Programme and

project management
Professional Diploma
in Procurement and Supply
Programme to project
management relationship
Programme management defined

• Delivery of multiple interdependent projects and

active which taken together deliver significant
business benefits
• Programme is set of related projects which
collectively deliver an overall change for the
organisation
Project defined
• A specific, finite task to be accomplished combined
with seven factors common to projects: importance,
performance, finite due date, interdependence,
uniqueness, resources and conflict: Meredith and
Mantel (2006)
• Projects are unique, transient endeavours
undertaken to achieve a desired outcome (APM)
• Project is a temporary endeavour undertaken to
create a unique service or result (PMI)
• A group of activities that have to be performed in logical
sequence to meet pre-set objectives outlined by client
(Burke, 1999)
 An endeavor in which human, material and financial
resources are organized in a novel way to undertake a
unique scope of work of given specification(s), within
constraints of cost and time, through the delivery of
quantified and qualified objectives’.
(Chapman & Ward, 1997)
Project management defined
• The process by which projects are defined, planned,
monitored, controlled and delivered such that the
agreed benefits are realised (APM)
• Is the planning, organizing, directing and controlling
of company resources for a relatively short-term
objective that has been established to complete
specific goals and objectives. Furthermore project
management utilizes the systems approach to
management by having functional personnel (vertical
hierarchy) assigned to a specific project (horizontal
hierarchy). H Kerzner 2009
• Application of knowledge, skills, tools and techniques
to project activities to meet project requirements.
(PMI)
Stages/elements in a project
• Definition
• Planning
• Initiation
• Control-key elements
• Organisational processes
• Closure
• Definition
• Investigating the feasibility of the project, defining
goals and objectives and submitting a proposal to
obtain approval
• Planning
• Preparation of workable plans, budgeting,
defining standards that need to be maintained
• Initiation
• getting the staff on board, allocating tasks,
preparing launch. This stage has a key bearing on
the motivation and participation of the workforce
• Control-key elements: are time, cost and quality. The
control process involves monitoring these parameters
against project progress and making changes or
adjustment where necessary
• Organisational process: coordinating the resources that
do the work to develop the product-getting the work
done
• Closure: bringing about the project’s completion and
ensuring that the product is integrated into the
organisation, system or environment into which it was
designed to fit.
Projects vs operations
Projects
• Bring about change
• They may offer investment opportunities
• They have unknown elements, therefore they create
risk
Operations (business as usual)
• There are familiar policies, processes, procedures or
precedents which may be followed
• There is virtually no risk
• The activities are not new, but repeated.
Programme and project
similarities
• They bring about change
• They will have key delivery milestones
• They require appropriate resources to deliver
• They will use various assessment and management tools
• They are a temporary endeavour to deliver a range of outcomes
• They will be constrained by time, scope and cost
• They will have approval, reporting and governance requirements
• They are different from day-to-day, ‘business as usual’ activities
• They support organisations in the delivery of change
Programme and project
differences
• Programmes carry a much wider scope and will be
delivered via many different projects and sub-projects
• They will bring about high-level change, often called
transformation, because of the scope, scale and cost of
the programme
• They will generally report directly through to a board or
governance structure via a senior officer
• They are by nature highly strategic activities involving a
high-level problem-solving approach
Project stakeholders
• The client
the person or organisation who has commissioned the project,
whether this is an external customer or an internal department
• The users
the person or persons who will use the product or service once it has
been created
• The project owner
may be an external organisation commissioned to supply the project,
or it may be the internal department charged with, say, implementing
a new system.
• The project manager and his team
Mendelow’s power/interest
matrix
• (A) low priority group therefore there is no need to take
their goals into account
• (B) important because of their high interest, therefore
they need to be kept in the loop through communication
and education
• (C) important because of their high power and if they are
dissatisfied their interest might grow
• (D) key players who have the influence and are motivated
to use their interest. To be able to accommodate them
early involvement and participation in the project is very
crucial
• Note stakeholder mapping is not static: continually check
Managing expectations and
perceptions
PROCESS OUTCOME
Expectation Provide samples of process Determine the actual
documentation requirements
Do not over promise Do not overpromise
Perceptions Provide regular reports Promote positive aspects
of outcome
Shareholders’ expectations
• Fitness for purpose
• Aesthetic design
• Absence of defects
• On-time delivery
• Value for money
• Reasonable running costs
• Satisfactory reliability and durability
• Support from worthwhile guarantees
Influence vs Power vs authority
• Influence is the action of bringing a shift in someone
actions
• Power is the ability to exert influence : brute
strength, charisma
• Authority is the legitimate right to wield power
The Iron Triangle
• Health, Safety and risks are an integral part of Project
planning process
• In addition health and safety is a legal obligation for
all organisation
• Quality control is to avoid defects or failures which
can come at huge cost if ignored
Programme and project
constraints
• Ideally projects are to finish on time, within budget
and to the highest level of quality
• In practice the PM is often faced with trade-offs
between the three objectives
• If the schedule is slipping it could be brought back by
adding more resources and this may result in
increase in cost
• Or rectify the schedule by skimping on the next stage
but this might affect quality
• Therefore any decision to strike a balance or making
trade-offs should be taken within the framework of
stakeholder expectations
• Therefore there is need for a PM to have a clear idea
of who the stakeholders are and what they regard as
important
• So that trade-offs reflect stakeholders requirements
Programme and project
constraints
• In a project to construct a new type of aircraft, passenger safety
is the overriding objective. Quality is paramount, regardless of
the implications for cost and schedule.
• In a fixed-grant research project, the cost budget is totally
inflexible. If money runs out, work will cease. The quality and
schedule have to fit in with the limited funds available.
• In a project to organise a music festival, customers will arrive at
the scheduled time and ‘the show must go on’. Regardless of
quality and cost considerations, the time schedule is essential.
Measurement and control
• Cost is usually easier to measure and control as it is
measured in financial terms that everyone
understands
• Cost are estimated at outset of the project and as
expenditure is incurred regular comparison of
budgeted and actual expenditure can be done easily
• Quality is not easy. Tools such as TQM are designed
for repetitive work
• Quality is a slippery concept and perceptions of what
the project is aiming for may change subtly overtime
• Time control project techniques are invaluable
• The WBS structure identifies all the tasks
• Tools such as the critical path identifies the sequence
of activities
• But the link between time and cost is not always clear
• For example the project may be on budget but not
necessarily having accomplished all deliverables in a
given period
Earned value analysis
• This has led to researchers seeking a combined
measurement to reflect both time and cost
• Earned Value is an approach where you monitor the
project plan, actual work, and work
completed value to see if a project is on track.
• Earned Value shows how much of the budget and
time should have been spent, considering the
amount of work done so far.
• For example, if we have completed 50 per cent of a
task that was budget at 1000 then we have achieved
an earned value of 500
• How do we estimate percentage complete so as to
calculate earned value for tasks that have began but
not yet complete?
Measurement and control
• The 50–50 rule
any task in progress is supposed to be 50 per cent complete. This has the
merit of simplicity, but clearly is not very scientific.
• The 0–100 rule
using this rule, a task is regarded as 100 per cent complete when it is
finished; until then, it is regarded as 0 per cent complete
• The critical input rule
identify the critical input for each task, and calculate what percentage of
the critical input has so far been used
• The proportionality rule
if a task is supposed to take ten days, and we have so far been occupied
on it for three days, we regard the task as 30 per cent complete
Progress-tracking metrics
• Percentage complete values: frequent collection of
data on the percentage of each activity which has
been completed ( how far have we come)
• Estimated time durations: estimating the remaining
duration of each activity in working days (how far
have we got to go)
• Actual start/finish times: recording an actual start
and actual finish date (when completed) for each
activity-( are we there yet)
Progress-tracking metrics
METRIC ADVANTAGES
Percentage • Easy to understand by
complete everyone
• Lends itself to aggregation,
resource management and
EVA approaches
Remaining • Practical approach
durations • Motivational: puts pressure
on the estimator to live up to • Arguably, simplistic and
the estimate
Actual • Ultra simple to use
start/finish • No room for subjective
assessment
• Easy to collate information
DISADVANTAGES
• Can be subjective, inviting
‘creative’ reporting and
conflict
• Carries no implications for
resources or costs deployed
difficult to aggregate
• Little or no precision in
relation to tasks in progress:
unacceptable for any
significant task
Greer: elements of project success
1 Focus on three dimensions of success
2 Planning is everything
3 Managers must transmit a sense of urgency
4 Use a proven project lifecycle
5 Communicate in vivid detail
6 Deliverables must evolve gradually
7 Obtain clear sign-offs from sponsors
8 Insist on a documented business need
9 Fight for time to do things right
10 Match responsibility with authority
11 Involve the sponsors and stakeholders
12 Sell and re-sell the project
13 Acquire the best people possible
14 Top management must actively set priorities
Pinto and Slevin
1 Project mission A clear statement of goals and direction
2 Support from top Senior managers must be ready to provide necessary resources
management and authority
3 Project A detailed specification is needed for each activity
schedule/plan
4 Client consultation Establish regular communication with the client
5 Personnel Recruit and retain the right skills for the project
6 Technical tasks Ensure availability of required technology and expertise
7 Client acceptance The project manager must ‘sell’ the final outcome to the end users
8 Monitoring and Comprehensive control information must be delivered in timely
feedback fashion
9 Communication Ensure regular communication with all project stakeholders
10 Troubleshooting Ensure PM is equipped to handle crises and deviations from plan
Greer: ten ways that projects fail
1 Don’t bother prioritising the organisation’s overall project load.
2 Encourage project sponsors and key stakeholders to take a passive role on the project
team.
3 Set up ongoing committees focusing on management processes (endless meetings and
subsequent notes will hamper project progress).
4 Interrupt team members relentlessly.
5 Create a culture in which project managers are expected to ‘roll over’ and take it when
substantive new deliverables are added half way through the project.
6 Half way through the project, when most of the deliverables have begun to take
shape, add a whole bunch of previously unnamed stakeholders.
7 Never insist that sponsors formally sign off on the deliverables.
8 Make sure project managers have lots of responsibilities, but no authority.
9 Describe project deliverables in the vaguest possible terms.
10 Get projects up and running as quickly as possible, without documenting agreements
in a formal project charter.
Project elements or factors
• Importance
• Performance
• Lifecycle with a finite due date
• Interdependencies
• Uniqueness
• Resources
• Conflict
Developing a WBS

Level 1 Phases Identify the major phases of

Level 2 Project deliverables and
related milestones
Level 3 Activities
Level 4 Tasks
work
Identify the major
deliverables of the project
Identify the activities needed
to create the deliverables
Break the activities down into
detailed tasks
Work breakdown structure
A six-stage approach to
developing the WBS
• Using information from the project action plan, list the task
breakdown in successively finer levels of detail
• For each work package, list the personnel and/or
organisations responsible for completion
• Review this with the people responsible to ensure accuracy
• Calculate the cost of each activity
• Aggregate the information into a project master schedule
• As the project is carried out, continually examine resource
usage and timing in the light of the WBS
Another example of a work
breakdown structure
Reducing costs with supply base
rationalisation
• Operational costs
the costs of running day-to-day relationships with the associated costs
of administration of purchase order creation and invoice clearance

• Managerial costs
costs linked to the management of relationships, involving contract
management, solving problems, visits, quality improvement and other
forms of development activities
Difficulties arising from
nominating subcontractors
• The main contractor may not feel the same sense of
responsibility for subcontractors that have been nominated
• The purchaser will generally take on a greater responsibility
for the co-ordination of work to be done by the nominated
subcontractor
• Main contractors will tend to limit liability for the work that is
to be performed by nominated subcontractors and so will
guard against any defaults in the time or quality of the work
provided
Exercising control over the use of
subcontractors
• To encourage main contractors for projects and programmes
to source subcontractors from SMEs, which will help promote
business opportunities to businesses in local communities
• To ensure that main contractors do not source from
subcontractors that may represent a risk to the supply chain
• To ensure that the number of subcontractors that work on site
is restricted, as the multiplicity of subcontractors can cause
difficulties in labour relations
Types of joint venture
• Vertical joint venture
the activities of the partners tend to follow on from each other in
sequence
• Horizontal joint venture
where the partners will generally carry out their work in parallel, so
that they work together to create the project or programme
• Homogeneous joint venture
where the partners will be operating in broadly the same industry
• Heterogeneous joint venture
where the partners will be operating in different industries and will
therefore have specialisations in different disciplines
Traditional supplier relationships
• The purchasing department will take the responsibility for order
placement with external suppliers and contractors but has little
direct contact with these to develop value-added outcomes
• Purchasing functions will be led by conformance to procedures
and processes, with the department administering the tendering
of contracts
• Selection of suppliers and contractors is done primarily on
pricing
• Relationships with suppliers and contractors will tend to be
adversarial, lacking trust and of an arm’s length nature and
relying on competitive pressure to drive improvements in value-
added outcomes
Common features of partnering
• Problem resolution
• Continuous improvement
• Supply chain network
• The behaviour of purchasers
• The behaviour of main contractors
• The behaviour of consultants
• The behaviour of subcontractors
Key principles of partnering
• Early involvement of key members of the project team
• Selection of suppliers on the basis of value, not lowest price
• Common processes, such as shared IT
• A commitment to measurement of performance as the
basis for continuous improvement
• Long-term relationships in the supply chain
• Modern commercial arrangements based on target cost or
target price with incentivisation through shared pain and
gain
Partnership success factors
• Team integration
How well integrated is the programme and project team?
Are there effective and coordinated links between the client and the supplier officers?

• Advisory support
Are appropriate technical advisors on hand at the key times to support clear strategic
and operational thinking?
Is the advisory support biased to the customer or the supplier viewpoint?

• Stakeholder engagement
Do the engaged stakeholders represent an appropriate spread of customers and end
users?
What are the rules of engagement and are those clearly understood by both parties?

• Cost, time, quality and safety control

Are all of these core programme and project elements being adequately factored into
the process to ensure that focus and control is maintained?
Five core elements of customer and
supplier relationship performance
• Relationship
• Capability
• Strategy
• Quality and innovation
• Financial status
Causes of time overruns
• Our estimates naturally contain uncertainties
• People include safety margins in their estimates
• A given activity usually takes at least the time allowed
for
• As Goldratt identifies ‘a delay in one step is passed on
in full to the next step, whereas an advance in one
step is usually wasted’
• Student syndrome
• Most people are required to multi-task
Tasks completed in sequence
The effect of multi-tasking
Avoiding overallocation
• Set realistic project schedules
project managers should avoid forcing employees to attempt to achieve unreasonable
or aggressive schedules
• Prioritise tasks and projects
overt pressure on individual project members can be avoided by prioritising tasks and
projects
• Linking tasks
this can be an effective tactic when individual project members are working on similar
tasks for two or more projects
• Leaving float or slack
deliberately leaving a contingency to allow for slack or float during the performance of
the projects can help avoid overallocation
• Avoid the fire fighting culture of projects
evidence of fire fighting as the norm of project management is often indicative of an
inadequate level of resources
Leadership and management
Management Leadership
•Planning and budgeting •Creating a sense of direction
•Organising and staffing •Communicating the vision
•Controlling and problem- •Energising, inspiring and
solving motivating
•Leadership is about coping
with change. It can, essentially,
only be exercised over people.
Mintzberg’s managerial roles
NATURE OF ROLE ROLE DEFINITION
Interpersonal • Figurehead
Arising from a manager’s formal authority • Leader
or position in the organisation and unit • Liaison
Informational • Monitor
Arising from a manager’s access to internal • Spokesperson
and external contacts • Disseminator
Decisional • Entrepreneur
Arising from a manager’s formal authority • Disturbance handler
and access to information, which places • Resource allocator
him in the best position to solve problems • Negotiator
relating to the unit or department as a
whole
Dealing with constraints
STEP EXPLANATION
1 Identify the In manufacturing, the constraint might be Machine A or
constraint something similar. In a project it might be a shortage of
critical resources.
2 Exploit the Work Machine A to the limit of its capacity, with no
constraint interruptions or unnecessary work etc.
3 Subordinate Plan all scheduling around Machine A. There is no point
everything else to scheduling rapid progress at earlier stages if everything
the constraint comes to a halt at A.
4 Elevate the Take steps so that Machine A is no longer a constraint (eg
constraint replace it with a more powerful and speedier machine).
5 Go back and find the Once the block at Machine A has been removed, it will be
next constraint found that some other aspect of the production process is
a constraint. We need to repeat the process all over again.
Advantages of project software
• The computer processes large volumes of data quickly and accurately
• Where change is necessary, the computer re-calculates times and
resources in a fraction of the time it would take manually
• Software allows rapid production and communication of management
information
• Recipients of the management information can interrogate the system
or work interactively with it
• A computer makes it possible to schedule a programme of many
projects all together, in one combined multi-project calculation
• The software makes for standardisation – in organisations where
project work is frequent, users benefit by being instantly familiar with
the layout of project plans
Disadvantages of using software
• There is a financial investment in software
• The project plans will reflect the views of the software
manufacturer
• Users of the software will require appropriate training
Synchronous and asynchronous
communication
Synchronous tools
• Audio conferencing
• Web conferencing
• Video conferencing
• Conference calls by telephone
• Instant messaging (eg using
Microsoft Messenger)
Asynchronous tools
• Online discussion boards
• Email
• Streaming audio or video
• Shared calendars
• Web logs (blogs)
Financial instruments
• Debt finance
Under this form of finance, a firm raises money for working capital or
capital expenditures by selling bonds, bills, or notes to individual
and/or institutional investors (principally banks). In return for lending
the money, the individuals or institutions become creditors and
receive a promise that the principal and interest on the debt will be
repaid.
• Equity finance
Equity finance is a way of raising capital from external investors in
return for handing over a share of the firm’s business. This may take
many forms, including a share of future profits, but is most frequently
associated with sharing the ownership of the business to some
degree.
Debt finance terms
• Debt instruments
Refer to the raising of loans from banks or pension funds or insurance companies.
• Senior debt
In the event of a default by the purchaser, the lenders (principally banks) of senior debt have the right to
claim ownership of the assets of the project.
• Subordinated debt
In project financing, this form of debt is subordinate to senior debt and forms a claim on the project
company if there is a default.
• Standby loans
A mechanism under which a lender gives written commitment to advance a specified amount of money at
specified terms on demand or on a specified future date.
• Debentures
A debenture is similar to a term loan except that the loan is typically sold to a variety of investors and is a
medium- to long-term debt format that is used by large companies to borrow money.
• Project finance in bundles or portfolios of projects
Projects are now being procured or considered in bundles rather than on an individual, standalone basis.
• Refinancing and restructuring
It is common for the original project finance to be refinanced and restructured from its original terms.
Three phases of a typical project
• A start-up phase
in which the project is ‘born’

• A middle phase
in which work gets under way and rapid progress is made as resources
are deployed productively

• An ending phase
in which progress slows
The project lifecycle
Time distribution of project effort
Project lifecycle for baking a cake
Alternatives to the ‘S’-shaped
lifecycle
Estimates of project cost
Maylor’s four-phase project lifecycle
Phase Key issues
D1: Define the Project and organisational
project strategy, goal definition
D2: Design the Modelling and planning,
project process estimating, resource
analysis, conflict resolution
and justification
D3: Deliver the Organisation, control,
project (do it!) leadership, decision making
and problem solving
D4: Develop Assessment of process and
the process outcomes of the project,
evaluation, changes for the
future
Fundamental questions
• What is to be done?
• Why is it to be done?
• How will it be done?
• Who will be involved in each
part?
• When can it start and finish?
• How should the project be
managed on a day-to-day
basis?
• How can the process be
continually improved?
Cumulative expenditure
Weiss and Wysocki’s lifecycle
PHASE ACTIVITIES
Definition • State problem
• Identify goals
• List objectives
Planning • Identify project activities
• Estimate time and cost
• Sequence activities
Organising • Obtain resources
• Recruit project leader
• Recruit project team
Controlling • Define management style
• Establish control tools
• Prepare sitreps
Closing • Gain client acceptance
• Install deliverables
• Document the project
• Obtain preliminary resources
• Identify assumptions and risks
• Identify which activities are
critical
• Write project proposal
• Organise project team
• Assign work packages
• Review project schedule
• Issue change orders
• Issue final report
• Conduct review of the project
Elements of a project plan
ELEMENT DESCRIPTION
Overview A short summary of the project objectives and scope
Objectives This contains a more detailed statement of technical and profit goals
General approach Describes both the managerial and the technical approaches to the work
Contractual aspects This includes a list of all reporting requirements, customer-supplied
resources, liaison arrangements, review and cancellation procedures etc
Schedules This lists all tasks and milestones with estimated dates
Resources This includes the budget and the cost monitoring and control procedures
Personnel This defines the skills and expertise needed for the project
Risk management This covers both potential problems and potential lucky breaks, with
plans planned responses
Evaluation methods Standards should be established at the project’s inception against which
its eventual success or failure can be evaluated
Three levels of organisation
• The technical level
This is concerned with the performance of specific operations or tasks
associated with the performance of the project.

• The managerial level

This is concerned with the co-ordination and integration of work that
is performed at the technical level.

• The community level

The managerial level interrelates with the community level which is
concerned with the broader interrelationship between the project and
its environment.
Pure project structure
Advantages of project structures
• The project manager (PM) has full line authority over the project
• The PM communicates directly with senior management,
crossing functional boundaries
• A more or less permanent group of experts can remain in place
for successive projects
• The separate identity of the project fosters commitment
• With authority centralised, decision making is swifter
• There is unity of command – one worker, one boss
• The structure is simple and flexible
• The structure supports a systems-based approach
Functional project structure
Matrix project structure
Matrix structure
Advantages
• Combines functional efficiency
with product/project
accountability
• Fosters interdisciplinary co-
operation in pursuit of project
goals
• Develops tolerance of flexibility
and ambiguity
• Focuses all functions on customer
satisfaction and results
• Brings conflicts of authority into
the open
Disadvantages
• Potential competition/conflict
between dual managers
• Potential stress on staff ‘caught’
between competing or conflicting
demands
• Potential inefficiency of
ambiguous priorities and
switching between tasks
• More complex (potentially slower)
decision-making processes
• Costs of added management
layer, meetings and so on
Inception, implementation and
phase out
The RACI framework
Responsible This is the person or role responsible for performing
the task, that is, the actual person doing the work to
complete the task.
Accountable This is the person who is ultimately accountable for the
task being done in a satisfactory manner. Essentially,
the Accountable person must sign off the work that
the Responsible person produces.
Consulted Those people whose input is used to complete the
task. Communication with this group will thus be two-
way in nature.
Informed Those people who are informed as to the status of the
task. Communication with this group is thus one-way
in nature.
Key features of a control system
• At what points in the project will we try to exert
control?
• What factors are we trying to control?
• How do we measure the factors we seek to control?
• How much deviation do we tolerate before we
intervene?
• How can we spot potential deviations before they
occur?
A cybernetic control system
Postcontrol application
• The project objectives, identifying the extent to which
objectives were met and the causes why they were not
met in full
• Milestones, checkpoints and budgets
Significant deviations from these predetermined targets should be
identified and explained.
• The final report on project results
This should highlight significant deviations from plan, both good and bad.
• Recommendations for performance and process
improvement
This is a valuable tool for improving future project performance.
Change control system
Project final report
• Project performance
a comparison of what the project achieved with what it tried to achieve
• Administrative performance
a summary of how well the administrative aspects of the project were handled
• Organisational structure
including comments on how the structure helped or impeded the progress of the
project
• Project and administrative teams
a confidential summary of the performance of individuals
• Techniques of project management
a summary of how well the team performed in the areas of forecasting, planning,
budgeting, scheduling, resource allocation, risk management, and control
Review and audit criteria
CRITERIA AUDIT REVIEW
Financial Accounting systems Return on investment, cost
variances
Time Conformance to plan Customer satisfaction
Quality Quality procedures Customer perceptions
Human Conformance to policy Team spirit, motivation
resources
Environmental Conformance to policy Environmental impact
assessment
Planning Conformance to plan Cost, techniques used
Control Systems for control Basis for improvement
Performance improvement
The experiential learning cycle
Model form contracts – key terms
• Contractor’s responsibilities
• Purchaser’s responsibilities
• Contract pricing
• The valuation of variations and claims
• Meetings
• Insurances
• Contractor’s indemnities
• Completion of the works
• Acceptance of the works
• Liabilities for defects
• Suspension of the works
• Dispute resolution
• Damages for delays including liquidated damages
• Force majeure etc
Aims of the New Engineering
Contract
• Achieve a higher degree of clarity of terms and language when
compared to other existing model form contracts
• Use simple commonly occurring language and avoid legal jargon
• Repeat identical phrases if possible
• Produce core clauses and exclude specifics of any contract to
avoid the need to change the core terms
• Precisely and clearly set out key duties and responsibilities
• Aim for clarity above fairness
• Avoid including details which can be more adequately covered in
a technical specification
Key features of NEC3
• Written in the present tense and using plain English
• Designed to be used to manage the project rather
than to rule who is at fault
• Standalone clauses – no cross referencing between
clauses
• Clear layout with consistent numbering and language
used throughout
• The Contracts in the NEC3 Suite share common
overall layout and design
NEC3 contract conditions
CORE CLAUSES MAIN OPTION CLAUSES SECONDARY OPTION
CLAUSES
• General • Priced contract with • X1 Price adjustment for
• The contractor’s main activity schedule inflation
responsibilities • Priced contract with bills • X2 Changes in the law
• Time of quantities • X3 Multiple currencies
• Testing and defects • Target cost with activity • X4 Parent company
• Payment schedule guarantee
• Compensation events • Target cost with bills of • X5 Sectional completion
• Title quantities • X6 Bonus for early
• Risks and insurance • Cost reimbursable completion
• Termination contract • X7 Delay damages
• Management contract • X12 Partnering
• X13 Performance bond
• X14 Advanced payment
• X18 Limitation of liability
• (plus others)
Core clauses
1 General
2 Contractor’s main responsibilities
3 Time
4 Testing and defects
5 Payment
6 Compensation events
7 Title
8 Risks and insurance
9 Termination
Pricing mechanisms
• Fixed lump sum pricing
• Activity schedule pricing
• Bills of quantities
• Target cost pricing
• Cost reimbursable pricing
Compensation events
(1) The project manager gives an instruction changing the Works Information
(the specification).
(2) The Employer does not allow access to and use of a part of the Site by the
later of its access date and the date shown on the Accepted Programme.
(3) The Employer does not provide something which he is to provide by the
date for providing it shown on the Accepted Programme.
(4) The project Manager gives an instruction to stop or not to start any work
or to change a Key Date.
(5) The Employer or Others:
• do not work within the times shown on the Accepted Programme
• do not work within the conditions stated in the Works Information or
• carry out work on the Site that is not stated in the Works Information.
(6) The project Manager or the Supervisor does not reply to a communication
from the Contractor within the period required by this contract.
NEC optional clauses
• X1 Price Adjustment for Inflation
• X2 Changes in the Law
• X3 Multiple Currencies
• X4 Parent Company Guarantee
• X5 Sectional Completion
• X6 Bonus for Early Completion
• X7 Delay Damages
• X12 Partnering
• X13 Performance Bond
• X 14 Advanced Payment to the Contractor
• X18 Limitation of the Contractor’s Liability
• Z Options
Other model form contracts
Organisation
The Institution of Civil
Engineers (ICE)
The Institution of Mechanical
Engineers/
The Institution of Engineering
and Technology
Institution of Chemical
Engineers (IChemE)
The International Federation
of Consulting Engineers
(FIDIC)
Joint Contracts Tribunal (JCT)
Model form contract
The New Engineering Contract (3rd edition), 2005
Model form contract (MF/2) for the supply of
electrical, electronic or mechanical plant, 1999
International Form of Contract Lump Sum contract –
the International Red Book, 2007
Conditions of Contract for Construction for Building
and Engineering Works Designed by the Employer:
The Construction Contract, 1999
JCT Standard Building Contract (with or without Bills
of Quantity) 2011
Key features of the JCT model
form contracts
• Contracts are generally let on the basis of fixed lump sum prices.
• The JCT contracts encourage the use of retention monies. This is in the
form of a fixed percentage of the contract sum which is withheld on each
interim invoice.
• The JCT encourages up front agreement of liquidated and ascertained
damages (LAD) which is an estimate of the employer’s weekly financial
damages if the contractor fails to achieve the dates set for Contractual
Completion.
• The JCT introduced the concept of Determination, whereby the contract
can be terminated for suspension of works, failure to proceed regularly
and diligently, failure to remove defective works, failure to execute works
in accordance with the contract, and insolvency of the contractor.
JCT and NEC model form contracts
JCT FORM OF CONTRACT
Written in legalistic language
Contains 40 principal Conditions
Originally written for Traditional Contracts
Design Consultant supervises the Contractor’s
Work and applies the Contract Conditions
independently of the Employer and Contractor, so
there could be potential conflict of interest
Reactive approach, with consequences and
actions being determined in response to events
Tends not to promote a co-operative working style
Claims are dealt with retrospectively and may
become protracted
Substantial volume of case law
NEC FORM OF CONTRACT
Written in plain English
Contains 9 Core Clauses
Options included to accommodate all
Procurement Strategies
Project Manager acts as the Client’s agent and is
not required to act independently, therefore no
conflict of interest
Proactive approach, designed to minimise
problems, including early warning systems
Requires the parties to act in a spirit of mutual
trust and co-operation
Claims are transformed into compensation events
and dealt with during the term of the Contract
Low level of case law and low incidence of
disputes
Pricing arrangements (showing
risks to the buyer)
Fixed lump sum pricing
arrangements
• Financial risk
since its total price commitment is known in advance, the supplier bears the risk of
cost fluctuations
• Cashflow management
the timing of payments (related to milestones or instalment deliveries) is pre-
planned
• Supplier motivation
a fixed price schedule gives the supplier a strong incentive to complete the work
efficiently and on time, since any cost savings (below the agreed price) are kept by
the supplier – and it is also liable for any inflationary cost increases
• Administrative simplicity and contract management costs
the purchaser’s team will not be concerned with monitoring or auditing the
supplier’s actual costs
Fixed price with review or
re-determination clauses
May be suitable where the parties are unable to agree on a
fixed price for the whole duration of a long-term contract.
• Supply market costs and conditions may only be forecastable for
a short period ahead owing to uncertainty or volatility
• The nature of the work on a project may be less accurately
specifiable after the initial stages
• Costs on an innovative project with a new supplier may fall over
time
An example bill of quantities
Items required to create a bill of
quantities
• Detailed plans and engineering drawings for the
project
• Specifications of the exact materials to be used
• The costs of the materials to be used
Target costing
The cost-plus approach builds up
the cost of a product by analysing
its components step by step. A
profit margin is then added and the
result is the contract price for a
project.
A target costing approach starts at
the other end. The purchaser
and/or the supplier estimates the
maximum selling price that the
market will be willing to pay for a
product with specific features. A
maximum price is then negotiated
with a particular buyer. The
supplier then works backwards to
calculate the production cost that
must be achieved in order to
provide a reasonable profit, and
attacks costs to reduce them to the
required level.
A target costing arrangement
Options for incentivised contracts
• The establishment of a negotiated target cost for supply, on
which a fixed maximum price (including a ‘target profit’ for the
supplier) is based. If the supplier achieves cost savings, the
amount of the savings will be shared with the buyer, on an
agreed percentage or proportion basis.
• Staged payments or contingency payments or faster payment
for early delivery
• Specified bonus payments (or incentive fees) added to the
fixed price, linked to attainment of specific KPIs, cost savings
or improvement targets
• Revenue, profit or gain sharing
Cost-plus pricing
• A cost plus fixed fee (CPFF) contract
includes payment of allowed costs plus a pre-determined fixed
amount, as the fee for doing the work

• A cost plus incentive fee (CPIF) contract

includes payment of allowed costs plus a higher fee for meeting or
exceeding performance or cost targets or KPIs

• A cost plus award fee (CPAF) contract

includes payment of allowed costs plus a fee (bonus) based on the
contractor’s performance
Alternative arrangements
• Cost without fee
for non-profit-making providers

• Cost sharing
where the supplier stands to benefit from its own work. In such cases,
the buyer and supplier may agree on a fair basis for sharing the costs
(often 50: 50).

• Time and materials

for contracts where the precise work to be done cannot be predicted
in advance. Instead, the parties agree on a fixed rate per labour hour,
plus materials supplied at cost.
Project management strategy
• Full turnkey
• Partial turnkey
• Traditional client co-ordinated
• Management contracting
Design and build contracting
ADVANTAGES OF DESIGN AND BUILD DISADVANTAGES OF DESIGN AND
BUILD
Places maximum responsibility for Consequences are disastrous if an
the project in the hands of one unsuitable contractor is selected
organisation
Probably achieves the quickest In complex projects, the choice of
possible completion possible contractors may be very
limited
Encourages innovation in design, Price must reflect the very high risk
leading to improved quality and lower and responsibility assumed by
cost contractor
Avoids diseconomies that arise when Contractor may skimp on areas
using multiple outside contractors beyond the strict contract terms (eg
safety)
Minimises any claims for ‘extras’ as
these are all a responsibility of the
contractor
Management contracting and
construction management
BOOT acronym and its derivatives
• BOOT: build, own, operate and transfer
• FBOOT: finance, build, own, operate, transfer
• BOO: build, own, operate
• BOL: build, operate, lease
• DBOM: design, build, operate, maintain
• DBOT: design, build, operate, transfer
• BOOST: build, own, operate, subsidise, transfer
• BTO: build, transfer, operate
• BOT: build, operate, transfer
BOOT contracts
• Construction package
this will consist of all the areas of work that are required to achieve the
constructional works
• Operational package
this will contain all of the components associated with operating the facility and
can typically include facilities management services, training of staff, supplies of
materials and consumables, insurances, guarantees, licences etc
• Financial package
this will inevitably fulfil the funding arrangements for the facility and will often take
the form of a loan from a bank or banks
• Revenue package
this will include the activities associated with revenue generation such as pricing
for services provided, balancing demand from customers with the supply of
resources and the calculations of taxation payable
Advantages for BOOT contracting
strategies
• Additionality
• Credibility
• Efficiencies
• Benchmark
• Technology transfer
• Privatisation
• Off balance sheet financing
The 4Cs approach
• Challenge the existing services provision
If the existing service is delivered in house then does this provide best value for
money for the taxpayer as against what is available in the external marketplace?
• Compare
This means comparing the performance of the existing services against other
offerings.
• Consult
This means consultation with various stakeholders, clients and groups to
determine their perception of the service they are receiving.
• Compete
The competitive process may be carried out through any of a number of channels.
For example, the service may be formally tendered and the in-house service will
tender along with external bidders; alternatively, the in-house service may be
judged to be effective and therefore retained without subjecting it to competition.
Advantages claimed for PPPs
• Limited public funds can be supported and enhanced by a private
sector joint venture
• Limited public sector skills and capacity can be supported by a
private sector partner
• Risk is shared
• Continuous improvement of public services may be enhanced by
incentivised performance-related contracts
• PPPs can facilitate and support larger and more complex
infrastructure projects than would be possible under traditional
public funds
• PPP contracts, programmes and projects may have the added
benefit of being attractive to major national and international
contractors and worthy of investment
Criticisms of PPPs
• If PPPs are poorly negotiated, the contracts might result in
public sector embarrassment
• Private sector costs associated with bidding for PPP projects
can be substantial and there may be legal recourse if bidding
occurs and projects do not go ahead
• Significant human resource issues can often arise in PPPs
when public service staff are transferred to the private sector
• There is a danger that the private sector may cut corners to
maximise profits by reducing employees’ wages and benefits
and service levels
Three classes of PFI project
• Those which are financially free standing
The private sector undertakes the project on the basis that costs will
be recovered entirely through charges for services to the end user.

• Services sold to the public sector

Project costs are met by charges levied by the private sector provider
on the public sector body which lets the contract.

• Joint ventures
Costs of the project are met partly from public funds and partly from
other sources with overall control of the project being in private
sector hands.
Risks associated with PFI funding
mechanisms
• Design and construction risks
• Commissioning and operating risks
• Demand risks
• Final residual value risks
• Technology and obsolescence
• Regulation risks
• Project finance risks
• Contractor default risks
Types of cashflow
• Cash outflows might include the cost of capital equipment, any loan
interest payable, wages and salaries of new employees taken on as part of
the project, and tax payable on the profits arising.
• Cash inflows might include increased cash receipts from customers,
savings in operating costs arising from increased efficiency, and possibly
any reductions in tax bills.
• Net cashflows in any period are the cash inflows less cash outflows for that
period.
• There are also opportunity costs of capital. This means the benefit forgone
by investing in the chosen project rather than the next best alternative.
• Finally, there is the impact of depreciation. Depreciation is not a cashflow
– it is merely a ‘book entry’, reclassifying capital expenditure as operating
expenditure.
Cashflows for Project A
Net cashflow Cumulative
each year cashflow
£ £
Year 0 (200,000) (200,000)
Year 1 50,000 (150,000)
Year 2 50,000 (100,000)
Year 3 50,000 (50,000)
Year 4 50,000 0
Year 5 50,000 50,000
Cashflows for Project B
Net cashflow Cumulative
each year cashflow
£ £
Year 0 (200,000) (200,000)
Year 1 20,000 (180,000)
Year 2 20,000 (160,000)
Year 3 20,000 (140,000)
Year 4 80,000 (60,000)
Year 5 80,000 20,000
Year 6 80,000 100,000
Weaknesses of the ARR approach
• It takes no account of the project’s life
A 20 per cent return may seem more attractive than a 15 per cent
return, but a project offering 15 per cent for five years may be more
attractive than one that offers 20 per cent for only two years.

• It takes no account of the timing of cashflows

Later cashflows are more speculative than earlier ones, but all are
given equal weight in the ARR calculation.

• The measurement of accounting profits is subjective

Using DCF tables
Rate of discount
5% 6% 7% 8% 9% 10%
Year
0 1.000 1.000 1.000 1.000 1.000 1.000
1 0.952 0.943 0.935 0.926 0.917 0.909
2 0.907 0.890 0.873 0.857 0.842 0.826
3 0.864 0.840 0.816 0.794 0.772 0.751
4 0.823 0.792 0.763 0.735 0.708 0.683
5 0.784 0.747 0.713 0.681 0.650 0.621
6 0.746 0.705 0.666 0.630 0.596 0.564
NPVs for Projects A and B
Project A Project B
Year Discount Cashflows Present values Cashflows Present values
factors £ £ £ £
0 1.00 (200,000) (200,000) (200,000) (200,000)
1 0.93 50,000 46,300 20,000 18,520
2 0.86 50,000 42,850 20,000 17,140
3 0.79 50,000 39,700 20,000 15,880
4 0.74 50,000 36,750 80,000 58,800
5 0.68 50,000 34,050 80,000 54,480
6 0.63 80,000 50,400

Net present value (350) 15,220

Advantages of DCF
• Unlike the payback method, DCF takes account of all
cashflows over the life of the project, not just those
in the early years
• Unlike the ARR method, DCF concentrates on the
most relevant factor: actual cashflows rather than
accounting profit or loss
• DCF is the only method to take account of the crucial
factor of the time value of money
Programme board skill composition
• Procurement and contracting (including strategies for
engagement of local labour)
• Stakeholder engagement (communication and consultation)
• Customer services (maintain focus on deliverables and
feedback loop)
• Programme milestones and Gantt charting (performance
review)
• Financial and programme budget management (updates and
overview)
• Legal matters such as compliance with standards and health
and safety issues
Project board function
The Project Board members should take the following steps:
• Demonstrate to the organisation a commitment to the project
and its delivery
• Support the Project Manager in the decision-making process
• Provide overall guidance and direction to the project
• Report to any interested senior management groups
• Approve the project plans but also question the realism of
plans and estimates
• Take ‘ownership’ of appropriate identified project risks and
take action to mitigate the risks
Project responsibility charting
Responsibility charting
• Level 1
At a global or programme level. At this level, companies can be
identified along with milestones or work packages

• Level 2
At an organisational level so that activities and individuals working on
the project are shown on the chart

• Level 3
At a micro or detailed level so that tasks are detailed with individuals
responsible for the work identified
Project selection
• The sacred cow
A project is suggested by a senior and powerful official in the organisation. Less senior managers
have no option but to implement it, no matter how poorly thought out it may be.

• The operating necessity

If a system is threatened with collapse, and is essential to the business, then a project to rescue it is
a necessity. Little formal justification is needed in such a case.

• The competitive necessity

An organisation may need to take drastic action, for example by modernising its IT, in order to
maintain its competitive position.

• The product line extension

A project to develop and distribute new products may be judged on the degree to which it fits the
firm’s existing product line.

• The comparative benefit model

Projects are ranked by reference to the value of benefits they bring to the organisation. Those
offering the greatest benefits are selected for implementation.
Project selection – numerical
methods
• The unweighted factor model
A list of relevant evaluation criteria is established. Each project is then scored
depending on the number of criteria it satisfies. A problem with this is that it does
not identify the extent to which a project matches a particular criterion.
• The unweighted factor scoring model
This remedies the problem by identifying (on a scale of 1 to 5) how closely each
project matches particular criteria. A further problem remains with each of these
methods: they do not distinguish between criteria of high and low importance.
• The weighted factor scoring model
This is roughly the same, with the refinement that each evaluation criterion is
given a weight to reflect its importance.
Elements of a PID (project
initiation document)
• Project goals and objectives
• The critical success factors by which achievement of the objectives
will be judged
• Details of the project scope
• A risk assessment
• Roles and responsibilities within the project team
• Project control mechanisms
• Reporting lines and procedures
• A list of planning milestones
• The project budget
Principles of management
• Division of work • Centralisation
• Authority • Scalar chain
• Discipline • Order
• Unity of command • Equity
• Unity of direction • Stability of tenure of
• Subordination of individual personnel
interests to the general • Initiative
interest • Esprit de corps
• Remuneration
Characteristics of bureaucracy
• Hierarchy
Each lower office is under the direct control and supervision of a higher one.
• Specialisation
Work is divided into technically specialised functions.
• Impersonality
Employees work within rules and regulations, according to formal procedures. There is
nothing ‘personal’ about the authority or control applied by management.
• Rationality
‘Jurisdictional areas’ (areas of authority) are determined rationally. The hierarchy of
authority, duties and responsibilities and measures of performance are clearly defined.
• Uniformity
Standardised performance of tasks is expected, regardless of who carries them out.
• Stability
Rules, structures and continuity remove ambiguity and create a stable environment.
Formal organisational structure
• Define work roles and relationships
• Define work tasks and responsibilities
• Channel information flows efficiently through the organisation
• Coordinate goals and activities of different units
• Control the flow of work, information and resources
• Support flexible working and adaptability to changing internal and
external demands
• Encourage and support the commitment, involvement and
satisfaction of the people who work for the organisation
• Support and improve the efficiency and effectiveness of the
organisation’s performance through all of the above
Features assessed by performance
measures
• Whether the project was completed to the desired
budget
• The level of performance achieved as well as levels of
customer satisfaction
• Delivery timescales achieved
• The relationship strength and responsiveness
developed with the external supplier
The changing importance of
project objectives
LIFECYCLE STAGE COST SCHEDULE PERFORMANCE
Formation High High High
importance importance importance
Build-up Low High Medium
importance importance importance
Main phase Low High High
importance importance importance
Phase-out Low Medium High
importance importance importance
Key problems in developing
specifications
• Lack of internal communication between key stakeholders in
the design or manufacturing process
• Poor communication between suppliers and buyers due to
suspicion and mistrust
• Fast changing requirements due to shifts in the trading or
technical environment
• Political conflicts between different departments or functions
• Wishful thinking in achieving an understanding of the trading
environment
Stages in the sourcing process
Good sourcing practices
• Early supplier involvement
• Early cross-functional dialogue
• Decide how to handle IPR
• The use of variant bids
• The use of SMEs/appropriateness of partnering
• Evaluate risks early
Supply chain participants in the
construction sector
• The client
• Architects and engineering specialists
• Contractors
• Product manufacturers
• Manufacturers’ distributors
• Material suppliers
• Service providers
• Insurance companies
Corporate social responsibility
• Environmental responsibility
• Human rights
• Community involvement
• Impact on society
• Equal opportunities
• Ethics and ethical trading
• Sustainability
• Biodiversity
• Corporate governance
The waste hierarchy
Environmental issues
• Depletion of non-renewable resources such as oil, gas, timber etc
• Generation of polluting emissions to air and water
• The use of energy (involving extraction and burning of fossil fuel)
• Destruction of habitats and loss of biodiversity
• Emissions to air, land and water, including ozone, volatile organic
compounds (VOCs), CO2, NOx (nitrogen oxides) and SOx (sulphur oxides)
• Generation of solid waste
• Emissions associated with transport
• The energy used in manufacture
• Manufacture and use of packaging
• Use of energy, for example, electricity or petrol
• Use of some products, for example, photocopiers and printers, can lead to
the generation of ozone, which has local health effects
• Environmental impacts associated with disposal (incineration, landfill, etc)
Sample criteria for environmental
scorecards
1 Number of projects with commitment to sustainability
2 Projects built to standards such as BREEAM, Social Accountability International’s
standard SA8000
3 Number of sustainability workshops
4 Energy performance rating
5 Recycled content by value
6 Percentage of waste diverted from landfill
7 Sustainability evaluations
8 Whole life costing undertaken
9 Membership of associations promoting sustainability
10 Community projects undertaken
Social Accountability 8000 issues
• Child labour
• Forced labour
• Health and safety
• Freedom of association and right to collective bargaining
• Discrimination
• Discipline
• Working hours
• Remuneration
• Management systems
Promoting opportunities to the
supply chain
• Being prepared to explain the process and making requirements
clear and unambiguous
• Advertising opportunities as widely as possible and ensuring
advertisements are clear and concise
• Giving a full description of the project taking into account the
nature, size and risk of specific procurements, as well as any risks
associated with individual suppliers
• Being prepared to provide meaningful feedback, even to
successful bidders, ensuring that any feedback is as helpful as
possible
Actions encouraged by the UK
Office of Government Commerce
• Hold open supplier meetings, which provide a forum for potential prime
contractors and subcontractors to get together as well as to find out more about
the project
• Publish the names of companies acting as prime contractors in a procurement, and
details of awarded and upcoming contracts
• Where appropriate ask main suppliers to show their track record in achieving value
for money through the effective use of their supply chain, including how SMEs can
gain access to their subcontracting opportunities
• Ensure that main contractors pay subcontractors on time and that payments flow
down the supply chain
• Encourage main suppliers to adopt supply chain management practices that
integrate, incentivise and reward good performance throughout the supply chain
• Be open to consortia bids from SMEs as this is one way in which small businesses
can tackle large procurements
The project risk management
cycle
• Risk identification
• Risk evaluation
• Identification of responses to risk
• Risk control actions
• Planning and resourcing
• Monitoring and reporting
Possible responses to project risk
• Tolerate the risk
We simply live with it.
• Treat the risk
We manage it in such a way as to minimise its impact.
• Transfer the risk
We place the risk in the hands of a third party, eg by insurance.
• Terminate the risk
Some risks are too great to tolerate and we have to take steps to
remove them.
• Plan contingency actions
Assignment of risk ownership
• Have owners been allocated to all the various parts of the
complete risk process and the future risks been catered for?
• Are the various roles and responsibilities associated with
ownership well defined?
• Do the individuals who have been allocated ownership actually
have the authority?
• Have the various roles been communicated and understood?
• Are the nominated owners appropriate?
• In the event of change, can ownership be quickly and effectively
reallocated?
• Are the differences between benefit and delivery risks
understood?
Quantifying risk
• Impact refers to consequences or implications if the risk does occur
• A minor impact indicates that the risk would not have important implications.
• A moderate impact indicates that the risk could have implications for the organisation’s
ability to succeed.
• A significant impact indicates that the risk would have important implications for the
organisation.

• Likelihood refers to the probability that the risk may occur, given its
nature and the current risk management practices in place
• A low likelihood indicates that the risk is unlikely to occur, given its nature and current
risk management practices in place.
• A medium likelihood of occurrence indicates that the risk has a moderate probability of
occurrence.
• A high likelihood of occurrence indicates that the risk is likely to occur, despite the risk
management practices in place.
An impact/likelihood grid
Normal distribution
A Monte Carlo simulation
Number of times the simulation Percentage of simulation runs where
result was less than or equal to the the result was less than or equal to
Total project duration Total Project Duration the Total Project Duration
11 5 1%
12 20 4%
13 75 15%
14 90 18%
15 125 25%
16 140 28%
17 165 33%
18 275 55%
19 440 88%
20 475 95%
21 490 98%
22 495 99%
23 500 100%
Benefits of a risk register
• Provide a useful tool for managing and reducing the risks
identified before and during the project
• Provide the project sponsor, Board or senior management
with a documented framework from which risk status can be
reported
• Ensure the communication of risk management issues to key
stakeholders
• Provide a mechanism for seeking and acting on feedback to
encourage the involvement of the key stakeholders
• Identify the mitigation actions required for implementation of
the risk management plan and associated costings
Risk register information
• Reference number a unique reference code for the risk
• Description the nature of the risk and how the risk will impact on the
organisation
• Probability this is the likelihood of the risk happening
• Impact a rating defining the effect that the risk will have on
the ability to achieve objectives
• Mitigation a description of the action to be taken to reduce the
probability of the risk occurring, or to reduce its impact
• Contingency where a risk is considered to be severe, consideration should
be given to a contingency plan
• Accountability the person that carries the responsibility for ensuring that
the risk is monitored and effectively managed
• Status a description of the current position for the risk
An example of a risk register
Mitigation actions
• Preventive actions
planned actions to reduce the likelihood that a risk will occur and/or
reduce the seriousness should it occur

• Contingency actions
planned actions to reduce the immediate seriousness of the risk when
it does occur

• Recovery actions
planned actions taken once a risk has occurred to allow you to move
on
Supply chain risk management
considerations
• There are many types of risk in the end-to-end supply chain
• Their characteristics in terms of probability and severity will
vary greatly
• Risk will be sensitive to the context of the company, its
markets and its position in the supply chain
• The permutations and combinations of risk are such that few
generalisations will apply
• Pinpointing all of the areas that a company may face is likely
to be a difficult task, but also a worthwhile one
Consequences of demand risk
• Demand exceeding supply could result in price
increases that will either have to be absorbed by the
organisation or passed on to customers
• The inability to meet demand may be perceived by
customers as a failure of commitment and may affect
both future business and reputation
• Demand that is consistently below projections will be
a major threat, as investments would have been
made on the projected figures throughout the
specific areas of the supply chain
Process risk areas
• Variation in manufacturing output
• Poor equipment utilisation
• Quality issues
• Warehouse operating issues
• Supply chain issues
• Transport issues
Activities in Project Alpha
ACTIVITY PRECEDING ACTIVITIES DURATION IN DAYS
A – 3
B – 3
C – 7
D A 1
E D, J 2
F B 2
G C 1
H E, F, G 1
J B 1
A skeleton network for Project
Alpha
Project Alpha: numbering the
nodes
Project Alpha: earliest start times
Project Alpha: latest finishing
times
‘Crashing’ activities
• Identify activities that may be ‘crashed’
• For each activity, establish cost of crashing
• Estimate activity duration with resources added
• Determine revised completion date and cost
• Recalculate critical path and costs
• Compare various options to determine most effective
solution
Buffers
Buffers are defined quantities of time applied to a project
schedule to protect the promised due date from variation.
• A feeding buffer
Protects non-critical tasks where they feed into critical tasks. This
improves the chance that the critical task can begin on time.
• A capacity buffer
Used in a multi-project environment to protect each project from
variation in resource use on other projects.
• A resource buffer
Protects against the possibility that a key resource will be in short supply
when needed.
Examples of indices
• Commodities indices, or commodity price indices
track the weighted average of selected commodity prices, and are
designed to be representative of a broad commodity asset class or a
subset of commodities (such as energy, metals or agriculture)

• The Labour Market Index (LMI)

tracks the weighted average of wages and salaries, according to labour
type and location, as a guide to labour costs
Indexation and price adjustment
formulae
• To estimate the current average prices or costs of a product, by
using price/cost data for similar items at a previous ‘base’ date
• To eliminate the effects of inflation or deflation when analysing
price and cost trends
• To allow for currency fluctuations when estimating or
negotiating future prices or costs
• To compare the cost performance of different suppliers, or a
particular supplier over time
• To identify and define average price/cost changes, as the basis
for contract cost or price adjustment calculations
Dealing with post-contract price
adjustments or increases
• Adjustments should be authorised by a single responsible official, where
possible, to maintain control over total budget variance
• Adjustments should be confirmed in writing, as part of contract version control
• All relevant contract stakeholders should be notified of agreed adjustments
• Where standard costing is in operation there should be a procedure for
monitoring price adjustments and variances against standard material uses
• Where adjustments are calculated in accordance with an agreed contract price
adjustment formula, records should clearly identify the cost base date(s) of the
original contract, and the circumstances giving rise to the adjustment
• Suppliers should be asked to provide data to justify any price increase claimed
• If a buyer and vendor cannot come to agreement on a proposed price increase,
the buyer may need to consider alternative suppliers or materials, or the use of
longer-term contracts
Budgetary control
• Planning
Detailed project plans can value the costs and timescales of the activities to be undertaken.
• Co-ordination
The budget will help co-ordinate the activities of the different personnel so that they can work
collaboratively to achieve the set budget.
• Communication
The budget can help each individual’s involvement with the project and the process can ensure the
accountability of individuals in their contributions to the project.
• Motivation
The budget can be a helpful tool for influencing peoples’ behaviour and therefore for motivating
personnel to achieving the targets set out in a properly constructed project.
• Control
By comparing the actual costs with the budgeted costs, action can be taken to ascertain the reason
for any variances.
• Performance evaluation
The success of the project overall and the project team can be measured by its success in meeting
the budget.
Approaches to budget creation
• Top down
Managers estimate overall project costs as well as the costs of the
major work packages. These cost estimates are given to lower level
managers who are provided with the estimated costs and then are
generally expected to achieve these estimated costs in practice.

• Bottom up
The people that are involved in delivering the tasks, schedules and
work breakdown structure are consulted regarding costs and
timescales, and the data collated is then aggregated to compile the
total costs for a project.
Costing information
• Material costings
Material costs will be based on the specifications created for the project.
There will be estimates of the quantities of materials required together
with their pricing.
• Labour costings
The calculation of labour costs will consist of the multiplication of
estimated labour hours by the rates chargeable for different grades of
labour. In addition, other direct costs associated with the project that
involve people can be added to the budget, such as travel and subsistence
costs.
• Overhead rates
Separate variable and fixed overhead rates may be established and
apportioned to the cost of the activity.
Lifecycle costing
Lifetime costs of managing a
capital asset
Unnecessary cost
• Unnecessary costs of design
• Unnecessary cost of a component
• Unnecessary cost of a material
• Unnecessary cost of poor buildability
• Unnecessary lifecycle cost
Value engineering phases
1 Information phase
The team decides on the objectives and the scope of the study.
2 Speculation phase
This phase is concerned with the generation of creative design ideas, usually through a
‘brainstorming’ process, leading to the formulation of alternative design solutions which fulfil the
value objectives.
3 Evaluation phase
The objective of the phase is to critically appraise the proposals of the previous phase.
4 Development phase
The favoured alternative solutions to emerge from the previous phase are then developed to a level
of detail sufficient to enable cost studies to be undertaken for each option.
5 Presentation phase
The presentation phase is concerned with the production of a report by the VE team, detailing the
conclusions of the VE study and presentation of the recommendations arising out of the review.
6 Implementation of value engineering proposals
the Project Manager should act on the proposals made, indicating where recommendations will be
incorporated into the design, and detailing cost and time implications.
Benefits of buying alliances
• Reduced acquisition costs
• Shared market intelligence and product knowledge
• Shared resources – people, time, management information
• Investing together in supplier development and R&D so enabling
improvements can be shared
• Increasing the suppliers’ interest as a greater value is placed on the
group
• Presenting a united front to suppliers
• Releasing time to concentrate on more strategic procurement
• Inter-member trading can be set up to cover for shortages;
inventory can be managed more effectively; supplier benefits from
greater market penetration
Many to many relationships
Consortium relationships
Difficulties with consortium
purchases
• The central purchasing organisation that creates the consortium-based
contracts through its sourcing and contract negotiations will need to
recover the costs of its personnel and overheads. The difficulty is that the
gains achieved through the consortium are automatically wiped out by the
mark-up added to cover these costs.
• It will rarely be the case that the consortium-based contract will be a
mandatory requirement for all of its members to buy into. As a result,
particularly with organisations that have devolved purchasing, there can
often be a lack of ‘buy-in’ to the contracted frameworks.
• There is often a lack of co-ordination between the members of the
consortium. A larger buyer can tend to take control and be the dominant
member.
Open book costing
Contractors or suppliers can provide data for the
following items:
• Labour costs
• Material costs
• Plant hire
• Overheads
• Subcontract costs
• Profit
A template for open book costing
Measures of progress
• Percentage completion of an activity in terms of cost and
time
• Planned progress against actual progress
• Work in progress
• Any impact on critical path
• Payment progress
• Overall work content
• Outstanding requirements (resources etc) planned or still
required
Time control systems
• Time budget
the overall project duration as fixed by specific constraints in the
contract strategy; the period which, once fixed, becomes a key
parameter for management of the project
• Time plan
a division of total time into interlinked time allowances for readily
identifiable activities with definable start and finish points; the overall
project programme
• Time checking
monitoring actual time spent on each activity against the allowance in
the time plan; reporting any variances as soon as identified for critical
activities
Benefits of reports
• Mutual understanding of project goals
• Awareness of the progress of parallel activities
• More realistic planning
• Understanding interrelationships between different tasks
• Early warning signals of problems and delays
• Reducing delays in communicating any changes deemed
necessary
• Faster management response to defective work
• Higher visibility to top management
• Keeping the client and other interested parties up to date
Types of control processes
• Cybernetic control
automatic detection and correction of deviations from plan

• Go/no-go controls
testing to see whether some condition has been met before allowing
progression to the next step

• Post control review

after the event with a view to improving future performance
Earned value analysis
Three quantities form the basis for cost performance
measurement using earned value analysis:
• Budgeted cost of work scheduled (BCWS) or planned value (PV)
the sum of budgets for all work packages scheduled to be accomplished
within a given time period
• Budgeted cost of work performed (BCWP) or earned value (EV)
the sum of budgets for completed work packages and completed portions of
open work packages
• Actual cost of work performed (ACWP) or actual cost (AC)
the actual cost incurred in accomplishing the work performed within a given
time period
An S curve
Terminology in the S curve
TERM DESCRIPTION INTERPRETATION
PV Planned Value Shows the estimated value of the
work planned to be done
EV Earned Value Shows the estimated value of the
work actually completed
BAC Budget at Completion Shows the budget for the project
EAC Estimate at Completion Shows the total expected costs
for the project
Additional terms
• Performance measurement baseline (PMB)
the sum of BCWS for all work packages for each time period, calculated for the total project duration
• Budget at completion (BAC)
the sum of all the budgets allocated to a project
• Schedule variance (SV)
the difference between the work actually performed (BCWP) and the work scheduled (BCWS)
• Cost variance (CV)
the difference between the planned cost of work performed (BCWP) and actual cost incurred for the
work (ACWP)
• Cost performance index (CPI)
the ratio of planned cost of work performed (BCWP) to actual cost (ACWP)
• Schedule performance index (SPI)
the ratio of work accomplished (BCWP) versus work planned (BCWS), for a specific time period
• Estimate at completion (EAC)
a forecast of most likely total project costs based on project performance and risk quantification
The causes of variations
• Change of specification or scope
• Change of schedule
• Financial problems
• Inadequate project objectives
• Lowest price procurement processes
Remedial actions
• To provide an early warning of an event
that could cause the contract price to
increase, delay completion, delay meeting
a key date or impair the performance of
the works
• To instruct the contractor to attend a risk
reduction meeting
• To notify the contractor if there are any
inconsistencies in the specification or other
documentation
• To approve the contractor’s design and the
use of subcontractors
• To approve the contractor’s programme of
work and potentially decline acceptance
for plans that are not practicable or that do
not comply with the specification or works
information
• To stop or not to start any of the work
• To submit quotations for acceleration of
the work
• To order the contractor to correct any
defects and to order repeats of tests or
inspections
• If a defect is not rectified by the
contractor, to re-contract to a third party
to correct the defect and order the
contractor to pay the cost of this
• To approve payments to the contractor –
and should certify payments within one
week of each assessment
• To approve quotations for compensation
events that change the contract price
and/or effect the completion date
• To decide to terminate the contract and
approve any payments due on termination
Alternative dispute resolution
• Negotiation
• Mediation
• Conciliation
• Neutral evaluation
• Expert determination
• Adjudication
• Arbitration
• Litigation
Consequential losses and damages
For a claim for damages to succeed, the following
conditions must have been met:
• The breach of contract caused the loss
• The loss was a reasonable foreseeable result of the breach
• The evaluation of damages is reasonable
• The claimant is not claiming for any loss which they could have
avoided
Liquidated damages
• Delay damages
An optional clause X7 under the NEC3 contract refers to ‘delay
damages’ for example.

• Damages for the inefficiency of the completed works

‘Service credits’ are often used as a form of liquidated damages in the
IT sector, using this principle to deduct monies for inefficiencies.
Penalties
A clause will generally be held to be a penalty if any one
of the following conditions is met:
• The sum included in the clause is extravagant in its amount
when compared with the greatest loss that could be proved
• The clause consists of paying a single lump sum of money on
the occurrence of one or more or all of a range of events
• The clause is imposed by the purchaser once the contract is
underway (because a liquidated damages clause is a genuine
pre-estimate of probable loss and so will have been
incorporated into the contract)
Contractual warranties and
conditions
• Conditions are so important that without them one or other of
the parties would not enter into the contract. Consequently,
to make a condition falsely, or to breach a condition, is viewed
so seriously that the wronged party will be entitled to treat
the contract as void, voidable or at least rescinded.
• Where the term is a warranty, the wronged party will only be
able to seek monetary damages for any loss suffered. The
contract itself will remain binding on both parties.
Specific performance
• An action for specific performance is an alternative to
the usual award of damages for a breach of contract.
• Under such an action, the courts will compel a party
to execute a contract according to the precise terms
agreed upon in the contract that the parties have
agreed to or, alternatively, to execute a substantial
part of the contract so that justice will be done
between the parties.
Procedures for termination in the
NEC3 contract
Clause 91.2
The Employer may terminate if the project manager has notified
that the Contractor has defaulted in one of the following ways
and not put the default right within four weeks of the notification:
• Substantially failed to comply with his obligations
• Not provided a bond or guarantee which this contract requires
• Appointed a Subcontractor for substantial work before the
Project Manager has accepted the Subcontractor
Frustration
• Contracts can also be discharged through frustration.
• This occurs when neither party has defaulted on the
original contract but other circumstances have
intervened to prevent the contract from being
performed as originally intended.
• The result must be that further performance of the
contract is impossible, illegal or radically different
from what the parties contemplated when they
entered into the contract.
Quality issues
• Rejected
When a quality issue involves the work being completely restarted and
all previous work deemed unreasonable, then the quality issue will be
classified as rejected.

• Reworked
When a quality issue involves work that requires modifications to
return it to the agreed standard, then it should be classified as rework.

• Compromised
If the project team accepts work that is below the agreed standard,
then this will be classified as compromised.
Stages of a project
Project KPIs
GROUP INDICATORS
Time 1 Time for completion 4 Time predictability – design and
2 Time predictability – design construction
3 Time predictability – 5 Time to rectify defects
construction
Cost 1 Cost for completion 4 Cost predictability – design and
2 Cost predictability – design construction
3 Cost predictability – 5 Cost to rectify defects
construction
Quality 1 Defects 3 Quality defects at End of Defect
2 Quality defects at Available for Liability Period
Use
Client 1 Client Satisfaction with the 2 Client Satisfaction with Service
satisfaction Delivered Product
Health and 1 Reported Accidents 2 Lost Time Due to Accidents
safety
Three dimensions to an audit
• The efficiency of the project
This dimension assesses whether the project meets both the budget
and the schedule.

• The customer impact of the project

This dimension includes meeting the project’s technical and
operational specifications as well as the customer’s likelihood of any
repeat purchases. Subjective measures can also be used to assess
customer satisfaction.

• The business/direct success

These are measures of the contribution of the project to meeting
internal business objectives such as market share and market position.
A project audit template
• Introduction
• Current status
• Cost
• Schedule
• Progress
• Quality

• Future project status

• Management issues
• Risk management
Audit steps
• Assemble a small team of experienced experts
• Familiarise the team with the requirements of the project
• Audit the project on site
• After completion, debrief the project’s management
• Produce a written report according to a pre-specified
format
• Distribute the report to the project manager and the
project team for their response
• Follow up to see if the recommendations have been
implemented
Explicit and tacit knowledge
The Nonaka-Takeuchi model
Knowledge conversion
FORM OF KNOWLEDGE DEFINITION
CONVERSION
Socialisation Obtaining tacit knowledge through personal
experiences which are often shared
Externalisation The process of converting tacit knowledge into
explicit knowledge so that it can be understood by
others
Internalisation The process of converting explicit knowledge to tacit
knowledge
Combination The process of connecting discrete elements of
explicit knowledge to larger and more complex
forms of explicit knowledge
Barriers to learning experienced
by government departments
1 Lack of senior manager endorsement and commitment to personal
and organisational learning
2 Silo organisation structures preventing knowledge being shared to
learn from
3 Ineffective mechanisms and processes in place to support learning
4 High turnover within the workforce preventing learning being
developed over time
5 Lack of time for learning due to high workload and management
prioritising upcoming scopes of work over learning through reflection
Dealing with conflict
• Encourage openness and emotional expression
• Set a role model for reacting to personality clashes
interceding as a conciliator between affected personnel
• Demonstrate the attitude that conflict should be
harnessed to achieve positive outcomes so that others
learn from the mistakes made
• Confront the conflicts that exist rather than shying
away from face-to-face contact