collaborative contracting strategies and the use of the nec3 family of contracts
DESCRIPTION
This was a presentation delivered by Dr Jon Broome, chair of the APM Contracts and Procurements specific interest group (SIG), on Tuesday 7th October. The event was organised and hosted by the APM North East branch and was entitled 'Project contracts and how they support collaborative working'. It was held at the Radisson Blu hotel in Durham.TRANSCRIPT
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leading edgeprojects consulting ltd , 2014
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Project contracts & how they support collaborative working :
Collaborative contracting strategies anduse of the NEC3 family of contracts
Presenter :Jon Broome
leading edgeprojects consulting ltd
setting | your | projects
up for | success
[email protected] +44 (0) 7970 428 929 www.leadingedgeprojects.co.uk
leading edgeprojects consulting ltd , 2014
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Outline Agenda
� Collaborative working : some models
� Collaborative contract strategies :
o Use of incentives.o Target cost contracts.o Alliances in all their formso Frameworks and Packages
� The NEC3 family : objectives and how it achieves them (briefly)
� Quick introduction to the NEC3 Professional Services Short Contract.
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Raising the Standard of Collaboration
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A virtuous circle of continuous improvement
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Aligned
Objectives
Continuous
Improvement .
Integrated Changing Culture
Processes & Teams & Skills
A simpler project based
Model for Partnering
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Value Planning
Risk Management
Project & Strategic Alliances,
Target and Cost Reimbursable Contracts
Use of Incentives.
Use of NEC family and PPC2000 forms of contract.
Selection by Value : Eligibility & Suitability
Aligned
Objectives
Continuous KPIs, Balanced Scorecard
Improvement Benchmarking, Performance Management .
Integrated Changing Culture
Processes & Teams & Skills Risk Management Facilitated Workshops
Value Engineering throughout Project
Shared Offices & IT Hard & Soft Skills
Process Mapping Training
Collaborative Programming Coaching
A Model for Partnering(with Bells & Whistles)
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A Virtuous Circle of Continuous Improvement
Aligned Objectives
ChangingCulture
& Skills
IntegratedTeams &
Processes
ContinuousImprovement
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Two quotes from Warren Buffet
1. “It is impossible to unsign a contract, so do all your thinking before you sign.”
2. “It is easier to stay out of trouble than get out of trouble.”
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Price (Output) vs.Cost (Input) Based Contracts
� A Price Based Contract is where the basis for payment is what the Provider has offered, regardless of what it costs him to do the work, once he has provided the output.
� An Input Based Contract is where the basis for payment is for the resources that the Provider uses to do the work. The input is often ‘cost’ (a cost based contract), but can be any unit of input e.g. time charge.
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The Role of Incentives.
The Purpose of Incentives is to :
� Align the Motivations of the Contractor with the Client and Vice Versa; or the Subcontractor’s with the Contractors & Vice Versa
� To Stimulate Improved Performance;
� Directed towards the Optimum Achievement of Project Objectives.
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Type of Incentives.
� Cost e.g. Target Cost Contracts.
� Time e.g. Bonus for early Completion.
� Performance In Use e.g.Output or Efficiency compared to benchmark.
� Process Incentives e.g. Key Performance Indicators. Health & Safety Processes.
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Incentive Plan Design.
Business Objectives and Drivers
Project Objectives
Prioritise then Weight Objectives
Balance Incentives and Set so that :
Value to Client > Amount Paid to Contractor > Cost to Contractor
of Achieving Objective.
Communicate
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CSF 1 : Clear objectives
� Abu-Hiljeh and Ibbs found that “incentive plans ……… require owners to define their objectives more clearly. They also encourage owners to communicate their objectives more effectively, both within their own organisation and to their contractors”.
� A summary of Construction Productivity Network event on incentive based contracts stated that “success is dependent upon a high level of trust and openness and everyone having a clear understanding of the project objectives. Agreements underpinning these have to be simple, clear and owned by all parties before the project begins”.
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CSF2 : Simplicity of design
� A CIRIA report, titled Construction Contract Incentive
Schemes 17, states that when multiple incentives are used “these require care in determining priorities, designing the incentive controls and understanding the interaction between them”.
� Stuckhart 14 states “that owners must be careful how they combine cost, schedule, or technical incentives in any one contract, so that incentives do not result in imbalances” and that “such imbalances might motivate the wrong behaviour or over emphasise some objectives at the expense of others”.
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CSF3 : Focus on what mattersIbbs and Abu-Hijleh, in their research in America :
� recommended clients incentivise “the project areas in most need of improvement or that yield the highest returns, depending on project objectives” and
� that when these areas are targeted a “total return to the owner of five times the plan’s cost is not unusual” ! In other words, the return
minus plan cost / plan cost was 4 to 1.
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CSF 5 : Focus on the positive� Uff and Capper, two distinguished UK lawyers, claim 26 that
“bonuses are far more effective psychologically than liquidated damages in obtaining performance and timely completion”.
� Newman of Bechtel illustrates this by stating that “our experience is that positive incentives, for some reason, have a much lower risk of causing aberrant behaviour, even when the monetary effect is the same. Applying a 20% fee penalty, as with a negative incentive for a cost over run, is somehow more painful to a contractor than getting an 80% score on an award fee basis”.
� Ibbs, in his research 9, found “positive incentives encourage positive actions, behaviours and relationships. Contractor’s energies are directed toward developing more effective ways to achieve project objectives”.
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CSF4 : Realistic starting point� A basic principle of incentives is that the Contractor
makes :o average profit for average performance,o improved profitability for better than expected
performance, ando reduced profit for poor performance
� This implies that the starting point of any incentive plan has to be realistic targets of performance.
� Stukhart 14 concludes that “to insure that incentive contracts achieve the efficiencies that owners want, it is essential that targets be realistic .... . This implies that owners must emphasise ....... reliable targets rather than elaborate sharing schemes and complex incentives”.
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CSF6 :
� Negotiate versus impose.
�Why ?
o Because the Contractor better understands the Client objectives & their weighting
o Because the Client better understands the Contractors drivers & their weighting
which results in a more effective incentive plan.
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Cost Reimbursable Contractswhat are they ?
Provider is reimbursed Actual Costs plus Fee.
Fee can be expressed either as :
� a fee percentage applied to Actual Costs.
� a fixed fee.
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Cost Reimbursable Contractwith fee percentage
Defined Cost
fee percentage
Price for WorkDone to Date
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Target Cost Contracts :what are they ?
� A development of CR contracts where the Provider is reimbursed Actual Costs plus the Fee.
� Any cost over or under run vs. the Target is split in pre-agreed proportions.
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Target Cost Contract
Actual Costs
Target
Under run
/ Gain
Overrun
/ Pain
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Target Cost Contract
Actual Costs
TargetEmployer’s share
Employer’s share
Provider’s share
Provider’s share
Under run
/ Gain
Overrun
/ Pain
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CSFs for Target Cost Contracts
1) Use them in the right circumstances : (a) in less extreme circumstances to cost+ contracts
where, if a Priced contract was used, the Contractor would either not tender or add a high premium
(b) where both parties can contribute to managing risk (threat &/or opportunity) within the target &/or
(c) where there could be significant, but manageable changes to the Target I.e. Employer owned risks
2) Intelligently set the share profile to create alignment & reflect risk within the target Prices
3) Make sure all the components of the Target are realistic : Defined Cost, Fee & risk allowance
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Target Cost Contractwith variable share profile and Employer taking large share of over run
Actual Cost
target Prices
Under run
/ Gain
Overrun
/ Pain
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Target Cost Contractwith cap on Employer’s share of over run :a Guaranteed Maximum Price (GMP)
Actual Cost
target Prices
Under run
/ Gain
Overrun
/ Pain
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CSFs for Target Cost Contracts4) Specify audit requirements as :
o a performance spec pre-contracto evaluate Providers’ proposals &o fine tune / agree early on in contract before start
spending serious money.
5) Ensure ‘real time’ financial management systems are in place foro up to date monitoring of Defined Costo agreeing changes to the Prices due to CEs ando forecasting out turn Defined Cost and pain / gain
share.o Adding in ‘bells & whistles’ / pairing back Scope to hit
Employer’s budget.
6) Select right quantity and quality of staff with pro-active collaborative skills and culture.
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Characteristics of a Project Alliance.
� Combination of construction management & target cost contracts & used in similar (more complex) circumstances to the former, with significant players part of the Alliance.
� Potential alliance members develop scope so can agree an alliance target.
� Fundamental characteristic is that alliance agreement / contract largely ties fortunes of each member to success of project rather than their individual work scope.
� Incentive to partner horizontally & vertically.
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Three sorts of Alliance Contract1. Traditional Alliance Contract : an extra
contract which sits on top of conventional (normally cost based) routes.
2. Pure Alliance (The “Australian model”) : everyone signs the same contract at the same time and includes works scope. PPC’2000 takes this approach.
3. Alliance Agreement : Add-on clauses to the individual contracts which tie fortunes to the success (only !) of the project. E.g. NEC3 option
X12.
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Alliance Contractual Framework
Sub
Consultants
Principal
Consultants
Sub
Contractors
Principal
Contractors
Sub
Suppliers
Principal
Suppliers
Client Alliance Agreement
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Project Alliances
When to use them :� On large projects where a management contract
might otherwise be used.
� Where there is potential for break through solutions through partnering, which implies must not over constrain alliance members
� There is a limited number of ‘strong’ works Providers who can have significant impact on project outcomes by working together.
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FrameworksWhat are they ?� A Client selects a Provider or Providers for a
series of as yet undefined projects usually for a set time period.
� As the time for each project approaches, it is defined and scoped up together till a budget and contract Price can be agreed.
� The Project is let, often in a Target Cost or Project alliance format.
� Each project is heavily benchmarked and lessons learnt from one are used in the next.
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FrameworksAdvantages :� Genuine ‘Bulk purchase’ discount on overheads
� Particularly in public sector, once framework in place, quicker and cheaper to get to contract.
� Continuous improvement against performance parameters of Client.
Disadvantages� High selection & start up costs : scale of works needs
to justify investment
� Complacency may set in : robust and visible benchmarks, incentives, transparency of costs, non-exclusivity clauses need to be in place to ensure motivation, plus internal competition
� Reduced competition at end of alliance period
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Frameworks
When To Use Them :
� When there is a series of projects, whose total value is sufficient to justify the investment in selection and start up.
� To minimise time & cost of getting to contract.
� When the workload will be roughly continuous and consistent.
� There is scope for (continuous incremental)
improvement over time e.g. they cannot be too constrained.
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Interlude …
� Answer this question in your mind :
“Of all that has been discussed, what insight is potentially of most use to you ?”
� Having answered it, swop perspectives with those around you (groups of 3) ?
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NEC Overview :the 3 main objectives
Stimulus to Goodproject Management
Clarity &Simplicity
Flexibility
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FlexibilityPurpose : to promote easy selection of ‘best fit’
contracting strategy for the project circumstances
� Whole family of interlocking contracts for works, goods & services.
� Modular structure within each contract, so that can rapidly assemble ‘best fit’ procurement arrangement without expensive legal input.
� Similar structure & terminology across whole family to promote ease of learning and ‘back to back’nessfor process integration and contractual cover.
Note : Whole family updated in 2005 and pre-fixed with nec3
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Members of the nec3 family :
� Engineering & Construction Contract
� Engineering & Construction Subcontract
� Engineering & Construction Short Contract
� Engineering & Construction Short Subcontract
� Professional Services Contract
� Professional Services Short Contract
� The Adjudicator’s Contract
� Framework Contract
� Term Services Contract
� Term Services Short Contract
� Supply Contract
� Supply Short Contract
As well as X12 : partnering option & X19 : Task Order.
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Contracting strategy at main payment option level
ECC EC-SubC
PSC TSC SupplyContract
Short Contracts (not Supply)
A : Priced Contract with Activity Schedules (AS)
���� ���� ���� ���� ���� ����
B : Priced Contract with Bill
of Quantities���� ���� ����
C : Target Contract with AS /
Price List���� ���� ���� ����
D : Target Contract with Bill
of Quantities���� ����
E : Cost Reimbursable/ Time
Based contract���� ���� ���� ���� ����
F : Management Contract ����
G : Term Contract ����
X12 : Partnering (project
alliancing) option���� ���� ���� ���� ���� ����
X19 : Task Order ����
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Contracting strategy at main payment option level
ECC EC-SubC
PSC TSC SupplyContract
Short Contracts (not Supply)
A : Priced Contract with Activity Schedules (AS)
���� ���� ���� ���� ���� ����
B : Priced Contract with Bill
of Quantities���� ���� ����
C : Target Contract with AS /
Price List���� ���� ���� ����
D : Target Contract with Bill
of Quantities���� ����
E : Cost Reimbursable/ Time
Based contract���� ���� ���� ���� ����
F : Management Contract ����
G : Term Contract ����
X12 : Partnering (project
alliancing) option���� ���� ���� ���� ���� ����
X19 : Task Order ����
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Secondary Option SelectionECC EC
SubCTSC PSC Supply
Contract
X1 : Price Adjustment for Inflation ���� ���� ���� ���� ����
X2 : Changes in the Law ���� ���� ���� ���� ����
X3 : Multiple Currencies ���� ���� ���� ���� ����
X4 : Parent Company Guarantee ���� ���� ���� ���� ����
X5 : Sectional Completion ���� ���� ����
X6 : Bonus for early Completion ���� ���� ����
X7 : Delay Damages ���� ���� ���� ����
X8 : Collateral Warranty Agreements ����
X9 : Transfer of Rights ����
X10 : Employer’s Agent ����
X11 : Termination by Employer ����
X12 : Partnering ���� ���� ���� ���� ����
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Secondary Option SelectionECC EC
SubCTSC PSC Supply
Contract
X13 : Performance Bond ���� ���� ���� ���� ����
X14 : Advanced Payment ���� ���� ����
X15 : Limitation of Contractor’sliability to reasonable skill & care
���� ����
X16 : Retention ���� ����
X17 : Low Performance Damages ���� ���� ���� ����
X18 : Limitation of Liability ���� ���� ���� ����
X19 : Task Order ����
X20 : Key Performance Indicators ���� ���� ���� ���� ����
Y(UK)1 : Project Bank Account ���� ���� ���� ���� ����
Y(UK)2 : H, G, C & R Act ���� ���� ���� ����
Y(UK)3 : Rights of 3rd Parties ���� ���� ���� ���� ����
Z : Additional Conditions of Contract ���� ���� ���� ���� ����
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Other Aspects of Flexibility� International Use : catered for by secondary options and no
paraphrasing of law
� Contractor’s design : for ECC, extent defined in the Works Information or equivalent.
� Multi-discipline work : exclusion of discipline specific procedures from CofCs. Either in Requirement or Contract Data
� Able to fine tune many provisions by entry in Contract Data
� Subcontracting : o ‘Purple Book’ can be used
o Short Subcontract for low risk & complexity work
o Slightly amended PSC or PSSC can be used for design subcontract
o Supply for specially designed goods
o Short Supply for commodities / off-shelf goods.
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Clarity & SimplicityPurpose : to promote ease of understanding at ‘doer’ level
& so reduce disputes due to misunderstanding or omissions
� Simple & common structure across whole family leads to ease of finding way around any contract
� Flow charting to ensure logic : hints at process of project management
� Shorter sentence length & use of bullet points
� Less subjectivity: preciser definitions, risk allocation & Roles & Responsibilities; stated maximum timescales.
� Defined Terms with Capital Initials to avoid replication
� Contract specific information in italics in Contract Data
� ECC is about a third of the length of traditional contracts
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Stimulus to Good Project Management
Purpose : Range of contractual mechanisms and incentives to promote collaborative project management, thereby increasing predictability of time, cost & quality being delivered.
It is founded on three key principles :
1. Foresighted, co-operative management shrinks risk and mitigates problems
2. Both parties are motivated to work together if it is in their professional and commercial interests to do so
3. Clear division of function, responsibility (& risk) helps accountability and motivates people to play their part
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Foresighted, co-operative management shrinks risk and mitigates problems
� A regularly updated and agreed programme with method statements & resources showing timing and sequencing of Employer and Contractor actions
� An active Risk Register stimulating active risk management
� An ‘early warning’ procedure for identifying future problems & minimising their impact
� Assessment of time and cost as contract progresses ideally before work done, but within set timescales
� Stated maximum time scales for actions of parties
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Overview of how change is dealt with
early warning Risk Register
16.1 Early
Warning
Potential
Event
Actual
Event
Contractor doesagreed actions asDefined Cost only
No CE
CE, but “arises fromfault of Contractor”
OR no effect
No change toCompletion Date
& Prices
CE
PM givesinstruction to
submit quotation
Forecastif possible
Recordsif not
Quotationsubmitted
within3 weeks
Quotationaccepted
within2 weeks
Use ofAccepted
Programme
16.3 Risk Reduction
meeting
Full on risk register (an aide memoire)
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Both parties are motivated to work together if it is in their professional & commercial interests to do so
� Statement of events for which Employer is liable : cleardefinitions of compensation events (CEs) in one place
� Sanctions on the Contractor to :o early warno submit a first programme containing information requiredo maintain an up to date Accepted Programmeo provide notification of CEs within set timescaleso provide realistic and timely quotations to these CEs
� Sanctions on the Project Manager to make timely decisions on the Employer’s behalf : stated timescales
� More structured method of calculating changes in Contractor’s time & costs : a dedicated detailed CE process + the Schedule of Cost Components
� Margin on compensation events is tendered : the fee percentage(s)
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The nec3
Professional Services Short Contract
(PSSC)
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The NEC3 Professional Services Contract (PSC)
‘the Orange Book’� First published in 1994.
� For use with any Professional Services Contract, where services specified in the Scope.
� Allows the project management of Professionals.
� But considered by many to be too heavy handed for simple to medium complexity appointments… … such as a client empowered project manager.
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The Requirement for aProfessional Services Short Contract
“a simpler approach to simpler commissions”� Replacing the APM’s current Standard Terms of
Appointment, including
o managing an NEC3 form as the ‘Project Manager’ etc.
o any project.
� Appointing other consultants under NEC3 e.g. designer
� Appointing any professional in the built environment
� Be attractive for any low value, low risk professional services commission in whatever sector.
� For international use.
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For flexibility of payment, the Consultant could be paid on :
1. A fixed price activity schedule basis
2. A time charge basis where they provide a service :
i. over an approximate period of time e.g. a project’s duration.
ii. on a very flexible ad-hoc ‘call-off’ basis e.g. a professional term services contract; or
iii. an ill-defined or high level Scope, where the issues etc. and therefore Scope are not defined.
The Requirement for aProfessional Services Short Contract
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3. allow for payment of standard measured items, both those specified to be done in the original Scope and those specified in the Scope, but ‘called off’ at a unit rate.
4. a combination of 1., 2. and 3..
5. as per 1. to 4., with additions to the Scope done either on a fixed price or time charge basis.
6. allow for time charge contracts as per 2. to have additions done on a fixed price basis where new bits of definable work emerge and the Client wish’s to have greater cost certainty.
The Requirement for aProfessional Services Short Contract
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The Target MarketThe centre point or bulls eye is a few people doing the work with helpers. For instance :
� One or two people doing the majority work to deliver a series of outputs to stated dates, albeit with their bosses oversight, and specialists contributing advice & reviews.
� A project manager under a time charge contract managing a project full time who, from time to time, may require extra expertise or resource at busy times.
� A professional adviser giving predominantly on-going, but ad-hoc advice to a client on a time charge basis. From time to time, they may need to bring in extra expertise &/or a discrete bit of work may drop out to be delivered on a priced basis.
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Value of Contracts ?
� less than a £1,000 for a couple of hours work to … …
� a couple of hundred thousand pounds per year for a full time project manager to … …
� up to half a million pounds for defined assignment delivered on priced basis by a small team (of say 6 people over half a year) at which point the PSC might start to come into contention.
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Final Review
On your tables :
� Review your original objectives : have you got them ?
� Discuss and agree your Top 3 key insights from today.
� Briefly feedback one to the main group ...... but it can’t be one that a previous
group has said !
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Contact Details :
Dr Jon Broome
Tel : 07970 428 929 / 01179 093 297
Email : [email protected] | your | projects | up for | success
Web : www.leadingedgeprojects.co.uksetting | your | projects | up for | success