Vendors in the Planning Phase

00:02 It's often the case that an organization will not have the required resources that a project needs. Therefore, the project manager here has the responsibility to procure what they need externally.

00:15 By this point, they should be very familiar with the details of the contract in order to properly assess the costs and the risks of any transaction.

00:24 They must be aware of timelines, due dates and quality levels of all resources they are procuring. There are three main types of contract that we will run through now. It is up to the project manager to find the best contract because it's their main tool for keeping track of vendor work and behavior.

00:44 So the first one is called fixed price, and it's the simplest type of contract the vendor commits to doing the work for a set amount within a certain time frame.

00:55 The pros of this is that any additional spending will be taken on by the vendor.

00:59 No risk for you.

01:01 Perfect. Or is it? You see that they are aware that with this kind of contract, if the costs are higher than expected, then they will incur losses.

01:12 Therefore, there is a chance they will put a big buffer on the initial price.

01:18 Or if they find that costs are getting too high, they may try to decrease the scope or the quality in order to compensate.

01:25 So know that this is beneficial to use when the scope is clear to all parties.

01:30 But a good analysis is important prior to making agreements.

01:35 The second type is called cost plus.

01:38 This is where the buyer agrees to pay any cost incurred by the vendor performing the work. This can be a fixed additional fee, a variable fee, or a mix of the two. Either way, it gives the buyer the flexibility to adapt the spending in accordance with the work being done.

01:56 But with that comes the risk of covering all extra costs, along with the chance that the vendor may keep the work going longer than needed or adding extra items to the to do list.

02:09 This contract makes more sense if the scope is not easy to define, but proper controls need to be put in place to ensure money is only spent on things essential for the project.

02:21 A fancy new haircut for the vendor doesn't fall into this category.

02:26 The third type of contract is called Time and Materials, and it's a mixture of fixed price and cost plus.

02:34 It's where the vendor charges the buyer an hourly or daily rate.

02:38 For example, when consultants or technicians charge per day for their services, it's another good contract to jump into when the scope is not clear and the work is more labor based than material based.

02:52 It runs a similar risk to the cost plus contract, but that just means the same countermeasures can be taken.

02:59 Well, there we have three types of contract, but there can be many variations and of course they can all be tailor made.

03:07 The project manager could add incentives for the vendor to complete work faster or to a better quality.

03:13 The contract can even include inflation if the project spans a long time.

03:19 The project manager must have a good understanding of all risks and benefits that each agreement can have.

03:25 Then define the most convenient approach for the project, the stakeholders, and of course, for the vendor themselves to agree.

03:33 Awesome. So that's how the project manager can deal with the financial side of things. But what about the non financial resources? Well, join us next lesson where we'll talk about human resources.

03:46 See you there.