Topic 5.10: Negotiating the contract

Likes people like this topic - including you!

SharesThis topic has been shared 25 times!

Progress2,605 people have passed the quiz

Negotiation is what happens between deciding upon a successful tenderer and awarding a contract.

Why negotiate?

To confirm the contract details or obtain better value for money

To achieve a full understanding between the parties

To establish or refine the statement of requirements and/or the performance regime

To clarify issues or objections to contract provisions

To explore any complex or one-off issues

To identify new opportunities

Administratively, you should start by agreeing on the make-up of the negotiating team of both parties.

For example: Will professional advisors be on the negotiating team or be available for advice as and when required?

Minutes are the formal record of a meeting

You should agree, too, on the location and agenda for each negotiating session, and establish time frames in which the negotiation of individual issues, as well as negotiations overall, will be conducted.

And don’t forget to assign responsibility for taking formal minutes of the negotiations, ensuring they are circulated and agreed on schedule.

Both parties should also set out and agree the contract terms and conditions subject to negotiation.

We will look at these terms in more detail in the next topic; for now, though, you should limit the number of ‘non-negotiables’ where possible, identify any problems, barriers or opportunities, and develop an approach to address them.

You should also establish any interrelationships between individual issues/provisions that are subject to negotiation.

For example: There will generally be a relationship between service levels and contract price.

When it comes to the negotiation itself, first and foremost you should listen.

Great negotiators use silence as a weapon, to the point where one party will negotiate with themselves.

Dr. Dave Arthur

“I’ll give you $500,000 for it.”

New guy

“… ”

Champion negotiator

Dr. Dave Arthur

“OK, I’ll give you $520,000!”

New guy

You should also focus on achieving the outcomes sought over the life of the contract, rather than on short-term gains.

In other words, be prepared to trade off less important requirements to achieve outcomes that are central to your project’s objectives.

Early, proactive consultation is best

You should also endeavour to keep unresolved issues to a minimum, agreeing arrangements for their later resolution.

Importantly, you should always involve senior management in setting the policy parameters, and communicate progress and/or changes in circumstances to them on a regular basis.

Now negotiation is really something that is best learned through experience, and cannot be fully taught in a topic here; nevertheless, here are some final tips and tricks I gleaned from my own practice (and, if I’m honest, failings).

Don’t disclose that the tenderer is certain to win the contract – this is easy to do if you have a preferred tenderer and want to get on with the project, but will only put you at a disadvantage

Put yourself in the other party’s shoes – what are their objectives? What is valuable to you, but low cost to them?

Treat others in the room with respect – acknowledge their counter-arguments and objections, even if you don’t agree to them

Never feel rushed – use that silence

Gather evidence and bring proof for your positions and arguments

Don’t be distracted by personality, behaviour or hygiene, and

Ultimately, be ready to walk away and start again with a new tenderer.

The best negotiations are integrative as opposed to competitive, meaning that the parties should be looking for mutual benefit as opposed to an unfair advantage.

After all, you are going to have to work together throughout the life of the contract, and negotiation really sets the tone for that relationship.

As we will see in the later topics on conflict and claims resolution, an absence of contractual goodwill can come at a serious downstream cost.

The contract anticipates and manages the relationship risk

Although all project documents are subject to some form of review and approval, the legally binding nature of a contract usually means that it will be subjected to a more extensive approval process.

In all cases, the primary focus should be to ensure that the contract language describes the products, services, or results that will satisfy the identified project need.

The project team should also seek support early from specialists in contracting, purchasing, law, and the relevant technical disciplines.

Such involvement might even be mandated by your organisation’s policies.

As the project manager, though, you should ensure that any signed contract you enter into has, at a minimum:

A statement of work or deliverables

A schedule baseline

The period of performance

Roles and responsibilities

The seller’s place of performance

Performance reporting guidelines

Pricing

Payment terms

The place of delivery

Inspection and acceptance criteria

Warranties

Product support

Any limitation of liability

Incentives and penalties

Insurance and performance bonds

Subordinate subcontractor approvals

Change request handling, and

Termination and alternative dispute resolution (ADR) mechanisms.

A contract for a complex procurement can run to several trees in length, and demands careful negotiation.

A well-designed contract is a project management plan in its own right.

It not only sets out a statement of work, schedule and budget, but an approach to risk management as well.

An unreasonable or imbalanced allocation of risks under a contract can occur as a result of the inexperience of the negotiating parties or one party’s strong negotiating position.

This imbalance may introduce new risks to the project, particularly where the parties do not fully comprehend the nature of the risks or do not possess the necessary capabilities to manage or control them.

As a project manager, you should also understand how tender selection criteria were applied and where the trade-offs have been made.

It might be, for example, that you have compromised some functions of the product to receive a price discount, or to achieve a faster delivery date.

This is important to communicate, as it will assist in managing stakeholder expectations throughout the delivery process, and may impact on downstream, dependent tasks.

Ultimately, the lessons of procurement acquisition can be applied to all project planning activities. 

Use this framework to negotiate risk aware contracts. And apply this level of rigour to the development of your project plan.

William Ury, co-founder of Harvard’s Program on Negotiation, is one of the world’s leading experts on negotiation and mediation.

For the past 35 years, he has served as a negotiation adviser and mediator in conflicts ranging from Kentucky wildcat coal mine strikes to ethnic wars in the Middle East, the Balkans, and the former Soviet Union.

Watch and learn his secrets!

Source:TED