Critical Issues REPORT JANUARY 2011Hot Topicsin Today’s Supply ChainManagementSUCCESSFUL CAPITAL PROJECTS IN UNCERTAIN TIMESBY BRYAN ASHENBAUM, SUMMARYCapital projects present perhaps the greatest set ofchallenges and difficulties a company can face. The purchase or lease of expensiveequipment, and the purchase, lease, and/or renovation of buildings and property arefirst and foremost a large percentage of company spend. They are inherently complex,have long time cycles and are marked by high levels of uncertainty throughout theirentire timeline. Many (if not most) of these projects are unique “one-offs,” and so1Executive Summaryrequire a great deal of customization. Add to this the uncertainty and risk posed by“macro” factors such as the economy or political instability, and the challenges wouldThe “Macro” give pause to the most seasoned of purchasing :Demonstrating theAt a recent CAPS Research Critical Issues partnership program on this issue,Value of Purchasingparticipants from a wide variety of companies addressed the many challenges andon Capitalissues encountered in seeing large capital projects through to successful throughCost ReductionThe conference attendees shared their thoughts during interactive presentations, open2and Cost Avoidancediscussion forums, and focused breakout sessions. This report distills these findingsKey Sourcinginto a comprehensive list of seven key challenges germane to capital projectsChallenges seven key sourcing challenges are listed below:3Capital Projects•The Reality of Tradeoffs in Capital Projects•The Management of UncertaintyMISSION STATEMENT•Building Competencies in Capital ProjectsCAPS Research, working in•Organizational Issues and Early Sourcing Involvementpartnership with its global network ofexecutives and academics, is•Communication and Collaborationdedicated to the discovery and•Metrics/KPIs for Capital Sourcingdissemination of strategy supply•Contractual Issuesmanagement knowledge and this report, “sourcing” will be used as a blanket term for “purchasing,” procurement”“strategic sourcing,” etc. Usage varies widely in exactly how the corporate function with spendresponsibility and control is formally Issues Report,Successful Capital Projects in Uncertain TimesCopyright ©2011 Institute for Supply Management™. All rights reserved.
Critical Issues 2 REPORT An underlying “macro” challenge also emerged from the conference; it addressed howsourcing can demonstrate to colleagues in other functional areas and in uppermanagement the value it brings to the table during capital the sections that follow, the insights and experiences of the conference participantsare used to do a “deep dive” into these challenges from the perspective of sourcingAny attempt to addressprofessionals assigned to capital key sourcingchallenges inherent inTHE “MACRO” CHALLENGE: DEMONSTRATING THE VALUE OF PURCHASINGcapital projects isON CAPITAL PROJECTS THROUGH COST REDUCTION AND COST AVOIDANCErendered somewhatAny attempt to address the key sourcing challenges inherent in capital projects isrendered somewhat moot if sourcing professionals cannot demonstrate the value theymoot if sourcingbring to table to their colleagues in other functions and to upper management. Aprofessionals cannotprimary metric used to determine sourcing’s value across the enterprise is itsdemonstrate the valuecontribution to cost reduction and cost avoidance. These terms are not without2they bring to table todefinitional ambiguity, but a previous CAPS Research critical issues reporton the topicdistilled the following definitions:their colleagues in otherfunctions and to upperCost Reduction (aka “hard” savings): Tangible bottom line reductionsresulting in saved money that could be removed from budgets or into the business. It relies on the assumption that some prior baseline orstandard cost exists so that these savings can be measured against the Avoidance (aka “soft” savings): A cost reduction that does notlower thecost of products/services when compared against historical results, but ratherminimizes or avoids entirely the negative impact to the bottom line that a priceincreasewould avoidance can also be described as a cost reductionthat increases efficiency or output without increasing resource more traditional sourcing efforts, cost reduction might be defined as a successfulnegotiation to reduce the price of a given raw material, whereas cost avoidance mightbe the sourcing manager’s ability to fend off an attempt by a key supplier to raiseprices. In such settings, far greater weight is typically given to cost reduction thanavoidance a more thorough discussion of cost savings/avoidance definitions and issues, please see:Ashenbaum, Bryan (2006). “Defining Cost Reduction and Cost Avoidance,” Critical Issues Report,CAPS Research. Tempe, AZ, March Issues Report,Successful Capital Projects in Uncertain TimesCopyright ©2011 Institute for Supply Management™. All rights reserved.
Critical Issues 3 REPORT For capital projects, however, the lack of historical baseline information suggests that inone participant’s opinion, “the savings from cost avoidance are approximately 10 timesgreater than those realized from cost reduction efforts.” This is problematic for capitalprojects sourcing managers — how to get proper credit if the vast majority of the valuedelivered is in the form of “cost avoidance” that may be looked upon with a jaundicedeye by colleagues and upper management?Sourcing managers onThe key point is that sourcing professionals will have to ensure that their efforts oncapital projects mustcapital projects are properly recognized by their colleagues. This means that costunderstand that cost isavoidance efforts need to be recognized, ideally through a standardized process that isnot necessarily the mostseen throughout the company as element, andKEY SOURCNG CHALLENGES FOR CAPITAL PROJECTSmay in fact beThe Reality of Tradeoffs in Capital Projectsconsidered almost theThe scale and timing of capital projects means that managers must carefully manage aleast important factor,number of “tradeoff” situations in which competing priorities must be carefullycompared to a timelybalanced. Among these are: versus budget, multiple stakeholders, “reality check” versus mission versus management expects capital projects to be completed on-time and under budget. The timing in capital projects is crucial — often, enormousamounts of money are lost for each week (or day) a facility remains unfinished or aparticular piece of equipment is not running. The fact that many projects are schedule-driven, leading to last-minute changes and inefficiencies, only heightens this can be seen as relatively non-important in the beginning and suddenly becomecritical as budgets tighten. Alternatively, cost can become “no object” near the end ofa project, especially if the project threatens to run significantly over on managers on capital projects must understand that cost is not necessarily themost significant element, and may in fact be considered almost the least importantfactor, compared to a timely finish. Of course, a project that shoots far over theexpected completion date also ends up running over on cost due to a variety of factors(., additional labor hours, etc.).One approach to reducing the time/budget tension for construction capital projects isto use modular construction. In this scenario, the equipment/building is essentially builtoff-site and then “plugged in” to the existing facility with minimal disruption. Conferenceparticipants agreed that this approach has considerable benefits, including fasterCritical Issues Report,Successful Capital Projects in Uncertain TimesCopyright ©2011 Institute for Supply Management™. All rights reserved.
Critical Issues 4 REPORT project time, meeting outage projections, and a smaller list of issues and downsides are largely logistical in nature — the cost and timing of transporting themodules, plus on-site reassembly. Participant consensus was that these logisticalissues, while not insignificant, were outweighed by the benefits of a some amount ofManaging multiple projects by their nature involve multiplestakeholders, and balancing their needs can be quite challenging. Participants indicatedmission creep is likelytime and again that such projects inevitably have too many stakeholders giving input,inevitable, all proposedwhich can raise complexity, expand timelines, and alter budgets. Sourcing’s challengeproject expansions arein this case is to select suppliers (such as the architect/engineer, general contractor,not necessarily required,and others) very carefully — otherwise, they will be hearing from a dozen or more oftheir internal customers in engineering, production, facilities, marketing, R&D, andand sourcing needs theelsewhere! An assessment of a supplier’s ability to handle complexity is a must; ininformation andcapital projects, suppliers see multiple “faces” of their client company on a regularconfidence to providebasis. Internally, the selection of a strong project manager is crucial. In the end, allrational may not have their wish list completed, and a project manager able tobalance the competing inputs and make hard decisions will be worth projects can suffer from two related phenomena that force tough decisions onmaintaining priorities. One is in the managing of expectations — internal stakeholdersoften have unrealistic expectations (given the time and budget realities) for the scope,cost and capability of the project. Sourcing, (ideally) having been involved from thebeginning and having negotiated many terms and expectations, can provide a “realitycheck” against unrealistic creep. Similarly, capital projects often suffer from mission creep, in which asteady trickle of changes and expansions that seem harmless individually become quitecostly and time-consuming in aggregate (one participant referred to this as “death by athousand cuts”). While some amount of mission creep is likely inevitable, all proposedproject expansions are not necessarily required, and sourcing needs the informationand confidence to provide rational most of the “tradeoff” decisions are made in the course of a project, thereare key tradeoff decisions in deciding upon which capital projects to support in the firstplace. Resources are not infinite, so where should they be placed — toward theupkeep of aging facilities, or toward a new facility that provides an opportunity forthings to be “done right”? While there are no definite answers, sourcing should be akey player in these decisions, rather than waiting to be told for which project they needto begin prepping Issues Report,Successful Capital Projects in Uncertain TimesCopyright ©2011 Institute for Supply Management™. All rights reserved.
Critical Issues 5 REPORT The Management of UncertaintyIn addition to having to make tough decisions involving necessary tradeoffs, managersof capital projects must also make these decisions in a climate of considerableuncertainty. First and foremost, the timing of capital projects makes them especiallyvulnerable to economic and market uncertainties. Facility construction can be started ingood economic times, only to have a recession (and subsequent customer marketFacility construction candownturn) leave upper management questioning whether it is no longer started in goodMillions can be spent on a new machine only to discover that a technologicaleconomic times, only tobreakthrough by a competitor will render it obsolete in half its projected to say, predicting such events is often impossible (especially in the case ofhave a recession (and“unknown-unknowns,” which is when one lacks even the basic knowledge tosubsequent customerintelligently speculate about possible events until they happen). Perhaps the best onemarket downturn) leavecan do is to avoid the tunnel vision of focusing only upon the project specifications,upper managementbudget and timelines, and to monitor these larger trends as possible for their potentialimpact. Just about the only certainty in capital projects is that there will likely be somequestioning whether it isdeviation, or adjustment, from the original plan!no longer more manageable uncertainties, capital projects appear to suffer greatly fromincomplete specifications and requirements. Comments from participants included:•“We often deal with incomplete package design, which hampers finalrequirements understanding.”•“Project scope needs to be defined early, not late.”•“An accurate forecasting of genuine project scope (costs, timelines, etc.) is veryhard. There are constant last-minute changes, etc.”•“Project schedules are accelerated, but also incomplete, so the scope not well-developed.”Of course, even if early specs are complete, it has been noted above that these tendto change over time. One participant noted that “during the project, sales projections,FDA input, titre/concentration and production efficiency estimates all changed multipletimes”Much of this may be the result of misaligned priorities: Sourcing needs details up-frontto begin the process of supplier selection, whereas engineering fears that providing toomany details too soon may generate a costly “lock-in” as project ambiguities hardeninto reality in the future. Early sourcing-engineering engagement (see below), plus aprocess to flesh out project specs earlier rather than later, could go a long way toalleviating this Issues Report,Successful Capital Projects in Uncertain TimesCopyright ©2011 Institute for Supply Management™. All rights reserved.
Critical Issues 6 REPORT Even when specifications can be determined up front, it is still notoriously difficult toget a true handle on capital project costs. Many suppliers are private, and it is quitedifficult to should-cost many capital project inputs. In addition, commodities hedgingdoes not play a significant role, as these input prices plays a much smaller role incapital projects than in raw material qualification isSupplier market uncertainty tends to be quite high, and this is exacerbated by the factthat many of the suppliers in capital projects are third parties (subcontractors) who willalways difficult, andbe onsite at company premises, making some procurement and managerial equipmentSupplier qualification is always difficult, and capital equipment suppliers and contractorssuppliers andmay be even more difficult to assess in terms of financial health. As with suppliers ofcontractors may be evenraw materials, capital sourcing managers must attempt a standard drill-down, looking atmore difficult to assessbalance sheets, filings, safety records, OSHA info, and related items. Some conferencein terms of financialparticipants indicated that when the supplier in question is a subsidiary that they askfor a “parent guarantee.” That is to say that they require the parent company the guarantee on the numbers provided and in effect back up the “child.”Participants also noted that due to the difficulty in qualifying suppliers, there was moreof a tendency to rely on previous suppliers who had already proven participating company provides a series of guidelines in dealing with theuncertainty inherent in the use of third parties in capital construction projects:•Local Subcontractor Supply BaseConstruction Manager (CM) selection is key — be thorough•Rigorous sub-contractor pre-qualification process••Third-Party ProcurementProcess must be bullet-proof, no deviations allowed•Staff competencies — robust vetting and extensive initial review and•oversight. Look closely at the CVs and initial purchase activities of thirdpartiesStaff commitment to short term, one project assignment. Regular•appreciation team functions, stay knowledgeable on future opportunities,future client reference•Alignment of Architect/Engineer (A/E) and CM (who are often directcompetitors)Regular principals meetings between client, A/E and CM•Encourage open, candid communication among all key stakeholders•Encourage direct communication to resolve issues — without the•necessity for client facilitationCritical Issues Report,Successful Capital Projects in Uncertain TimesCopyright ©2011 Institute for Supply Management™. All rights reserved.
Critical Issues 7 REPORT Building Competencies in Capital ProjectsAs with other areas of spend, companies must strive to develop expertise and acompetencies portfolio for capital projects. The challenge (again) is the unique natureof the capital project and its inherent non-repeatability. This makes applying knowledgefrom previous efforts to future projects tricky, but not personnelSourcing managers on the capital side need to develop technical and supplier marketexpertise as they would for any other spend category. But for capital projects, sourcingneed to have built uppersonnel need considerably more “engineering” knowledge (this can also be looselygood relationshipstranslated as “construction” knowledge as well, although the two areas are separate).with engineeringThey also need to have built up good relationships with engineering personnel, and bepersonnel, and beable to leverage engineering’s expertise in their negotiations with suppliers and insubsequent supplier management efforts. They also need to be seasoned projectable to leveragemanagers with a much longer time outlook. Although not necessarily a requirement,engineering’scapital sourcing personnel are likely to be those with considerable experience inexpertise in theirsourcing in general; their first assignments are often more traditional areas of sourcing,negotiations withsuch as raw materials or sub-assembly and inCompetence development assumes that best practices and learnings are supplierAgain, this is harder for capital projects, especially construction where each new facilityis unique. However, it’s worth the effort. Some participants indicated that “repeater”management that successfully leverage learnings from previous efforts can net 7 to 10percent in savings due to reduced engineering needs/cycles or due to best practicesthat smooth out the project timeline. Some “lessons learned” from the conferencediscussions included:•Supplier incentives must be aligned with one another. It’s a bad idea to haveone incentivized on schedule, another on cost, for example.•Bid packages must go out with a reasonable percentage of completion, to avoida cascade of changes and updates as the project progresses.•Subcontract awards must be made with a thorough understanding of T&Mrates, lump sum payouts, etc. These need to be tracked closely, and sourcingmust avoid allowing too much of this to simply be handled by the constructionmanager/general contractor.•Be careful when too many onsite personnel are subcontractor employees andnot directly working for the Construction Manager. One starts to see goalconflicts arise as this percentage gets too participants also indicated that a considerable amount of supplierdevelopment work should be anticipated to truly create a “repeatable” experienceCritical Issues Report,Successful Capital Projects in Uncertain TimesCopyright ©2011 Institute for Supply Management™. All rights reserved.
Critical Issues 8 REPORT from which learnings and best practices can be taken away. Opinion was split: Someparticipants claimed that supplier development work is rarely (if ever) done within thescope/timeline of the capital project, due to scheduling constraints. Others claimed thatat their firms, a fair amount of development work is typically budgeted within a was pointed out to the second group that budgeting development work in advanceruns the risk of doing development with the “wrong” suppliers (who wouldThe broad organizationalsubsequently be dropped from future bids due to performance, etc.). The firms that dotrends in sourcing area fair amount of supplier development work claimed that pilot work is often done firsttoward more centralized(to limit this risk).structures, yet manyAreas in which companies seem to struggle to build decent capital projectbusiness units are globalcompetencies are in leveraging global spend and the sharing of mutual gains withsuppliers. Leveraging global spend for a raw material with broad applicability acrossand decentralized,business units is somewhat straightforward (at least in theory); leveraging capital spendespecially with regard tois made nearly impossible due to that fact that supplier markets are also somewhatfacilities and . Truly “global” suppliers in capital projects are less common (or are so large thatleverage for any single client is harder to realize). Capital projects sourcing is also not anarea where mutual sharing of cost savings between buyer and supplier has gained asignificant foothold, possibly due to the fact that such buys are far less final question was asked related to how competencies in capital sourcing could betranslated over to other areas of indirect spend, such as MRO sourcing. It is possible,however, that MRO and other indirect areas may have some practices that capitalsourcing should emulate, although this was not touched upon at the conference in Issues and Early Sourcing InvolvementOrganizationally, the question of capital sourcing’s proper fit arises. Capital can beclassified under a broader “indirect” umbrella (often with connections to real estate, ifthat is a separate group). The broad organizational trends in sourcing are toward morecentralized structures, yet many business units are global and decentralized, especiallywith regard to facilities and operations. The majority of conference participantsindicated that they were members of capital sourcing groups in centralizedorganizations, reporting up through the indirect side to the CPO. Their struggles andfrustrations from this perspective seemed to spring from the more decentralized natureof the functions they were responsible for supporting, including far-flung engineeringfunctions with which they shared responsibility to oversee general contractors. Inseveral cases, sourcing and real estate had overlapping responsibilities (with REhandling negotiation but sourcing handling renovations, .).Critical Issues Report,Successful Capital Projects in Uncertain TimesCopyright ©2011 Institute for Supply Management™. All rights reserved.
Critical Issues 9 REPORT Staffing was a hot-button issue at the conference; all participants indicated that capitalsourcing groups feel significantly understaffed, with a handful of sourcing personnelsupporting in many cases hundreds of engineers and scores of projects. Commentsincluded:•“We have a small purchasing team interfacing with a much larger engineeringteam.”The risk of maverick•“A huge internal client base relative to the sourcing group.”spend (spend occurring•“Everyone seems to face staffing restrictions in this area. We try puttingoutside the purview oftraining programs and policies in place to educate the people at the variousfacilities who are running their own, smaller-scale projects, so we cansourcing) seems to beconcentrate on larger ones.”higher on capitalBeyond staffing size, another issue was the proper alignment of sourcing resources projects. It was noted that there is often a knowledge gap between theengineers and some international sourcing teams (the international sourcing teamsbeing younger and less experienced than the home country engineers, in general). Oneparticipant addresses some of these organizational issues with a dedicated “businesssourcing manager” (BSM), who serves as the liaison between the commoditymanagers in sourcing and the divisional internal customers. Other approaches include afair amount of co-location between sourcing and engineering personnel, and significantcross-membership on operating risk of maverick spend (spend occurring outside the purview of sourcing) seems tobe higher on capital projects. This is perhaps due to the fact that such projects haveincreased numbers of non-sourcing personnel who interface with suppliers/contractors,as well as the fact that such projects are geographically distant from sourcingoversight. Although conference participants universally indicated that maverick spendwas (1) a significant problem and (2) against their company policies and culture, fewhad any significant penalties in place for repeat offenders in engineering or otherfunctions. There was one exception, wherein a sort of “three strikes” policy was part to counter the maverick spend problem, the other hot button issue was earlysourcing involvement (ESI). Much of the value sourcing brings to the table can berealized early in project timelines, and in preventing sub-optimal outcomes by beingpresent in early negotiations. While all participants agreed on the importance of havingsourcing involved early on capital projects, nearly all also felt that in their owncompanies, sourcing was never involved early enough! A fair amount of frustration wascaptured in the following quote: “Engineering shows up and tells sourcing they haveCritical Issues Report,Successful Capital Projects in Uncertain TimesCopyright ©2011 Institute for Supply Management™. All rights reserved.
Critical Issues 10 REPORT two days to negotiate T&Cs, per the project arbitrary timeline!” As with maverickspend, a few participants felt their firm was ahead of the curve, and noted thatsourcing was now (as opposed to in the past) an early and active player on and CollaborationThe importance of cross-functional and inter-company communication and collaborationwas consistently stressed throughout the conference. These can almost be seen ascrucial support for capital projects; without them, projects run over budget, over time,or perhaps fail primary concern of conference participants was how communication betweensuppliers and non-sourcing personnel could be controlled. It was felt that internalclients often undermined the sourcing mission by communicating sensitive information(internal cost estimates or volume needs) meant to be kept confidential (or at least notto be revealed too soon). Similarly, sourcing managers feared that internal clients toooften leaked communication that could undermine a successful negotiation, such asthe firm’s genuine sense of urgency regarding the project. Participants reported a fairlywide range of approaches to dealing with this issue, with some admitting there waslittle they could do, and others detailing a specific training regimen to educate internalclients on how, when and what to communicate to suppliers in the absence ofsourcing personnel. In some cases, certain internal clients were forbidden to even talkto the supplier without sourcing present!Internal collaboration, or moving beyond inter-functional communication to fostering amutually beneficial working relationship, was the subject of a special breakout sessionat the conference. The breakout session addressed the following aspects of fosteringsuccessful collaboration.•Most significant barriers to collaboration:Sourcing may not have the people in place with the right knowledge•Internal customer fails to understand the value that sourcing brings to•the tableSourcing has failed to effectively demonstrate the value they bring•KPIs not aligned with the line of business•Backdoor relationships with suppliers (by non-sourcing personnel)•No established rules/governance for when sourcing is involved in capital•projects•Requirements for successful collaboration:Roles and responsibilities need to be clearly defined and understood•Critical Issues Report,Successful Capital Projects in Uncertain TimesCopyright ©2011 Institute for Supply Management™. All rights reserved.
Critical Issues 11 REPORT Finance validates savings; the Line of Business reports it (not sourcing)•Senior leadership must actively support collaboration, alignment and•adhering to sourcing policiesFocus on total cost of ownership approach for all projects•Sourcing needs to develop an operational understanding of their•commodity, business — market knowledge, supplier knowledgeProcess to educate internal stakeholders on how to communicate with•suppliersNeed a process in place to educate internal clients on how they should•approach/ engage with suppliersTools to enable internal customers to move on some purchases without•sourcing involvementLikewise, guidelines on when to definitely go to sourcing•Cross-functional category strategy sessions/collaboration•Use supplier collaboration to help enhance internal collaboration•Sourcing entrenched with internal clients••Key action steps to move forward on establishing better collaboration:Sourcing must actively communicate the value-add on a regular basis•Establish sourcing policies and enforce non-compliance penalties•Metrics/KPIs for Capital SourcingAs mentioned above, establishing a standardized and broadly acceptable set of metricsor key performance indicators (KPIs) for capital sourcing is considerably difficult. Theprevalence of cost avoidance vs. hard cost savings, the unique nature and long-termschedules of capital projects, plus their inherent uncertainty and complexity all add tothis confusion. Some firms attempt to address this through a somewhatstraightforward application of the existing indirect sourcing metrics or KPIs to capitalprojects:Example from one company of KPIs for indirect sourcing:•Cost reduction (savings, avoidance)•Sourcing strategy•Sourcing operations and efficiencySpend under sourcing management, spend sourced within calendar year,•sourcing events, PO catalog utilization)Sourcing events — “mega sourcing” and “rapid sourcing” (special•events run through third-party provider, involving a somewhat morestreamlined process). Capital construction projects not generally runthrough these Issues Report,Successful Capital Projects in Uncertain TimesCopyright ©2011 Institute for Supply Management™. All rights reserved.
Critical Issues 12 REPORT •Diversity spend percentage•Supplier code of conduct compliance•Risk mitigationIt was noted that capital projects are still often the exception in attempting to applythese metrics: Successfully calculating cost savings/reduction efforts for capitalMost firms have a list ofprojects remains somewhat elusive, and the more streamlined sourcing events werenot currently used for capital T&Cs that areappended toOne area in which capital projects sourcing seemed to be roughly on par with moretraditional sourcing efforts was in the area of supply base diversity efforts. In particular,contracts/purchasethe use of multiple subcontractors makes the incorporation of second-tier supplierorders, but in the case ofdiversity something that can be tracked, which is considerably more difficult withcapital projects thesetypical materials sourcing. Participant companies varied greatly in their approach, someare all having supplier diversity on a generic wish list, and others utilizing strict goalswith defined percentages across all spend categories. Beyond the usual categories ofwomen- or minority-owned business, some firms stated that they had also beguntracking ownership by sexual orientation as a diverse supplier category, believing thatthere was industry/regulatory movement in this might be imagined, legal and contractual issues surrounding capital projects areextensive and confusing. The majority of discussion around contracts dealt withmanaging risk and liability via contract terms and conditions (T&Cs). Most firms have alist of standard T&Cs that are appended to contracts/purchase orders, but in the caseof capital projects these are all negotiable. Participants noted that their POs were oftenretuned heavily “redlined” — with T&Cs altered and lined out, and supplier-dictatedones burning question here is: how can suppliers/contractors be required to pick up their“fair share” on liability? One participant noted that in general, suppliers on capitalprojects want (1) a limit of consequential damages; (2) an overall cap on damages; and(3) to be only responsibly for negligence. Needless to say, this heavily advantages thesupplier, so considerable negotiation is involved in hammering these issues issues were also the subject of a special breakout session during theconference, the key findings of which are distilled below:•Current trends in contracts:Suppliers are asking for down payments and/or accelerated payment•schedules with greater frequency than in the Issues Report,Successful Capital Projects in Uncertain TimesCopyright ©2011 Institute for Supply Management™. All rights reserved.
Critical Issues 13 REPORT Suppliers are negotiating and requesting waivers to T&Cs more than in•the past.•Best practices in contracts:T&Cs — what are the best practices, how to get suppliers on-board?•One approach is to inform the supplier they can only redline the “top•three” of the various T&Cs that they have issues with. In other words,make them prioritize and convey that you’re willing to listen to the criticalones but that you’re not going to revisit the entire to hit the key decision-makers when negotiating with suppliers•Responses to suppliers on T&C change/waiver requests — have a•standardized response (approved language) for common requests. Thisaccelerates the negotiating repository for negotiated T&Cs.•“Representations & Certifications” page. Part of the RFP, potential•suppliers “certify” that they are capable of performing the work, thattheir personnel are capable or certified and they’ve not been involved available from the supplier side that lists the standard T&Cs.•This way, this way the supplier knows in advance what they are facingshould they win the you use a “standard” set of T&Cs, then typically this is a “best” set•from the buyer’s standpoint, and negotiation (if any) tends to go in thedirection of the Issues Report,Successful Capital Projects in Uncertain TimesCopyright ©2011 Institute for Supply Management™. All rights reserved.
