Difference Between Contract and Project Charter
About few years ago, I got an assignment to setup PMO for a small software services company. After understanding their organization structure and project management processes, my first recommendation was to start developing Project Charter (PC) for every project. I provided a brief overview of the PC to the main stakeholders and apprised them about the purpose of developing a Charter. I even gave them a PC template to kick-start the process. But, it took me some time to convince them to roll out the process.
That was not one off strange occurrence. Many people believe that a charter does not serve any specific purpose. They say that a Charter just provides the overall summary of the whole project. They also say that a charter is just an overhead; especially if a signed Contract exists.
This is not surprising, since many PMs have neither created nor seen a Charter. The problem lies in the organizational culture and not with the PMs. Many organizations just do not understand the importance of a charter.
Let me first state that a PC is an extremely important document. It is very different from a Contract. Both are required for entirely different purposes. A PC recognizes & authorizes the project within an Organization whereas a Contract is a legally binding agreement between two different Organizations (the Buyer and the Seller). The PC is issued by the Project Sponsor whereas the Contract is negotiated & signed by the the Buyer and the Seller.
Before we look into the difference between these two documents, let us take a look at some basic definitions.
Please note that all the following terms are defined in the context of a Project. These terms might have a different definition for Operations.
A person, a department or an organization that is the recipient of the end result of a project. A customer could be external or internal to the Performing Organization. Sometimes it is also called the Client.
A person, a department or an organization that arranges and provides funds to the project.
An organization that is responsible for delivering the end result of a project (to the Customer). Usually the Sponsor is a part of performing organization.
A document issued by the Project Sponsor to the Project Manager that formally authorizes the existence of a project and provides the authority to the Project Manager to use organizational resources for the completing the project.
A legally binding agreement between the Buyer and the Seller.
An organization that pays money to acquire or procure product or services from an external agency (Seller). Sometimes it is also called a procuring organization, a client or a customer.
An organization that provides services to the Buyer against the consideration of funds. Sometimes it is also called a performing organization, a vendor or a supplier.
PMBOK Guide’s Definitions
A contract is a mutually binding agreement that obligates the seller to provide the specified product or service or result and obligates the buyer to pay for it.
A document issued by the project initiator or sponsor that formally authorizes the existence of a project and provides the project manager with the authority to apply organizational resources to project activities.
You can also refer to Max Wideman Glossary of PMBOK® Guide to read some other definitions of these terms. Now we are ready to understand the difference between a Contract and a PC.
|It is a formal document signed between two independent organizations – the Buyer and the Seller.||It is usually prepared internally within the Performing Organization.|
|It is a mutually agreed document between the Buyer and the Seller.||It is issued by the Project Sponsor to the Project Manager. Sponsor gives the commitment to provide funds and resources while PM gives the commitment to complete the project.|
|It is a legally binding agreement.||Usually it is not a legally binding document.|
|It can be signed either for a project or for operational work.||It is prepared for a project only.|
|Projects that are done internally without any third party direction, support, or governance do not need a contract.||As a good practice, a charter should always be prepared.|
A Project Charter is extremely important for starting a project. It signifies the formal start of the project and provides authority to PM to use the organizational resources. It also commits the Sponsor to provide support to the PM throughout the project.
I hope you found this article useful and were able to understand the topic. Please leave a comment or ask a question. I would love to interact with you.