure you can engage competent contractors

Clients often try to place contracts at a time when the market is overheated, which will mean supplier resources and competences are diluted. This can happen when a number of clients in the same sector are seeking to place work because they have all identified an economic opportunity or to meet a legislative change (such as new environmental regulations). Clients need to monitor developments closely and not simply assume that supplier capacity is limitlessly elastic.

Clients need to generate confidence in the project if they are to engage the most competent suppliers. Suppliers also need to be confident that the number of suppliers who will be asked to bid is not so large that the chances of winning are small. New entrants to a market who do not have a long business presence will need to work particularly hard to establish credibility

Clients should avoid engaging, deliberately or by default, a single potential supplier to help formulate designs and costs estimates. This will be perceived within the supply market as giving that supplier an unassailable advantage and will discourage other bidders. Note that this very often happens when a project is at the development stage in a client’s organisation and project management and commercial professionals have not yet become involved.