Published by Civil Engineering Surveyor.
In 20 years spent working on multi-million pound contracts, John Judge of Judge 3D has never lost money on a project. Here, he outlines some tips for effective commercial management.
The role of commercial manager can be testing at the best of times, but when the current prime minister mentions the d-word and his colleague and close friend Ed Balls says the global recession is “the most serious in 100 years”, the position somehow intensifies. Depression or not, today’s commercial manager, because of increasing financial concerns and the extra scrutiny this brings, has even more responsibility to fulfil his or her obligation to bring the project in on time and budget.
In recent years there have been a number of high profile incidents in the UK where projects have run badly over budget. The intensifying economic trading position means no one can guess for certain what the future holds, but financial control and certainty is as important now as it has ever been. So as a commercial manager, there are certain rules and methods that can be adopted to protect your project.
Pre-contract – the problems often start here!
Eliminate misunderstanding at the bid stage by detailing clearly what needs to be done. The danger of running over budget can arise as early as the pre-contract stage if poor decisions are made. If suppliers and contractors misunderstand the work at this point, it can lead to unrealistic bids and create major problems for you further down the lifeline of the project. When issuing an invitation to tender, explain clearly your needs, expectations and reasoning behind these. If suppliers and contractors fully understand what is required of them, there can be no excuse for error, and when you make your choices you understand where every penny is being spent and why.
Competitive tendering is the only option. Partnerships and alliances have their place, but competitive tendering lays the foundations to controlling the finances of a project. Competitive tendering brings to your organisations the people who are keen and want to work for you and do a good job.
In the competitive tendering process, keep the number of bidders down to a maximum of five. When selecting whom to work with, take into consideration both their track record and quality of work, and their ability to handle the work you are asking them to do. Be aware of over competitive bidding when making your selection; ask bidders for an explanation as to how they arrived at their price, and if necessary remind them of your needs and expectations to ensure there are definitely no misunderstandings. It has to be a master/servant interface and you have to influence your suppliers to prioritise your needs over all others.
Client top tips:
• Only go to the market when you KNOW EXACTLY what you want to buy
• Do your research on who are the very best organisations to deliver your
• Understand OJEU requirements
• Avoid being fooled into accepting an artificially low price
• Avoid selecting the wrong scale of contractor
• Consider Hard and Soft issues in your assessment
Contractor top tips:
• Understand the client scope of work
• Understand the contract terms
• Make sure the base cost is RIGHT
• Know your true business overhead
• Are your production outputs correct
• Use known supply chain, treat new suppliers with caution
Post-contract – if the problems have not started they are about too.
Once contracts have been signed, it is important for the commercial manager to stay on top of any future spending. Any money spent during the project should have been planned for in advance. If extra money is spent during the project, you must understand why. One reason for this can be market forces, over which you have no control. If this happens, and say, for example, market forces drive up the cost of a particular material, do not stay quiet. Discuss the situation with your client and remember there are always choices and there is always an alternative.
If costs look as though they are going to rise dramatically and damage the integrity of the project. The priority must always be to inform your client right away. They should be prepared to listen to what you have to say and may even move to reduce your losses. Although this isn't about breaking relationships, the best commercial managers deal with difficult issues in an open and professional manner. The key is to look for other solutions rather than accepting second best.
As our market continues to be tough be clear to take on contracts which will give you a return. Zero or negative margins have the advantage of potentially allowing organisations to tread water to see out the storm. Unfortunately, such an approach often ends in confrontation and ultimate failure of the company.
If you find yourself in problems seek to resolve them swiftly and in a professional manner. Remember you have an obligation under your contract, which you must administer, if you’re on top of these issues then resolution has a much greater chance of success without having to fall back on the ultimate remedies within the contract.
However, should you need to utilise mediation, adjudication, arbitration or litigation have a clear objective you are setting out on. Turning back without resolution results in a serious loss of credibility. It’s rare to get a second chance. Such routes often result in the loss of a client, so be prepared to consider this result in your decision-making.
In circumstances where you are losing money a less used option is to stop work. Continuing to loose money in the misguided hope it will suddenly somehow right itself is often misplaced. To put this into perspective: for every £1 lost, most businesses must win another £20 in new work simply to break even, so another option is to stop work rather than to continue to haemorrhage costs. You can always restart when you have controls in place.
Contractor top tips:
• Give the management of the delivery team the authority to go do
• Have the right skill set and experience within the team
• Ensure you control client changes
• Be open and communicate with your client
• Select subcontracts wisely
• Manage your risks in a controlled framework
• Don’t do new work without contractual and value cover
Client top tips:
• Avoid focusing on the wrong priorities
• Clients who occasionally go to market for work often suffer from “a little knowledge
is dangerous”. Get the right team around you
• Invest the authority within the project team
• Budget for an appropriate level of change
• Bureaucracy is the single largest cost escalation driver in public service investment.
Contract and don’t change anything
• Help your contractor and you will ultimately help yourself Risk management is a vast topic, and it is also the commercial manager’s friend. Pay attention to risk management and ensure the project team are doing it and not just talking about it. Make the team demonstrate they are mitigating risks and not sitting there like a rabbit caught in the headlights. The commercial manager has to be the eyes and ears on the project for the project manager, but identifying and bringing problems and potential issues to the attention of the project manager is not enough - a good commercial manager will also have the solutions.
Delivering bad news to the client and avoiding being hauled over the coals as a result is the commercial manager’s greatest challenge. In this instance, timing is everything. You have to be in control of what is a difficult situation and manage the message, and this can only be achieved through diligence and knowing your stuff inside out. You must be prepared to give explanations where needed and when they are asked for, you need to be in a position whereby you are able to prove what happened was unavoidable and what you are doing now is the right course of action for the success of the project. When everyone else on the project is lost in the dark, the commercial manager must keep focused on the light at the end of the tunnel and get the others to see it as well.
If delivering bad news is the commercial manager’s greatest challenge, you could be forgiven for thinking that delivering good news would be the total opposite, but it isn’t. Good news can also be tricky to deal with. There is a danger of being too trigger-happy with your good news and releasing it too quickly, especially if this news appears to be too good to be true. Wait a while and assess the potential for destabilising eventualities. If something does go wrong and the good news you have announced takes a turn for the worse, you are put in the awkward position of appearing naïve. If colleagues lose their trust in you, the value of your opinion will plummet and your judgement is open to question. This untenable position can hinder the overall success of the project, and unless you restore your reputation quickly, the likelihood is you will be withdrawn. Therefore, in my experience it has always paid to bank good news and wait for the appropriate time to share it.
The good news that any organisation really wants to hear above all from the commercial manager is that you have been able to make the project profitable.
There is no secret to this, as every project is different and has its own idiosyncrasies. However, it is important to enjoy your work and never give up.