NCMA Cape Canaveral Chapter
Winter Educational Conference
Negotiating for Profit/Fee:
Lessons Learned & Best Practices
March 4, 2010
By:
Gregory A. Garrett, CPCM, C.P.M., PMP
Managing Director & Practice Leader
Government Contractor Services
Navigant Consulting, Inc.
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)
*
*
*Does not include the $787 Billion American Recovery and Reinvestment Act (ARRA) “Stimulus Act”.
Page 4
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.
2
3
4
5
2
3
4
5
2
3
4
5
I am an effective and persuasive contract negotiator.
1
Page 10
5
I verbally communicate clearly and concisely.
1
5.
4
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
4.
3
I always act as a true business professional, especially in contract negotiations.
1
3.
2
2
3
4
5
Skills to Win:
Self-Assessment Survey (Cont’d)
6.
My written communications are professional, timely, and appropriate.
1
7.
2
3
4
5
2
3
4
5
2
3
4
5
I confront the issues, not the person, in a problem-solving environment.
1
Page 11
5
I am willing to compromise when necessary to solve problems.
1
10.
4
I consistently build high performance teams, which meet or exceed contract requirements.
1
9.
3
I am an excellent team leader.
1
8.
2
2
3
4
5
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
12.
2
2
4
5
3
4
5
I understand generally accepted accounting practices and how to apply them when
negotiating deals.
2
3
4
5
I am highly computer literate, especially with electronic sales tools, and/or electronic
procurement tools.
1
Page 12
3
2
1
15.
5
I understand various cost estimating techniques, numerous pricing models, and how to
apply each when negotiating financial arrangements.
1
14.
4
I am able to achieve my desired financial results in contract negotiations.
1
13.
3
2
3
4
5
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
17.
2
3
4
5
2
3
4
5
2
3
4
5
I am considered a technical expert in one or more areas.
1
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5
I have extensive education, experience, and training in our organization's products and
services.
1
20.
4
I have extensive education, experience, and training in contract law.
1
19.
3
I understand the contract management process and have extensive education, experience,
and professional training in contract management.
1
18.
2
2
3
4
5
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 Win
Self-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 Negotiation
A Complex Human Activity
Successful contract negotiator must:
• 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
Page 16
Reference Text: Contract Negotiations, by Gregory A. Garrett, CCH, Inc. (2005), pgs. 53-54.
Contract Negotiation Process
Plan the Negotiation
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Prepare yourself and your
team
Know the other party
Know the big picture
Identify objectives
Prioritize objectives
Create options
Select fair standards
Examine alternatives
Select your strategy, tactics,
and
counter tactics
Develop a solid and approved
team negotiation plan
Conduct the Negotiation
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
Determine who has authority
Prepare the facility
Use an agenda
Introduce the team
Set the right tone
Exchange information
Focus on objectives
Use strategy, tactics, and
countertactics
Make counteroffers
Document the agreement or
know when to walk away
Document the Negotiation and
Form the Contract
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
Prepare the negotiation
memorandum
Send the memorandum to the
other party
Offer to write the contract
Prepare the contract
Prepare negotiation results
summary
Obtain required reviews and
approvals
Send the contracts to the other
party for signature
Provide copies of the contract
to affected organizations
Document lessons learned
Prepare the contract
administration plan
Reference Text: Contract Negotiations, by Gregory A. Garrett, CCH, Inc. (2005), pg. 61.
Page 17
Contract Negotiations
Essential Elements
Key Inputs
Tools & Techniques
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 negotiations
o Conduct negotiations
o Document the
negotiation and Form
the Contract

Page 18
Desired Outputs
 Contract or Walk
away
Reference Text: Contract Negotiations, by Gregory A. Garrett, CCH, Inc. (2005), pg. 56.
Sources of Major Risk in Cost Estimating,
Negotiating Profit/Fee, and Contract Pricing
Sources of Major Risk
Uncertainty 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
(Types of Contracts)
Fixed-price
FFP
FP/EPA
T&M*
FPI
Profit (No Limits)
T&M
Cost-reimbursement
CS
CR
Profit (Time) No Fee (Material)
CPIF
CPAF
CPFF
CPPC**
Fee (Limitations)***
(Low)
(Buyer’s Risk
&
Level of Oversight)
(High)
(High)
(Seller’s Risk
&
Opportunity for
Profit/Fee)
(Low)
*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
Page 20
Checklist of Buyer
Contract 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
Page 22
Reference Text: Contract Negotiations, by Gregory A. Garrett, CCH, Inc. (2005), pg. 86.
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
Page 23
Reference Text: Contract Negotiations, by Gregory A. Garrett, CCH, Inc. (2005), pg. 86.
Questions and/or Comments
Thank You
Gregory A. Garrett, CPCM, C.P.M., PMP
Managing Director & Practice Leader
Government Contractor Services
Navigant Consulting, Inc.
703-734-5953
[email protected]
Page 24