Government Contracting Database
Negotiation Procedures – Corps of Engineers
Negotiating government construction contracts and modifications is an art, a science, and an acquired skill. In order to acquire the skill, the negotiator must have a firm knowledge of the basic rules of government contract law and appropriate contract procedures. Since negotiation depends on communication, a successful negotiation of price demands careful and complete preparation. Negotiation without adequate preparation invites failure and is, in fact, a breach of the negotiator’s obligation to himself, to the government, and to the public trust. Spending sufficient time and effort on analyzing the proposal, gathering pertinent pricing and other data, and formulating a definitive and defensible negotiation position will serve the negotiator better than any repertoire of bargaining table techniques. Adequate preparation enables the negotiator to negotiate with strength — to take and hold the initiative throughout the negotiation conference and to meet any challenge with confidence. It is emphasized that lack of preparation for negotiations places the government in a position of distinct disadvantage.
The discussion contained in this chapter is based on the assumption that negotiation after receipt of proposals is considered necessary; that is, for any situation where adequate price completion has not been assured via competitive bids or proposals taken with the view of an award based upon the lowest reasonable price. If there has been adequate price competition, award shall be made to the lowest reasonable offeror without further negotiation, provided this price is relatively in line with an independently developed, detailed government estimate. (See FAR 36.203.)
Webster’s definition of “negotiate” as “to communicate or confer with another so as to arrive at a settlement of some matter; meet with another so as to arrive through discussion at some kind of agreement or compromise about something.” For the purpose of this chapter, negotiation can be defined as an exchange of ideas for the purpose of reaching an agreement. In a truly successful negotiation there are no losers.
Types Of Negotiation
The range of subjects which may be covered by negotiation in government procurement are as varied as the types of contracts. In general, the types of negotiations which can be expected are contract modifications, original contract, performance problems (no effect on time or price), claims, disputes, and terminations.
The Federal Acquisition Regulation, Subpart 2.1 defines “contracting officer” as “any person who, either by virtue of his position or by appointment in accordance with procedures prescribed by this regulation, is currently a contracting officer (see FAR 1.602) with the authority to enter into and administer contracts and make determinations and findings with respect thereto, or with any part of such authority. The term also includes the authorized representative of the contracting officer acting within the limits of delegated authority.” The same section distinguishes various contracting officers as PCO (procuring contracting officer), ACO (administrative contracting officer), and TCO (terminating contracting officer). More familiar to the Corps of Engineers is the RCO, or resident contracting officer. The contracting officer may delegate to a resident engineer or to some other member of the district staff authority as an authorized representative of the contracting officer. The authorities contained in this written delegation by the contracting officer are for the purpose of authorizing the contracting officer’s Representative to take certain actions which are otherwise required to be taken by the contracting officer personally under the various provisions of the contract. The matters delegated are typically those which are required to be taken at the construction worksite and specifically excluded are any actions which would result in a change to the contract amount or completion date.
The negotiation of price and other contract terms is generally conducted by a duly appointed representative or representatives of the contracting officer. The negotiations can be conducted either individually by the negotiator or with the support of a team. The decision to use a team negotiator or with the support of a team. The decision to use a team will depend upon the nature, size, dollar value, complexity, and importance of the construction contract or the modification being negotiated.
In either case, the negotiator alone retains full responsibility for the content of the final negotiated agreement. Consequently, when a team effort is being made, a role of positive leadership must be assumed by the negotiator. The negotiator must know when and how to call on the members of his team and how to best utilize the skills they possess. Through pre-negotiation briefings, the negotiator must ensure that the team members understand that their chief function during the actual negotiations will be to listen and evaluate and to handle any specific duties assigned to them.
The negotiator must retain control over the proceedings at all times and must not allow the discussion to be delayed by secondary issues or permit the contractor to divert the proceedings to a lengthy consideration of straw issues. The negotiator must take special care not to be placed on the defensive by explaining and justifying the government’s position to the contractor. An agenda, as discussed below, will be helpful in maintaining control of negotiations.
Effective control of communications is critical in a team approach to negotiations. If team members were to inject their voices, ideas, and emotions into the discussion at will, it would obviously become impossible for the negotiator to use pre-planned negotiation tactics and strategy effectively. There are two dangers inherent in this situation. Some contractors might try to lead team members into contradicting each other, or a team member might well say something that would upset the team’s planned strategy.
A team member should speak only under two conditions. One when the negotiator signals permission to do so and, secondly, when it is appropriate to speak, according to a prearranged plan designating various members as spokesmen for particular problems or areas. But these exceptions should be limited, as much as possible, to items and issues of fact or challenge of the contractor’s amounts, position, etc. Assertions of government policy, promises, and offers, and all other statements directly or indirectly committing the government should be the exclusive responsibility of the negotiator.
Location of the Negotiations
Price negotiations are generally held either at the district office or at or near the Corps job site office, depending on which is more convenient for the parties involved and whether site conditions will become a major delaying issue in the negotiations. As a rule, construction contracts should be negotiated at the district office or at some other central location. Negotiation of contract modifications should normally be conducted at the Corps site office if convenient for the parties involved. The reason for holding the negotiation of contract negotiations at the site is that questions of fact concerning site conditions can be easily resolved with little or no delay to the negotiations.
It is generally accepted that negotiations conducted at the government office will result in the following advantages for the government in general, and for the negotiator in particular:
- It may be psychologically advantageous to have the contractor come to the government office for negotiations.
- Government employee travel time and/costs will be minimized.
- It is the negotiator’s customary place of doing business and, thus, he will be able to obtain and use reference data more readily.
- It ensures the availability of legal, technical, and other experts and specialists to assist the negotiator.
- It reduces the time pressures on the negotiator to conclude negotiations.
- Higher authority is more readily available for consultation should an impasse occur.
The physical surroundings of the negotiation proceedings may have great effect on the course and final outcome of the negotiations and can add to or detract from the strength of the government’s bargaining position, the effectiveness of its strategy, or the persuasiveness of its arguments. Personal discomfort caused by an overheated room or uncomfortable chairs can turn an otherwise rational and harmonious discussion into an acrimonious debate. Care should be taken to see that the conference room meets certain basic requirements. The room should be spacious enough to accommodate all attendants comfortably. It should have proper lighting, acoustics, and heat control, and should be furnished with comfortable chairs and a conference table large enough to seat the negotiator or negotiation team and the contractor’s representatives. A blackboard and other visual aids also may be helpful, as may a desk calculator. And, of course, there should be an adequate supply of pencils and paper.
As a courtesy, the contractor’s representatives should be provided a separate room so that they may confer privately during recesses in the negotiation. The room should be equipped with telephone service, if possible, for collection of charge toll calls.
The preparation phase, sometimes referred to as the fact-finding phase, is essential to achieving the pricing objective, which is the negotiator’s preliminary determination of what should be a fair and reasonable price for the work to be accomplished. Experienced negotiators have a difficult time describing how they prepare for negotiations because they do right things automatically after learning by trial and error. The method described below is one approach to preparing for negotiations:
- DOCUMENT REVIEW – The fact-finding process starts with a review of the documents which have been sent to the contractor and the government estimate (GE). The documents sent to the contractor include the Request for Proposal (RFP) with the prescribed proposal format. Review of the RFP and the GE should determine if both items accurately reflect the scope of work. In addition, the GE should be reviewed to reflect field conditions and proper construction practices and procedures. During this process, notes should be made on any differences between the documents sent to the contractor and the government estimate which might indicate an area of potential confusion.
- CONTRACT REPORTS AND SCHEDULE REVIEW – The second step in the preparation phase is the review of various progress reports and schedules, such as contractor-prepared network analysis, quality control reports, other contract reports, government quality management reports, and contract correspondence. Not all of the above items will be appropriate to every change order, but one or more will usually be utilized in the preparation phase of the negotiations process.
- CONTRACTOR’S PROPOSAL – The third step in the preparation phase depends on the monetary size of the contract or change order. The monetary size may result in an increase in the type of data available and the degree of reliability. In the case of a change order, if the net cost is in excess of $500,000, cost and pricing data must be submitted, unless exceptions are applicable. Such data is not mandatory for changes under $500,000.
Analysis of a contractor’s proposal can be a complex and time-consuming task. Just as the contractor must be given adequate time to study the job requirements and conditions before preparing and submitting a proposal, so too, the negotiator must have enough time to make a comparative examination of the contractor’s proposal before entering into price negotiations. By obtaining the contractor’s proposal well in advance of the negotiation meetings, the negotiator can become familiar with its content, analyze it in detail, prepare a list of significant differences, and prepare information in support of the government’s position. In addition, examination of the proposal may disclose misinterpretations that can be corrected before negotiation, thus avoiding unnecessary delays.
How far in advance of the negotiations should a proposal be obtained from the contractor will depend upon a number of factors? Proposals for large, highly complex projects may require several weeks, or even months, for a thorough analysis, while certain routine modification proposals may require only a cursory review. In addition, the amount of time that the negotiating team can devote to such an analysis must also be taken into consideration, as must the relative skill and experience of those who will carry out the analysis.
During the review of the contractor’s proposal, notes should be made of the items which do not appear to be logical, necessary, or reasonable to accomplish the work. The review will result in a list of work items along with costs from the contractor’s proposal and the government estimate from which the significant differences can be determined. In addition, during this step the government estimate should be revised where appropriate, and the necessity for revisions documented.
Before entering into formal negotiation with the contractor, the negotiator must establish what negotiating objectives are and how they may best be attained. Clear-cut decisions must be made beforehand as to which objectives (i) cannot be compromised under any circumstances, (ii) can be compromised and to what extent and in exchange for what, and (iii) merely represent an antidote to anticipated “pie-in-the-sky” demands by the contractor. The latter, of course, can be quickly and easily jettisoned as soon as the contractor shows a reciprocal willingness to abandon extreme demands. Whenever possible, alternative objectives should also be established.
In addition to defining the government’s objectives, the negotiator should at this time try to anticipate the position that the contractor is likely to take on various issues. This can be done by evaluating the contractor’s bargaining position. Some of the more important factors that must be considered are:
- The degree of competition present.
- The contractor’s need or desire for the work.
- The time pressure on the government and the contractor to obtain agreement.
- Regulatory pressures in the form of the DAR and other procurement regulations and administrative processes.
- Legal pressures.
- Political pressures.
- Public opinion, as it affects the reputation of the parties concerned.
This evaluation will enable the negotiator to prepare, in advance, appropriate responses to the contractor and to accumulate appropriate backup documentation.
One final word of warning — while advance planning is highly desirable, strategy must remain flexible. Unexpected developments that will require immediate changes in strategy and tactics may occur at the bargaining table. The negotiator must be alert during the course of bargaining for those twistings and turnings in the contractor’s position that may render part or all of the government’s strategy inappropriate; accordingly, adjustments in negotiating strategy must be made. Then he will adjust his strategy accordingly. In this regard, it will be beneficial to ensure, before price negotiations commence, that there is a mutual understanding of the scope of work. Such an understanding will tend to eliminate major surprises which may weaken the government’s strategy and position.
- What are the issues, and what are their relative importance?
- What are the pros and cons of each issue?
- What assumptions have I made?
- What information do I have, and what more do I need?
- What do we want?
- What are our deadlines? Can I negotiate these within our organization?
- What is my authority and negotiating strength? What resources do I have (personnel, time, etc.)?
- What is my target for each issue? What decisions do we want the other side to make?
- What is my limit for each issue (see pricing objectives)?
- What can be sacrificed and what cannot?
- What do they want?
- What are their deadlines?
- What pressures are on the other side (other jobs, cash flow, changes in personnel?
- What is their organization; who makes the decisions?
- What have they done before? (Use financial reports, records of negotiation, inspectors, contract administrators who are familiar with the other side and their negotiator.)
- What pressures are on the other side’s negotiator (trial period, layoffs, personal problems, etc.)?
- What are the limits of the negotiator’s authority?
FAR 15.807 (AFARS 15.807) requires the contracting officer to develop prenegotiation objectives prior to any pricing action. The purpose of these objectives is to help the contracting officer to judge the overall reasonableness of proposed pricing and to negotiate a fair and reasonable price. In setting the objectives, analysis of contractor proposed data, audit data, the technical report information (whether or not required), the independent government estimate, and any historical data is necessary. Any questioned costs in audit reports should be specifically addressed. Discussion with the contractor on scope may be appropriate.
The scope and depth of the objectives shall be directly related to the dollar value, importance, and complexity of the pricing action. For negotiated contracts or modifications up to $500,000 this written Memorandum of Objectives shall be prepared, signed, and dated by the responsible government negotiator. For anticipated contractual actions of $500,000 or more, the written Memorandum of Objectives shall be signed by the contracting officer.
The original Memorandum of Objectives shall be made a part of the official contract file and a copy thereof shall be appended to the negotiation memorandum when it is forwarded to DCAA or the Corps of Engineers auditor.
Negotiation Conference Phase
Setting the Stage
When the negotiator sits down with the contractor at the negotiation table for the first time, certain formalities and housekeeping matters must be attended to before the parties get down to the business of negotiating. Participants must be introduced; the time and place of anticipated future meetings must be set; the ground rules and procedures that will govern the negotiations must be agreed to, and the nature of the official negotiating report must be settled. In addition, if the negotiator has not already done so, the authority of the contractor’s representatives to bind their company must be ascertained. Successful negotiation is not possible in an atmosphere dominated by the refrain, “Well, this looks okay to me, but I’ll have to check with the boss before I can go along for the company.” The contractor’s representative, under these circumstances, becomes nothing more than a messenger.
The negotiator should then make a few introductory remarks restating the principles and objectives of negotiation. He might point out that each side will be striving to obtain the most favorable deal possible for itself, but that it is not in the interest of either party to enter into an agreement that is obviously unfair or prejudicial to the interests of the other. He should assure the contractor’s representatives that he will make every effort to be objective in assessing any and all proposals made by the contractor and that the contractor is expected to do likewise on suggestions and proposals by the government.
In negotiating an initial contract, it is often desirable to review briefly some of the more attractive nonmonetary features of the contract work. The proposed construction may have considerable prestige value or offer the contractor an opportunity to develop or expand special skills and capabilities that will be useful in obtaining future work. A listing of these and other advantages will stimulate the contractor’s interest in, and whet his appetite for, the contract and, thereby, make him more receptive to the negotiator’s proposals and suggestions.
Finally, any valid grievances or complaints that the contractor has against the government on matters unrelated to the pending negotiations must be disposed of before any serious negotiations begin. If these matters cannot be resolved, explained away, apologized for, or tabled in some other way to the contractor’s satisfaction, they may have an unfavorable influence on his attitude and willingness to comprise. But, should the contractor simply be using complaints unrelated to current matters in order to put the negotiator on the defensive, he should not be allowed to delay the progress of negotiations for any great length of time.
There is no such thing as being politely late for a negotiation conference. A contractor who has had to travel some distance to attend a negotiation session, only to be kept waiting by a negotiator whose office is just down the corridor, is likely to be irritated and, as a result, uncooperative. Then, too, the party who is late may feel obliged to be too conciliatory on important matters under negotiation in order to salve the irritation of his adversary, thus prejudicing his objectives. If anyone is going to be late, let it not be the government.
Sometimes, when the contractor is late, it may be to the negotiator’s advantage to question the reason for being late. At other times, when the contractor employs tardiness as a tactic to fray the temper of the negotiator or to indicate a supposed lack of interest in the work, it may be preferable to ignore his action or indicate that it is of no consequence.
It is important that negotiations be conducted in an atmosphere of cordiality, friendliness, and mutual trust. Each party must respect the other’s interests, and each must be willing to evaluate fairly the other’s positions and arguments. Both parties must be strongly motivated to reach agreement on the contract or change in question. Opening the proceedings informally is one of the best ways to create a good atmosphere. Telling a joke, expressing the government’s gratitude to the contractor’s representatives for journeying to the place of negotiation, general conversation on matters of mutual interest, and so forth — any of these tactics can serve the purpose. If appropriate, commend the contractor on previous contract performance.
Avoidance of Interruptions
It is important to avoid, or at least minimize interruptions of the meeting by persons not directly involved. Control of recesses and adjournments should be retained by those actually participating in the meeting, preferably by the negotiator. Interruptions arising from external sources, unless they pertain specifically to the negotiations at hand may disrupt progress.
For the same reason, it is essential that the negotiator clear his calendar of other government and personal business during the period set aside for negotiations. The government’s position is weakened if the negotiator must leave the conference to attend other meetings or to attend to other business. If a negotiating team is being used, the members must similarly be free to concentrate on the negotiation proceedings. Sometimes a contractor will state that only a certain amount of time is available to negotiate a contract or modification. The negotiator must be on guard against any time pressures which would adversely impact the negotiations.
Importance of Direct, Clear, Simple Language
All too often, semantic difficulties — not real differences of opinion — are responsible for disagreements at the bargaining table. To avoid misunderstandings, the negotiator should follow three rules: first, use short sentences; second, use short words; and third, repeat important points.
Need for a Calm, Patient, and Tolerant Approach
Emotion blinds reason and begets emotion from the other side. No satisfactory agreement can be reached when emotion rages on both sides of the table. When it prevails on one side only, the other side gains an advantage that may enable it to obtain more favorable terms.
In some instances, an individual who finds himself in an indefensible position will display anger in an effort to divert attention from or to cover up his weakness. If the contractor becomes angry with the negotiator’s line of questioning, it may well be that they are unable, or unprepared, to defend the proposal. By remaining calm and continuing to probe the area that provoked this reaction, the negotiator often will succeed in meeting the government’s negotiating objectives.
Emotional outbursts, however, may play one valid role in negotiation — that of play acting. Calculated emotionalism, designed to impress the contractor with the depth of the negotiator’s feeling on a particular issue, may sometimes serve a useful purpose. When a similar stratagem is employed by the contractor, however, the negotiator must be careful to avoid being trapped into an emotional battle, and must instead force the discussion back into a calm, deliberate path, perhaps by means of a tactical recess, a joke, or simply silence.
Four Steps In Negotiations
Although the negotiation conference cannot always be conducted in a step-by-step sequence, the negotiator should determine the contractor’s position on important issues, establish the government’s position, explore alternatives in case of disagreement, and reach a final agreement on all requirements. In the following paragraphs, the purpose and nature of each of these four steps are discussed, and suggestions are offered as to appropriate practices and techniques to be used by the negotiator in each of them.
Determining the Contractor’s Position
Effective negotiation cannot take place unless and until the scope of requirements are clearly set forth. One of the most difficult aspects of negotiation is to confine discussion to what is important and relevant. Consequently, the negotiator should first try to determine the contractor’s position on all issues. For example, if the work is in a remote location, the negotiator might explore the contractor’s attitude on using government transportation. If he expresses definite opinions on the matter, the negotiator will be aware that transportation may become an important issue.
Probably, the most helpful attribute for a negotiator in determining the contractor’s position is a pointed and unflagging inquisitiveness. When negotiating, the negotiator should not be satisfied merely with a vague comment on any point, particularly if the point proved bothersome during proposal analysis. Most contractors realize that, in negotiation, the less specific knowledge the government representatives possess, the more easily their judgment can be influenced. Consequently, during a negotiation the contractor may attempt to pass over a vulnerable point by presenting an abundance of information on the point, seemingly with good intentions, but actually with the aim of misdirecting the negotiator’s thinking or by making sweeping generalizations that, in themselves, are true, but which are not decisive for the point at hand. For example, in defending a proposal for paving a road, the contractor may continually resort to the statement: “Paving costs are going up for everybody.” This statement may be known to be true, but the points which the negotiator should have clarified are exactly why the paving in question is increasing in cost if indeed it actually is, and by how much.
Initially, the negotiator should strive, by means of carefully directed questions, to make the contractor break down and explain in detail the item costs that make up his proposal. Ideally, this may be done by asking the contractor to explain how his estimate was developed in each area, but not with the preface that the negotiator considers a particular item of cost to be high or unreasonable. Rather, he should make it clear that such detailed consideration is necessary for understanding consideration of the company’s proposal. This constant probing will give the negotiator a greater opportunity to assess the reasonableness of the contractor’s proposal. And, just as important, it will indicate how well the contractor has planned and scheduled the work to be performed.
A most effective way to promote meaningful discussion is to establish an agenda of issues that the negotiator and the contractor wish to consider in the conference. The negotiator may propose such an agenda at the outset, pointing out that the objective of the conference is to negotiate an agreement that is fair to both sides, but that differences of opinion on specific points must be reconciled before this agreement may be concluded. A well-prepared statement of significant differences between the government estimate and the contractor’s proposal, with monetary differences deleted, will serve very well as a negotiating agenda. In order that the agenda may have maximum effect, from the government’s point of view, the negotiator may include several “straw” points on which he can maintain a position, but on which he may concede, to promote an attitude of conciliation on the part of the contractor. The advantages of the agenda technique are: (i) it points up the issues to be negotiated, (ii) it helps put the contractor in a frame of mind to make concessions, and (iii) it enables the negotiator to lead and control the negotiation conference.
Establishing the Government’s Position
After thoroughly discussing and examining the contractor’s proposal and agreement on specific adjustments, the negotiator is ready to make an initial counteroffer. The initial government counteroffer must not be arbitrary, but rather tied to negotiated adjustments and government position. As a general rule, the counteroffer should be a total offer. It should also be the lowest possible offer that is justifiable, and one that will permit logical and orderly negotiation of a mutually acceptable price. In presenting his counteroffer, as at all other times during the negotiations, the negotiator usually should be careful not be referred directly to the nature or contents of the estimate. FAR 36.203 does permit, if necessary to reach a fair and reasonable price, disclosure of specific cost figures within the estimate, but prohibits disclosure of the overall estimate except as permitted by agency regulations.
Once the counteroffer has been made, discussion should be listed to establishing the arguments for each side. In explaining the government’s position the negotiator should be careful not to indicate a final position on any point unless he intends to insist on that point. Otherwise, if the negotiator backs down later, it may weaken the government’s case.
The negotiator should avoid long drawn out discussions of any one element of the contractor’s offer or the government’s counteroffer. Frequently, the contractor will intentionally draw the negotiator into a prolonged argument over a relatively minor point, fully realizing that his overall position is unsupportable. The contractor may ask for an excessive profit rate in his cost proposal, then insist upon this rate during the price negotiation sessions so as to divert attention from more significant “soft spots” in the proposal.
After the contractor’s offer and the government’s counteroffer have been discussed, it may be advisable to recess the conference to give the contractor and his negotiation team an opportunity to explore the negotiator’s position and to come up with a counteroffer. In fact, whenever a serious difference arises or tempers flare on any issue under negotiation, a recess often has a positive effect on the progress of the negotiations. While negotiations are recessed, both parties have the opportunity to make a realistic appraisal of their respective positions and, normally, become more disposed to make concessions that will speed final agreement.
If the negotiator can predict agreement on the midpoint of difference between his last offer and the best price of the contractor, he may make an offer to this effect, provided the contractor clearly understands that it is not intended to serve as a basis for a further increase in the government’s price. In other words, the negotiator should propose to “split the difference” only when he is prepared to state that he intends to take a firm position on the offer.
Once the negotiator has stated a final position offer or counteroffer, the negotiator must be tactful, but firm, in holding to that position, even though another conference may be necessary to affect the contractor’s acceptance of it. The negotiator should not permit himself to be swayed by arguments of excessive backlog, or by such statements as “we really don’t need this work” or we’re only doing this as a favor to you.” The contractor would never have entered into the negotiations in the first place if the firm didn’t want the work. If the negotiations are broken off, the negotiator should strive to make sure that the contractor leaves with respect for the government’s position, even though the firm is not yet ready to accept it. In any event, the negotiator must not given the impression of being arbitrary, capricious, or desirous of reducing the contractor’s price if it is considered reasonable in all respects. While contractors generally include some excesses and contingencies in their proposals, it is not always necessary or desirable to force a reduction in the price in order to successfully consummate negotiations.
Exploring Alternatives in Event of Disagreement
If the contractor disagrees with the government’s position, the negotiator should explore other courses of action. The ability to discover alternatives that are mutually acceptable to the contractor and the government is the singular attribute of a successful negotiator. In price negotiation, particularly, the number of possible alternatives is limited only by the resourcefulness and flexibility of the negotiator. If the parties are far apart on a total price, the negotiator might propose that the work be reduced in scope and that some of it be treated as government-furnished material (GFM), deferred to a later date, or eliminated entirely. Or, as an alternative, consideration might be given to special contract terms, such as escalation or price redetermination. Use of such clauses will require special approval and the negotiator must be thoroughly familiar with the operation of these and other pricing terms and with their usefulness in bridging the differences between the contractor’s and the government’s final position.
A technique that is sometimes used with considerable success in asking the contractor to suggest a solution that will meet his own requirements as well as those of the government, is that if the contractor’s solution is inadequate, the negotiator may press him for one that is more acceptable. For instance, if the contractor does not want to assume full responsibility for satisfactory completion of the work, he may propose the use of a cost-plus-fixed-fee contract. The negotiator can dispose of this with a comment such as “The work does not meet the requirement for use of a CPFF contract.” By citing higher authority or various regulations like the FAR, the negotiator will encourage the contractor to come up with some realistic solution that the negotiator will be able to accept as being within his prerogative.
Reaching a Final Agreement
The quickest way to reach an agreement with the contractor is to avoid an argument. The negotiator should, when possible, agree with the contractor, but at the same time attempt to guide the discussion to the government’s position. The agreement and rebuttal technique is often helpful. Instead of disputing a contractor’s statement, the negotiator can respond by saying: “Yes, I see your point, but don’t you believe it is also important to consider …?” Once the contractor finds the negotiator agreeing on a point of approach, there is a natural tendency to agree, in turn, at least partially, with the negotiator. In this way, it is often possible to find common ground.
Logic and persuasion usually are not enough to effect agreement. Within certain limits, at least, negotiation is a matter of “horse trading.” The extent to which the negotiator or the contractor makes concessions without getting anything in return depends upon the relative bargaining positions of the parties. As explained previously, the negotiator may be in a strong enough position to force agreement simply by stating that the government is unwilling to do business on any other terms and the contractor may lose the contract. Such an extreme approach to negotiations is not possible, of course, unless there are other qualified firms available and unless the contractor is anxious to obtain the contract. This latter approach does not build sound relationships, however, and should be used only rarely. One advantage to the negotiator, in the case of a modification, the contractor must perform any work within the scope of the changes clause and has the contractual right to dispute the contracting officer’s unilateral price determination.
Another, and more appropriate, technique sometimes used by the negotiator in dealing with obdurate and recalcitrant contractors is to have a higher authority write to the company president or chairman of the board. A letter signed by General So-and-So or Secretary Doe can often be very effective in breaking a logjam at the negotiation table. No company wants to go on record as being unreasonable in its price demands. This technique should be used sparingly, however. Otherwise, the contractor will treat it as just another of the government’s standard negotiation techniques. To keep it effective, the negotiator should use this technique only when the contractor’s representatives have taken a patently unreasonable position that blocks agreement and when extraordinary steps are required to reestablish bargaining in good faith.
Other methods that can be quite effective in dealing with uncooperative contractors are:
- Point out and explain the benefits of being known as a cooperative contractor.
- Conversely, point out the influence that being known as uncooperative could have on the contractor’s chances of receiving other negotiated government contracts.
- Appeal to the contractor’s emotions by references to patriotism and the national importance of the work being performed.
After an agreement is reached, the negotiator should make certain that each of the parties understands precisely what agreement has been reached. If some important conditions have been overlooked or misunderstood, the contractor may refuse to sign the contract or modification, and then negotiations must be reopened at a later date. Therefore, it is often desirable to put the essential terms of the agreement in writing before the negotiation conference ends. If possible, the negotiator should get the contractor to dictate the agreement so as to reduce the possibility of later disagreement. Otherwise, a common understanding may not really have been reached, and the contractor may get the impression that he is being put on the spot. If the contractor is unwilling to dictate the agreement, the negotiator should do so in the contractor’s presence. This is especially important if it has been difficult to reach an agreement.
Records And Reports
Memorandum of Record and Negotiation
A running record of each negotiating session is to be prepared and at the conclusion of each negotiation of a prime contract or modification, the negotiator must prepare a memorandum covering the important aspects of the negotiation. The memorandum should include enough detail to reflect the most significant considerations controlling the establishment of the price and other contract terms. This memorandum or final report serves these purposes:
- It is the official record of the negotiation and is to be included in the contract file (see FAR 15.808, ECI 3-811, and EFARS 15.808).
- It represents a substantial part of the negotiator’s formal request to higher authority for approval of a negotiated contract or modification.
- It is for the use of any reviewing authorities.
- It will serve as a primary source of the information that the draft writer will require when drawing up the final contract document.
- It will include an explanation of why cost or pricing data was, or was not, required (see FAR 15.804) and, if it was not required in the case of any price negotiation in excess of $500,000, a statement of the basis for determining that the price resulted from or was based on adequate price competition, established catalogue or market prices of commercial items sold in substantial quantities to the general public, or price set by law or regulation.
- It will identify the degree of reliance on cost and pricing data furnished by the contractor and used by the negotiator should a later audit reveal defective cost and pricing data. This is an important aspect of the record, since without a clear indicating that there was, in fact, such a reliance, government recovery under the Truth in Negotiations law, as is set forth in the terms of the “Price Adjustment for defective Cost or Pricing Data” Clause, may be impossible.
- It will include details on the government estimate, how it was used in the negotiations and, if revised as a result of the negotiations, will include a statement justifying those revisions.
- It will identify the degree of reliance placed on the audit and will include details of how any costs treated in the audit as “questioned or unsupported” was handled and resolved.
- It will include a statement concerning the prenegotiation objectives memorandum along with details of any significant changes made thereto.
To serve all nine purposes, the report should be clear, concise, and complete. A good question to be considered in writing such a report is: “Will a person (or agency such as the Army Audit or the Government Accountability Office) reading the report two or three years after negotiation, with no knowledge of the transaction, be able to reconstruct the situation and arrive at pertinent, independent conclusions on the negotiated agreement.
The amount of documentation needed depends on the size and type of procurement action being undertaken. If the contract action is relatively small and is awarded on the results of price analysis, the documentation need not be elaborate and detailed as for an award based on the results of both price and cost analysis. The document and its attachments must identify, where appropriate, the cost or pricing data submitted or otherwise acquired and used in the process and it must be complete enough in its narrative to show how the negotiator moved from the contractor-furnished cost or pricing data to the agreed upon price. It must show the updated costs in the government’s objective and any new facts and interpretations of old facts that persuaded the government negotiators to move from their negotiation objective, if it, in fact, that did, to the agreed price.
The record of negotiation is a document which establishes the reasonableness of the agreement reached with the contractor and is the permanent record of the agreement. You may not be around in the future to help reconstruct events, so you must leave tracks that strangers can follow. You must always guard against excessive detail and, perhaps just as importantly, against using the jargon of the specialists involved. FAR 15.808 gives a format for a Price Negotiation Memorandum (PNM) adapted as follows to fit our operations.
1. SUBJECT – This is a memorandum for many readers with different purposes, so the subject should be fairly complete. Don’t address it to any particular individual or office. The subject, together with the introductory summary (the first segment of the PNM), should give the reader a complete picture of the negotiation. For example, the subject might be:
PRICE NEGOTIATION MEMORANDUM
No. 10 Contracting Corp.
Moscow, New Jersey
Contract No. DOGA xxxxxxxx
Construction of XYZ Dam
Modification No. 10
2. IMPORTANT SUMMARY – Show the type of contract and the type of negotiation action involved, together with comparative figures of the company’s proposal, the government’s negotiation objective, and the negotiated results. Identify, specifically, the contract items included in the total figure shown as the negotiated amount. In one case you might note that items 1 through 4 are included in the total figure but are identified separately later in the PNM. In another instance, a detailed item breakout might be included in the introductory summary. Regardless of the method used, the information should be shown on a single page. For example:
Category – Proposed Objective Negotiated
3. PARTICULARS – The purpose of this second segment is to cover the following without duplicating any information that was included in the SUBJECT explained in paragraph 1, above.
- Contract or purchase request number, including supplemental agreement number, if appropriate.
- Complete name and location of company.
- Unit prices quoted and negotiated. If many, attach as a schedule.
- Dates and places of fact-finding, prenegotiation review, and negotiation.
- Names and titles of participants in prenegotiation review.
- Names and titles of company and government personnel in attendance, identifying the principal negotiators.
4. PROCUREMENT SITUATION – In describing the procurement situation indicate the status of construction, field situation, time pressures, and the impact of the modification on the present or future work. List any previous negotiations of the same or similar items with appropriate data. List only the most recent or most relevant of such prior procurements. Include discussion of any unique features of the procurement.
5. NEGOTIATION SUMMARY – This fourth segment will show the company’s contract pricing proposal, the government’s negotiation objective, and the negotiation results tabulated in parallel form and broken down by major elements of cost and profit. Whether these will be summary figures for total contract value, summary for the total price of the major item, unit price for the major item, or some other presentation will depend on how negotiations were conducted. The better procedure is to portray the negotiation as it actually took place. Unit cost and profit figures may not given the true picture of the significance of each element; you show total as well as unit values in the narrative that follows.
If, to the price out of multiple line item procurements, you may have developed a computer model that provides both unit and total prices, all you have to do is attach the detailed printout of the unit price breakdown.
A parallel tabulation gives a quick comparison of events, but can obviously mislead, and so needs explanation in the narrative portion of the PNM. Besides, we can now hear the cry, “We negotiated price; we didn’t agree on separate elements of cost and profit. How can I show what I didn’t do or don’t know?” True, you did not agree with the offeror on values for equipment, subcontracts, other material, engineering, model shop, tooling, fabrication and assembly, labor, and so forth. However, if you used cost analysis, you certainly talked about those costs and others. The offer was supported by estimates of those costs. Government analyses were concerned with them — your objective gave them values. You had reasons, both factual and judgmental, for the values in your objective and you tested again the validity of those reasons. Besides, in the interval between offer and negotiations, both facts and judgments probably changed because later data were pumped into the system and, because of this, interpretations changed too. As you negotiated, your ideas about some of those values in your objective changed and, with that, your objective also changed. When you finally shook hands, you should have known what you thought the costs were going to be; these are the numbers you put in the “Negotiated” column.
It is important that you identify, and in so doing, tie the knot on the thread that traces costs (relied on and not), from the proposal through analysis, updating, and negotiation and, in the course, explaining their influence on the price finally reached.
Discuss in succeeding paragraphs the treatment of each of the major elements in the company’s proposal. Devote separate paragraphs to the major cost categories of the SF 1411. Start the discussion of each cost with a comparison of the amounts in the proposal, the objective, and the estimate supporting the price agreed to. The narrative will consist of a paragraph describing the basis of the contractor’s estimate, another paragraph discussing the basis of the government’s negotiation objective, and a paragraph discussing the results of the negotiations. Make these paragraphs as precise as possible in identifying factual data, their sources, and their currency. Where seemingly significant cost or pricing data submitted by the contractor were not relied on or were not used, identify them. The reasoning supporting the objective and any significant departures from it in moving toward agreement on price should establish, with little room for question, what data were used and what data were not relied on.
These separate discussion should establish the reasonableness of the government negotiation objective and the price negotiated. The PNM will explain how reports of cost analysis and/or price analysis were used as well as to set forth how the principal findings from each were reconciled or otherwise taken into consideration in the agreement finally reached. You should supply the answers to the questions you know will be asked when there are significant differences between the negotiation objective and the conclusions and comments of these advisory reports. The same goes for significant departures from your prenegotiation position regarding any particular element of the price.
Contracts that involve certified cost or pricing data contain clauses that provide for an adjustment to the contract price if the data are later shown to have been defective. The clause provides that the contracting officer must first determine if the price agreed upon was, in fact, increased by reason of the defect. While negotiations are conducted to reach agreement on a fair and reasonable price, and every effort must be directed to that end, memorandums must be written such as to allow the contracting officer to properly make that determination, should the facts make one necessary.
For example, assume that you relied upon a current overhead rate of 20% and negotiated a price that involved resolution between you and the contractor of many judgmental factors. However, you, nevertheless, based your final position on the assumption that the certified current overhead rate was 20%. You subsequently discover that the rate did not reflect a significant increase in the contractor’s base during the month before the negotiation meeting, and that the increased base was expected to continue over the period of your contract. You, therefore, relied on inaccurate data and the contracting officer’s decision to adjust the price, if a significant sum were involved, would be easier if your memorandum clearly spelled out the fact that you had relied upon the 20% rate.
On the other hand, suppose you decided in the negotiation that this contractor’s overhead was hopelessly out of line. This conclusion is based on your knowledge of other similar firms and on advice from the auditor. You probably will tell the contractor about this conclusion and you will undoubtedly get a reaction, either a counter-argument or some recognition of the validity of your position, or both. You may go ahead and ultimately negotiate price that reflects his acceptance of your position, or you may use a rate of 15% in developing your objective, without an indication of acceptance by him, and still get his agreement on a total price that is close to your objective. Your memorandum would then show that you did not rely on the cost or pricing data he submitted. In such an event, a defect disclosed later would probably not warrant any adjustment in price.
Remember that the contractor’s judgment is not involved, but the facts that supported the judgment are. If your judgment rests on these facts and they are defective facts, you must consider adjusting the price. If the total price was based on only part of his data, you must identify the part that you did not rely upon and furnish your rationale for the solution you adopted. You must delineate the basis for the price negotiated in such a way that the data not relied on can be identified, so future discovery of defective cost or pricing data can be evaluated and the amount of any necessary price adjustment fixed. It is equally important to be able to show that no price adjustment is indicated, if such is the case.
For prospective price negotiations, estimated profit is an integral part of the negotiation objective. Therefore, the development of the profit objective for those negotiations should also be discussed here. You should use the OCE form entitled “Weighted guidelines Profit/Fee Objective” to document the use of the weighted guidelines calculations. It should be inserted in the PNM. The rationale supporting assigned weightings should be shown in detail in the body of the memorandum. If, for some reason, the weighted guidelines are not used, the PNM should explain, in similar detail, the system used in developing the profit objective as well as the weightings used.
After this detail, the narrative must justify and explain the selection of contract type and the specific pricing arrangement agreed to. As to the contract type, where the selection is obvious, as with relatively small dollar buys of commercial items, little or nothing needs to be said.
When incentive arrangements are used, explain fully the incentive parameters and how they were developed. If you negotiate a CPIF (cost incentive only) arrangement, explain the range of incentive effectiveness and how you arrived at the cost-sharing arrangement. You can do this in a short paragraph explaining where and why actual costs may vary from target and assessing the probabilities that there will be significant variances. For FPIF arrangements, explain the considerations involved in establishing sharing arrangements and price ceilings. If costs have already been incurred, explain how they were considered in setting the contractual arrangement.
When multiple incentives are used, particular attention must be given to the interrelationships of the various segments of the incentives. This includes, in addition to the reasons why incentives were placed on particular performance characteristics, a brief discussion of trade-off possibilities between cost, performance, and time. Cost/profit charts showing the relationships between cost and profit on straight cost incentive arrangements, and between the cost and other incentives on multiple incentive arrangements, should be attached to the PNM. If you used a computer in structuring the incentives, attach copies of the trade-off curves and tables.
In the final paragraphs summarize why the agreed price is fair and reasonable, not just that it is felt to be fair and reasonable. When, in order to reach agreement, you have made an additional concession in price without changing your ideas about cost, the circumstances and rationale must be explained. If it is an incentive arrangement, and you have traded cost for profit, explain the mathematics of the trade-off. In the highly unusual case where you consider that the most likely final price will be significantly higher or lower than the negotiated targets or price, discuss this probability openly and document it fully for use in planning, programming, budgeting, and later analysis. In every case, remember that the purpose of this summary is to demonstrate the reasonableness of the price negotiated and not to explain negotiated reductions from the company’s proposal.
- MISCELLANEOUS – Reference to and remarks regarding such things as audit reports and analysis by outside elements should go here.
Techniques Of Negotiation
- Relationship between the Negotiator and the Contractor: This relationship should be friendly but businesslike. The contractor is the seller, you (the government) are the buyer.
- Advance Preparation for Negotiation: There is no substitute for thorough preparation before sitting down at the table as the government’s negotiator. The government is in a position of distinct disadvantage if its negotiator is not most familiar with the work to be negotiated prior to commencing negotiations.
- Statement of Differences: A statement of differences between the government estimate and the contractor’s proposal should be prepared in advance of negotiations. Differences in quantities, prices, and production rates can be prepared in a relatively short time by simply tabulating the differences between the government estimate and the contractor’s proposal as the comparative analysis is being made. If the negotiator is armed with a statement of differences at the time negotiations commence, he knows the magnitude of differences to be negotiated and can avoid revealing the total price of the government’s estimate, endless hours of searching during discussions and the chances of errors, oversight, and misunderstanding. Remember, we are seeking a fair and equitable price for the work. If you encounter items in a contractor’s proposal which are significantly low, do not hesitate to explore the contractor’s understanding as to the scope of work and allow him to adjust to a fair and reasonable price.
- Order of Precedence in Negotiation: After the statement of differences is prepared, negotiation should commence with the items in order of largest differences. When possible, start with the item where you are the strongest or you suspect weakness in the contractor’s proposal.
- Contingencies in Proposals: Contingencies must be identified in every case and not concealed in an item of work. There are certainly many allowable contingencies which must be dealt with in construction; break them out and identify them.
- Use of Price Analysis for Negotiation: In many instances, price analysis is sufficient to determine the reasonableness of a proposal. (Remember, price analysis is where we are looking at totals only.) There are pitfalls in the use of price analysis. However, the proposal may contain compensating omissions and overcharges. Each proposal should be examined in detail and discussed to assure full understanding of the scope of work.
- Use of Cost Analysis for Negotiations: In all instances where the contractor’s cost or pricing data are submitted in accordance with FAR 15.804, cost analysis must be performed. Remember cost analysis entails the verification of cost data, by means of an audit, the evaluation of the specific elements of costs, and the projection of these data to determine their effect on prices.
- Flexibility of Negotiations: The negotiator must remain flexible. Correct errors, omissions, etc., in the government estimate if necessary. This attitude will be helpful in consummating an agreement on honest differences. If a serious error is discovered in the government estimate, call a recess and correct the error in private. If the increase in the estimate is significant, assure that funds are available before continuing negotiations. If funds are not available, it may be necessary to revise the scope of work.
- Consummation of Agreement: After negotiations are completed, summarize your agreements to assure complete understanding. If you are unable to complete all records at the time, prepare a properly identified recap sheet which reflects total prices and any special considerations agreed upon. Ask the contractor to sign the summary of agreements.
- Record of Negotiations: A complete record of negotiations should be prepared as soon as practicable after consummation of the agreement. The record should fully reflect the degree to which cost or price analysis was used and the reasons thereof. If contractor cost or pricing data were obtained in accordance with FAR 15.804, the record must reflect the extent his data were or were not used by you to determine the agreed to final price. If any item in the proposal was so used and is suspect, the record should reflect this.
Ethics Of Negotiation
All persons engaged in government procurement occupy a position of public trust, which places upon them a direct responsibility to follow the highest standards of personal conduct in their relationships with contractors. The business ethics of all persons charged with the administration and expenditure of government funds must be above reproach. Many practices that are normal and proper in the private business environment are simply not allowed for government employees. Thus, the acceptance of entertainment, gifts, or favors (no matter how innocently offered or received) from anyone seeking or enjoying profitable business dealings with the DOD may compromise and embarrass both parties. Loss of public confidence in the integrity of business relations between the government and industry must never be allowed to occur.
As is stated in FAR 3.101-1: “All government personnel engaged in procurement and related activities shall conduct business dealings with industry in a manner above reproach in every respect … while many Federal laws and regulations place restrictions on the actions of government personnel, the latter’s official conduct must, in addition, be such that the individual would have no reluctance about making a full public disclosure thereof.”
Updated: July 2, 2018