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Project Management - Contracts & Outsourcing

Updated on November 2, 2011

A project manager has to see a lot of activities in the nature of administrative, technical, socio-economic and environmental. If the manager is an engineer, supervision of technical jobs would be some-what easy. But other areas would receive less attention.

It is, therefore, imperative that the manager, in consultation with the board of directors, passes on some activities to contractors. This is known as out-sourcing which involves sub-contracting to a third party some of the activities like machine fabrication and installation, product design, manufacture and even marketing. Many multinational companies have outsourced routine jobs such as pay role, tax accounting, recruitment call center services and e-mails.

 

Advantages and Dis-Advantages

There are certain advantages in out-sourcing such as (i) The company can focus on its core activities, (ii) it would be cheaper and efficient, (iii) and over-heads would be reduced. But at the same time, there are dis-advantages like (i) threat to security and confidentiality, (ii) bad publicity, (iii) becoming hostage in hands of unscrupulous supplier, and (iv) hidden costs.

FLYOVER
FLYOVER
Laraib Hydel Power Plant
Laraib Hydel Power Plant
Hubco Power Plant near Karachi, Pakistn built under turnkey contract with National Power Ltd, UK
Hubco Power Plant near Karachi, Pakistn built under turnkey contract with National Power Ltd, UK

New types of out-sourcing

New type of out-sourcing are coming up, one is BOOT (Build, Own, Operate & Transfer). Laraib, a company, is developing a hydel power project, New Bong Escape. The company would use it own funds, carrying out all activities in its own name, operate the plant when completed, sell power to distribution company under usual tariff and transfer it to Government of Pakistan at the end of 25-year term. Many bridges and flyovers have been constructed under this arrangement and owners are happy with the toll tax being collected by their staff.

Other forms a are:

  • BO ( Build and Operate ). Pakistan’s largest private power project, HUBCO, was constructed and operated by National Power of UK under this arrangement. Some call it Turn-key projects where sponsors would accept the project only when they are satisfied with its operational efficiency. It is like building a University Campus and attracting a desired number of students (say 2,000). There are penalties if there is a delay which is some time equal to Return on Investment made by the sponsors.
  • BOO (Build, Own, Operate). A private party complete the project, owns it and puts into operations. There is some different from purely private investment as BOO is carried out for infra-structural projects like building a private railway line. Here government ensures that the land is obtained under some legal framework otherwise, a private party can never force the land owners to sell it to the project.

Type of contracts

When one outsources, one should pick up a suitable type of contract, some of which are listed below:

  • Lump Sum Contract
  • Unit Price Contract
  • Cost Plus Contract
  • Incentive Contracts
  • Percentage of Construction Fee Contracts

To cut short, there two major type of contracts: (i) Lump Sum Contract (Fixed Cost) and (ii) Cost Plus % returns. In the latter, there is a danger of conflict of interest. If the contractor tries to be honest and efficient, it would reduce cost and thereby its returns. On the contrary, over-costing would lead to fat returns. If the contract is modified as cost plus a fixed fee, the drawback would be eliminated.

Advantages and dis-advantages of both are given below:

 

NATURE OF CONTRACTS

(click column header to sort results)
FIXED  
COST-PLUS  
ADVANTAGES 
ADVANTAGES 
Assurance of ultimate Cost 
Provides maximum flexibility to owners 
Minimum Owner's follow-up 
Minimize Contractors Risk & Returns 
Maximum incentives for quick completion
Minimizes negotiations
 
Permits quick start and early finish
 
 
DIS-ADVANTAGES
DIS-ADVANTAGES
Long Negotiations
No assurance of final cost.
Quality may not be assured
No incentives to minimize Time and Cost
May prove costly due to built-in contingencies
Conflict of Interest of Contractor
 
Frequent changes suggested by the owner or staff may lead to high cost and scope change.

CONSIDERATION

 When procuring machinery or vehicle from outside, a project manager must spell out what he or she is looking for.  Not only technical specification be given but also functional aspects be stated in details.  This would help the supplier to offer a suitable or appropriate piece of machinery for long term business relations.  This is explained below:

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    • Rufi Shahzada profile image

      Rufi Shahzada 7 years ago from Karachi

      Dear Sir,

      Thanks a lot for such a nice and informative HUB, well the advantages and disadvantages of outsourcing are explained so well.

      The video of "BURGER KING outsourcing to INDIA" is just awesome example.

      THANKS A MILLION!

      RUFI SHAHZADA

    • mohammad faisal profile image

      mohammad faisal 7 years ago

      sir,this article is very informative.all the things are explained by you in a very simple way.

      thanks for sharing such great knowledge with us.

      regards:

      Muhammad Faisal

    • Syed Kabeer Ehsan profile image

      Syed Kabeer Ehsan 7 years ago

      Respected Teacher, Very informative teacher.. and burger king vedio of answering machine.. that strategy is not the effective, i guess.. because it is creating a bad impact of burger king due to communication errors.. .

      but, Very informative hub page Sir.. .

    • profile image

      mariajaved 7 years ago

      sir, u very well explained all the terminologies,outsourcing example & video are superb,it provided a practical knowledge thanks a lot for sharing this with us

    • profile image

      Aymen noor 7 years ago

      sir,the article is very informative, all the things are explained in a very simple way & easy to remember

    • hafeezrm profile image
      Author

      hafeezrm 7 years ago from Pakistan

      Thanks all for nice comments.

    • SHAHZAD,AHMED profile image

      SHAHZAD,AHMED 7 years ago

      Respected Sir,

      It is one of your informative article that provides precious information regarding project management and outsourcing.

    • profile image

      Adamtree 7 years ago

      thanks for the hub.. didn't know the specific types of contract outsourcing

      https://hubpages.com/business/outsourcing-business

    • projectmngmt profile image

      projectmngmt 7 years ago from USA

      Read your previous hubs...your hubs really are so informative...I keep on scanning your other hubs also. Really great article you made. :)

    • hafeezrm profile image
      Author

      hafeezrm 7 years ago from Pakistan

      Thanks @projectmngmt for your comments.

    • profile image

      HIRA SAMI 7 years ago

      SIR, ur article is very interesting. contracts & outsourcing are explained in very easy way.

      thanku

      regards

      HIRA SAMI

    • shakiraaa profile image

      shakiraaa 6 years ago

      it really works

    • profile image

      shaista 5 years ago

      gud work'

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