The commercial framework is extremely important to the success (or failure) of a project. Insufficient funding, loosely defined milestones, deliverables and payment schedules can all lead to poor commercial contract management. Two contract forms are common:
- Time and Material
Creation of safe financial plan
Time and Material contract
An arrangement with a contractor that provide services by:
- Actual cost of direct labor, usually at specified hourly rates,
- Actual cost of materials and equipment usage, or
- Agreed upon fixed add-on to cover the contractor’s overheads and profit.
When using Time and Materials (T&M) contracts, cover agreements such as:
- Labor Rate: Specifying a fixed rate for all labor including administrative personnel.
- Material Mark-Up: T&M contracts usually add between a 15 and 35 percent onto material prices.
- Not-to-Exceed: The T&M not-to-exceed, is a contract in which the contractor can bill the work performed, agreed with a cap that is the maximum amount charged by the contractor.
- Maximum Labor Hours: In addition to the not-to-exceed condition, a maximum number of labor hours could be set.
A fixed-price contract is an agreement between a vendor or seller and a client that stipulates goods and/or services provided and the price that paid for them. These contracts stated usually where reasonably definite specifications are available, and costs estimated with reasonable accuracy. A fixed price contract places minimum administrative burden on the contracting parties, but subjects the contractor to the maximum risk arising from full responsibility for all cost escalations.
Fixed-price contracts are common in many IT projects projects, including project management, procurement and outsourcing. Having the scope and cost clearly defined from the outset saves administrative time and also avoids much of the negotiation time required for less clear-cut types of agreements.
- Create the financial plan.
- Establish a baseline of project finances and expense regime.
- Establish a management system for project finances.
- Validate commercial arrangements for third parties including contractors.
- Validate payment schedule aligns with project milestones and company accounting periods.
Hints and tips
- The contract and its schedules is the basis of the project finance agreement.
- Derive the baseline from the contract and implement a strong commercial and change management process around this.
- Engage the necessary procurement expertise for third party services, software licensing and OEM hardware.
- Financial Plan, including:
- Cost schedule;
- Payment schedule with any third parties.