How to Reduce Risks in Contractor Management

Hiring a contractor without clear and specific rules can significantly increase the project execution risks. Many project managers are not aware of all the risks they are taking, and therefore, fail by not taking preventive actions.

This post presents some actions that should be executed to avoid or reduce, the risk exposure when hiring contractors for projects. However, in practice, the traditional lack of time for adequate contract planning forces the project manager to make contracts with contractors without a detailed scope and a good evaluation of the proposal. As a result of not investing the time in planning, the usual problems appear, including schedule delays, projects finishing over budget, and safety incidents.

Contractors – One of the Main Sources of Problems

Even though hiring contractors is a common practice now days, there are many problems for the contracting companies and unfortunately, they are not always prepared to actively limit these risks. Not much attention is given towards preventing common problems, and project managers end up responding reactively, which can then cause significant financial losses for the contracting company as well as expose workers to safety risks.

The most frequent risks faced by the hiring company are:

• Fiscal and labour risks;
• Accidents on the job site;
• Delays in project execution and surpassing the project budget;
• Risk of receiving a product of low quality; and
• Risk of not receiving a warranty from the contractors.

When contracting another company to execute part or all of a project, it’s not possible to transfer 100% of the risk. The ultimate responsibility remains with the hiring company, and the same is true for promises made to the final client. It’s rarely possible to transfer fines to the contractors, or transfer costs for extensive repairs and/or delays which might occur. Without preventative action against risks, the planned profits from the contract can easily turn into huge losses to the hiring company. To guarantee the advantages of partnership with contractors, the hiring company must do the preparation for the entire contract process, paying special attention to the documentation done by the sub-contractor candidates and to creating a good risk response plan.

How to Prevent Risks

Two factors are fundamental in preventing the risks that arise when a contractor is hired: the contracting policies of the company and the attitude of the project manager. The contracting policies of the hiring company can cause many constraints in the project manager’s work (e.g., many companies always hire the contractors that offer the lowest prices, without analysing their structure or experience). Changing the company’s policies is difficult, because it depends on the level of influence and autonomy of the project manager inside the organisation, but a preventative attitude against risks during the contracting process is their obligation. The project manager plays a decisive role during the contracting and management of contractors, and therefore must always use the best practices that can help to reduce risks.

Based on the procurement management processes in A Guide to the Project Management Body of Knowledge (PMBOK® Guide – Third Edition), it is possible to suggest four steps that can help a project manager with the efficient management of contractors:

1. contract planning,
2. contractor selection,
3. contract administration, and
4. corrective actions.

It is worthwhile considering the employment of a software-based contractor management solution. Utilising an automated system can allow one to efficiently and effectively carry out the above four steps. A central repository of information means all parties can view and interact with relevant documentation, while know the status of any contractor.

Conclusion

For the process of hiring contractors not to be fraught with risk the project manager needs to give them adequate time in order to complete the hiring process correctly. Not following some of the essential steps before hiring subcontractors, can significantly increase the risk exposure of the project. A result of poorly made subcontractor agreements is that some of the most damaging financial problems can appear long after the project has been delivered, via labour disputes, quality problems, etc. Adopting a mindset of prevention towards contractual risks is an obligation of the project manager; his or her company needs to give him or her the necessary support and avoid that subcontractors are selected, in the end, solely because they are the low-cost provider.