Managing Labor Rates and Contracts

Summary

This best practice offers guidelines for managing labor rates and contracts in organizations where rates can vary by role, location, or other factors, or who use outside contractors associated with a vendor contract. 

Labor Rates and Contracts

In organizations, rates for internal labor can be generic (i.e., all internal resources will be calculated at a $100 per hour labor rate), or can vary by cost center, role, location, or a number of other variables.

For external resources, rates can be set up by role or vendor.

Best Practice Article

Labor rate tables and contracts can be used to:

• Define cost and billing rates by role, proficiency, rate type, and vendor.
• Define default cost contracts by vendor that define rates for all resources associated with that vendor.
• Override a given resource’s role or rate type by project, phase, activity, etc. in order to change the cost and billing rate the resource is charged at.
• Use contracts to manage labor cost.
• Flow all cost and billing calculations into all downstream systems, such as financials and capacity planning.
• Associate multiple (cost) contracts to the same project, phase, activity, etc.

These needs are especially important in the following cases:

• Organizations where labor rates are tracked by role and another factor (such as location).
• Organizations where role rates need to be split by proficiency (e.g., Business Analyst/Expert is costed differently than Business Analyst/Novice).
• Organizations where a portion of their labor is outsourced to external vendors and rates for these resources are managed by standard contracts by vendor for that vendor’s resources.
• Organizations where rates need to change based on the work a resource is performing. There are two different cases:
  • A resource has a specific role (such as Business Analyst) and is costed as the standard rate for that role. However when the resource fulfills a different role, the system should use that alternate role’s rate to cost that resource’s labor.
  • For a given project, the organization uses a different set of cost rates for a given project, phase, etc.​
     

Managing Contracts

Contracts can be fixed-price, in which the contractor builds all costs into a single quoted price (including labor and materials), or they can be time-and-materials, in which costs are charged as the services are delivered. Some time-and-materials contracts have a price cap to avoid costs getting out of hand.

If time-and-materials contracts are managed well, it can save the customer money, as a vendor will often pad fixed-price contracts to avoid bearing too much risk (knowing that implementations sometimes expand to fit client needs).  Also, it can allow for flexibility in case the initiative changes based on learnings during implementation. However, some customers prefer fixed-price contracts, as it shifts some of the risk to the vendor and removes the uncertainty out of the total cost. Some vendors and customers agree to add incentives to the contract as well, based on meeting certain schedule of benefit targets.

In either case, for both parties, the customer and the vendor, it is important to be clear about the scope of an initiative, as well as the parameters and constraints of the contract. Likewise, it is important to assess risks ahead of time and address them. Finally, an excellent way to reduce risk is to approach the initiative as a partnership toward achieving the defined outcomes, as opposed to merely a “service provider and customer” relationship. To this end, each party’s role should be outlined.
 

Contract Lifecycle Management (CLM)

Contract Lifecycle Management (CLM) is a discipline and approach that involves managing contracts from initiation through award, compliance, and contract renewal. It is a proven way to reduce risks associated with non-compliance, conditions and terms, and performance against the contract. It provides better visibility of contract milestones and triggers, agreed-upon deliverables, and provides a central repository of contracts.

With effective Contract Lifecycle Management, terms and conditions don’t get lost in the shuffle, details don’t get overlooked, and vendor performance is more easily managed by both the customer and vendor. More importantly, with better visibility of contract milestones and triggers, problems can be addressed proactively. This leaves you to focus on maintaining strong vendor relationships as opposed to cumbersome contract spreadsheets and addressing problems that could have been avoided.
 

Related Planview Enterprise Functionality

Labor Rate Sets – Labor Rate Sets in Planview Enterprise enable you to create multiple rates for resource roles based on location or other variables. This negates the need to create separate resource roles for each location if their rates vary by location.

Contracts and Project Rate Overrides – Enabling the Contracts option in Planview Enterprise provides additional functionality for managing labor costing. These cost contracts are designed for organizations where a portion of their labor is outsourced to external vendors and rates for these resources are managed by standard contracts by vendor for that vendor’s resources. All cost contracts are vendor specific and hence only apply to those resources associated with the given vendor. Once contracts are enabled, there are two methods for managing external labor costs:

• Default Contracts – This contract defines the default rates for all resources working for a specific vendor. The contract does need not to be associated with specific projects, phases, etc. because it applies to all projects, phases, etc.
• Project Rate Overrides – Project rate overrides enable you to override the cost rates used by a vendor for the project in question.

Content Management – The Content Management functionality in Planview Enterprise allows you to store contracts in a central repository for easy access and retrieval. In addition, it can integrate with SharePoint for organizations who use SharePoint for document management.