Why your Project Team must be Commercially Aware

Many years ago I worked on an EPCM project for a major Tier 1 client.  Like most companies we were always told that we had to keep the client happy.  Client satisfaction was key!  One particular young engineer took this to heart.  If the Client’s team wanted some minor design change he was happy to oblige, after all they were the Client.  The trouble was, once the package was released to market for tender, the bids came in at more than double the estimated price.  Worse still this particular Contract was time sensitive meaning the Client would lose significant revenue for every day the contract was delayed. Re-scoping the work and sending the package out for rebid was out of the question and the client had to award the package and accept the higher cost.  To say the client was a little unhappy was definitely an understatement.

So was this young engineer solely to blame? Absolutely not. In fact nobody had really explained change management to him or gave him any understanding of the commercial impacts of the decisions he was making.  A design change notice form existed, however neither the engineer nor any of his supervisors or managers adhered to change process to identify and quantify what was happening on the project. In fact I’d be surprised if he even knew what the defined project scope was.  Unfortunately we focus on the technical training of our personnel however rarely is any thought given to project management and/or commercial training.  We are told to innovate, provide technical solutions and keep the client happy but we are not told how to commercially assess the impact of these changes and how to manage these changes through the commercial bounds of the contract.

The reality is that this happens every day on projects.  Scope creep is a reality and the impact to cost, time and company reputation is something that can and should be avoided. By ensuring that everyone on the team is aware of exactly what the scope of work is and by having a robust change management process to capture deviations from this scope, management has far greater visibility and control over the delivery of the project and the ultimate cost and time outcomes of the project.

We have all had situations where the client has asked for something different or additional work however there is nothing worse than giving the client and invoice and hearing him say “if I knew it was going to cost this much I would never have done it”.  Nothing sours a company client relationship more and it can be so easily avoided.  A change notice detailing out additional cost and time impacts gives the client the ability to make an informed decision.  Additionally trending delays, changes and events which impact your ability to deliver may either result in a formal delay claim at a later date.  These changes also give visibility to management to understand what is happening on the project and how this can affect time and cost.  Innovation in design is a major focus of design teams but any innovation outside of current scope needs to have a cost benefit analysis done followed by formal change process to ensure that the client is aware of full impact of this innovation.

I have heard lots of reasons why managers don’t follow a formal change process.  Sometimes this is due to lack of knowledge and understanding, or lack of communication.  I heard that “we don’t want to the swamp the client with lots of paper work” or “we don’t want to be overly contractual”.  The truth is that a formal change process will protect you commercially.  Change notices let management and the clients know what is happening on the project and they can either knowingly approve (knowing the full cost and time impact) any changes or stop them before they impact the project.  Present an invoice to a client where Changes in scope have not been formally approved and there is a real risk that you may not get paid.

Commercially, there is only one person who has authority to spend additional client money.  It’s not the Design Managers, not even the Project Manager.  It is the Client Representative, whose name is on the Commercial Agreement.  Believe me, he wants to know as much as you what is happening on the project.  After all he’s received budget approval and signed a Contract for your company to build and deliver a defined scope.  He doesn’t want to have to go back to his board and seek approval for additional funds only to deliver something different from what they wanted in the first place.  Operations and site personnel will always want more bells and whistles; however the company who is managing the funding has to balance practicality with budget constraints.

In my opinion, communication, good processes and training is the key to having your team more commercially focused.   Project team members today are potentially the project managers of tomorrow and good practices and learning experiences can help you to develop more rounded commercial and risk aware teams. 

A project setup workshops or  kick-off meetings held at the start of the project can clearly communicate to the team how the project is intended to be delivered, what scope the client is paying for, who are the key team members delivering the project, key risks, key dates and commercial  obligations. A contract summary sheet detailing key information such as company and client representatives, key dates and milestones can simplify the understanding of the key elements of the contract and are more accessible to team members who don’t want to wade through the full commercial agreement.  Likewise a Scope book or Scope document detailing exactly what the client is paying should be available to all package managers and their teams ensures team members are fully aware of what they are required to deliver.  It is important that any lack of clarity of scope is resolved with the client and detailed.

Having a well managed project controls system ensures that you have a detailed project baseline and that deviations in both time and cost are identified and variances analysed and communicated. This includes a robust change management process to capture trends and changes in scope.

The project team are integral to capture changes happening on the project.  They are, after all, at the coal face of the project and are aware of what is happening in their area. Therefore it makes sense to make these team members aware of the commercial impacts of these changes.

So at the end of the day what happened to this young Engineer?  Was a training program put in place for him and his managers?  Was a lessons learnt don’t and mitigation processes put in place for the future.  The sad thing is the answer was no to all of this.  There were no internal repercussions and the learning opportunity from of all of this was wasted.  However the company found going forward it was no longer on the preferred company list of bidders for the clients.  In trying to keep the client happy they had done the exact opposite. Now that is the real story and a prime example of the true impact of commercial ignorance on your project.

 

Carmen Bates is a Project professional with over 27 years’ experience in Project Controls, Project Accounting and Commercial Management

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