Contractor/Vendor Selection: Bridging The Communication Gap

Susan Peterson, M.B.A., PMP 2008,
Copyright Susan Peterson, All Rights Reserved

In the continuing series on outsourcing project work this month’s column addresses the challenges related to selecting those individuals and/or organizations that will provide the expertise needed for specific activities. All too often this process is filled with “communication disconnects” in documenting what is needed from contractors/vendors. Whether one uses requests for proposal (RFPs), requests for information (RFIs), or other types of vendor solicitation documents, clear definition is critical. I have participated in the election process in multiple roles including leading the selection process, writing solicitation documents for clients, and responding to client proposals. The following areas are primary considerations to effectively facilitate the project vendor selection and subsequently the contracting process.

Be specific -- even if it hurts.
There is no substitute for clarity in specifying what activities need to be performed. Too often project leaders feel that there is not enough time to fully document requirements or specifications. They also may feel that providing detailed documentation means that there will be no room for negotiation if there are changes during the project. Sometimes, there are situations when many of the details regarding a project work need are unknown. In any case, providing more clear definition is better than merely documenting the are minimum requirements. In those instances where little is known, the solicitation document can state the situation and request that the respondents provide their best solutions. Otherwise, the vendors will be forced to respond vaguely or to guess (often incorrectly) about what was intended.

The project manager should also include a template for responses in order to obtain usable information that is comparable across all responses. For example, a cost template should be provided so that the breakout of costs can be readily compared among vendors. Vendors have a variety of costs that may or may not be included in an hourly rate, so the project manager needs to know what is covered in order to avoid surprises later. Also, it may appear to speed the review of responses by including a number of expertise or capability questions that can be answered "yes" or "no". However few respondents will answer "no", knowing full well that a ”no” response can be the basis for rejection while there is “always a way” to provide the “yes”.

“How ‘good’ is ‘good’”?
In order to avoid nasty confrontations during the course of the project that are always counter-productive, the solicitation should include tangible definitions of quality and performance. These definitions should correlate not only with the final deliverables but also with appropriately scheduled interim deliverables. If the potential respondents have not performed project work for the organization in the recent past, these interim deliverables may be scheduled more frequently. Acceptance criteria should also be clearly defined. For example, there are numerous “horror stories" about the disasters caused by the interpretation of "The
software has been fully tested”.

It never gets any better than the “courtship”
One would assume that potential contractors/vendors would present their best possible images to project managers during the selection process. However, I have seen solicitation responses that consisted of photocopied pages stapled together in no apparent sequence. Conversely, I have also seen responses that ere nothing but “color-coordinated glitz". While few relationships are perfect, the project manager needs to assess the overall caliber of a contractor/vendor's response in order to better predict the quality of the future relationship.

Contractors/vendors are human beings.
I once heard about a company that circulated many solicitations but that never awarded any contracts. This company took all of the responses and used the information to conduct the work in-house. It is expensive for contractors and vendors to respond to project solicitations. These costs are not recoverable. Project managers need to be prudent in soliciting responses to proposals. Once the contract has been finalized, all respondents should be notified. While a contractor/vendor may not be suitable for one project, it may be a “good fit” for other projects.

As with all successful relationships, effectively working with outside project personnel requires good upfront research, objective review, and ongoing management. Next month’s column concludes the outsourcing series with best practices to manage contractors/vendors in a project environment.

Susan Peterson, M.B.A., PMP, is a consultant who manages diverse programs and projects in both the private and public sectors for individual organizations and consortia. She also conducts enterprise assessments of project portfolio management practices. An overview of her program and project specialties is available at http://www.pmi-sd.org/Consultants. She teaches the Project Management Simulation capstone course in the University of California, San Diego, Project Management Certificate program and is a member of the curriculum committee. She can be contacted at susanada@aol.com.

Outsourcing Sounds Good -- But What’s The Cost?

By: Susan Peterson, M.B.A., PMP Copyright 2008, Susan Peterson, All Rights Reserved

Continuing the column series theme of outsourcing, let’s assume that you’ve decided that your project has some definite needs for expertise and/or skills that are not found or that are not readily available inside your organization. As mentioned in last month’s column, the base cost of an activity can be an illusive factor to accurately calculate. There are a number of considerations to assess when determining the “true” cost of performing work. In addition to the base cost, organizations that perform outsourced work will include at a minimum a profit margin and an overhead factor. A project manager who is considering outsourcing needs to be prepared with realistic assessments in advance of contractor negotiations. In this month’s column we cut through some of the “smoke and mirrors” that seem to accompany so many cost estimates and uncover the underlying factors that are major influences of project work costs. Think of the following narrative as a bridge etween accounting textbooks and grim reality.

Do we “have a clue” what it costs us to do this work in house?
Even when using the most sophisticated project accounting systems, it may be difficult to isolate typical costs for specific types of work. A good starting point is to define and document the tasks, the performance measures, and the “allowable” variances. Another critical component of this exercise is to assess areas of risk and to determine which risk areas will be transferred or shared as a part of an outsourcing relationship. Once all of this information has been compiled, an estimate of in-house hours and costs can be determined. Typically, this estimate will be higher than project sponsors want to acknowledge. A project manager needs to hold firm amidst pressure to eliminate tasks in order to “cut costs”. Providing an overly optimistic estimate of work required to an outsourcing organization invariably leads to additional charges and schedule extensions hen the actual hours overrun the false estimate.

What don’t we know?
There are those situations when organizations do not know all of the factors about the work that needs to be performed because the work has never been done in-house. Particularly if the work involves new or unproven technology, custom equipment, or specialized skills, project managers may feel unqualified to estimate the actual level of effort that is involved. In these cases some upfront research is necessary. While a project manager may not uncover all of the aspects related to a particular activity, he/she should obtain enough information to avoid being “blown away” by potential contractors that may inflate the effort, complexity, and investment necessary to perform specific work. It is also necessary that the project manager have a “healthy respect” for the actual challenges that are inherent in unfamiliar work.

Let’s “get real” about our expectations
One of the more prevalent areas of misunderstanding between organizations and contractors concerns expectations. While project managers may believe that specifications and requirements have fully documented every aspect of each activity and deliverable, there are unwritten expectations that are assumed. Often these expectations are based on the work culture of the organization. The bottom line about expectations is “don’t ake anything for granted”. Some areas that the organization needs to consider include the following:

• Project management -- What project management practices are used in-house? Is the project manager expected to oversee the contractor’s personnel, to be responsible for quality of outsourced deliverables, etc?
• Service levels -- How accessible do contractor management and personnel need to be (especially important in global outsourcing)? What turnaround is expected on interim decisions? Are a number of decisions made “on the fly”?
• Deadlines -- What does “completed” really mean for each deliverable?
• Unanticipated problems -- What degree of flexibility or agility is considered the “norm” in-house, meaning are problems “worked around”, solved, or ignored?

Readers will note that no traditional accounting principles were detailed in this discussion of project cost considerations. While there are numerous publications that address specific quantitative approaches, it is the realistic definition of work, risk, and expectations that must be determined before any cost numbers can be ffectively applied.

Susan Peterson, M.B.A., PMP, is a consultant who manages diverse programs and projects in both the private and public sectors for individual organizations and consortia. She also conducts enterprise assessments of project portfolio management practices. An overview of her program and project specialties is available at http://www.pmi-sd.org/Consultants. She teaches the Project Management Simulation capstone course in the University of California, San Diego, Project Management certificate program and is a member of the curriculum committee. She can be contacted at susanada@aol.com.

PMP® Challenge Question - 2/1

There were no correct responses to the last challenge question, so I'll hold those questions for future use. Here's a fresh question to start off February:

An Earned Value Analysis for a recently closed out project revealed:

SPI = 0.7, CPI = 1.0

State at least THREE conclusions you can draw from this statement.

See you on 2/15 with the correct answer!

Earn Your Value (Part III)

To recap parts one and two of this post, we saw:

- how earned value is useful for monitoring both costs and schedule
- the basic formulas used to see if our projects are off track (and by how much)
- the recommendation that earned value be looked at weekly
- the ideal values for cost and schedule index are one (1.0)
- a simple way of communicating earned value information to our clients.

This week I'd like to take a look at the things we can do to manage our projects, especially if the CI and/or SI is much bigger or much smaller than one. Note that I can merely suggest causes -- you will need to diligently look at your projects and their circumstances to arrive at the conclusion right for you. You may want to produce a graph or visual of your progress so you can pinpoint the time at which things started to go south.

CI << 1 and SI = 1
Being on schedule but over budget might represent a significantly underestimated budget (or a tight budget dictated by the project sponsor), a purchase which required significantly more dollars, or a significant amount of paid overtime to keep the timeline. Since the money is gone, this is difficult to mitigate and bring back on track. Significant re-planning or re-phasing of the project may help. Its probably best at this point to be more concerned about keeping on schedule while watching over the budget more carefully as you go forward.

CI = 1 and SI >> 1
Being ahead of schedule and on budget has some usual generic causes you need to look at first. One is common for construction and other projects relying on good weather -- there was insufficient time in the schedule to mitigate a long run of bad weather. Needless to say, with the delay, you may have resources not working at optimum rates since less work has been completed. You may also have fewer resources working on your project than needed. They are less expensive resources, but the job isn't getting done. You need to look carefully at your resource and risk plans to sort this out.

CI >> 1 and SI = 1
Under budget but still on schedule? This could be enviable, or it might be a sign of unpaid overtime not being tracked. Still, you will probably do best to determine the cause and keep the project on schedule without being overly concerned about budget.

CI >> 1 and SI << 1 In this case, you are under budget, but behind on schedule. The most likely cause is in your resource plan again -- you may have too few resources or are waiting for supplies.

CI << 1 and SI << 1
This is far more typical of troubled projects -- they have problems with both budget and schedule. Worst case, the project is ready for termination. You may have to continue working due to contractual circumstances, but its going to be difficult to correct both costs and schedule. You may have to consider asking for more budget to make some favorable adjustments to the schedule, or shifting some of the work to subsequent project phases. This situation requires the most analysis and judgement to correct.

CI >> 1 and SI >> 1
The answer to being significantly ahead of both schedule and budget usually lies in "sandbagged" estimates. Everyone was a little too cautious and added too much time and money. There may have also been very favorable conditions. You probably want to consider sacrificing some of the budget for the greater good of the company and its project portfolio. Planning for an early release of resources may be necessary as well. In any event, make sure you keep a reasonable contingency (say 15%) available in case your lucky streak stops!

As a final thought, you might want to calcuate what is sometimes called the critical ratio for your project, which multiplies the Cost Index and Schedule Index. This helps you arrive at a single number combining cost and schedule and allows you some leeway in each. As always, if you have a question or comment, feel free to drop me a line at sdcapmp@aol.com or as a comment to this entry.

Happy New Year!

Earn Your Value (Part II)

Last week we looked at the basic principles and formulas surrounding Earned Value Management. While the full practice of EVM may be very complex, it also provides a simple way to update clients on the status of smaller projects. But before we look at the "how", let's take a look at the "how often".


The frequency will actually depend on many things, but I recommend you start with once a week. If a month passes by and there's a problem, its usually too late to do anything about it. Once a week allows you to keep closer track of expenditures and invoices. Once a week also let's the client see the progress. You can always skip reporting for a week if you didn't work on the project, but you still need to follow up on tracking of expenditures and invoices. I usually log expenditures, invoices, and payments to see the full project picture.

Your weekly report to clients needs to contain the basics of cost and schedule variance, plus an estimate of the remaining expenses. Knowing the cost and schedule indices isn't necessarily of interest to a client, but its useful information to determine project health. Rather than include it, you might use it in a formula to color code the information. The basic format I've used for clients is:

Note that each project and change request is listed separately. The client clearly sees the weekly progress of what was projected vs. the actual expenditures. At the start of the status reporting, I include an explanation of what each column means. A simple footnote under the table explains any significant deviations. Whenever I used this format for client projects, I never had issues getting the client to pay the bill. They clearly saw what was happening from week-to-week -- there were no surprises.

You might improve upon this slightly by color coding based on the indicies. Anything around a 1.0 is good. Anything too large may be too good to be true and anything less than .9 may indicate an issue which needs to be addressed. You can decide the actual performance based on how tightly you need to control the project.

So to recap, last week we looked at the basic Earned Value formulas. This week we looked at a very simple way to apply the formulas and report the data. Next time we'll take a look at how to apply the data in a meaningful way to manage projects.

Happy Holidays to all!

Earn Your Value (Part I)

As I was thinking about what to write this week, I noticed my only mention of Earned Value Management was both brief and some time ago. Its an important topic, so I'm going to devote my next three entries to it. This week, we're going to look at the basics. Next week, we'll look at how to report Earned Value to clients and stakeholders. In the third and final post in this series, we'll look at how to use Earned Value Management principles to manage projects.

The usual illustrative story of Earned Value goes something like this ... you hire a painter to paint four walls in four days. Each day is budgeted for $1,000 for a total of $4,000. If at the end of 2 days, I tell you the painters spent $1,500, do you know what the status of the project is?

The answer is "No" because you don't know how much work was actually completed. If I were to tell you the painters finished 3.5 walls, would you know? Also "No" because you don't know how much was spent.

Earned Value is a project management technique which can help you look at time, cost, and performance of your project -- you see the relationships between all the dimensions and not just a view of one. There are simple calculations to provide you with the amount of deviation from schedule and costs, plus performance factors which can be used to predict the future performance of your project. Even simple projects or consulting engagements can benefit from application of the key principles.

The 4 basic formulas to remember are quite simple:

CV = EV– AC -- the cost variance is the earned value less the actual cost

SV = EV– PV -- the schedule variance is the earned value less the planned value
CI = EV/AC -- the cost index is earned value divided by actual costs

SI = EV/PV -- the schedule index is earned value divided by planned value

Basically these formulas help you to understand:

- how far from planned costs and schedule am I?

- at what rate am I deviating from planned costs and schedule

The planned value in the illustrative example is $2,000, the cost of the work planned for by the end of the second day. Since I completed 3.5 days of work, the earned value is $3,500. You can see at a glance that I'm ahead of schedule as well as ahead of my budget. This means the cost index and schedule index will both be greater than 1.

At the end of day 2, I now have several good ways to update my project estimate. If I think the savings I accrued in the first two days of the project are typical of what I will experience for the rest of the project, I can multiple my final estimated budget ($4,000) by the inverse of the cost index. This gives me a new estimated final budget of $1,720. On the other hand, I might judge this not to be typical, in which case I might re-plan the remainder of the project, looking closely at the quality of the work completed and any obstacles which could slow down the finishing of the last 1/2 wall.

Of course this is a very simple example and a more complex schedule or budget would require considerably more analysis. As additional resources, there is an extensive bibliography online, an excellent training resource is Roger Mandel, and Quentin Fleming's (pictured above) book which describes earned value project management in its most fundamental form.

Don't forget to check back next week to see how we can share Earned Value information with clients and stakeholders.

PMP Challenge Question - 10/1

Don't forget to review the 9/15 question for the rules of the PMP Exam Prep giveaway. The answers will be posted at the end of the entry period.

Now here's the 10/1 question:

If the Net Present Value (NPV) of project A is $40K (and the project takes 2 years to complete) and for project B it is $60K (project takes 5 years to complete), which project would you rather undertake and why?

Good luck!

Managing Risks of Fixed Costs

Last week we looked at fixed schedule, so its only natural to want to look at fixed costs too. Or perhaps I should more precisely say "fixed price" since fixed costs have a connotation of overhead. And there's a further clarification to make as well (finances are so much more complex than schedule and time) -- we're talking about risk to the seller. Many buyers like fixed prices since they know exactly what their budget will be, but its the seller who has to manage most, if not all, of the risk.

Now with the clarifications aside, here's my top 5 list:

1. Well defined scope and specifications: Having a well defined project scope and necessary specifications will make it easier to manage and estimate. Uncertainty leads to errors.

2. Diligently completed estimates: if there was ever a time to be cautious in estimating, this is it. Obviously you're not going to be able to "sandbag", but a carefully thought out and documented estimate provides a solid basis for success. Be sure to have it carefully reviewed and drill down where ever there is uncertainty or poorly defined specifications. Here's a great place to look at historical information on similar projects.

3. Track all expenditures as they happen, not when the invoice arrives: problems like delayed mail or slow vendor billing cycles can allow problems to go unseen. Estimate every expenditure and then compare to actuals. Use earned value methods if possible. Any deviations or unresolved differences need an immediate review.

4. Track time as carefully as costs: time often translates to money, and lost time can translate to unexpected costs.

5. Don't be afraid to negotiate: its called fixed price, but the unexpected still happens. Obviously things like "I forget to add it into the estimate" aren't going to fly, but legitimate additional time, expenses or scope can be negotiated if the costs become excessive. My company was the buyer of a fixed price contract that went on for an additional year or so because the company had an internal change of plans and was unable to assist the seller with certain aspects of the project originally promised. The seller was patient for a long time, but finally came back and rightfully negotiated to have some of the additional costs covered.

That covers my list! As always, comments welcome in the post or to sdcapmp@aol.com. Thanks for stopping by!

PMP Challenge Question - 9/15

Before we get into the next question and the answer to the last one, here is how you can get a PMP Exam Prep book including PMP(r) Exam Success Series from Crosswind Project Management. This includes their "Brain Dump" review card and CD Exam Simulator. For a lucky runner up, I have a Prepare for the PMP(r) Exam: Formulas and Important Facts to Remember card from Value Based Project Management.


To be eligible for these prizes, you must:


a) correctly answer 2 of the next 3 PMP challenge questions (that would include 9/15, 10/1, and 10/15)

b) email your responses to sdcapmp@aol.com before 12:01am 10/30/2007

c) have your name drawn from the eligible emails received.


Winners will be notified by email and will need to supply a mailing address for prizes.


Note I won't be posting answers to these questions until after 10/30. I always acknowledge receipt of emails, so if you don't hear from me in 24-48 hours, you might want to try me again.


So first, here is today's challenge question:


Task A is worth $400, is 95% complete, and actually cost $395 so far. Task B is worth $350, is 85% complete, and actually cost $330 so far. Task C is worth $500, is 100% complete, and actually cost $450. Task D is worth $1,000, is and is not started. In Earned Value terms, what is the value of AC for this project?


Now let's take a look at the answer to the 9/1 Challenge Question:

I asked you to calculate the PERT value for the network presented on 8/1 and 8/15 using the Early Start, Duration, and Early Finish. I'm going to show you what it looks like when you use the critical path with the most tasks. This is probably most representative of the PERT time, but you could use the second critical path as well for validation. The key facts to solving the question are:


1) PERT is a weigthed average of the most likly, most pessimistic, and most optimistic time.

2) You cannot add standard deviations, so you need to compute the variance to determine the range of confidence.

A chart of the tablular results can be found here.

Adding the numbers together, we calcuate the PERT duration as 33.16 units +/- 10.76 units at one confidence interval.

Good luck with the next challenge!

Timing of Status Information Counts

In general, I recommend checking in on project status no less than once a week. If you wait longer, say two weeks, by the time you find out an issue, get it solved, confirm the solution, and make sure things are on track, you can lose up to six weeks. Serious issues may require more frequent meetings than weekly so you can stay on top of the solution. The key is both flexibility and good judgement.

When it comes to controlling project costs, the timing may be even more important. The timing of money commitment, the actual expenditure,the arrival of the bill, and the payment of that bill may occur at drastically different times. To be sure things are appropriately tracked, you should:

- develop a budget
- have an appropriate change control method in place to manage scope and finances
- take note of when the expense was incurred
- promptly forward bills for payment
- carefully monitor the budget
- take action in a prompt and timely manner if financial targets aren't being met.

Likewise, when time is money, you will need timely and accurate information. I recently had a project go over budget since the time report was about two weeks behind and I didn't know exactly how much time was being devoted to the project (fractional resources present their own challenges) by a team member.

While thinking about and preparing this article I discovered this web site by Max Wideman that elaborates further on the topic. May all your projects be on budget!

Look Before the Project - Part I

For the next few weeks I'd like to take a closer look at initiating projects, with special attention to costs. This is an area of weakness for many who jump in to do work before looking at the consequences or rewards. Rather than use a microsope, you need a telescope to see to the far and of the project. We'll focus on costs, but once again, there are many other factors which must be analyzed.

There are many different methods and techniques, but one easy one is to determine the ratio of benefits to costs, starting with the "hard dollars" -- the real cash to be spent and saved. This is also a good sales tool since it shows the tangible benefit of buying the project, product, or services. One easy illustration can be found in imaging systems.

Let's looks at the hypothetical costs of the imaging system -- a small server ($5,000), software ($100,000 -- its a high end package), and a high speed scanner ($10,000). We may also need to pay someone to install the system ($20,000) and someone to operate the scanner ($75,000/year in salary and benefits). We may also want to spend $25,000 to train our staff. This means that in a year we will spend a total of $200,000 for our imaging system.

Now we need to look at the hard dollar savings. Through attrition and re-organization, we can reduce our clerical staff. Let's say we save $150,000 in salary and benefits from two clerical positions. Surely we will be able to reduce paper, file cabinet, and office supply costs. A case of moderately priced paper can be $40. If we project savings of 1,000 cases a year (a small amount for many larger companies), that's $40,000. Let's call it $50,000 to include file cabinets and other supplies such as paper clips and file folders. I've also found many large companies lease storage to keep all the paper and file cabinets. Let's assume the lease savings are $100,000 per year. So far, we have identified $300,000.

Of course we could continue on and look at the possibility of more hard dollar costs and savings, but now let's look at the less tangible items. Imaging industry associations may tell us a missing file or paper can take an average of a half hour to locate. How many times have you lost paper? Once a week? Once a month? Who conducts the search for the missing paper and what are they paid per hour? How about productivity of employees who no longer have to get up and walk to the filing room, but can access the image of the piece of paper right from their desktop workstation? These can be either factored directly into the ratio , or more likely, just annotations to back up the hard dollars.

As you can see, the benefits of our hypothetical project outweigh the costs, making the ratio greater than 1. If we line up all potential projects, look at their specific benefit-cost ratio or BCR, we can get a picture of which are the best candidates from a financial standpoint -- the projects with the largest ratio. In fact, most imaging proposals have fairly high hard dollar benefit cost ratios. So why aren't we all working in a paperless world? Well that's beyond the scope of this article!

Have any questions about BCR? Please post them in the comments. Next week, we'll take a look at a more modern approach -- Total Cost of Ownership or TCO.

Keeping Your Project on Track with Earned Value

A lot of folks in San Diego wonder how the construction of Petco Park, a managed project, could have possibly spent all the funding before it was half completed without anyone knowing. While I certainly don't have proof as to the actual cause, there is one very good way projects can get into this state -- they failed to look at all three key project success factors -- time, cost, and performance.

The usual illustrative story goes something like this ... you hire a painter to paint four walls in four days. Each day is budgeted for $1,000 for a total of $4,000. If at the end of 2 days, I tell you the painters spent $1,500, do you know what the status of the project is? No because you don't know how much work was actually completed. If I were to tell you the painters finished 3.5 walls, would you know? No, because you don't know how much was spent.

Earned Value is a project management technique which can help you look at time, cost, and performance of your project. Using it can provide an early warning of issues which need to be addressed before they permanently derail your project. Like many other tools, its use must be scaled to your project. Employing all elements of the methodology may be too costly or not including enough may oversimplify and provide a false view of your progress. There are also some limitations -- if you don't have a real plan of any kind, there will be nothing to measure.

The basic principles of Earned Value are easy to understand. There are simple calculations to provide you with the amount of deviation from schedule and costs, plus performance factors which can be used to predict the future performance of your project. Even simple projects or consulting engagements can benefit from application of the key principles.

For more information and resources on Earned Value, please visit http://www.acq.osd.mil/pm/. The DOD was a very early adopter of the technique and has some of the best resources available. Don't be caught with a project that's half done but already over budget -- look over this information for techniques which will help keep your projects on the right track.