Contracted management – clarifying the roles of owner and manager


Major capital expansion projects have become extremely complex. Few, if any, owners possess the resources to internally manage such projects. Their usually shortlived nature also inhibits expansion of the owner organization to accomplish this task. The major techniques used to execute such projects have been utilized by outside agencies to provide expertise to supplement and complement the owner's management team, and by consultants or contractors while serving as managers for the owner.

Confronted with the need to implement a major capital project, an owner must decide how he will manage it. Depending on the size of the project and his own organization, management by the owner can range from total divestiture to total internal control of the smallest detail. The former arrangement is most common in small organizations whose major capital projects are infrequent and internal staff inadequate to take on the additional task of management of a large project. The latter is almost never done except on smaller projects where the owner has sufficient staff to manage small projects and they are of a generally recurring nature such that a staff is already available. The problems addressed here are characteristic of larger projects, generally of a recurring but cyclical nature, where an owner chooses to seek outside help, but is concerned with how to maintain control of his project.

Most major corporations have chosen to reduce staff to that required to maintain the central business and find alternate means to cope with the infrequent nature of major capital projects. The reasons are twofold. First, there are the problems of hiring and terminating of the personnel to perform the job which may run only three to five years. Secondly, there are the problems of obtaining and retaining the special expertise required by a major project. Given the need to implement a large project, the owner must find a way to complement his organization.

One way to create a project management organization effectively is to utilize a matrix form from internal sources and to fill in the gaps or additional needs with personnel from outside sources. These outside sources can be temporary hires, loans from affiliate companies, or consultants from a specialty contractor. Although this maximizes the control of the owner in that he can place his own personnel in positions of authority, it has several major drawbacks. Although the matrix form has proven successful in many instances, a significant factor in its success is that the corporate identity of the personnel assembled from areas within the company remains the same. The opportunity to work on a special project is, in most instances, seen as a reward and an opportunity for further progression in the corporate structure. This is not the case with the gap fillers, assembled from disparate backgrounds and companies whose tenure is always uncertain. Control may be maintained, but motivation and the concentration on the object will be more elusive. This is even true when a single specialty contractor is called upon to provide the personnel to complement an owner's staff. Since the contractor has no singular identity with the success of the project, and will usually get only the blame for things gone wrong and little credit for success, he is not likely to provide his very best people to fill subordinate roles. Contractor personnel themselves are not likely to be very enthusiastic about the opportunity, given their role and general lack of authority in such a situation. These drawbacks can be overcome by relinquishment of part of the control and assigning it to an outside manager.

Managing the implementation of large projects on behalf of an owner has been one of the major growth areas of large international contractors such as Fluor, Bechtel and Parsons. Along with the corporate identification, the owner is represented by dedicated personnel with required expertise who have often worked together on similar ventures. In addition, he has on call the many specialized resources of these contractors and their depth in experience and personnel. Many other contractors are also developing this experience and, in an era of megabuck projects, it has represented an opportunity for rapid growth. Engagement of a famous name, however, does not by itself insure success.

Even if it is necessary to engage a management consultant or contractor organization to provide a management function in the execution of a project, an owner would be remiss in not overseeing that effort. In addition, the owner's organization may itself be complex, in which case he must provide a means of entry to an outside entity in order for the relationship to function properly. This necessary addition of owner staff, the engagement of an outside manager, and the contracting with third parties for the execution of the work, present organizational problems which must be addressed.

Prime consideration must be given to clearly define the responsibilities of the different parties. Broad generalities must give way to specifics. For example:

Engineering 1. Prepare detail design drawings.
2. Prepare fabrication drawings for piping, structural steel and concrete reinforcing.
3. Prepare purchase specifications.
4. Review vendor shop drawings.
5. Prepare as-built drawings.
6. Provide drawings and sketches as required for field crews.
Finance/Procurement 1. Prepare progress invoices.
2. Purchase materials and supplies.
3. Maintain payrolls and records.
4. Develop and submit changes as appropriate.
Construction 1. Plan and schedule plant and personnel.
2. Supervise craft and labor crews.
3. Operate and maintain construction equipment.
4. Resolve labor disputes.
5. Maintain clean and safe worksite.
Engineering 1. Review contractor drawings for conformance to standards and job specifications.
2. Interpret standards and specifications.
3. Review vendor technical proposals for conformance to standards and specifications.
4. Review and approve contractor quality assurance and quality control program.
5. Inspect vendor supplied material.
Finance/ Procurement 1. Review and approve contractor progress payments.
2. Review change requests. Prepare estimates and negotiate change settlements.
3. Review and approve contractor and subcontractor financial qualifications.
4. Prepare expenditure forecasts and other financial statements of job condition.
Construction 1. Inspect workmanship for conformance to drawings and specifications.
2. Interpret specifications.
3. Review contractor progress against plan.
4. Monitor contractor performance against contract requirements.
Engineering 1. Provide design basis and establish standards.
2. Provide soil and other data.
3. Resolve conflicts in interpretation of standards and specifications
Finance/Procurement 1. Provide funds for the work.
2. Identify any special material requirements or preferred equipment or vendors.
3. Provide owner required insurance and indemnity.
4. Approve changes.
Construction 1. Plan and schedule plant and personnel.
2. Obtain permits.
3. Arrange utilities.

This is by no means an exhaustive list but the point is that ambiguity has no place in the delineation of responsibility. Once established, responsibilities can be delegated and interfaces established.

Each organization involved in a given project formulates its own organization chart and delegations of responsibility within the organization. Traditionally at the macro level, these tend to fall along several discipline lines, be it an owner, manager, or contractor organization. These lines are engineering, construction, and cost and scheduling. As the level of activities performed by the various parties increases, the structure becomes more complex and these disciplines are further subdivided. Typical organizations for a large project are shown in Figure 1.

Typical Organizations for a Large Project

Figure 1
Typical Organizations for a Large Project

These organizations do not, however, function in isolation. There are, of necessity, formal and usually contractually explicit lines of communication and interrelationship established. These are illustrated in Figure 2.

Owner, Manager, and Contractor Interrelationships

Figure 2
Owner, Manager, and Contractor Interrelationships

Each plane depicted above represents the parties and their individual level of responsibility. Through the axis of these planes pass official and formal communciations. In terms of function, this axis provides for the delegation of responsibilities from the owner, through to the manager and the contractor. In reverse, accountability for performance of these responsibilities is from the contractor, through the manager to the owner. Within these planes of responsibility, organizations exist to carry it out. Of necessity, the complexity of the work and time pressures create informal lines of communications between the organizations.

The functional matrix of the three organizations provides each of the parties with the delineation of respective responsibilities. Still to be worked out between the owner and manager and manager and contractor are the limitations on the execution of those responsibilities. A formalized agreement must be developed to ensure actions are taken in a manner consistent with the contractual relationship between the parties. Contract language, organization and function definition, and operation must be consistent and well understood. The manager must know what actions he can take unilaterally, those which require the owner's concurrence, and those which require his approval.

Contractual relations between owner and manager must delineate the responsibilities delegated. Through retaining control in certain areas, the owner utilizes the manager's staff and expertise for development but requires his approval to implement action. In this instance the liability for the action is retained by the owner. In other areas the owner may only wish to be appraised of the manager's action prior to his taking it. This usually is implemented by the concurrence of the owner to the manager's action and the manager's liability for the course of action. The majority of the functional effort goes on without the express knowledge of the owner or his team except for certain areas defined by the owner in which he wishes to remain appraised of action taken after the fact. In such instances, the manager copies the owner on directions given to the contractor.

As an example, a typical responsibility matrix for engineering drawings is depicted in Figure 3.

Responsibility Matrix

Figure 3
Responsibility Matrix

Similar matricies should be established in all technical contract and administrative areas. The end product may be called a “Project Procedures Manual.” Such a document proves invaluable in the execution of projects conducted in this manner. It should be available, current and updated frequently as administrative problems are encountered and dealt with.

The procedures manual is a valuable tool which helps make the relationship function smoothly. A match of organizations is equally important since people are the force to make it work. In general, a mirror image form of organization between the owner and manager is the most conducive to troublefree implementation. Several factors must be kept in mind by the owner in setting up this form of organization. Foremost is the clear charge to the owner's team that its primary function is to oversee the performance of the manager and provide him access to the company's resources in order for him to carry out his duties.

Figure 4 illustrates typical interrelationships between the owner, manager and contractor. One of the basic keys to making this interrelated organization function smoothly and responsively is the establishment of informal lines of communication. The flow of decisions and directions must be established at the lowest levels and clearly understood by all parties. A fundamental part of the “Procedures Manual” must be the responsibilities and authorities of the respective players on each team. If all decisions and communications must proceed up and down in the organization through the respective project managers, the system may bog down with delay. Without a clear and established delegation path, the system would be in chaos. Early attention to establishing informal structures will aid in avoiding potential problems.

Informal Communication Channels Among Teams

Figure 4
Informal Communication Channels Among Teams

Figure 5 illustrates several organization structures, responsive to the responsibilities assigned, but conducive to a typical problem, called “bypassing”. Structure A is representative of an organization where the owner may have chosen not to delegate a specific function to the manager but has assigned overall responsibility. An example could be in the negotiation of changes, where the owner decides to perform this function while at the same time delegating overall cost control to the manager. Both can still be accomplished, but it requires an understanding on the part of both owner and manager that the informal channel available must be short-circuited as shown, if the responsibility of the manager is not to be frustrated.

Problem Organization Structures

Figure 5
Problem Organization Structures

Structure B is representative of organizations created without regard to balance. To be effective in this mode of management, two principles need to be followed. The first is that functionally they should be a mirror image, and second, that the span of delegation should be less as one ascends the hierarchy from contractor to owner.

These illustrations highlight several rules which must be followed in adopting this form of management to a project. These rules are:

1. Functions and responsibilities of the parties should be clearly understood and adequately detailed.

2. Organizations should be structured to be functionally compatible.

3. Informal lines of communication must be recognized as necessary and desireable and the scope and content clearly defined and understood.

The first rule, of course, is basic. Nothing promotes more confusion than a lack of understanding of one's role and responsibility. Describing one's function in broad terms creates duplication of effort which is wasteful of resources. It also generates conflict. A very perceptive client once said, “Don't buy a dog if you intend to bark yourself.” One of the toughest challenges of an owner in this form of management is to back off and let the manager perform the functions you have contracted him to perform. This is harder still for the individuals on the owner's team, who have probably been used to direct involvement with the execution contractors. Selection of the proper people with the proper temperament for this mode of management is of critical importance.

Redundancy and duplication of effort can be avoided if the organization structures are reduced mirror images in matters of function. Given the nature of the responsibility and objective in most capital projects, this should not be difficult to achieve. In elaborating on the responsibilities of the parties and the internal delegation within each organization, the structures will normally be developed in the classical sense with engineering and construction forming the main facets. Finance and control sometimes present problems since they are not always separated in the same fashion. It is necessary to examine the roles of accounting, cost control, and planning and scheduling to assure these functions are aligned properly to promote adequate and effective communication. This is particularly true if, as in the example of Structure A in Figure 5, the owner retains financial control.

The greater the number of personnel involved, the greater the awareness of informal communication. This is essential if the system is to work; however, as indicated, this does provide the seed for potential problems. The informal network must, however, be recognized and made to function in a positive way. The lines of authority, scopes of activity, and functions should be well understood so these avenues can effectively channel the decisions along the shortest path. A manager who insists on reviewing and passing on all the actions of his subordinates will not fit into this form of management.

Bypassing must be strictly prohibited. Once the channel is open it is difficult to stem the flow. An obvious way to avoid this problem is the mirror image organization concept. It, at least, creates a similar functional role which inhibits the bypass. Managers must take prompt action when and if it occurs. Geography is also an effective inhibitor. If those in similar roles should not be communicating directly with each other, a physical separation enhances this objective. Conversely, those who need to communicate should be located within easy communication distance.

There is no doubt that the existence of another plane of responsibility between the owner and the contractor lengthens the lines of communication. This is particularly true of decisions. Obviously, if the owner delegates decision-making authority to the manager, this reduces the time necessary to resolve problems. On the other hand, if consultation is necessary, the manager becomes an intermediary and the time required to make and communicate decisions is increased. Bypassing is also enhanced.

It is important to note that if decision-making in key areas is retained by the owner, the authority to make those decisions should rest with the owner's team. To promote this, the matrix form of management within owner organizations is becoming more common. It enables the owner team to be made up of decision makers representing the interests of internal organizations yet presenting a single responsible team in the exercise of owner responsibilities. If the owner retains decision-making authority and does not delegate this to his team, then another level is introduced and further delay is likely to occur.

An analogy can be made of this system to that of a series of even finer screens. The mesh of the screens must be carefully selected such that the majority of the material passes through most of the layers to the bottom. The same is true with authority and, hence, decision-making. What is done at each level should be clearly defined and the authority commensurate with the responsibilities carried or implied. Forcing this authority further down into the system facilitates decision-making.

Management by an outside agency from an owner's point of view is a compromise. This compromise must be made, however, if alternative forms of management are unavailable. It can be made to work effectively, but it involves a strong commitment on behalf of an owner. That commitment must include appropriate and commensurate delegation, a clear definition of responsibility, and the assignment of an owner team dedicated to the task.


Frederick L. Blanchard is currently responsible for the major portion of ARAMCO offshore projects and the development of a grass roots community and industrial complex at the company's northern area operating center in Tanajib, Saudi Arabia.

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