Vendors serve as the backbone of many projects. As a matter of fact, vendors play a critical role for any type of business. Vendors provide businesses with supplies, technology, equipment, services and about a million other things. Without these vendors, most businesses could not survive. The same can be said for projects – a bad vendor can make or break a project under the right circumstances. Project Managers must learn to manage vendors effectively from day one to maximize their relationship, while protecting the project from possible downsides. In this article, we’re exploring how to manage vendors effectively as a Project Manager, along with 10 crucial tips for success!
What Is A Vendor?
According to Investopedia, a vendor is “…a party in the supply chain that makes goods and services available to companies or consumers“. While the definition really is that simple, one can imagine how many types of vendors exist, as well as the amount of business being conducted with a particular vendor.
For example, a company may use a specific vendor to buy their office supplies. While this vendor is necessary, it’s unlikely that a business will succeed or fail based on this relationship.
On the other extreme, a project may require that a particular vendor supply several million dollars worth of goods to the project. A vendor in this scenario can absolutely be the difference between project success and project failure.
What’s The Difference Between A Vendor & A Subcontractor?
Many businesses refer to any company they do business with as a ‘vendor’. In some ways, this is true – even subcontractors are technically vendors by the most fundamental definition in the prior section. Accounting departments don’t always make a distinction in terms of invoicing and payments.
What are the differences between a vendor and a subcontractor, though?
Subcontractors are hired to perform a specific part of a project. In order to be a ‘subcontractor’, you must be hired by a party who has already signed a contract to perform a specific scope of work for a client. In turn, this party issues a subcontract to a company for perform a portion of that scope.
From a legal perspective, a subcontract carries different terms than an agreement with a typical vendor. This can include different payment terms, insurance requirements, financial standing and a host of other metrics.
Many vendors don’t require signed/written agreements at all – once you’ve opened a business account with them, they’ll provide goods or services as agreed upon and invoice your company under net 30 payment terms (or similar).
At most, vendors will often sign a Purchase Order instead. Purchase Orders differ from subcontracts in that they ultimately represent a transaction rather than an agreement to perform work. With this difference comes a separate set of legal terms, payment terms and liability/risk.
How To Manage Vendors Effectively As A Project Manager: 10 Crucial Tips
Now that we’ve defined what a vendor is, let’s talk about how to manage vendors effectively as a Project Manager. Here are our top 10 must-know tips!
- Understand Payment Terms & Pay On Time
- Execute A Purchase Order For Large Dollar-Value Vendors
- Define Expectations & Requirements
- Iron Out Logistic Terms & Conditions
- Establish Communication Protocol
- Always Review Invoices Prior To Paying Them
- Avoid Releasing Large Up-Front Payments (When Possible)
- For Ongoing Vendors, Form A Real Business Relationship
- Keep A Written Email Record Of Requests & Discussions
- Clarify Project-Specific Requirements Up Front
We’ll provide a bit more information on each of these tips in the following sections.
1. Understand Payment Terms & Pay On Time
A good business relationship always includes fair and timely payment. Ironing out the exact payment terms with a vendor is a critical step to take at the beginning of a project – when both parties are clear on how the billing process will work and how long it’ll take to release payment, the relationship will run a lot smoother going forward.
For example, some projects are set up in a ‘pay-when-paid’ format – that is, the vendor will only be paid once the purchaser receives payment for the same service/goods from their client. If a vendor must wait for a contractor’s client to pay them, they must know this ahead of time.
Read Next: Importance Of Finance In Project Management: Key Terms & Processes
2. Execute A Purchase Order For Large Dollar-Value Vendors
Where there’s large dollar values, there’s terms and conditions. Generally speaking, the larger the value, the more complex these terms will become.
This is why large purchases should be laid out and defined on paper in the form of a written agreement.
What’s considered a large purchase is different from one company to another. Should the purchase have a significant effect on the financial standing of the project or overall operation, there should be safeguards put in place via legally binding terms.
For example, construction materials must meet certain specifications and requirements in order to be accepted by the owners and designers. Most construction Purchase Orders include a clause stating that material must be supplied as specified in order to be officially accepted and warrant payment.
Read Next: What Is A Construction Purchase Order? 13 Things To Include In A PO
3. Define Expectations & Requirements
This has been covered a bit by the prior two points, but the message is that expectations and requirements should be made clear to vendors as early on in the project as possible.
This is essentially the same concept as clearly defining the scope of work for a project.
For example, if a cleaning service is hired for an office, it makes sense to clearly define what exactly must be cleaned, how frequently it needs to be cleaned and any other pertinent instructions. Otherwise, this cleaner will do whatever they feel is needed as opposed to what you really need.
Read Next: Overwhelmed By Big Projects? 6 Approaches With Metaphors & Examples
4. Iron Out Logistic Terms & Conditions
Many issues between companies and vendors arise our of logistical errors. In order to manage vendors effectively, we must also define the logistics surrounding the projects’ needs – we can’t expect vendors to do things they haven’t been asked to do!
Take the cleaning example from section no. 3. Along with defining the expectations and requirements for this vendor, it makes sense to clearly outline any logistical requirements, too. If this vendor can only work after 6PM on Tuesdays and Thursdays and must only use organic cleaning products, it’s essential that they know this up front.
Read Next: How Do You Manage Subcontractors? 7 Essential Tips
5. Establish Communication Protocol
Whether it be for day-to-day coordination, billings or any other number of specifics, one must clearly establish communication protocol in order to manage vendors effectively.
This includes establishing who the decision maker is, the point of contact for billing/accounting, who will process quote requests/orders, etc.
Read Next: How Do You Run An Effective Status Meeting? 10 Best Practices
6. Always Review Invoices Prior To Paying Them
This is a project management best practice for ANY kind of invoice, but vendors are certainly a large part of it – all invoices must be clearly reviewed before they’re approved to be paid.
Mistakes happen – sometimes we get invoiced for things that we didn’t buy or we’re being billed incorrectly in some other way. There’s countless other reasons why invoices should be reviewed beforehand but preventing an accidental payment is quite easy when done proactively!
Read Next: Project Acceleration In Project Management: 5 Methods + The Good & Bad
7. Avoid Releasing Large Up-Front Payments (When Possible)
In some scenarios, vendors are completely justified in billing a large up-front deposit. In fact, deposits are very common in many industries.
Should a vendor request a large deposit payment, we must first know exactly why such a large amount is required.
It’s also important to consider what other similar vendors require – are some vendors offering specific goods/services in exchange for a 10% deposit while another is requesting 50%? There’s probably something strange happening.
At a minimum, a vendor being paid a large amount of money up-front gives them tremendous amounts of leverage – if this is the case, it better be for a good reason!
Read Next: Project Management Efficiency Tricks & Hacks: 10 Go-To Techniques
8. For Ongoing Vendors, Form A Real Business Relationship
A true business partnership requires trust, commitment and give-and-take between both parties. Vendors are no exception.
It’s necessary to form a true partnership with your vendor for optimal performance. There are certain intangibles that come with a good business relationship, such as rushing an order, adjusting on the fly to accommodate a project’s needs or giving a slight discount to help a company out in dire straits.
This deeper level of trust and commitment will be called upon when you least expect it – this isn’t usually possible without some kind of existing business relationship.
Read Next: Importance Of Negotiation In Project Management, With Examples
9. Keep A Written Email Record Of Requests & Discussions
We should also keep clean records of all requests, transactions and discussions that occur with our vendors.
Whether it be to provide a clear written directive to our vendor, to track what’s been ordered and when or the logistics of a specific project, keeping this information organized is a must in order to manage vendors effectively as a Project Manager.
Read Next: How Do You Organize Project Documentation? A Few Must-Know Methods
10. Clarify Project-Specific Requirements Up Front
Last but not least, we must keep our vendors abreast of any project-specific requirements that they’ll be held to.
When we’re working on a project with specific contractual requirements, we must make sure that these contractual terms are ‘passed through’ to our vendors so they perform to the same standard. Not doing so can cause gaps between the vendor, contractors, clients and other parties involved.
Read Next: Inexperienced Project Manager? The Do’s & Don’ts For Young P.M.s
How To Manage Vendors Effectively As A Project Manager: In Summary
Vendors are vital to the performance of any business as a whole, let alone the completion of a specific project. Because of this, Project Managers absolutely need to manage vendors effectively! Luckily, this only requires some knowledge and a systematic approach. I hope this article has been helpful – thanks a lot for reading!
