27 March 2009

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Quick Quiz
By Barbee Davis, MA, PHR, PMP

I work as a third-party programmer for AnyNameSI Systems Integrators on a time and materials basis. However, I know that the software I develop is being sold to their customer, BigTime Customer, on a fixed price basis. What should I do in this situation to lower my risk that this three-way contract will not go smoothly?

A. Convince BigTime you should do their work directly, bypassing AnyNameSI altogether.

B. Run your costs as high as you can to teach AnyNameSI not to try to profit from your work.

C. Refuse this contract, as the risks are too high for you to incur.

D. Tell AnyNameSI you need to have firm requirements documents, a clear acceptance policy and a written change policy.

Answer: D. Tell AnyNameSI that you need to have firm requirements documents, a clear acceptance policy and a written change policy.

This is a common scenario, filled with risk.

The topic of this article was suggested by Raghavendra Ramachandra,MBA,PMP. He is from Singapore and has worked in IT project management for the past nine years.

Initially, it seems that the end customer, BigTime, is getting their hardware and software for a fixed price. No risk. It also appears that the systems integrator, AnyNameSI, has their profit guaranteed. AnyNameSI plans that the amount of their fixed price contract is high enough for them to pay your fees and still make a profit.

At a glance, you appear to be in a good place, too. With a time and materials (T & M) contract, for each hour you work you will be paid at your hourly rate, plus all costs that you incur will be reimbursed.

However, there is an endless list of possible risks. If you do not have direct contact with the customer, you could misunderstand the functional and non-functional requirements, or begin to code without acceptance criteria.

You could over-estimate the amount of materials you can charge back to AnyNameSI.

Your contract may have a hidden upper dollar limit.

Perhaps there are penalty bonuses or early delivery bonuses you might inadvertently overlook.

The change management plan could be non-existent, or understood differently in all three organizations.

To keep this three-way arrangement advantageous for all parties, you need to make sure your immediate client, AnyNameSI, captures and conveys clear requirements for the software you are to create. If not, will they allow your project team to talk directly to the end-user team? Otherwise, important functionality may be missing from the end-product. If you have to add it later, your price will increase and this will reduce AnyNameSI’s profit margin.

Remind AnyNameSI to ask about non-functional requirements. Performance? Scalability? Maintainability? Integration with existing hardware and software? Is BigTime expecting documentation? How much test code coverage do they assume they will get? Who will support this software if there are questions? What are the acceptance criteria attached to the quality of your software?

What materials will you be able to charge to AnyNameSI? Office supplies? Heat, light and electricity? Travel and meal expenses? Training? Time spent in communication, preparing reports, tracking your time, meetings and project management?

While AnyNameSI probably won’t share their potential profit amount, they might let you know up front the highest amount you can bill them. That way, you don’t run the risk of spending many hours and incurring expenses they don’t want to pay at the end of the project. Even though you are working for T& M, submit an estimate to AnyNameSI based on the requirements included with your contract. If your fee is unrealistic from the beginning, allow AnyNameSI to go to BigTime right away.

Ask AnyNameSI if there are penalties for late delivery. Are there bonuses for early delivery? Will they be willing to allow you to share in the bonuses if you incur extra expenses in completing your portion of the project early?

Be sure you, AnyNameSI and BigTime have a common change management agreement. As the end-user, BigTime may feel additions to the software functionality are “free” within their fixed price contract. Protect the company that hired you, AnyTimeSI, by letting Big Time realize that changes from the original requirements will cost extra. This may allow you the expanded budget to please both clients.

Even if you feel like you are the least powerful of the three organizations, use foresight and good communication skills to help the entire group have a successful outcome.

The more parties in a business undertaking, the higher the risk. But if you are proactive to make sure all entities are protected, you can look forward to more business that is profitable and worry-free.

Barbee Davis, MA, PHR, PMP, is a reviewer for the global PMI Registered Education Provider Review Team. She owns Davis Consulting and is a published author, speaker, writer of training materials and an innovator in presentation skill workshops for corporate trainers. She holds a Black Belt in MS Project and teaches at the university level. Ms. Davis encourages your questions or comments.