Delivering contracted work successfully
The challenges that an SME faces after winning a contract are many. We will take a look at how SMEs can deliver contracted work successfully with effective management of three critical aspects – scope, time and costs. In addition, will learn some lessons from the world's largest security firm G4S's contract to provide sector security personnel for the Olympic Games held in London.
Nick Buckles, CEO, G4S, was ecstatic that they had won the contract to provide security cover for the London Olympics. When it was over, he was quoted as saying that he regretted having signed the contract in the first place. While G4S did not exactly fail in doing what it set out to do, which was supplying 2000 personnel, history will mark its engagement as a contractual failure. Taking this case as an example, we look at the three keys to managing a contract successfully.
Work the scope
The first key to fulfilling a contract is simply to deliver what has been promised. During the bid, bidders often use value addition as a differentiator to position themselves as chosen vendors for fulfilling the contract. However, a large percentage of contracts fail because deliverables are not managed well. Simply put, any mismanagement of the scope of a contract threatens to bring disastrous results. The scope defines what must be done as part of a contract’s fulfillment and more importantly, what will not be done. Once this is understood, all work efforts must be directed to ensure that the results are delivered in the expected time.
Any significant change to a contract’s scope will resonate ominously in terms of both cost and time. Sometimes, contracts may be either time-bound or resource-limited. In a time-bound contract, any incremental changes to the scope can result in cost escalation while in a resource-limited contract such changes can result in extensions of the timeline. SMEs must examine their resource capability closely to recognise whether they can address a scope change, as even big players can falter here. Sub-contracting is a strategy that can be adopted in such instances if the contract terms permit it. If scope changes are drastic, revisit plans and estimates and opt for separate contracts to ensure the fulfillment of the primary contract.
The Example: It was initially estimated that the Olympic Games would need 10,000 security personnel, of which 8,000 would be volunteers or come through a publicly funded recruitment scheme. G4S won the contract to provide the remaining 2,000 based on a very competitive price bid. When asked about resource planning, Ian Horseman-Sewell, Account Manager for the Games, G4S, was quoted as saying that G4S had the potential to run an event in Australia at the same time as providing staff at the Olympics. However, toward the end of 2011 the initial estimate of 10,000 had more than doubled itself to become 23,700 personnel! The scope of work had just doubled. G4S took the challenge and renegotiated their contract to raise their billing from GBP 86 million to GBP 284 million for the additional personnel. However, G4S was able to provide only 13,700 personnel. Though this was nearly seven times the initial estimate, it eventually resulted in contract failure.
- Deliver the scope in its entirety
- Subcontract if resource pool is not resilient
- Address drastic scope changes through separate contracts
Fence the cost
A scenario familiar to the SME is one where the cost of fulfilling a contract ends up bleeding its profit lines. Increase in costs may result in incomplete delivery and failure to complete the contract. No single disastrous event causes costs to escalate. Multiple decisions by project managers across the contract timeline contribute to cost escalation. Among SMEs, lack of experience and knowledge in dealing with complexity and uncertainty can influence the decision making.
While external reasons such as inflation can influence costs, the common reasons SMEs register losses are closer home. Faulty estimation techniques, poor planning, weak processes, uninformed decisions, absence of periodic cost reviews and inadequate quality control contribute to cost escalations. The second key to successful completion of contracts is to have sound estimation, planning and review of cost. It is important to remember that estimates are just best guesses when it comes to planning. While plans look good on paper, well defined processes and informed decisions help shape reality.
The Example: Reviewing the Olympic Games contract, Nick Buckles, CEO, G4S, was quoted as saying, “We did this purely because we wanted to have a successful security operation at the Olympics. It is not particularly financially lucrative for us. It was much more about, ironically, reputation and building it for the future.” Unfortunately, the contract resulted in negative reputation for G4S. G4S had to take an additional USD 80 million hit for failure to complete the contract, lose reputation due to public perception of the failure and suffer loss of goodwill as reflected in share value. This was despite raising management cost estimates nine times and operational costs twenty times the initial estimate.
Most contracts are undervalued by nature. Add cost competitiveness of bidders to this and the result is a contract with thin margins and tight specifications. Quality control ensures that the scope is addressed completely. Rejected work and rework increases costs, while scope changes and resource scarcity challenge the SME by narrowing profit margins. SMEs can fence project costs by conducting periodic cost reviews to choose better options and make more informed decisions.
- Use sound basis for cost estimations
- Review cost information during decision making
- Factor quality control to assure work scope
Watch the time
SMEs need to be exceptionally cautious about any time overruns. Time overruns inevitably result in cost escalations. Internal reasons for time overruns can arise from the poor planning, supplier, inspection or logistical delays, assembly lines problems, resource scarcity and rework. Time-consuming negotiations with partners, suppliers and labourers can also eat into the contract time.
The third key to successful contract fulfillment is to have a well-defined work schedule and plan for resources to be phased in and out of the project. SMEs need to define milestones and interim deliverables that will also help them keep track of resource usage and availability to complete the contract. Review supplier and partner performance periodically to identify delays early on and compensate for them. SMEs with the ability to leverage time by arranging work creatively will stand to gain from resource and work efficiencies.
The Example: With just six months to go before the start of the Games, G4S agreed to provide nearly seven times as many personnel as it had agreed to provide initially. This meant that recruitment would have to increase by 400%. It should have been obvious to both G4S and the Games organisers that it was a logistical impossibility to process more than 8,000 security industry authority applications in such a short period. The initial shortfall acknowledged by G4S was 3,500 personnel. The Home Secretary was made aware of the shortfall just two weeks before the start of the Games. Being a time-bound national contract, the Cabinethad to intervene and rescue the situation by deploying an extra 3,500 military personnel to fill the gap. An additional 1,200 personnel were added later and G4S agreed to foot the bill of the military personnel. Unfortunately, the entire risk of an outsourced project cannot be outsourced.
- Work with a well-defined time based work schedule
- Review third party performance periodically
- Arrange work phases to maximize work efficiencies
Some pointers to use
What are some of the pointers that you can use? The most critical aspect in bringing all the above together is communication. You can never over communicate the need to complete the work according to the agreed scope. Check with your team periodically to review shared understanding of work specifications. Use team meetings as review points for your work timeline. Communicate the cost implications for delayed timelines and engage them in keeping the work schedule alive and updated. Conduct post period cost reviews to help your team have a business perspective of the work undertaken.
Have regular client interactions to ensure that your work efforts and the desired scope are aligned. Evaluate all scope changes as viable with regard to time and cost factors before deciding to take up the challenge. Where possible, include a cost escalation clause to address increased costs due to external factors such as inflation, economy factors, and similar.