Negotiating for Profit/Fee: Lessons Learned & Best Practices March 4, 2010
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Transcript of Negotiating for Profit/Fee: Lessons Learned & Best Practices March 4, 2010
Negotiating for Profit/Fee:Lessons Learned & Best
PracticesMarch 4, 2010
By:Gregory A. Garrett, CPCM, C.P.M., PMPManaging Director & Practice Leader
Government Contractor ServicesNavigant Consulting, Inc.
NCMA Cape Canaveral Chapter
Winter Educational Conference
Negotiating for Profit/Fee:Lessons Learned & Best Practices
Key Topics of Discussion:
The World We Live
The Need for Contract Negotiation Skills * Q&A – Exercise
Contract Negotiation Competencies – The Skills to Win * Self-Assessment Survey
Negotiating Profit/Fee * Lessons Learned
* Best Practices
Page 2
“The World We Live In”
From: “Optimizing the Federal Government’s Supply Chains,” by Gregory A. Garrett, NCMA, Contract Management Magazine, April 2009.
Page 3
Increasing Federal Government Spending & Transactions (FY ‘00 – ’09)
Page 4
*Does not include the $787 Billion American Recovery and Reinvestment Act (ARRA) “Stimulus Act”.
* *
U.S. Federal Government Supply Chain Challenges
The U.S. government is not a business
The mission of the government is serious and complex
The Federal Acquisition process is overly regulated, expensive, and slow
Federal Government Contractors are increasing their subcontracting
The Federal Acquisition Workforce is understaffed and needs training
Page 5
Contract Negotiation Skills Gap
Key Facts
• Many of the Master Contract Negotiators in both the public and private business sectors, have retired, or retiring, or are retirement eligible by 2012
• During the past 10 years, there had been a significant increase in the complexity of contracts and related projects making it more challenging to negotiate a good deal at a fair and reasonable price
• Recent U.S. Government Procurement Policies are placing more financial risk on government prime contracts and subcontractors
Page 6
Exercise – Q&A
1. How important are contract negotiation skills to ensure business success?
2. How well do you negotiate?
3. Does your organization have the number and level of skilled master contract negotiators needed?
Reference Text: Contract Negotiations, by Gregory A. Garrett, CCH, Inc. (2005), pg. 12.
Page 7
The Contract Negotiator’s Competencies Model
Reference Text: Contract Negotiations, by Gregory A. Garrett, CCH, Inc. (2005), pg. 14.
Page 8
Skills to Win: Self-Assessment Survey
• Complete the 20 question – Skills to Win: Self-Assessment Survey (1 = Low Skills to 5 = High Skills)
• Summarize and add-up your score on the survey worksheet
• Compare your result to the Self-Assessment Survey Scoring table
Page 9
Skills to Win: Self-Assessment Survey
1. I am a person of high integrity.
1 2 3 4 5
2. I always act as a true business professional, especially in contract negotiations.
1 2 3 4 5
3. I ensure all of my business partners and team members act honestly, ethically, and legally, especially when involved in contract negotiations and contract formation.
1 2 3 4 5
4. I verbally communicate clearly and concisely.
1 2 3 4 5
5. I am an effective and persuasive contract negotiator.
1 2 3 4 5
Page 10
Skills to Win: Self-Assessment Survey (Cont’d)
6. My written communications are professional, timely, and appropriate.
1 2 3 4 5
7. I am an excellent team leader.
1 2 3 4 5
8. I consistently build high performance teams, which meet or exceed contract requirements.
1 2 3 4 5
9. I am willing to compromise when necessary to solve problems.
1 2 3 4 5
10. I confront the issues, not the person, in a problem-solving environment.
1 2 3 4 5
Page 11
Skills to Win: Self-Assessment Survey (Cont’d)
11. I recognize the power of strategies, tactics, and counter tactics and use them frequently in contract negotiations.
1 2 3 4 5
12. I am able to achieve my desired financial results in contract negotiations.
1 2 3 4 5
13. I understand various cost estimating techniques, numerous pricing models, and how to apply each when negotiating financial arrangements.
1 2 3 4 5
14. I understand generally accepted accounting practices and how to apply them when negotiating deals.
1 2 3 4 5
15. I am highly computer literate, especially with electronic sales tools, and/or electronic procurement tools.
1 2 3 4 5Page 12
Skills to Win: Self-Assessment Survey (Cont’d)
16. I am knowledgeable of e-marketplaces, vertical and horizontal trade exchanges, e-auctions, and how to use them to buy or sell products/services.
1 2 3 4 5
17. I understand the contract management process and have extensive education, experience, and professional training in contract management.
1 2 3 4 5
18. I have extensive education, experience, and training in contract law.
1 2 3 4 5
19. I have extensive education, experience, and training in our organization's products and services.
1 2 3 4 5
20. I am considered a technical expert in one or more areas.
1 2 3 4 5 Page 13
Skills to Win: Self-Assessment Survey (Cont’d)
Skills to Win – Self-Assessment Survey Worksheet
Questions # Self-Assessment Score (1-5)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
Grand Total Score: _______________________________
Page 14
Skills to Win: Self-Assessment Survey (Cont’d)
Skills to WinSelf-Assessment Survey
Scoring
90+: You have the knowledge and skills of a master contract negotiator.
80 - 90: You have the potential to become a master contract negotiator, after reviewing the specialized skill areas and determining in which areas you need to improve your skills. You are an intermediate contract negotiator.
65 - 79: You have basic understanding of successful contract negotiation skills. You need to improve numerous skills to reach a higher level of mastery of contract negotiations. You are an apprentice contract negotiator.
0 - 64: You have taken the first step to becoming a master contract negotiator. You have a lot of specialized skills areas you need to improve. With time, dedication, and support (education, experience, and training) you can become a master contract negotiator.
Page 15
Contract NegotiationA Complex Human Activity
• Master the art and science, or soft and hard skills, required to become a master negotiator
• Possess the intellectual ability to comprehend factors shaping and characterizing the negotiation.
• Be able to adapt strategies, tactics, and counter tactics in a dynamic environment
• Understand their own personalities and personal ethics and values
• Know their products and services, desired terms and conditions, and pricing strategy
• Be able to lead a diverse multi-functional team to achieve a successful outcome
Successful contract negotiator must:
Reference Text: Contract Negotiations, by Gregory A. Garrett, CCH, Inc. (2005), pgs. 53-54.Page 16
Contract Negotiation Process
Plan the Negotiation Conduct the Negotiation Document the Negotiation and Form the Contract
1. Prepare yourself and your team
2. Know the other party3. Know the big picture4. Identify objectives5. Prioritize objectives6. Create options7. Select fair standards8. Examine alternatives9. Select your strategy,
tactics, andcounter tactics
10. Develop a solid and approvedteam negotiation plan
11. Determine who has authority
12. Prepare the facility13. Use an agenda14. Introduce the team15. Set the right tone16. Exchange information17. Focus on objectives18. Use strategy, tactics, and
countertactics19. Make counteroffers20. Document the agreement
or know when to walk away
21. Prepare the negotiation memorandum
22. Send the memorandum to the other party
23. Offer to write the contract24. Prepare the contract25. Prepare negotiation
results summary26. Obtain required reviews
and approvals27. Send the contracts to the
other party for signature28. Provide copies of the
contract to affected organizations
29. Document lessons learned30. Prepare the contract
administration plan
Reference Text: Contract Negotiations, by Gregory A. Garrett, CCH, Inc. (2005), pg. 61.
Page 17
Contract NegotiationsEssential Elements
Reference Text: Contract Negotiations, by Gregory A. Garrett, CCH, Inc. (2005), pg. 56.
Key Inputs Tools & Techniques Desired Outputs
Solicitation (RFP,RFQ, etc.)
Bid or Proposal Buyer’s source
selection process Seller's past
performance Previous contracts Competitor Profile• Business Ethics/
Standards of Conduct Guidelines
Market and Industry practices
Oral presentations Highly skilled contract negotiators Legal Review Business Case Approval Contract Negotiation Formation Process
o Plan negotiationso Conduct negotiationso Document the negotiation and Form
the Contract
Contract or Walk away
Page 18
Sources of Major Risk in Cost Estimating, Negotiating Profit/Fee, and Contract Pricing
Sources of Major RiskUncertainty and risk in cost estimating, negotiating profit/fee, and contract pricing arise from six main sources: Lack of buyer understanding of its requirements Shortcomings of human language and differing interpretations Behavior of parties Haste Deception Poor cost estimating, negotiating, and pricing practices
Reference Text pg. 14
Page 19
Negotiating Profit/Fee vs. Risk
Page 20
FFP
Fixed-price T&M* Cost-reimbursement
(Types of Contracts)
FP/EPA FPI T&M CS CR CPIF CPAF CPFF CPPC**
(High)
(Low)
(Low)
(High)
(Buyer’s Risk&
Level of Oversight)
(Seller’s Risk&
Opportunity for Profit/Fee)
*T&M contracts typically involve higher levels of risk for buyers
**Illegal in government contracting
***FAR 15.4 15% of estimated cost Fee Limit for Research & Development 10% of estimated cost Fee Limit for all others, except 6% of estimated cost Fee Limit for Architect & Engineering
Profit (No Limits)Profit (Time) No Fee
(Material)Fee (Limitations)***
Checklist of BuyerContract Negotiation Best Practices
(The Buyer Should: ) Know what you want – lowest price or best value
State your requirements in performance terms and evaluate accordingly
Conduct market research about potential sources before selection
Evaluate potential sources promptly and dispassionately
Follow the evaluation criteria stated in the solicitation: management, technical, and price
Develop organizational policies to guide and facilitate the source selection process
Use a weighting system to determine which evaluation criteria are most important
Obtain independent estimates from consultants or outside experts to assist in source selection
Use past performance as a key aspect of source selection, and verify data accuracy
Use oral presentations of proposals by sellers to improve and expedite the source selection process
Reference Text: Contract Negotiations, by Gregory A. Garrett, CCH, Inc. (2005), pg. 85.
Page 21
Checklist of Contract Negotiation Best Practices
(The Buyer and Seller Should: ) Understand that contract negotiation is a process, usually involving a team effort
Select and train highly skilled negotiators to lead the contract negotiation process
Know market and industry practices
Prepare yourself and your team
Know the other party
Know the big picture
Identify and prioritize objectives
Create options – be flexible in your planning
Examine alternatives
Select your negotiation strategy, tactics, and counter tactics
Develop a solid and approved team negotiation plan
Use an agenda during contract negotiation
Reference Text: Contract Negotiations, by Gregory A. Garrett, CCH, Inc. (2005), pg. 86.Page 22
Checklist of Contract Negotiation Best Practices (Cont’d)
(The Buyer and Seller Should: ) Set the right tone at the start of the negotiation
Maintain your focus on your objectives
Use interim summaries to keep on track
Do not be too predictable in your tactics
Document your agreement throughout the process
Know when to walk away
Prepare a negotiation results summary
Obtain required reviews and approvals
Provide copies of the contract to all affected parties
Document negotiation lessons learned and best practices
Prepare a transition plan for contract administration
Understand that everything affects price
Understand the Ts and Cs have cost, risk, and value
Know what is negotiable and what is not
Reference Text: Contract Negotiations, by Gregory A. Garrett, CCH, Inc. (2005), pg. 86.Page 23
Questions and/or Comments
Thank YouGregory A. Garrett, CPCM, C.P.M., PMP
Managing Director & Practice LeaderGovernment Contractor Services
Navigant Consulting, Inc.703-734-5953
Page 24