NEGOTIATION STRATEGY FOR LABOR, OVERHEAD, AND PROFIT

2017 PEPS Conference

NEGOTIATION STRATEGY FOR LABOR, OVERHEAD, AND PROFIT2017 PEPS Conference

Dan Neal II, P.E., Steve Stagner

November 3, 2017


Table of Contents

2

Overview

PEPS Negotiation Process

Negotiation Timing

Rate Negotiations

11

22

33

44

Summary55

Questions66

2017 PEPS Conference 3

Overview


Purpose

4

To help set expectations for the negotiation of professional services contracts between TxDOT (represented by the PEPS Division) and consultants


PEPS’ Goals

To negotiate with the highest qualified provider to reach a fair and reasonable cost for the services to be provided

To negotiate with the highest qualified provider to reach a fair and reasonable cost for the services to be provided

To support the Department’s effort to select and oversee the use of consultants to deliver transportation projects

To support the Department’s effort to select and oversee the use of consultants to deliver transportation projects

To be customer service orientedTo be customer service oriented

5


Negotiable Components

ALL components are negotiable AND interdependent

6

Scope

Schedule Budget

Scope

Managing work

Schedule

Monitoring progress

Budget

Processing payment


What is the budget?

Product of negotiation process

Represents the agreement on:

– Cost of the work to be done (Max $ Not to Exceed)

– Rate schedules (by payment type)

• Staffing categories

• Labor rates

• Overhead rate

• Profit rate

• Level of effort

• Hours by labor category for each task

• Number of Units or Other Direct Expenses

7

Topics to be covered in this presentation


Separate Pieces but Parts of the Whole

Each contract stands alone

Business models and management philosophies vary by firm

Numbers will vary from firm to firm

8

Evaluate as variables in overall value

equation

Numbers do not stand alone

Do not fixate on

one number



• Pre-negotiation meeting

• Consultant makes the first offer

• PEPS evaluates offer to determine if the offer is reasonable

• If the offer is outside of the reasonable range, make a counter offer

• When both parties are in agreement negotiations are concluded

• If agreement cannot be reached negotiations are terminated by either party. Negotiations can begin with the next qualified provider.

10


Negotiation Rules of Engagement

Will be shared with each provider at the beginning of the negotiation process

Establish the basic ground rules for the negotiation process



12

Negotiation Prep. & Planning Negotiations

PNR Prep

Rate Tool & Tran File Prep

Notification

Rate Negotiations

Pre-Neg Mtg

Selection

ID SD

Scope Negotiations

ID WA

Work Schedule Neg.

Exe

cutio

n

LOE Planning Phase

LOE Negotiation PhaseLaunch Phase


Negotiation Timing


Timing of Negotiations

14

Completing negotiations within a timely manner is PEPS’ goal and prioritySet overall expectation for the negotiations and how

offers and counter offers will be made when beginning negotiations.

Deadlines can and should be agreed upon mutually.

It is expected that PEPS will respond in a similar timeframe when incremental deadlines are given.


Timing of Negotiations (continued)

15

Negotiations are expected to be complete with 10 to 30 working days, depending on the type and number of contracts

Staggering the deadlines should be considered when negotiating with multiple providers

Consistent follow-ups on deadlines is important – no dragging it out

Failure by a consultant to meet reasonable deadlines can be grounds for terminating negotiations


Rate Negotiations


Payment Types

The strategy for each payment type will differ slightly

17

Lump sum

Unit cost

Specified rate

Cost plus fixed rate


Payment Type Selection

18

CPFFSpec Rate Unit Cost

Lump Sum

EngineeringAdvanced Planning X X X*Schematic Design andEnvironmental X X X*PS&E X X X* XConstruction Phase Services XConstruction Engineering Inspection X X*Repetitive Tasks X

Surveying X X XMaterials Engineering / Testing X XGeotechnical Engineering / Services X XBridge Inspection X XArchitecture X

* Unit cost for: Survey and Geotechnical items


Example: Specified Rate Negotiations


Elements Being Negotiated

20

Hourly Base Labor Rates

Profit

Overhead


Information is available to evaluate Labor, Overhead, and Profit Rates separately

Specified Rate – Unloaded (SR-UL)

Labor

Overhead

Profit

Other Direct Expenses

21

Specified Rate(control)

Labor Rate x (1 + OH Rate) x (1 + Profit Rate) = Specified Rate

$35 x (1 + 1.65) x (1 + 0.12) = $103.88


Specified Rate – Loaded

Labor

Overhead

Profit

Other Direct Expenses

22

Specified Rate(control)

Information is not available to evaluate Labor, Overhead, and Profit Rates separately

Loaded Rate = Specified Rate


Profit


Profit

24

Majority of TxDOT’s work is predictable

10% is very reasonable profit

Nothing is to exceed 15%

Approval is required to go below 8%


Overhead(Administrative Qualifications)


has a FAR compliant indirect cost rate (overhead rate) that meets department requirements

Defined in the TAC

Administrative Qualification

26

Process used by the department to verify that a provider:

has a job cost accounting system adequate for segregating direct and indirect costs

is aware of federal cost eligibility and documentation


Indirect Costs/Direct Costs

27

• Any cost not identified specifically with a particulate final cost objective, i.e., a cost that is not directly connected to a project

Indirect Cost

• Any cost identified specifically with a particular final cost objective, i.e., a cost directly related to a project

Direct Cost


AQ Team and Indirect Cost Rate Review and Negotiation

28

1• The PEPS Administrative Qualifications Team

validates the OH or Indirect Cost Rate submitted by firms in their audit report

2• The AQ Team makes necessary adjustments

to the audit report, which may result in a different outcome of the proposed OH rate

3• The AQ Team discusses their findings and

any adjustments with the firm before OH rate is finalized


Overhead Rate

29

Overhead Rate = $Overhead Expenses/$Direct Labor

• Allowable overhead expenses divided by the direct labor base• Typically expressed as a percentage (1.6500 or 165.00%)

PEPS policy is to utilize the FAR compliant indirect cost rate or overhead rate. What’s negotiable?

• Limited exceptions, such as consultant proposing lower OH rate• OH rate validated during AQ review process (evaluate the loaded rate for

an overall reasonableness check)

Evaluating the Loaded Rate

• Allows PEPS negotiator opportunity to evaluate reasonableness of calculated loaded rate

• Loaded Rate = Rate * (1+OH)*(1+Profit)


Best and Final Offers

30

If a best and final offer is received from the consultant and the intent is not to accept the offer, then the PEPS negotiator must have the agreement of the Service Center Manager,

and discuss with the PEPS Director. The District or Division must be notified

If PEPS intends to make a best and final offer, when assumed that it will not be accepted, then the PEPS negotiator must have the agreement of the Service Center Manager, and

discuss with the PEPS Director. The District or Division must be notified.


Disagreement is Okay

31

If the consultant or TxDOT walks away … It’s a business decision. It does not impact the consideration of the consultant on

future selections.


Summary


Summary

TxDOT’s overall objective is to reach a fair and reasonable rate, with the most highly qualified provider

Negotiations should be quick and timely on both sides

PEPS needs to consider the offers made, especially when they include rates from other recent negotiations

The full picture must be considered

33


Questions and Discussion

34

Questions


Contact Information

35

Dan Neal II, P.E.TxDOT | PEPS Center of Excellence | Section Director(512) 416-2667Email: [email protected]

Steve StagnerACEC Texas | President(512) 474-1474Email: [email protected]

NEGOTIATION STRATEGY FOR LABOR, OVERHEAD, AND PROFIT

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