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

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“The World We Live In”

From: “Optimizing the Federal Government’s Supply Chains,” by Gregory A. Garrett, NCMA, Contract Management Magazine, April 2009.

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Increasing Federal Government Spending & Transactions (FY ‘00 – ’09)

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*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

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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

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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.

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The Contract Negotiator’s Competencies Model


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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

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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

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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

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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


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 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: _______________________________

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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.

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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


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Contract NegotiationsEssential Elements


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

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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

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Negotiating Profit/Fee vs. Risk

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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


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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

[email protected]

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Negotiating for Profit/Fee: Lessons Learned & Best Practices March 4, 2010