Subcontractor Risk is a Major Reason for Project Failures

Guest Post by John Ayers (first posted on CERM ® RISK INSIGHTS – reposted here with permission)

Studies show that the majority of companies today outsource up to 60-70% of their work scope to subcontractors to stay competitive. As a result, subcontractors are a major source of risk to a project.

How to minimize the subcontractor risk on a project is addressed in this paper. The approach to do this is based on my 30 years of project and project risk management experience and knowledge.

Background

Years ago, most large companies had their own division for making critical components. I worked for a large defense company in the 1960’s. They designed, fabricated, tested and used their own power supply in their products. This is just one example of keeping work in house. As the world became more competitive and new companies specializing in power supplies (for example) emerged, my company started to outsource the power supplies to subcontractors to stay competitive. The trend has increased and probably will grow in the future. As a result of this change, subcontractors become a serious risk to you project. You need to know how to manage this risk.

Subcontractor Risks

Key subcontractor risks are shown below.

Bad subcontractor selection
Poor subcontract management
Insufficient time for subcontractor to prepare proposal
Awarding contract to subcontractor late
Requirements not fully defined
Poor subcontract arrangement with key suppliers

1. POOR SUBCONTRACTOR SELECTION

Selecting a subcontractor to work with is vital to the success of your project. The approach described below is one I used and it worked well.

The first step in the subcontractor selection process is to establish a subcontractor assessment team. The team is led by the subcontracts manager. He/she is the only member of the team that has the authority to commit the company. Other members usually comprise: engineering; quality; manufacturing and subject matter experts (SME) as required. For example, you would want a welding engineer for large welded structures.

The team visits candidate subcontractors to meet the people, see the facility and audit their key processes. The purpose of the visits is to determine if they are qualified and are interested in getting on the bidders list. The team reduces the number of candidate subcontractors to a manageable number of 3 based on their findings.

The team reviews each subcontractors proposal and develops a list of questions that the subcontractors must answer. This process is called fact-finding. The purpose of it is to understand the basis of the proposal.

The next step is for the team to conduct a technical assessment of the 3 candidate subcontractors and recommend the best technical choice to the project manager. He/she coordinates with finance to come up with the total cost comprising the subcontractors cost and your cost to make them successful. Negotiations are held with the winning subcontractor and a purchase order placed to get them under contract.

2. POOR SUBCONTRACTOR MANAGEMENT

You have no control over the subcontractor except what is specified in the contract. This means you have to manage the subcontractor closely and frequently. There are basically three actions you can take. They are:

Review subcontractors monthly report which typically includes:

Overall subcontract status
Problems
Schedule status
Cost status
EVM status
Metric status

Hold weekly telecoms
Onsite visits as required

Frequency of onsite visits depends on the subcontractor. If you have worked with them in the past and they did a good job, visits every 2 months may sufficient. If the subcontractor is doing poorly, then once a week may be in order. Very important to visit subcontractors facility because many times you learn new facts that were not visible in the monthly report or weekly telecoms.

3. INSUFFICIENT TIME TO PREPARE SUBCONTRACTORS PROPOSAL

A major reason for subcontractor risk is lack of time to prepare their proposals. Let me explain. Typically, the customer’s request for quote (RFP) allows 60 days to submit your proposal. This means the RFP for the subcontractor has to be prepared and sent to them as soon as possible after receiving the customers RFP to allow them maximum time for them to submit their proposal. As a result, the subcontractor proposals are “soft” (based mostly on estimates as opposed to vendor quotes for example). To mitigate this risk, add margin to the subcontractor’s price before it is included in your proposal.

4. AWARDING CONTRACT TO SUBCONTRACTOR LATE

After contract award, your first priority is to get the subcontractor under a contract. To do this, the specification, statement of work (SOW), and other key project documents have to be updated, reviewed, approved, and released to configuration control before you can send an RFP to the subcontractor. This process takes time. In many cases, by the time the subcontractor is under contract, you are already behind the baseline plan. As a result, your schedule and budget are at great risk. To mitigate this risk, it is essential you start working with the selected subcontractor before the customers RFP is issued.

5. REQUIREMENTS NOT FULLY DEFINED

There is little time in this process to fully define requirements. The customers contractual requirements are usually complete and well defined. But your derived requirements (typically done by system engineering) take time to perform the analyses, simulations and other technical work to define the derived requirements. As a result, the subcontractor has to respond to incomplete requirements leading to their cost and schedule increases later on when they are well defined. To mitigate this risk, work on requirement definition must start before the customers RFP is issued. In addition, add margin to the subcontractors price in anticipation of this happening.

6. POOR SUBCONTRCTOR ARRANGEMENT WITH KEY VENDORS

I will explain this risk with a story. I was project manager for shipboard use plug and play tactical shelters. At the time, there was only one qualified tactical shelter company in the US. We had done business with them numbers of time but wore out our welcome. They would not deal directly with us but would perform the work for another company. As a result, we placed a small company under a cost-plus contract to perform project management. They in turn placed the shelter company under firm fixed price contract. We thought they had placed a cost-plus contract with the shelter company.

After about 4 months into the project, we sent our subcontractor a design change which under a cost-plus contract should not have been a big deal since we paid all expenses. Meeting of surprise. The proposal we got back from our subcontractor was very high. Then we found out the shelter company had a firm fixed price contract which explained it. This contract arrangement caused adverse budget and schedule impacts to the project for the duration of the job. To mitigate this risk, it is necessary to vet the subcontractors key suppliers as well as the subcontractor to ensure their contractual arrangement is what you expected.

Summary

Most companies outsource the majority of their work scope to subcontractors. As a result, the subcontractors become major risks to the project. I have seen many projects perform poorly due to poor subcontract management.

The 2 basic actions you can take to mitigate this risk are: (1) carefully select the subcontractor; (2) closely and frequently manage the subcontractor. Be aware of other risk factors (shown below). Add margin to your proposal to mitigate these risks. Start working with your subcontractors well in advance of the customers RFP issuance.

Other risk factors:

Insufficient time for subcontractor to prepare a solid proposal
Soft requirements
Late subcontract award
Poor contractual arrangement with subcontractors suppliers

BIO

Currently John is an author, writer and consultant. He authored a book entitled ‘Project Risk Management. It went on sale on Amazon in August 2019. He has presented several Webinars on project risk management to PMI. He writes a weekly column on project risk management for CERN. John also writes monthly blogs for APM. He has conducted a podcast on project risk management. John has published numerous papers about project risk management on LinkedIn.

John earned a BS in Mechanical Engineering and MS in Engineering Management from Northeastern University. He has extensive experience with commercial and DOD companies. He is a member of PMI (Project Management Institute). John has managed numerous large high technical development programs worth in excessive of $100M. He has extensive subcontract management experience domestically and foreign. John has held a number of positions over his career including: Director of Programs; Director of Operations; Program Manager; Project Engineer; Engineering Manager; and Design Engineer. He has experience with: design; manufacturing; test; integration; subcontract management; contracts; project management; risk management; and quality control. John is a certified six sigma specialist, and certified to level 2 EVM (earned value management).https://projectriskmanagement.info/

If you want to be a successful project manager, you may want to review the framework and cornerstones in my book. The book is innovative and includes unique knowledge, explanations and examples of the four cornerstones of project risk management. It explains how the four cornerstones are integrated together to effectively manage the known and unknown risks on your project.