Let’s assume you are a small company that wants to grow the business by soliciting subcontracts from a major prime contractor.  What unknown risks may be in store for your company in pursuing this path.  I will tell you what some of the risks are including an example and suggest ways to mitigate them.

UNKNOWN RISKS
A prime contractor has to outsource a majority of their work to be competitive. They are always on the lookout for hidden vendor jewels that are low cost, have excellent capability, great quality product, and on time delivery track record.  If the vendor performs well, the prime subcontractor tends to go back to the vendor time and time again. It is a win-win situation for both parties.  But if the vendor performs poorly for whatever reason, it is placed on the prime contractor’s black list which means they will not use the vendor for future projects in all likelihood.

What makes an excellent vendor perform poorly as a subcontractor to a prime.  There can be many reasons.  One major reason is the vendor usually does not have the resources to meet the contractor’s requirements and expectation.  Large companies tend to overwhelm smaller vendors by the numbers of engineers and other support people that interface with the vendor and visit their facility for various meetings.  This means the smaller vendor support staff spends considerably more time with their customer than planned resulting in less work being accomplished on the project.  As a result, the project schedule may start to slip drawing more customer management personnel to the vendor for an explanation as to why the schedule is slipping thus creating a snowballing effect.

Another prime reason for poor vendor performance is the amount of document deliverables to the prime contractor.  Not having worked for a prime contractor, the vendor tends to under bid the time and effort required to prepare, review and deliver the contract documents. They find out not only is the customer not satisfied with the document but it requires many more iterations to complete the document than planned to meet their satisfaction. As a result, the vendors cost and the schedule are negatively impacted.  The customer is unhappy with the schedule delay and takes up more of the vendor resources to understand why and what is the recovery plan.  The vendor’s contract is usually a firm fixed price type.   As the vendor experiences cost growth (they typically think is due to the customers added scope), they may put in a claim that the customer disputes and makes them very unhappy.   Similar scenarios exist for the deliverable fabrication, integration, test, and sell off of the deliverable products.

I think you can begin to get the drift. There is a learning curve associated with working as a sub to a prime contractor. Problem is you don’t know it first time around.

MY RISK EXAMPLE
I worked for a prime contractor that awarded a subcontract to a small but very experienced and capable vendor.  The contract was for manufacturing drawings/procedures, build, test and delivery of a first article structural platform with electrical enclosures for a tactical mobile communications system. It was a build to print to our provided design technical document package.  The contract included an option for the build and test of 10 production units at a predetermined price.

As you would expect, the vendor’s staff was small. Their first team was on the playing field with little bench strength. We had a team that was about 4 times larger with a very strong bench back home to use as needed.  We overwhelmed the vendor’s team to the extent that when we were at their facility they only had time to entertain us impacting progress on their schedule. The vendor also was assigned the majority of action items from our meeting further impacting their team’s progress on the schedule even more.

The vendor was required to submit their manufacturing drawings and procedures to us for review and approval. It took several iterations with the procedures to satisfy our expectations for format and content before approving them. Similar thing was true with their drawings. In addition, as the manufacturing drawings were evolving, we found errors on our design documents resulting in engineering change orders. The vendor had to provide manpower to evaluate and bid each change. The net result of these activities was to tie up the vendor resources thus delaying schedule progress even more.  The more the schedule was delayed, the more attention and management support help was provided to the vendor tying up the vendors management team.  The vendor did not have the staff to support customer requests and changes and maintain the schedule at the same time.

At the end of the contract for the first article, the vendor refused to accept the predetermined price for the optional 10 production units due to the increased cost associated with implementing our design and supporting our team requests and actions i.e., the cost of the learning curve to deal with a large prime for the first time. They entered into negotiation with us for revised pricing.   We settled on a new price and the vendor completed the contract.  My company placed the vendor on the black list (never to do business with them again) because of their poor performance on the first article contract ignoring the fact that we were the cause for a lot of the delays.

MITIGATION SUGGESTIONS
I suggest the following actions to mitigate vendor risks when submitting a bid to a large prime contractor for a subcontract:

1. Increase your best price estimate by a healthy factor (2-3 times for example).
2. During your proposal cycle, request an example of the procedure format expected by the prime to ensure you understand and plan for it.
3. Assume 3 iterations for procedure approval as well as generous (2-4 weeks) customer review time for receiving their comments.
4. Anticipate a large customer team will ascend on your facility and will require a lot of support. Include in your proposal, the cost and plan to increase your staff by a significant factor with new hires and or job shop skilled people.
5. Limit the number of visits to your facility and meetings to facilitate cost estimations for supporting these activities. In other words, do not leave it unbounded.
6. Include in your proposal support for customer generated engineering changes to evaluate the change and bid it to the customer for approval prior to a contract change ( which will include additional budget and schedule required to implement the change)
7. During your proposal effort, review the SOW and Specification paragraph by paragraph with the prime contractor to ensure you understand the scope and requirements. Prepare a compliance analysis for the SOW and Specification noting any clarifications that your proposal is based on (you cannot state noncompliance because it will disqualify you as a candidate vendor).
8. During negotiation with the prime, review the final SOW and Specification as well as your compliance analysis with the vendor. Ask many questions to ensure you understand the requirements. Request changes as required to ensure it is clear to your satisfaction. Do not exit negotiations until you are convinced your negotiated price meets the prime’s expectations and requirements.

SUMMARY
If you are a small vendor with no experience working as a sub to a prime contract for the first time, recognize there is a learning curve that you must climb to become successful and become a favored vendor for the prime. There is also a cost for this learning curve in terms of increased staff and cost to implement the customers’ requirements to their expectations. If you fail to perform, you will most likely not receive any future programs from them. But if you are successful, they will come back to you over and over again.

Bio:

John earned a BS in Mechanical Engineering and MS in Engineering Management from Northeastern University. He has a total of 44 years’ experience, 30 years with DOD Companies. He is a member of PMI (project Management Institute). John has managed numerous firm fixed price and cost plus large high technical development programs worth in excessive of $100M.  He has extensive subcontract management experience domestically and foreign.  John has held a number of positions over his career including: Director of Programs; Director of Operations;  Program Manager; Project Engineer; Engineering Manager; and Design Engineer. His technical design areas of experience include: radar; mobile tactical communication systems; cryogenics; electronic packaging; material handling; antennas; x-ray technology; underwater vehicles; welding; structural analysis; and thermal analysis.  He has experience in the following areas: design; manufacturing; test; integration; selloff; subcontract management; contracts; risk and opportunity management; and quality control.  John is a certified six sigma specialist, certified level 2 EVM (earned value management) specialist; certified CAM (cost control manager).