Advantages for Both Parties
What we have described is a very simplified version of what managers actually encounter in the real world, especially on large, complex systems projects. But our main objective is to demonstrate how to translate a realistic contractual philosophy into a practical arrangement that satisfies the essential needs of both acquirer and supplier.
As we have described, the precise relationship between these two parties is determined by the manner of compensation. In turn, you can best determine the most appropriate form of compensation by the extent to which you can define and estimate in advance the work involved. For this reason, it is wise to make the first one or two CWOs cost reimbursable contracts. The scope, architecture, and specifications for the product are in the greatest flux during this period, and more flexibility is required on the part of both suppliers and acquirers. Subsequent CWOs related to specific deliverables can be fixed cost as the product specifications become more solid.
The progressive approach to contracting that we have described has enormous benefits from both a managerial and a technical perspective.
Project Management Benefits
When it comes to project management, the multiple contract approach for progressive acquisition:
- Dovetails neatly with RUP methodology, which offers technical processes and workflows with well-defined goals and milestones.
- Provides for cost-effective rigor and quality.
- Allows both parties to enjoy a productive partnership at the working level.
- Gives acquirers a mandate to stay involved at the right level and time.
- In contrast to single, fixed-price "big-bang" contracts, facilitates flexible responses to inevitable changes in requirements, market conditions, and technology.
- Does not demand that the acquirer maintain an "open checkbook" in exchange for flexibility.
- Meets the needs of the acquirer's senior management by establishing financial control and potential for competitively priced work.
- Satisfies supplier needs by providing some assurance of a long-term relationship.
- Provides for equitable risk sharing; the acquirer is assured of a controlled cost, and the supplier is assured of a reasonable profit.
- Can help establish time-to-market with reasonable assurance, provided that both parties work effectively.
Technical Management Benefits
In the technical area, the multiple contract approach for progressive acquisition:
- Encourages a development lifecycle that is product driven rather than document driven.
- Is applicable to both whole-system and separate component development.
- Allows requirements to evolve consistently with build chronology.
- Breaks down the work structure in an evolutionary way rather than "freezing" a structure at the outset of the contract.
- Encourages real teamwork between the supplier and the acquirer at the technical level.
- Allows managers to apply objective metrics at a level consistent with overall project progress.
- Positions reviews as part of the partnership rather than as independent exercises.
- Ties reviews to supplier performance; movement to the next increment is not sanctioned until the current review is satisfactory.
- Provides the supplier with performance-based payments; the supplier avoids absorbing the cost of unanticipated risk events out of a fixed profit margin, which inevitably leads to short-cutting toward the end of a contract.
- Minimizes the acquirer's costs across the product lifecycle rather than minimizing only short-term development costs.
Be sure to come back next month for Part III of this series. We will present a "Beginner's Guide to Contracting" that takes a look at ways to actually formulate head contracts and CWOs for progressive acquisition.