In today’s business environment, many companies outsource a majority of a program’s work to stay competitive.  Far too often, hidden subcontractor’s risks cause unplanned significant cost and schedule growth resulting in serious negative program impact.

Sound familiar?  Learn how to mitigate these risks:

HIDDEN RISKS
]This is my take on hidden risks.  I think the best way to convey it is to share a couple of examples with you that I have experienced:

My First Story:
We had a contract with a subcontractor to design, build, test, and install a very large servo controlled antenna mount for a missile defense radar.  I was sent to the subcontractor’s facility to review their proposal.  I went through the SOW (statement of work) and Specification paragraph by paragraph as well as reviewing their vendor bids in detail.  As a result of my review, I identified several missing tasks in their proposal that constituted hidden risks.

A major one being the fact the subcontractor did not have a SOW or specification for their major vendors, just a quote based on a brief task statement in the purchase order.  I convinced them to add a SOW to specifically define the work as well as a specification to define the requirements.  They agreed.

The hidden risk avoided here was the likelihood their vendor could have delivered a non-compliant product or impacted cost and schedule due to fixing missing scope.  This hidden risk was caused by our subcontractor lack of major subcontract experience.

Another hidden risk involved the antenna mount bearing.  The antenna mount included a large custom designed bearing to keep the mount centered as it rotated.  Since the bearing was embedded in the bowels of the antenna mount, it would be a major catastrophe to replace it due to the long down time needed to replace it and the criticality of the missile defense radar mission.  As a result, the bearing was designed for an unusually long life of operation. The bearing was subcontracted to a foreign, well known, large custom bearing manufacturer.  In reviewing our subcontractor’s number of visits to the bearing supplier, I discovered they only had 1 trip in their proposal.  This was insufficient since interim inspections were required to ensure the proper pre-load and other parameters met specification.  Once the bearing assembly was complete, these critical parameters could not be inspected.  At my suggestion, they added 3 additional trips to the bearing supplier.  The hidden risk avoided here was the possibility the bearing may have not met specification and the cost and schedule growth to resolve the problem.  This hidden risk was due to the fact our subcontractor did not have large custom bearing experience.

My Second Story:
On another program, we had a subcontract with a system house for a military tactical shelter.  Our subcontractor provided the system integration and program management services to us.  They in turn contracted with a manufacturer to design, build, test and deliver the shelters.  The overall subcontract was valued at approximately $20M with a period of performance of 2 years.  We had a cost plus contract with our subcontractor. During negotiations with them, nothing was stated or discussed regarding the type of contract they had with their shelter vendor.  We thought (and wanted) a cost plus contract but it turned out to be a FFP (firm fixed price) contract.

Since this was a new high tech shelter development program, we wanted to have as much flexibility as possible which is why we wanted a cost plus contract.  You do not get the flexibility you need on a new development program with a firm fixed price contract.  Once we found out about the FFP contract, we had no recourse but to manage it the best we could.  As we feared, the FFP contract impacted our subcontractor cost and schedule as we moved forward due to the added scope for every little change the shelter vendor passed on  to our subcontractor.

This approach caused delays while each change was evaluated and approved, just the thing we wanted to avoid.  The contract agreement between our subcontractor and their vendor was a hidden risk that actually materialized resulting in significant impact to our program.  We missed this risk during the proposal review, fact finding process and negotiations.  We felt our subcontractor’s lack of experience with major subcontracts contributed to this hidden risk.  We felt our subcontractor thought they could control costs better with a FFP contract for their key supplier, but they were wrong.

SUMMARY OF HARD LESSONS LEARNED
So how can you find and mitigate hidden subcontractor risks?

• Hidden subcontractor risks can significantly impact your program unless identified and fixed prior to contract award.
• Face to face meeting with the subcontractor and a very detail review of their proposal, vendor bids, SOW and Specification during fact finding and negotiations is recommended.
• Ask a lot of questions.
• If possible, visit the subcontractor’s major vendors to review their proposal, assess their risks and the type of contract they have with your subcontractor.
• Tour their facility to evaluate their ability and capability to meet the program requirements.
• Be weary of subcontractors that propose pricing significantly below other bidders.
• Understand why there is such a large price difference.
• Keep in mind that it has to be a win-win situation for you and your subcontractor.
• Do not hesitate to point out missing scope to them even though their proposed price may increase.

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).