Project Management

Contract Negotiations

last edited by: Peter Wootton on Apr 22, 2024 6:34 AM login/register to edit this page

Negotiation is a process involving two or more people with conflicting positions. These people attempt to reach an agreement by modifying their original positions. Usually, it requires bargaining in order to reach an acceptable arrangement. The arrangement, however, should not be seen as a win-lose situation. The solution should be mutually beneficial or, in some instances, mutually unprofitable.

Procurement managers generally lead negotiations, but buyer as well as seller project managers are also involved in contract negotiations, especially in cases of cost-reimbursable and time and material contracts, as there will likely be negotiations to finalise the contract price, and project managers are responsible for facilitating project management and resolution of technical issues on the project. Without a project manager’s involvement in negotiations, it is common for a contract to be signed that the project manager later discovers cannot be completed.

Negotiation Objectives:

The objectives of negotiations are to:

• Obtain a fair and reasonable price

• Develop a good rapport with the seller.

The second objective may surprise people because they think of negotiations as win-lose. In this case, the seller is less concerned with completing the work than with recovering what was lost in negotiations, and the buyers project manager will spend time in making sure the seller does not add extra costs, propose unnecessary work or initiate other activities to win back what was lost during negotiations. In a win-win situation, the buyer gets the work completed and the seller makes a reasonable profit. Many projects go bad because of how negotiations were handled, not because of project problems themselves.

Negotiation Tactics:

There are several personality traits of successful negotiators. Being empathetic, respectful, fair, patient, flexible, and having a sense of humour are just a few. Each of these traits will allow you to have a successful negotiating experience, especially if it is a tough or overly drawn-out circumstance.

When engaged in negotiations with a vendor/seller, there are a number of negotiation tactics that can be employed, depending on the situation:

Fait Accompli : Standard contract terms that are non-negotiable. (In reality, anything in the contract is negotiable, although your adversary will never admit it).

Deadline : A set deadline by which the other person has to decide or act. Make it clear that this is the time by which they must do what you want them to do. As the deadline approaches, it increases the emotional pressure, making people talk more about what will happen if the deadline is missed. This may include threatening actions or vague and disturbing hints.

Good guy / bad guy : One person acts in an aggressive and pushy way, making unreasonable demands and requiring compliance. The other person then acts in a kind and friendly way, asking nicely and getting compliance.

Missing man: The person who can actually make the decision is missing from the negotiation. The negotiator can then negotiate for a lower price or more favourable terms, which they claim they can agree to.

Limited authority : Refusing to give in on items because you have not been given authority to do what is being requested.

Fair and reasonable : You can engage the other person by asking them what is fair . You can also bring something into the negotiation that is, by definition, fair. You can also reject criteria from the adversary on the grounds that it are not fair.

Unreasonable/Extreme Demands : Stating that the other side is making unreasonable demands of you in the negotiation.

Delay : stretching out the negotiation, especially at critical moments. This technique might be very effective when a resolution to the negotiation is required to be reached as soon as possible.

Withdrawal : This can be an emotional withdrawal or a physical withdrawal and can portray lessening of interest.

Attack : A direct attack on your integrity, trustworthiness, competence, or other such bullying bombast designed to force compliance out of you. At the end of the negotiation, an agreement must be reached, agreed upon, and understood.

Negotiation Strategies:

Jeffrey Pinto, author of Project Management Handbook, has outlined five strategies for negotiation.

1. Concession making – Involves changing your proposal so that it provides less benefit to you and more benefit to the other side. You may agree to make the requested changes without any additional charges or extensions to the project completion date.

2. Contending It Involves trying to persuade the other side to make a proposal more favourable to you but less favourable to them. Tactics include threats and arguments. You are unwilling to make any additional concessions.

3. Compromising – Intermediate between concession-making and contending. A middle ground is sought that involves some degree of sacrifice for both sides. Two project managers may agree to share the costs of the changes or agree to an extension in the project completion date.

4. Problem solving : efforts to find agreements that are highly beneficial to both parties. Project managers may honestly discuss their objectives and priorities. By exchanging information on budgets and deadlines, a solution may be found.

5. Inaction or withdrawal involves attempts to delay or avoid serious negotiations. The strategy of withdrawal involves terminating negotiations without an agreement.

Items to Negotiate:

The main items to address while negotiating a contract can be vastly different, depending on what is being purchased. To achieve a signed contract, the items usually negotiated are scope, schedule and price. Other things that can be negotiated include responsibilities, authority, applicable law, project management processes to be used, payment schedules, etc. Many people do not realise that price may not be the primary section criteria or the major concern while negotiating. Often, it is not a factor at all. Schedule may be more important and a buyer might sacrifice cost to gain speed.

Final Words:

Specific suggestions for negotiating in the project environment include:

• Assure the project is properly chartered and sponsored

• Establish clear company priorities with buy-in and support from the sponsor and leadership team

• Locate the project results within company priorities

• Tie project goals and results to supporting business goals

• Clearly define and vividly illustrate the tasks required to reach project goals

• Clearly define and vividly illustrate project resource requirements

• Build trust and credibility through accurate project planning, schedules, and open and honest communications

• Provide risk assessments for missing resources

• Know the cost of delay

• Quantify the cost of NOT having the resources required

• Be aware of cultural differences and respect

last edited by: Peter Wootton on Apr 22, 2024 6:34 AM login/register to edit this page