PROJECT PROCUREMENT case studies in project program and organizational project management
248 CASE STUDIES
CHAPTER SUMMARY
Name of Case Area Supported
by Case
Case Type Author of Case
The 30,000 Frigidaire Types of Contract
Critical Incident Dragan Z. Milosevic
Mountain of Iron, Mountain of Dollars
Contract Specification Critical Incident
Dragan Z. Milosevic
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The 30,000 Frigidaire
Dragan Z. Milosevic
Neither the contractor nor the owner had any idea that such a small issue could snowball into an incident of such proportions. At fi rst, it did not look as
though such a small issue could grow into a situation of uncontrolled words and behaviors, and almost bring the whole project to a halt.
And, such a small issue was called in the contract specification, “ special cooling device. ” Its cost of 30,000 in a half - a - billion - dollar international project
was almost nothing, but as the experienced know, the poison comes in small bottles. According to the contract procedure, every piece of the hard special
cooling device ware that the contractor delivered for a project had to be physi- cally accepted and taken in property by the owner ’ s committee of experts. This
process is called the physical inspection and acceptance.
This is a critical incident designed with the specific purposes of introducing a type of contract and the contract situation that seems to have both sides to react in
a way as their contractual rights are breached. More specifically, the contract type is the turn - key contract that is not much used in the United States, but is appropriate
for U.S. companies transferring technology to less developed countries.
THE TURN - KEY CONTRACT
The contractor is a 1 billion, European company that makes a living build- ing industrial plants, like the one in this critical incident, mostly using turn - key
contacts. The owner is a state - owned manufacturer from the Middle East. To oblige with the contract, the contractor ’ s engineers submitted what they
called a “ special cooling device. ” When the owner ’ s engineers saw it, it is fair to say that they looked astonished. Also, there was rather unusual behavior. It more
resembled some secret ritual than the work of an engineering committee. This was what the owner ’ s engineers did: They spent about 10 minutes going around
it, looking at it from different angles with intense curiosity, opening the door of it, putting their heads inside, making different facial grimaces, whispering to each
other, all the time not asking any questions. Finally, they said they would be back in 20 minutes, without mentioning what the problem was, for it was obvious that
250 CASE STUDIES
the whole situation smelled of a problem. After the 20 minutes they came back with a verdict in writing — the owner ’ s committee was presented with an offer
of an ordinary Frigidaire, asserting that it was a special cooling device, and the contract sum was to be reduced by 29,600, or to be determined on the level of
the price of an average Frigidaire.
The heated debate began. Everyone on both sides formed an opinion, and shared it publicly and unselfishly. It appeared as though no one had control of the
situation; at least neither management side did. In uncontrolled discourse, words like “ the contractor is dishonest, ” and “ the contractor is ripping us off ” on the
owner ’ s side and “ the owner does not understand the contract ” on the contractor ’ s side began to circulate. The conflict bubble was close to bursting.
This was a “ turnkey ” contract that was never really understood by anyone on the site. Basically, the essence of the contract is “ function of entirety. ” That
means that the contractor guarantees that the plant which is the subject of the contract shall function. It also means if the contractor “ forgot ” to include in
the contract specification an item which is necessary for the plant ’ s function of entirety, the contractor shall deliver the missing item free of charge. Moreover,
the contractor is to “ use and choose ” subcontractors in a coordinated way in order to realize the function. For both of the essentials — entirety of function and coor-
dination of subs — the contractor is entitled to a fee between 20 and 30 percent of the contract sum.
Regarding the dispute about the special cooling device, the owner ’ s engineers thought that the contractor ’ s delivery of a Frigidaire for 30,000 was a huge rip -
off, and so reducing the contract specification item to the Frigidaire price would be the only fair outcome. They did not recognize that the contract was the turn -
key. The contactor ’ s opinion, of course, is based on their understanding of the meaning of the contract type. They based it on a recent example of delivering,
free of charge, an overhead crane, which was not part of the contract specifica- tion. Namely, the contractor established the need for the crane in the process,
and delivered it to secure the function of entirety. The contractor presumed that the item figure of 30,000 for the special cooling device was proper. The device
was not a typical Frigidaire one could buy anywhere, it was a special indus- trial Frigidaire bought in Germany from a manufacturer of specialty cooling
equipment. For that reason, the contractor was against the reduction of the item contract price. As there was no change in the total contract sum when the con-
tractor delivered any item free of charge to secure the entirety function, there should be no change of the total contract sum in the case of typos or similar
instances.
As the contractor held his ground, the owner contacted his headquarters, spe- cifically, the corporate contract department, with the question of how to proceed
in this case. To the owner ’ s surprise he was told to leave the issue to the contract department, which is responsible for cases like this.
Project Procurement Management 251
Discussion items
1. What are major traits of turn - key type contracts? 2. What are major traits of unit type contracts?
3. Contrast turn - key type contracts with those of unit type contracts. 4.
Is the owner right in demanding the price reduction of the 30,000
Frigidaire? 5.
Is the contractor right in refusing the price reduction of the 30,000
Frigidaire?
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Mountain of Iron, Mountain of Dollars
Dragan Z. Milosevic
This critical incident case focuses on the special area in procurement - commercial discounts. Contract specifi cations contain one set of equipment data, while in
actuality, a different set of data hold true of the delivered equipment. The equip- ment is mostly CNC tool machines. In the contract specifi cations, one number of
grooves and their size are mentioned while those delivered are different. That is often a bone of contention between the owner and the contractor.
IBRAHIM
Mr. Ibrahim, a tooling engineer, had a dream job. He worked for the state, meaning he had connections. He worked out of the resident engineer ’ s offi ce, meaning he
had money. He worked with foreigners, meaning he had connections and money. On the job site, he was with the maintenance department. As it was his job to
inspect and maintain the equipment, he noticed that CNC tool machines, per con- tract specifi cation, were delivered with a reduced number of grooves than they
were contracted for. The grooves were shallow, and the total machinery weighed less. Ibrahim reported this to his boss, Abdullah - Kadir, who then ordered him to
go ahead with the delivery as planned.
Ibrahim and Abdullah - Kadir represent the owners. They are also the new people in leading positions within the company. There weren
’ t any former
employees who knew about the history and people working under the contractor, which left Ibrahim and Abdullah - Kadir unfamiliar with past occurrences. So,
a very difficult game had to be played by the ambitious players, even though they didn ’ t know the history.
When Ibrahim returned with the data, which included the type of tool machine, the dimensions of the groove, and the number of grooves, he learned
that all the machines delivered are different from contract specification. In fact, Mr. Ibrahim realized that the contractor worked off a different machine specifi-
cation. After informing his boss about these results, he was given orders to ask the contractor to change the machine specification, meaning the grooves ’ number
and size for future delivery. This resulted in a project change. This was the logic
Project Procurement Management 253
of the owner and represented how the owners viewed the issue. Since all the iron used to produce these machines was already paid for by Mr. Ibrahim ’ s predeces-
sor, the owner did not expect to pay any extra for this change. In fact, the owner expected to get the money back because the new specification could result in the
use of less iron. Unfortunately, the contractor saw this as an attempt to introduce a new order. The contractor was not aware of the consequence of these project
changes. He did not link these project changes with the cost, even though this was a significant change.
With the new specification, the contractor needed to use a better iron than the one Mr. Ibrahim ’ s predecessor had originally paid for. In fact, the new iron was
the technologically better iron, and therefore, it cost more. The iron of the higher technological value was used to produce a higher quality of grooves. The people
working for the contractor did not succeed in explaining this to the owner.
So, these were two different views concerning the same issue. By the end of the project, the cost of the change was tremendous. The owner refused to pay the
final amount. The contractor ’ s representatives were astonished.
Discussion item
1. What can a contractor do to prevent such a mistake in the future?
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Part II CASE STUDIES IN PROGRAM
MANAGEMENT
WHAT IS PROGRAM MANAGEMENT?
Proven to be highly effective in the management of complex product development efforts, Program Management has received more attention lately. The concept of
program management perhaps originated from the U.S. Navy as the program management formation was reflected in the development of an underwater bal-
listic missile launch system during the 1950s. Looking at the structure of the missile launch system, a series of interrelated efforts including launcher, missile,
navigation, operations, etc., was collectively and coherently managed to attain military targets. This, in fact, mirrors the program management definition generally
known at present as the coordinated management of interdependent projects over a finite period of time to achieve a set of business goals.
1
The Project Management Institute also defines program management in a similar way, as the central-
ized coordinated management of a program to achieve the program ’ s strategic objectives and benefits.
2
There are a couple of widely used terms that are similar to program man- agement; and although related, they are distinctly different disciplines. Project
1
Dragan Z. Milosevic, Russ J. Martinelli, and James M. Waddell, Program Management for Improved Business Results , John Wiley Sons, 2007, p.6.
2
Project Management Institute, The Standard for Program Management , 2008, p. 6.
256 CASE STUDIES
management is one good example in which many people use it interchangeably with program management. The two terms, however, are quite different. The dif-
ference lies in the focus of each discipline. While project management is tactical in nature, program management is more strategic and focuses on the business
success rather than the execution success. The two disciplines, therefore, require different management mindsets. One is meeting time, cost, and performance
requirements; another is achieving sustainable business results.
Project portfolio management is another term that often causes confusion, as it is also frequently defined as the management of multiple projects. Nevertheless,
portfolio management is often regarded as a process to evaluate, prioritize, select, and resource new ideas, which may or may not be related or interdependent, that will
help achieve the corporate business strategy. The program management is rather a function that determines the business and execution feasibility of a selected idea,
which later turns into a plan successfully executed and delivered to the customer. Another way to look at it, the portfolio management process is to determine
the business value of a product, service, or opportunity. The opportunity is then assigned to the program management function to turn these ideas into a tangible
product, service, or infrastructure capability that delivers the value.
The Standard for Program Management from the Project Management Institute
3
suggests five program management process groups. They are initiating, planning, executing, monitoring and controlling, and closing process groups. These
process groups are used as skeletons for organizing the case studies presented in Part II.
3
Project Management Institute, The Standard for Program Management , 2008, p. 40.
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