Project Management - Contracts & Outsourcing

A project manager has to see a lot of activities in the nature of administrative, technical, socio-economic and environmental. If the manager is an engineer, supervision of technical jobs would be some-what easy. But other areas would receive less attention.

It is, therefore, imperative that the manager, in consultation with the board of directors, passes on some activities to contractors. This is known as out-sourcing which involves sub-contracting to a third party some of the activities like machine fabrication and installation, product design, manufacture and even marketing. Many multinational companies have outsourced routine jobs such as pay role, tax accounting, recruitment call center services and e-mails.

There are certain advantages in out-sourcing such as (i) The company can focus on its core activities, (ii) it would be cheaper and efficient, (iii) and over-heads would be reduced. But at the same time, there are dis-advantages like (i) threat to security and confidentiality, (ii) bad publicity, (iii) becoming hostage in hands of unscrupulous supplier, and (iv) hidden costs.

New type of out-sourcing are coming up, one is BOOT (Build, Own, Operate & Transfer). Laraib, a company, is developing a hydel power project, New Bong Escape. The company would use it own funds, carrying out all activities in its own name, operate the plant when completed, sell power to distribution company under usual tariff and transfer it to Government of Pakistan at the end of 25-year term. Many bridges and flyovers have been constructed under this arrangement and owners are happy with the toll tax being collected by their staff.

Other forms a are:

• BO ( Build and Operate ). Pakistan’s largest private power project, HUBCO, was constructed and operated by National Power of UK under this arrangement. Some call it Turn-key projects where sponsors would accept the project only when they are satisfied with its operational efficiency. It is like building a University Campus and attracting a desired number of students (say 2,000). There are penalties if there is a delay which is some time equal to Return on Investment made by the sponsors.
• BOO (Build, Own, Operate). A private party complete the project, owns it and puts into operations. There is some different from purely private investment as BOO is carried out for infra-structural projects like building a private railway line. Here government ensures that the land is obtained under some legal framework otherwise, a private party can never force the land owners to sell it to the project.

When one outsources, one should pick up a suitable type of contract, some of which are listed below:

• Lump Sum Contract
• Unit Price Contract
• Cost Plus Contract
• Incentive Contracts
• Percentage of Construction Fee Contracts

To cut short, there two major type of contracts: (i) Lump Sum Contract (Fixed Cost) and (ii) Cost Plus % returns. In the latter, there is a danger of conflict of interest. If the contractor tries to be honest and efficient, it would reduce cost and thereby its returns. On the contrary, over-costing would lead to fat returns. If the contract is modified as cost plus a fixed fee, the drawback would be eliminated.

Advantages and dis-advantages of both are given below:

 When procuring machinery or vehicle from outside, a project manager must spell out what he or she is looking for.  Not only technical specification be given but also functional aspects be stated in details.  This would help the supplier to offer a suitable or appropriate piece of machinery for long term business relations.  This is explained below: