Formulating and Negotiating Contracts - Essay Example

Procurement process Report Executive Summary: This Report offers an analysis of costing and planning issues related to the procurement arrangement between NEHPA and Syntigration-XB Inc. The objective of the transaction was to optimize purchasing options of the NEHPA and streamline operations including minimizing costs. Project Costing: The basic assumptions and premises that NEHPA was working with at the commencement of the project, before it was transferred to S-XB were that the IT procurement team would comprise 25 persons on the basis of the S-XB day rates that were put forth, as follows: £95 per hour for the project manager, £75 per hour for managerial staff, £65 per hour for technical specialists, $55 per hour for senior development staff and £45 per hour for development staff. The total project duration, as per Appendix B, is from 10th January of year 1 to 21st April of Year 2, which is a total of 101 days or approximately 65 weeks. The project Manager has to be paid for the entire duration of the project, hence amount payable to project manager for working 37 hours per week for 65 weeks amounts to £2,28,475. Managerial staff are likely to be paid during the analysis and workshops section of every phase. As per Appendix B, this segment lasts for 102 days in Phase 1, 82 days in Phase 2 and 67 days during Phase 3. This amounts to a total of 251 days or approximately 35 weeks. The daily wages payable for 4 members of managerial staff for a 37 hour week works out to a maximum of £3,88,500. The development segment for phase 1 is 102 days, phase 2 is 93 days, phase 3 is 55 days, bringing it to a total of 250 days or approximately 35 weeks. Senior development staff are likely to be used for this stage of the project. An estimation of maximum possible costs for six senior developmental staff working a 37 hour week works out to £4,27,350. The testing and training stage of the project would be where technicians are working, and this is 61 days during phase 1, 30 days during phase 2 and 14 days during phase 3, i.e., a total of 105 days or approximately 15 weeks or £1,44,300. The deployment and handover stages are likely to be carried out by the development staff and the duration of these stages are 18 days for phase 1 and six days each for phases 2 and 3 respectively; i.e., a total of 24 days or approximately 3 weeks. For 10 members being paid £45 per hour for a 37 hour working week, the total amount works out to £4,99,500. Also to be factored in are the costs of hardware procurement and development, which have been estimated by Stuart Dickson as being about £200,000. Provision also needs to be made to allow an additional maximum sum of £250,000 to be available in order to satisfy the incentive scheme that NEHPA has allowed in the event of timely completion of the project. A 10% contingency amount also needs to be added to the projected costs in order to cover for any shortfalls in the budgeting or for any extra expenses that may arise. On this basis, the table showing the overall budget costs is as given below: BASIC PROJECT COSTING No: Details Cost/hr Cost/week No: of weeks Total Cost 1 Project Manager £95 £3,515 65 £228,475 4 Managerial Staff £75 £11,100 35 £388.500 6 Senior Developmental Staff £55 £12,210 35 £427,350 4 Technical Specialists £65 £9,620 15 £144,300 10 Development staff £45 £166,500 3 £499,500 Total Wages £1,688,125 Hardware development £200,000 Incentive Scheme £250,000 Total £2,128,125 10% contingency 213,812.50 GRAND TOTAL £2,351,937.50 Costing Analysis: The costing process that has been used by NEHPA appears to be lacking in several aspects. At the outset, the approximations which have been made are too wide ranging and not specific enough; neither have they provided an adequate level of contingency funds to cover any emergencies that could arise. The contractual terms are ambiguous because they have not covered incidental expenses that could arise, such as accommodation and living expenses for the S-XB team. As per the original definition of the project, three phases were set out, of which financial management was one. This phase was to be based on an oracle application, which was to devise both overall financial projections for the entire projects, as well as a detailed financial spend profile for each specific application that is a part of the overall project. The problems that have emerged in its actual application have been caused because there was an overall vision and general overview of financial spending, but the specifics of the design were not set out and an assumption was made that such details would be worked out as the project moved along. This left room for unanticipated expenses to crop up, which could not be planned for and budgeted for, such as accommodation expenses for the S-XB team. Project Planning: NEHPA could have improved its performance on the project if it had taken into consideration the necessary time frames for completion of the project. For instance, NEHPA is a Government organization, where decision making is a longer process involving input from various officials. On the other hand, S-XB is a private IT organization where decisions are made within a much shorter time frame. According to Jurong and Caldwell (2008), when a private and public organization work together, it is necessary to develop the skills and capabilities that would be necessary for the performance of the contract. The performance of this contract could have been improved if NEHPA had insisted upon S-XB satisfying the criteria it had offered while presenting its tender, i.e., the original team of experienced IT experts from Lancashire who would have been familiar with NEHPA’s requirements. In reality however, NEHPA has allowed the project to proceed with different individuals from Boston, who do not have the knowledge or experience of the original team that was proposed. Despite this, the X-SB team has worked to complete Phase 1 on time, hence NEHPA also needs to ensure that its decision making and approval processes are speeded up so that the required deadlines and timeframes can be met. The schedule that has been set out has allowed a time frame of 5 days for feedback, hence S-XB may not necessarily get the immediate response they are demanding, but they do need to ensure that they provide a response within the five day period that has been allocated so that the project can continue to move through further stages. A Gantt chart summarizing the critical tasks in Phase 1 is set out below: ID Name of task Jan Feb March April May June July August Sept 1 Phase 1 - Systems Analysis (Jan 10 to Feb 10) 2 P1- Documentation (Feb 11 to May 21) 3 P1-1 and P1-2 design (May 1 to May 21) 4 Workshop (P1 - 1 and 2: May 22) 5 Feedback period (May 23-27) 6 P1 - 1, 2 redesign (May 28-June 16) 7 P1-3 design 8 Workshop 2 -P1 -3 (June 17) 9 Feedback period 2(June 18-22) 10 P1-3 Redesign (June 23-July 12) 11 P1-3 Reports (June 29-July13) 12 Workshop 3 (July 14) 13 Feedback period 3 (July 15-19) 14 P1 final redesign (July 1-25) 15 System testing (July 20 -Aug 9) 16 Migration (NEHPA - Aug 9-16_ 17 User testing ( Aug Sept 5) 18 Phase 1 handover (Sept 23) Resource based costing: A breakdown of the forecasted cost of the X-SB team for Phase 1 of the project is given in the figure below. These figures are derived based upon developers being paid at a rate of £22 per hour and senior developers at a rate of £300 per day for a standard eight hour day. David Field, being the project Manager, is to be paid a fee of £3.5K every month and an additional amount of £150 per week for personal expenses, i.e., an amount of £300 per month towards personal expenses over and above the monthly salary. The basic assumptions made in preparation of this report are that technicians and other professionals are not being used for this project, and only developers and David Field are being used. Another assumption is that this project covers only Phase 1, extending from January 10 to September 23, i.e, over a period of 256 days or 36 weeks. Moreover, resource requirements are being ignored to arrive at this assessment, i.e, workshops and the handover milestones are not being taken into account. The P1 systems analysis stage involves one SD and 2 Developers. The weekly fee for a SD is £300 per day or £1500 per week. For each developer, the daily wage at $22 per hour is £176 per day and £880 per week. On the basis of the chart provided in Appendix C, time frames have been set for the various stages of Phase 1 of the project, as also stipulated below in the table where costs are calculated and presented as follows: Phase 1 task Resources P1 systems analysis (30 days) SD (£6000), D[2] (£3520) P1 documentation (100 days) D (£11,404) P1-1 and P1-2 design (20 days) SD (£4500), D[3] (£7920) Feedback period 1 (5 days) SD (£1500), D[3] (£2640) P1-1/2 redesign (20 days) D[2] (£5280) P1-3 design (20 days) SD (£4500), D (£2640) Feedback period 2 (5 days) SD (£1500), D[3] (£2640) P1-3 redesign (20 days) D[2] (£5280) P1-3 reports (15 days) SD (£3000), D (£1760) Feedback period 3 (5 days) SD (£1500), D[3] (£2640) P1 final redesign (25 days) SD (£4500), D[3] (£10,560) System testing (20 days) SD (£4500), D[4] (£10,560) Migration (NEHPA) (7 days) SD (£1500), D[3] (£2640) User testing (NEHPA) (25 days) SD(£6000), D[2] (£7040) On the basis of the above, it may be noted that the total estimated costs as per S-XB would amount to £115,524, and this only includes amounts being paid to senior developers and developers along with the project manager and does not take into consideration at all, wages paid to technicians and others who are also involved in the project. As opposed to this, Section A1 has provided an estimation of costs on the basis of wages paid per hour, which have been proposed by S-XB in its offer to NEHPA. As per this table, the project manager, i.e, Field is to be paid at the rate of £95 per hour, which amounts to £3515 per week. Applying this figure in the table presented above, payment for 35 weeks for Field would itself amount to £123,025, a figure that is over and above the total costs that are actually being paid to the project manager, senior developer and 4 developers, although the workshop and handover date have not been included in Field’s assessment provided above. If the costs that have been allowed for developers is also taken into consideration, it may be noted that while a cost of £45 per hour has been demanded by S-XB for individual developers, which amounts to a daily salary of £225 and a weekly salary of £1575, as opposed to Field’s estimated payment of £880 per week. Similarly, Field’s estimate only accounts for £1500 per week for a senior developer, but applying the rates per hour that have been quoted to NEHPA, i.e., £55 per hour, this amounts to £385 per day and £2695 per week. These figures demonstrate that NEHPA is being charged at a rate that is almost double the costs that Field is actually incurring in executing the project. This explains why Field classified the financial information and assessment of actual costs to be incurred as “strictly confidential” and not to be revealed to NEHPA under any circumstances. Had NEHPA gained access to this information, they would have been able to grasp immediately that they were being overcharged and could have withdrawn from the contract. They would also have had grounds to rescind from performance of their side of the contract on the basis that S-XB was imposing fraudulent and excessive charges on them for performance of their side of the contract, and this would have also provided them the opportunity to seek an alternative supplier. Progress Management: The planning assessment section of this Report has identified one of the major aspects that needed improvement in order to ensure that the project moved towards satisfying the deadlines required, i.e, ensuring that NEHPA provided prompt feedback in a timely fashion so that S-XB could continue with the implementation of the project. Based upon the detailing of the progress made thus far, it may be noted that there appears to have been a stalemate at the Feedback Stage 1, for which a 5 day time period has been allocated. This leaves the following stages still to be completed: (a) P1-2 redesign – 20 days (b) P3 design – 20 days (c)workshop 2 – 1 day (d) feedback 2 – 5 days (e) P1-3 redesign -20 days, (f)Workshop 3 -1 day (g) P1-3 reports – 15 days (h) feedback 3 -5 days (i) P1, final redesign – 25 days (j) system testing – 20 days (k) migration – 7 days (l) user testing – 25 days. NEHPA estimates that getting the feedback would take several weeks, while X-SB wants the feedback in 3 days. The time left for completion of Phase 1 after allowing for all the above indicated stages to be completed is 159 days. There are two feedback stages left to be executed, both of which are likely to be time consuming. The workshop was concluded on May 21st and allowing for a 5 day response period on feedback from NEHPA, the project should have continued further from May 26th, while it stands incomplete insofar as this stage is concerned from June 1st. This represents a delay of 5 days over the original time schedule. Allowing an additional time delay of 10 more days and allowing similar delays of an additional 14 days each for Feedback stages 2 and 3, this would represent a total delay of 38 days, which need to be compensated at some other stage of Phase 1 of this project. Allowing scope for delays and extension of 38 days would enable completion of the project 38 days after September 23rd, i.e., on October 31st, instead of September 23rd. This delay could possibly be offset by making up for this time lapse at the design, re-design and testing stages of the project. On that basis, continuing the project as of June 21 and taking the tightening up of time frames into consideration, the revised timeline is as follows: P1-2 redesign – 20 days (original) – 17 days (revised) (- 3 days) July 8 (b) P3 design – 20 days (original) – 17 days (revised) (- 3 days) July 25 (c)workshop 2 – 1 day (original) – 1 day July 26 (d) feedback 2 – 5 days (original) - 15 days (revised) (+ 10 days) August 10 (e) P1-3 redesign -20 days (original) - 17 days (revised) (- 3 days) August 27 (f)Workshop 3 -1 day (original) - 1 day August 28 (g) P1-3 reports – 15 days (original) - 15 days September 12 (h) feedback 3 -5 days (original) - 15 days (revised) (+10 days) September 27 (i) P1, final redesign – 25 days (original) - 22 days (revised) (-3 days) October 19 (j) system testing – 20 days (original) - 12 days (revised) (- 8 days) October 31 (l) user testing – 25 days (original) - 25 days Actual expenditure: As noted above, there is a wide disparity between estimated prepared by Field that are to be retained within the S-XB organization as opposed to the rates per hour for the various technicians and employees that has been proposed to NEHPA. The expected handover date for completion of the project is September 23rd, and as per the report on costs presented under the Section titled Costing in this Report, the total expenses add up to £2,351,937.50 or 2.35 million pounds. This was the estimated cost, even at the inflated rates presented to NEHPA by the S-XB company. In actual practice however, on September 1st itself, with the user testing stage still incomplete, the costs have already escalated to £3.78 million. The explanation for the runaway costs lies in inadequate planning and the lack of preparation of detailed budgets, taking into account all potential expenses. One of these unanticipated expenses is the accommodation for the executives of S-XB. The price for the accommodation finally selected was £950 per day and for about 35 weeks of project time required for Phase 1 of the project, the costs added up to £33,250. In addition £25,000 was approved to pay for office furnishing and telephony, but the actual costs emerged at a high figure of £88,700. Taking all these expenses into account, it may be noted that they total up to large amounts of money; all of which were spent even before S-XB had completed any procurement transactions at all, the purpose for which they had actually been hired. Hence, the establishment and infrastructure costs for the project amounted to higher amounts because they had not been effectively budgeted in the first instance. Since no provision had been made for accommodation or infrastructure, the project costs have increased so that they are far above the estimates that had been projected. General Overview: On an overall basis, it is to be noted that many of the defects that have arisen in this project have been caused by differences in the style of functioning of a private organization like S-XB and a public organization like NEHPA and the significant weaknesses in this project is the lack of a strategic planning approach. As Jurong and Caldwell (2008) point out, when a public client works with a private contractor on complex long term infrastructure projects as in the case of NEHPA which is a public body and Syntigration-XB Inc., there are large sums of money as well as a long time period involved, hence a strategic capability needs to be developed. It is vital for these kind of contracts to reflect the varying skills and capabilities of the different parties, just as it is also vital to ensure that all possible contingencies and problems are taken into account beforehand. Long term contracts between private and public sector enterprises are complex, and it raises issues in relation to developing and renewing the skills and capabilities that are likely to be required in the performance of the contract. For example, before commencing operations, it was first necessary for NEHPA to change their style of functioning in order to adhere to deadlines, i.e, providing the feedback within the stipulated time period of 5 days. In the instant case study, there is a noticeable lack of detailed planning and costing, especially in the distribution of responsibilities for costs and comprehensive estimates of costs for each phase of the project. For instance, the estimates provided by S-XB provided for hourly rates for its employees, however this figure did not clarify whether it was only the wages that were covered or whether this figure also included the accommodation and miscellaneous expenses that were likely to be incurred by the employees of S-XB. Furthermore, while NEHPA had stipulated that the company selected would be responsible for formulating the actual processes, they had not clearly demarcated exactly how much funds would be allocated and whether such amounts would cover all expenses. NEHPA had also set aside a very large figure as an incentive to encourage its final selected supplier to complete the project on time. In doing so, the public sector enterprise placed the emphasis on speed rather than quality, so that it could impede the final outcome of the project. As already demonstrated in the execution of the project, costs for Phase 1 have already escalated beyond stipulated limits, while the time frames have also not been adhered to. NEHPA would likely have been more successful by placing an emphasis on the quality of the final product and stipulating that the financial incentive would be provided only if the final product satisfied both the time and quality constraints. In a study carried out by Kadefors (2008) using Swedish consultants, clients and service providers, the findings suggested that facilities management contracts that were outsourced required different kinds of contracts to be drawn up which would reflect the nature of the interactions that were to take place between the parties to the contract and would vary considerably depending upon the quality and volume of work (Kadefors, 2008). In the instant case, the lack of effective communication between the parties is very apparent. At the outset, S-XB has provided employees that were not the original experienced British and European executives it used to grab a hold of the project. NEHPA however, did not register its objections; similarly, it has also acceded to the demands for expensive accommodation and infrastructure demanded by the American employees of S-XB. Additionally, there are differences in the style of functioning between the two parties and their negotiation demonstrates a difficulty in arriving at mutually acceptable compromises. When contracts are well specified, they can foster a higher level of cooperative, long term, trusting exchange relationships, because various aspects of tasks are properly articulated and this helps in preventing misunderstandings and ensuring that all parties understand the tasks required (Kadefors, 2008). In this case, the ambiguity in contractual terms, the lack of experience of the final S-XB team allocated to the project and the weakness of NEHPA in acceding to all the demands of that team demonstrate inadequate communication, trust and understanding between the two parties involved in the contract. Formulating and negotiating contracts must be an extensive process and can be a learning experience, where difficulties are highlighted and solutions need to be found. (Argyres et al, 2006). When the contract is between a public sector enterprise and a private entity, asymmetric learning that takes place, with the private party appearing to be in a better position to acquire, embed and renew their learning. Two kinds of learning take place: (a) strategic learning or double loop learning (Argyris and Schon, 1978) and (b) operational learning which is single loop and project based; the authors (Argyris and Schon, 1978) have suggested that in the case of long term projects, best results can be obtained when both are combined. In this case however, the learning that has taken place appears distinctly asymmetrical; it is the inexperienced employees of XSB who have been able to learn more than NEHPA, which has only landed up spending far more than originally allocated for an inferior level of work and talent as compared to what it had been promised. If the original British and European team members suggested in the original proposal had been included, there could have been better coordination and understanding between the two parties, which would have facilitated a better performance of the contract and a better resolution of misunderstandings. NEHPA appears to have allowed itself to be largely manipulated in such a way as to serve the interests of S-XB rather than enforcing its own viewpoints and perspectives. NEHPA would have done far better to have linked its incentive scheme to quality as well as timely delivery. In this way, it could have insisted on commencing the project only with the high calibre employees it had been promised. In this way, the kind of learning it would have enjoyed would have facilitates achievement of its goals; as things have worked out in practice however, it has been forced to submit itself to the inexperience and hasty style of working of the employees of X-SB and has spent much more than its allocated amounts before Phase 1 is even complete. It appears very likely that NEHPA could face runaway costs as the project continues on and end up spending far more than anticipated, which could also make the project economically unviable. References: Argyris, C., and Schon, D, 1978. “Organisational Learning”, Addison Wesley, Reading, MA. Argyres, N., Berkovitz, J. and Mayer, KJ., 2006. "Complementarity and evolution of contractual provisions: an empirical study of IT services contracts", Organization Science, 18(1): 3-19 Kadefors, Anna, 2008. “Contracting in FM: collaboration, coordination and control”, Journal of Facilities management, 6(3): 178-189 Read More