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INTERNATIONAL JOURNAL OF

PROJECT
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International Journal of Project Management xxx (2007) xxxxxx
www.elsevier.com/locate/ijproman

Project negotiation analysis

Jarkko Murtoaro a, Jaakko Kujala
b

b,*

a
BIT Research Centre, Helsinki University of Technology, P.O. Box 5500, FIN-02150 Espoo, Finland
Department of Industrial Engineering and Management, Helsinki University of Technology, P.O. Box 5500, FIN-02150 Espoo, Finland

Received 8 November 2006; received in revised form 14 February 2007; accepted 6 March 2007

Abstract
Although it is widely admitted that the client and contractor face signicant diculties in negotiating major projects, project negotiations have not attracted much attention in the academia. Negotiations have not been studied very systematically in the project context,
research lacks a common abstraction of the subject and there exists a serious gap in knowledge, for instance as to what frames of thought
can assist project practitioners in crafting better agreements. This study proposes a systematic, logically consistent and theoretically wellfounded approach to the study of project negotiations. The basic idea of the approach is to embrace both the buyer and seller perspectives in a single continuum of recurring negotiations, oriented around the zone of possible agreement. Evidence for the validity and relevance of the approach is developed through an empirical inquiry into the negotiations surrounding the construction of a World Trade
Center complex. The results of the study suggest that the approach allows documentation and communication of descriptive and explanatory insights from past project negotiations, including profound eciency and fairness considerations. Finally, as the next logical step
on the research agenda and an attractive venue for future research, the study proposes to expand the scope of application to prescriptive
uses, i.e., the development of advice to project practitioners in on-going negotiations.
2007 Elsevier Ltd and IPMA. All rights reserved.
Keywords: Project negotiations; Project marketing; Project procurement; Project contract; Joint decision making

1. Introduction
Project business is concerned with complex transactions
involving products and services which are integrated into
total solutions to deliver certain business benets within
the constraints of time, cost and quality [1]. Every project
can be characterized as an isolated market for goods and
services [2], which makes it dicult to rely on either automated market mechanisms, or on unequivocal authority
structures to complete any given project transaction [3].
Negotiations predominantly in the form of competitive
reverse auction mechanisms are invoked to organize project trades jointly with two or more independent parties. In
the absence of routine conditions or a decisive authority,
*

Corresponding author. Tel.: +358 9 451 4874; fax: +358 9 451 3736.
E-mail addresses: jmurtoar@cc.hut. (J. Murtoaro), Jaakko.kujala@
hut. (J. Kujala).

the ability to inuence the terms of the trade and the resulting payos through negotiations increases signicantly.
Major projects entail hundreds of issues and a multitude
of implicit and explicit interests, resulting in substantially
complex negotiations between the client and contractor.
Details of the project are agreed upon during extensive clientcontractor interaction, often over a substantial period
of time [4]. Yet, project negotiations are not conned to the
planning oriented phase culminating in contract signing.
Serious bargaining often commences only after an initial
settlement is reached, and the most arduous negotiations
are typically conducted during or after implementation.
Variation and change orders, claims, accidents and many
other possible disturbances typically trigger renegotiations
after contract signing regardless of how detailed an initial
project contract is. A project can be conceived as a single
continuum of recurring negotiations with multiple parties,
at dierent times, with varying concerns [5].

0263-7863/$30.00 2007 Elsevier Ltd and IPMA. All rights reserved.

doi:10.1016/j.ijproman.2007.03.002

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It is widely admitted that a client and contractor face

signicant diculties in negotiating major projects [4,6].
Although research on the general subject of negotiations
is extensive [7], project negotiations have not attracted
much attention in the academia [8]. The subject has not
been studied very systematically in the project context, project research lacks a common abstraction of the phenomenon, and negotiations play only a minor role in the
academic curriculum of project business. There exists a
serious gap in knowledge, for instance as to how key project participants converge on agreements through negotiation; how to evaluate the quality of any forged project
contract; and what frames of thought as well as practical
behaviour can assist project practitioners in crafting better
settlements over the whole life of a project.
This study applies a particular theory of negotiations,
namely the negotiation analysis approach (NAA) [9] to
the context of project negotiations. The intended contribution of the study is to introduce NAA to project business
academicians and to explore the validity of the approach
in the context of project negotiations. Following a theoretical review of NAA, an empirical case study is subjected to
a descriptive and explanatory analysis through the framework. The case study consists of the negotiation process
surrounding the planned construction of the World Trade
Center at the HelsinkiVantaa Airport (WTC) Finland,
from idea phase up to project contract signing. Anecdotally, NAA represents the conceptual lens and methodological approach through which the inquiry into the WTC
negotiations is carried out.
The paper is divided into three sections: The rst section
introduces the negotiation analysis approach as the theoretical framework of this study. The framework is given a
substantial share of attention so as to lay the necessary theoretical foundations for this study, as well as to incite further research applications. The second section is an
empirical application of the framework in the descriptive
and explanatory analysis of the WTC negotiations. The
third section includes evaluations on the applicability of
NAA in the context of project business, and presents a
reection of the ndings of this study with earlier project
business research as well as with predominant industry
practices.
2. Theoretical background: negotiation analysis approach
Negotiation is the process of joint decision making [10].
It is communication, direct or tacit, formal or informal,
between individuals who are motivated to converge on an
agreement for mutual benet [11]. At the core of the subject
is the insight that separate, unitary behaviour, even if perfectly intelligent and informed, often leaves individual decision makers or interacting parties with outcomes inferior to
what could have been achieved through jointly selected
courses of action. Purely self-serving actions of two independent, but interacting parties do not necessarily serve
the interests of either of the parties in the best possible

way [12]. The fundamental rationale of negotiations is

therefore to jointly devise, select, commit to, and implement courses of action that are superior to unilateral action
for each and every party [7].
However, even if joint action can yield a surplus relative
to going-it-alone, negotiating participants may nevertheless
be reluctant to cooperate, exchange information and commit to joint paths of action, because they fear that the
counterpart may take opportunistic advantage of the information they convey, claim a disproportionate share of the
implied surplus of cooperation, or even dishonour joint
commitments [13]. Negotiating partners are therefore
forced to balance cooperative actions with competitive
ones (a challenge widely referred to as the negotiators
dilemma), and employ contract mechanisms that ensure
surplus gains from joint courses of action will be exploited
correctly and divided appropriately [14].
Negotiations take place in all domains of life, but the basic
structure of negotiations in dierent contexts is fundamentally the same all negotiation situations share four common
characteristics [13]: First, there are two or more parties; second, the parties can be creative and cooperate to arrive at a
joint decision; third, the payos to any party depend either
on the consequences of the joint decision or alternatives
external to the negotiations; fourth, the parties can reciprocally and directly exchange information, honest or not.
The negotiation analytic approach provides a systematic, logically consistent, and theoretically well-founded
approach to the study of negotiations. The theoretical orientation of the approach draws from three principal elds
of study, namely game theory (GT), decision analysis (DA)
and behavioural decision theory (BDT), all of which essentially rest on the ideal of rational decision making. Key
contributions to the approach include works such as The
Strategy of Conict [15] and Conict of Interest [16] on
the side of GT; Decision Analysis [17] and Value-Focused
Thinking [18] on the side of DA; as well as Judgement
Under Uncertainty [19] and The Social Psychology of Bargaining and Negotiation [20] on the side of BDT. The rst
overall synthesis of these three elds in the study of negotiations appeared with the publication of the Art and Science of Negotiation [14] followed by others in the same
synthetic avour [911].
The main methodological orientation and arguably
value of the approach is in its qualitative framework of
thought, rather than its sophisticated quantitative aspects:
Analysis mostly simple analysis can help [14]. The
approach utilizes various technical concepts from each of
the three elds to capture the characteristics of negotiation,
but departs from some of their analytic rigor and formal
argumentation in order to pursue a broader scope of application and increased practical value [9].
2.1. Game theory (GT)
Game theory provides a framework for analyzing interdependent decision making, such as when the client and

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contractor make their decisions independently of each

other, but these separate choices interact to determine a
payo for each side [12]. Full descriptions of the courses
of action that can be taken by each party are encapsulated
into strategies. Rigorous analysis of the interaction of
the strategies leads to search for equilibria or complete
campaigns of action such that each party, given the choices
of the other parties, has no incentive to change its plans.
However, game theoretical analysis rests, among other
assumptions, on the idea of all parties having complete
information of the other parties choices, which is seldom
the case in real world situations. In practical project negotiations, for example, a contractor may choose to omit critical features of the deliverable at contract signing, only to
raise them on the table during the implementation phase
to exploit a stronger bargaining position and thereby eectively raise prot margins.
2.2. Decision analysis (DA)
Decision analysis is the systematic decomposition and
clarication of a decision problem, where the payos of a
single party are not aected by the decisions of other
involved parties, anticipating ones actions [17]. It proceeds
by structuring and sequencing the partys choices and
chance events, then separating and subjectively assessing
probabilities and values, as well as risk and time preferences. An expected utility criterion is used to aggregate
these elements in ranking possible courses of action to
determine the optimal choice. An individual decision making perspective can help to structure joint understanding of
a project negotiation setting and to guide the joint behaviour of the client and contractor, primarily driven by selfinterests. It also enables comparison of the benets of a
joint agreement with separate, unilateral action. For example, in practically all projects, the client has other potential
contractors or other investment opportunities to turn to,
should the client fail to reach an agreement with any particular supplier.
2.3. Behavioural decision theory (BDT)
Behavioural decision theory is concerned with describing how and why people think the way they do [20]. The
descriptive insights of behavioural realities inform the
negotiating counterparts of decision making fallacies, socalled biases and heuristics that they are susceptible to.
The descriptive assessments of others allow negotiators,
e.g., to simulate considered strategies against the likely
responses of others. The descriptive assessments of the
behaviour of others need not be nave; instead, they can
assume any amount of sophistication, hidden agendas,
and rounds of interactive what if analysis [21].
Project negotiations involve real people burdened with
multiple humane concerns and cognitive limitations, who
do not necessarily conform to the ideal of rational economic man. BDT foremost gives good predictions of

how other project stakeholders might actually behave.

For example, it is not uncommon that in the case a project
goes awry, the client or the contractor launches a claim and
thereafter refuses to openly cooperate even if mutually benecial compromise resolutions exist or emerge. In BDT
terms, an escalation of commitment to an adverse course
of action abides, meaning that the psychological costs of
reversing a decision are higher than the material benets
gained thereby, typically to the disadvantage of both the
client and the contractor.
2.4. Analytic structure of negotiations
Prior to introducing the concepts that comprise NAA, it
seems helpful and warranted to make a certain fundamental conceptual distinction. This study separates concepts
that constitute the analytic structure of negotiations from
the concepts, which refer to the ow of negotiating behaviour within that structure. Although this distinction has not
been made explicit in earlier treatises of NAA, the dichotomy has been, nonetheless, implicitly present. Namely,
NAA employs analytical approximations of actual negotiation settings, which are assumed to be present and xed
for the purpose of analysis. Yet, the analytical models are
constructed on the underlying premise that the elements
of the model may change or be purposefully changed over
time, through the behaviour of the negotiating parties, acts
of creativity, and so forth. It therefore seems helpful to
organize the study of negotiations around two sets of concepts: The structure of negotiations is, in a sense, a snapshot of a negotiation situation outside of the time
dimension, determined by, e.g., the players, the terms of a
tentative agreement, and so forth. The ow of negotiations
is, in turn, the pattern of the negotiation process in time,
determined by, e.g., the dance of concessions, or the creative discovery of novel options.
The key analytical concepts of NAA form a logically
consistent, complete framework oriented around the perceptions of the zone for possible agreement [10]. Fig. 1
schematically illustrates the framework, with respect to a
bilateral negotiation setting between two parties, client
(A) and contractor (B). The analytical approximation of
a project negotiation situation may be described in broad
outline as follows.
There is a set of two or more decision makers called parties who are characterized by maximizing, or more realistically self-interest seeking behaviour. The parties are
haggling over one or more decision variables called issues.
For each negotiable issue, there is a range of two or more
possible resolutions called options.The xing of an option
for each of the issues combines into a solution, which is
called a contract. Each of the parties is assumed to have
objective criteria, or interests, against which the parties
are able to evaluate the attractiveness of each conceivable
contract, including the possibility of no agreement. The
value or utility a negotiator assigns to an arbitrary contract
is called his or her subjective payo. The set of all payo

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Payoffs to
Party B

As BATNA

Final contract

Creating
Tentative
settlement

Bs potential
Bs
surplus

Claiming
Efficient
frontier
ZOPA
Bs BATNA

Contract
set

As
surplus
As potential

Disagreement point

Payoffs to
Party A

Fig. 1. Schematic illustration of the negotiation analytic approach (NAA).

combinations from the various possible contracts (plotted

in payo-coordinates) is called the contract set. The contract set is the multiplicative total of the number of conceivable resolutions for each of the issues under
negotiation. For example, in negotiations with ve issues,
with three discrete options for each, the contract set consists of 35 = 243 contracts. Under standard assumptions
about the parties payo functions, the contract set is convex, i.e., bowed outward.
Each party is also presumed to have dened a best alternative to a negotiated agreement (BATNA), the best course
of action that the party could pursue unilaterally outside
the given negotiations [23]. Thus a basic test of a proposed
agreement is whether it oers a better payo than that
sides best alternative course of action outside of the negotiations a condition also known as individual rationality.
The payo from each partys BATNA therefore places a
constraint, a lower bound on the payo that the party must
realize from a negotiated settlement. Taken together, these
minimum payos dene the disagreement point, a negotiation setting equivalent of the non-cooperative Nash equilibrium concept. The feasible set, i.e., the region of the
contract set that also satises the BATNA constraints is
called the zone of possible agreement (ZOPA).
For any contract, the surplus to a party is the dierence
between the payos associated with that contract and the
partys BATNA. The concept of potential refers to the
maximum surplus a party can receive, associated with a
contract, where the other parties surpluses are zero, i.e.,
their payos are driven to their BATNA levels. A contract

is dominated if there is another contract that leaves none of

the parties worse o and is preferred by at least one party.
A reasonable property of any good negotiated agreement is that it is non-dominated, in other words (Pareto)
ecient. This condition holds on the ecient frontier,
where it is not possible to make some parties better o
while making no party worse o: all potential gains are
realized and no value is left on the table.
Another reasonable evaluative criterion of a negotiated
agreement is fairness. The concept can be understood with
respect to the concept of potential, and more specically
the proportion of potential a contract assigns to each of
the parties. A fair sharing refers to a contract that gives
each party a similar proportion of their potential. The
ZOPA consists of multiple possible contracts, and fairness
considerations are typically evoked to narrow down the
range of reasonable outcomes.
In a purely distributive bargaining structure, the relationship between the payos to each of the parties is strictly
negative, such as in the traditional competitive price bidding procedure. The ZOPA collapses to a diagonal line,
which holds out what can be termed as the distributive
potential. Increasing the payos to one side necessitates
an equal decrease in the payos to the other side. This situation is also referred to as zerosum game or winlose
negotiations. In an integrative negotiation structure, the
payos to the parties do not have a strictly negative correspondence. The ZOPA includes contracts, which are not
placed on a diagonal frontier, which means that the negotiation structure holds out integrative potential, and repre-

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sents a plussum game or winwin negotiations. In other

words, it is possible to increase the payos to one or more
parties without worsening the payos to any.
2.5. Interactive ow of negotiations
The ZOPA, whether distributive or integrative is, of
course, only an analytical approximation of an actual
negotiation setting, a simplied snap-shot outside of the
time dimension. Although an analytical model is wholly
determined and xed, a real world project negotiation setting is incompletely determined and uid [15]. In other
words, the parties themselves construct the situation: the
negotiating game is simply whatever the parties act as if
it is [9].
Typically, the parties do not know each others payos
with any reasonable degree of accuracy, and most often
negotiators are not even sure of their own [21]. They do
not necessarily know each others BATNAs, and at the
same time they may be hard at working trying to improve
their own. In general, each party has its own perceptions of
the location of the disagreement point and the shape of the
utility frontier [10]. Even if the ZOPA were xed and common knowledge, it would still be far from deterministic
what contract the negotiators would eventually converge
on. However, NAA distinguishes two fundamental classes
interactive behaviour that negotiators can exercise to craft
an agreement: claiming and creating [9].
Claiming refers to attempts to increase the payos to
one party with no increase, or a decrease in the payos
to others. Several broad classes of tactics used for claiming
value have been explored, including good cop/bad cop,
time ultimatum, and high ball/low ball [15]. Creating in
turn refers to attempts to increase the payos to one or
more parties, without a decrease in the payos to any.
The principles and approaches used to create value have
also been explored by several authors, and include principled negotiation [22], single negotiation text (SNT) [14],
the method of jointly improving direction [23], and integrative negotiation strategy [7].
Nonetheless, it is crucial to recognize that creating and
claiming behaviour are not separable phenomena in reality
[15]. For example, competitive moves to claim value individually often drive out moves to create it jointly [9]. Tough
behaviour may hamper eorts to identify joint gains, and
therefore negotiators cannot simply alternate between creating and claiming action. The chosen behaviours inuence
the construction of the perceived ZOPA as well as movement within the ZOPA, which is why negotiators need to
manage the tension between creating and claiming behaviour [13].
Negotiators need to also adjust their negotiation stance
with respect to their counterparts. In general, reciprocal
open and truthful sharing of information and creativity
help the parties identify integrative potential [24]. Yet, if
only one party is open and forthcoming, the other party
can opportunistically take advantage of this and claim a

greater share of value. If both parties take tough and even

hostile stances, the negotiations become characterized by
claiming behaviour and the parties are unlikely to identify
integrative potential, and most likely fail to realize potential gains. These considerations highlight the importance
of trust in negotiations. In the presence of trust, the parties
assume absence of opportunistic behaviour by the other
parties and can conde more information, resulting in better agreements, and consequently in even more trust [25].
In the case of most real-world setting, the parties need
not limit themselves to creating and claiming within a xed
conguration of the elements of negotiation; instead, they
can resort to a certain super-game type of behaviour, i.e.,
to exert eorts to change the game. The ZOPA, or at least
the way in which other parties perceive it can be altered
through purposive changes in, e.g., the parties, interests,
issues, options or BATNAs dening the negotiation structure. For example, an improvement in a partys own
BATNA improves the partys negotiating power, because
the minimum a party can expect from the on-going negotiations increases; whereas the introduction of a new, mutually benecial option can cause the integrative potential to
increase. In general, when the parties, interests, issues,
options, BATNAs, or perceptions of any of them vary,
the ZOPA will be transformed.
3. Empirical study: World Trade Center construction
negotiations
The basic idea of this empirical study is to encompass
both the project sales and delivery phases, as well as to
embrace both the buyer and seller perspectives in a single,
unied framework of project negotiations. A project is rst
and foremost conceived as a single continuum of recurring
negotiations with dierent parties, at dierent times, with
dierent rules of game applied. The use of NAA in this
study is therefore descriptive and symmetric: NAA is used
retrospectively from the joint perspective of all the key participants to describe the structure and ow of the negotiations and to develop modest insight into the how and
why the negotiations proceeded as they did. The empiric
study consists of the project negotiations surrounding the
planned construction of a commercial World Trade Center
(WTC) oce compound at the HelsinkiVantaa Airport in
Finland. While the main parties reached agreement on the
contract in the fall of 2006, the project is on-going at the
time of writing and is expected to enter the construction
phase early in year 2007.
The Finnish construction industry is dominated by ve
big players, which collectively account for over a half of
the residential, commercial, industrial and infrastructure
construction. The main contractor of the WTC negotiations, SRV Group (SRV or the Group), is the latest contender to be counted among the big ve national
construction companies. The WTC negotiations represent
a particularly rich, inter-temporal, multi-party negotiation
process, which has been on-going for more than two years,

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with varied and non-trivial turns. The case therefore provides a good empirical context to test the descriptive and
explanatory power of NAA. In addition, through NAA
the aim is also to provide some insight into SRVs evidently
successful business model, which relies heavily on bilateral
negotiation settings and is arguably a representative of the
project business orientation, denoted generally as the constructive marketing and sales approach [2].
The WTC negotiations were non-adversarial and converged on a jointly benecial agreement, which, in eect,
secured access to information on the case. Information
on the project negotiations was collected through semistructured interview sessions with SRV key employees
involved in the WTC negotiations as well as through
detailed documentation of the Groups business model.
The analysis and conclusions of the study were validated
at a workshop session, which included key management
and project development individuals responsible for the
design and execution of SRVs business model.
3.1. SRV Groups business model
The essence of the Groups business model, the SRV
Model, is twofold: First, the Group specializes in construction management so that all operative design, construction
and maintenance activities are sourced though competitive
bidding from a pool of sub-contractors, which the Group
manages and ranks in order of performance based on past
experience. Second, the Group is overwhelmingly proactive
and creative in its search for business opportunities, supported by a dedicated project development business unit
responsible for introducing new projects into the implementation pipeline. The Group exerts considerable eorts
to develop its own project opportunities, but also participates in traditional competitive tender schemes albeit secondarily. An estimated 80% of total turnover is generated
by constructive schemes and 20% through traditional competitive, lump-sum bidding against tight, pre-formulated
tender specications [26].
To begin with, NAA can be used to describe and
explain the essence of the SRV Model and to relate the
approach to established project business conceptualizations. The basic point is that the development and adoption of the model by SRV can be considered in NAA
parlance as a major eort to change the game to improve
the Groups negotiating power. Project based rms have
developed marketing practices designed to position them
in a demand environment using a deterministic approach,
or a constructivist approach [2]. In the constructivist
approach, the contractor becomes actively involved in
shaping the competitive arena and the rules of the game
[27]. The deterministic approach is based on the principle
that the project will be dened entirely by the future client, together with any advisors, and a contractor only
anticipates the competitive arena.
The essence of the deterministic marketing orientation
[27] and the established construction industry norm is that

clients transform bilateral face-to-face negotiations with

construction companies into reverse auctions, a particular
class of negotiations consisting of one buyer and two or
more suppliers. The basic rationale for doing so is to
exploit the competitive tension between multiple potential
suppliers to capture a higher share of the surplus a project
can generate. Competing suppliers, in drafting their bids,
need to balance potential surplus with the probabilities of
winning the project: a high bid implies a high surplus, but
risks losing the project. Typically, suppliers end up pricing
their bids only slightly above their BATNAs, so that their
implied surpluses are close to zero, but still better than having no business at all (sometimes suppliers even price their
bids below, i.e., individually irrationally, but seek surplus
payos eventually by defecting or claiming with guile during or after the project).
The essence of the constructivist marketing approach
and SRVs business model is to seek to transform reverse
auction settings back into bilateral negotiations, ideally
by developing a unique project oering: in other words, a
negotiation structure with only one potential seller and
one or more buyers. The basic rationale for doing so is,
of course, to evade the competitive tension between multiple potential sellers, thereby capture a greater share of the
implied surplus (often by referring to various fairness standards), and to position favourably in relation to competitors in the long-run.
Yet, SRV itself exploits the competitive tension of
reverse auction mechanisms in its dealings with subcontractors. The Groups focus on construction management
means that operative design, construction or maintenance
resources are mainly sourced through sub-contracting.
An important advantage of the business model is the shift
of the competitive tension from the clientcontractor relationship one tier lower in the value chain. SRV need not
price its projects close to its BATNA, nor strategically misrepresent cost structures. On the contrary, the practice
allows for more transparent sharing of information, contributing to higher trust, which in turn encourages even
more cooperative sharing of information and joint exploration of mutually benecially options, and the drafting of
better agreements. Ultimately, better agreements are key
in being able to add higher value to clients and in dierentiating relative to competition.
In eect, it is possible to partly explain SRVs established reputation for fair, un-opportunistic behaviour
through the above analysis. The SRV Model enables and
relies on bilateral negotiations, where consistent signals
of cooperation (e.g., sharing accurate cost information or
not defecting during implementation) have built a positive
reputation, which motivates clients to conde in more
information to the advantage of both SRV and its clients.
Planning as well as execution on more accurate and more
comprehensive information opens up further opportunities
to identify and propose more valuable solutions, which
feed back into incentives to cooperate, and engage in bilateral negotiations.

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3.2. Case project: World Trade Center HelsinkiVantaa

Airport
The WTC negotiation process was initially triggered
with one of the more experienced negotiators at SRVs project development unit proposing a business opportunity to
construct new oce premises under the globally renowned
WTC brand. There were two World Trade Centers in Finland at the time, one in the centre of the capital city, Helsinki, and one in Turku, Finlands former capital and
another commercially active city located on the western
coast of the country. Yet, the brand was perceived to be
commercially underutilized.
In parallel, the development unit was aware of a worldwide real estate trend involving the development of what
are often referred to as airport cities. Internationally
active airports around the world have begun development
of competitive commercial centers adjacent to their air trac
facilities. These relatively recent initiatives represent opportunities for global or export-oriented companies to establish
satellite oces or even headquarters on sites with easy access
for international professionals to interact. SRV realized that
the WTC brand could be utilized in synergy with the development of the HelsinkiVantaa Airport complex. A WTC facility in the close proximity of Finlands most important
international gateway had the potential to become a commercial centre of gravity for many internationally operating
Finnish companies, and the concept oered SRV an opportunity to realize a high-quality, high-brand value, sizeable
oce construction project in a prime location.
As is typically the case in modern project business environments, the WTC project included multiple interested
parties. The main parties comprise SRV Group (SRV)
the construction development and management company;
the Chamber of Commerce (CoC) a majority WTC
licence owner; the Airport Real Estates Plc (ARE) an
owner and developer of the properties around the airport
area; and an insurance company with a minority ownership
of the Finnish WTC licence and the owner of the Helsinki
agship WTC. Capital region zoning authorities were
involved as well, but their actions were mostly dictated
by statutory provisions and represented more of the legislative constraints under which the negotiations took place.
SRV is a for-prot organization, but it was motivated by
a host of other interests to realize the WTC project. The
project was valuable for its brand reference value as well
as for future opportunities to win projects in the vibrant
airport area, which represented a market opportunity of
several hundred million euros in the decade to follow.
CoC, as a non-prot organization, in turn, was keen on
driving the regional interests of entrepreneurs and SME
companies in the Helsinki area. AREs main interests, aside
from generating prots, were to continue the development
of the airport oering in terms of the growth of commercial
space as well as brand value. The insurance company foremost sought to protect the value of the established WTC in
the city centre.

The key issues under negotiation included the price for

the WTC licence with majority and minority owners, the
site and pricing of construction, and the schedule of implementation, with various levels of possible resolution for
each. From the original conception of the idea through
to the construction contract signing, it is possible to extract
and highlight two key phases representing dierent, but
interdependent negotiations, with distinctive features and
concerns in each one.
3.3. SRVs license negotiations with the Chamber of
Commerce and the minority owner of the WTC licence
Following the conception of the idea to construct new
premises under the WTC brand, SRV identied the current
holders of the licence. CoC represented majority ownership
with a share of two-thirds, and the insurance company
accounted for the remaining one-third.
The licence negotiations basically involved one issue,
price. The interests of the parties were divergent, in the
sense that SRV sought hold of the licence for a fee as
low as possible, and the counterparts a transfer of rights
for a compensation as high as possible. In NAA terminology, the negotiations were essentially distributive, so that
the ZOPA was fully represented by a diagonal line in the
payo coordinates, cut o at each end by the parties
BATNAs.
However, an interesting feature about the negotiations
was that CoC did not seem to have much savvy to consider
the game theoretic component underlying every negotiation: a party always has the option of taking unilateral
action to pursue payos outside of any given negotiations.
The more favourable external courses of action negotiators
have (BATNAs), the smaller the need for the negotiation
and the higher the standard of value that a negotiator
can expect from any proposed agreement.
Essentially, CoC could not conceive any other uses for
the licence, which is why it placed little value on the licence,
apart from not wanting to give it away for free. When SRV
oered to purchase the rights to the WTC brand, CoC was
tempted to accept a reasonable oer. From SRVs standpoint on the other hand, the value of the licence, the maximum it was willing to pay, i.e., SRVs BATNA was rather
high, and to determine a broad approximation of SRVs
BATNA only a little, systematic analysis is necessary.
Let us assume another project of similar size to the
planned WTC project, with a total of circa 30,000 m2 of
oor space. According to real estate developers, the WTC
brand justies rents of about 20% above identical premises
at identical locations [28]. Suppose next that a property
owner company considers building a new oce compound,
but has two options available: one with the WTC brand,
and one without it. Let us assume the company could
receive rental income of circa 30 per every square-meter
in the latter case, and 25 in the former. The dierence,
all other things being equal, would amount to about 2
million with a standard NPV calculation, using 6% as an

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appropriate discounting factor, and assuming that both

premises would be fully utilized for the next 30 years.
It seems reasonable to argue that the client, i.e., the
property owner company, would be willing to distribute
some of the surplus payos, say one-half to a construction
company that makes the WTC alternative possible. This
means that access to the licence guaranteed at minimum
a 1 million premium for SRV (at minimum, because the
licence was valued for other reasons such as reference value
and future opportunities as well). Nevertheless, it seems
very reasonable to assume that SRVs BATNA, its reservation point was beyond the threshold of 1 million a price
quite far from CoCs own perceived BATNA of about zero
for a perceivably redundant license.
CoC accepted SRVs initial oer as it was, since it was
framed and perceived as a fair, reasonable oer (see (1)
in Fig. 2). Although the actual value of the deal was undisclosed, had CoC begun to think systematically about its
BATNA, it could have, for instance, initiated negotiations
with other construction companies to improve its BATNA,
or even auctioned o the rights through a competitive bidding procedure to capture a price much closer to SRVs reservation value, i.e., SRVs BATNA.
The negotiations with the minority owner of the licence
did not proceed as swiftly. The most important point seems
to be that with the minority owner, it was SRV, itself,
which failed to conduct a bit of negotiation analysis in
game theoretic avour. In other words, SRV failed to put
itself in the shoes of the minority owner prior to initiating
the negotiations. The negotiations were just as crucial as

Payoffs to
SRV

those with CoC, since the WTC licence requires that all
uses of the brand are carried out in consensus, which is
why the minority owner had the veto-right to any of SRVs
proposed projects under the WTC brand.
The licence negotiations with the minority owner lasted
for a considerable time, although in the end the company
consented to SRVs proposed use of the WTC brand for
reasonable, foremost non-cash compensation. However,
in the beginning of the negotiations, the minority owner
insisted on being properly remunerated for the use of the
brand, but it was seemingly unable to systematically analyze the structure of the negotiations and thereby condently establish a reasonable reservation price, i.e.,
BATNA.
The minority owner merely argued that another WTC
complex would compete with the WTC building it owned
in downtown Helsinki, deducting from its commercial
value. However, these arguments, even if fully valid, were
vague and uncondent. In the end, SRV convinced the
minority owner with the assistance of third-party marketing professionals that the satellite WTC compound it proposed to build would not compete with their facilities at a
dierent location, and that they could both benet from
marketing and administrative synergies under the WTC
label, by sharing annual licence expenses and overheads.
In essence, the minority owners BATNA was very ambiguous and low, so that as SRV highlighted the possibilities
of marketing synergies, it was compelled to support SRVs
project, which oered it a positive surplus above a BATNA
close to zero. Again, had both parties been more systematic

Counterparts
BATNA
Division of
cost savings
Licence
settlement

Contract
negotiations
with ARE

SRVs
potential
SRVs
surplus

Project
contract

Guaranteed
maximum
cost

Payment
mechanism
ZOPA
Licence
negotiations
with CoC

SRVs
BATNA:
Ordinary office
project

Contract
set
No WTC Project

Payoffs to
Counterparts

Fig. 2. Summary of the WTC negotiations from the perspective of SRV.

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about their BATNAs, they could have, at minimum,

avoided costly prolonged negotiations, and converged
much more rapidly on an agreement, but perhaps also captured a greater gain.
3.4. SRVs land and construction negotiations with the
airport real estates
ARE as the owner, operator and developer of Helsinkis
Aviapolis, was next approached by SRV. The negotiations
were quickly identied as being integrative, with potential
synergies to be exploited by both parties. The four basic
issues under negotiation included land (or site), oor space,
quality standard and compensation. SRVs identied
BATNA at this point was perceived to be the construction
of a WTC compound in one of several alternative locations, representing key intersections of trac ows in the
capital region. Similarly, ARE had identied other possible
uses for its land properties at the airport and its immediate
surroundings, including a parking complex.
The negotiations basically proceeded issue by issue. The
rst issue under negotiation involved deciding on the site,
and various options were identied. The negotiators perceived three locations at varying distance from the airport,
with one in the very center of the airport zone. The other
two options were soon dismissed, as the parties interests
converged on exploiting fully the value of the WTC brand.
AREs perceived BATNA was to build a multi-storey car
park building, which would generate revenues in terms of
parking fees and serve the growing ow of airline passengers. However, both of the parties realized that the rents
from the WTC compound would be superior to those of
the parking compound, and that the rents would be higher,
the better the location were. There were obviously synergies to be exploited, or in other words, there was integrative
potential, so that the contract set was bowed outward, but
it was not evident how the surplus would be distributed.
SRV calculated and proposed a market based price for
the construction, which was immediately accepted by
ARE. SRV calculated a target price for the construction
project by using cost information from previous projects
jointly with preliminary bids from selected subcontractors.
This is in fact a standard practice, which includes verifying
best estimates with independent consultants. The Group
placed a percentage margin on top of the best total cost
estimate to come up with the target price. If actual costs
supplemented with SRVs margin ultimately end up lower
than the target price, the Group keeps a certain proportion
of the dierence and passes on the rest of the benets to the
client. If total costs together with the margin exceed the target price, the client pays only a certain proportion of the
dierence and SRV bears the rest up to a certain maximum
limit, after which SRV bears all costs.
Although the contract is already signed, there still
remains room to renegotiate about more oor space and
quality alterations with potential tenants. Any surplus
from these will be shared according to the payment mech-

anism, which distributes any value on top of the costs equitably between SRV and ARE according to pre-determined
proportions. SRV also has the possibility of suggesting
cost-saving solutions during the design as well as the implementation phases, and any benets will again be distributed according to certain proportions.
Again, neither of the parties considered their BATNAs
very systematically. SRV could have proceeded by calculating a good estimate of the NPV of the WTC compound for
ARE to determine the absolute maximum ARE was willing
to pay to have the project realized. ARE could have proceeded by initiating negotiations with other construction
companies to improve its BATNA, since even if other contractors were incapable of using the WTC brand, they
could still have proceeded with another similar commercial
project without the WTC brand.
Another interesting feature about the negotiated compensation scheme in the WTC project was the design of a
long-term, variable, performance based fee. Part of SRVs
compensation for the project development role is tied to
the rental income from the asset it manages to build. The
key idea of this contractual mechanism is that it aligns
the mid-term interests of SRV with the interests of the client. SRV is, in essence, incentivized to produce at highquality and keep to the schedule. The earlier the asset is
in operation, the sooner it will receive its share from rental
income. The higher the quality, the more satised tenants
would be, the higher the rental fees could be set, and again
the higher SRVs revenues will be. This choice of compensation again represents an eort to change a distributive
game into an integrative one in line with the SRV Model.
3.5. Case conclusion
The elements of the basic structure and the key phases in
the ow of the WTC negotiations come together in Fig. 2.
The point denoted as No WTC project represents the
disagreement point referring to an outcome, where the
WTC project had been abandoned altogether, and each
party had pursued other, more conventional opportunities.
The diagonal line represents the distributive ZOPA of the
license negotiations, and illustrates the favourability of
the license settlement for SRV, in terms of the proportion
of the potential the Group captures. The frontier bowed
outward exhibits the presumed location of the project contract on the constructive ZOPA of the land and construction negotiations with ARE. Finally, the bold diagonal
line shows the logic of the payment mechanism: All costsavings are shared according to certain proportions, as
are all cost-overruns to a certain point, after which SRV
bears the consequences alone.
The benets of the SRV Model, and more broadly the
benets of cooperative bilateral negotiations can be highlighted in relation to Fig. 2. From SRVs unitary perspective, the conventional competitive bidding would have
resulted in bids, which would have cut o most of SRVs
potential by improving AREs BATNA, and resulted in a

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shrunk ZOPA positioned in the lower right-hand corner, in

the proximity of SRVs own BATNA. Jointly speaking,
without an essentially collaborative avour, the participants would unlikely have identied all potential gains captured in the frontier of ecient contracts bowed outward.
The SRV Model allows the contractor to avoid the competitive tension in the early stages of the project contract span,
potentially increasing joint surplus there is a larger cake
to be shared.
The confrontational orientations, which often perpetuate traditional construction project scenarios, are at times
simply ill-suited to exploring let alone to creatively devising the most appropriate and benecial solutions. The
NAA framework points towards tentative explanations of
how integrative negotiation settings associated with bilateral negotiations have the potential to draw forth more
cooperative, open information exchange, and better agreements resulting in higher joint surplus. One-sided or at
times even mutual dissatisfaction is a natural outcome of
distributive negotiation structures associated with competitive bidding.
The basic retrospective orientation of the study does not
allow to make credible claims as to how NAA could have
been used to advise the counterparts separately or symmetrically or to argue what would have been the nal
outcome of the negotiations, had NAA been employed.
Moreover, since every negotiation is unique, it is dicult
to make assessments of the quality of agreements without
direct comparables.
However, NAA suggests that negotiators on each side
could have improved their negotiating power by being
more analytic about the structure of the negotiations. It
seems each side could have improved their surplus from
the bargain, primarily by having assessed their counterparts BATNA more rigorously, or by having worked to
improve their own. However, a fair point is that had any
of the parties tried to claim a signicantly greater share,
the negotiations could easily have ended at a dead-lock.
Fairness considerations have a certain transaction-cost
minimizing eect fair settlements are faster to craft and
more durable in terms of mutual commitment [10].
4. Results and discussion
This study proposed a systematic and theoretically wellfounded approach to the study of project negotiations. The
approach rests on the novel idea that a project can be conceived as a single continuum of recurring joint decision
making, in other words, negotiation. The approach treats
a project as an economic whole, not only from the project
phase perspective, but also from the buyerseller perspective. A contract embodies the formal results of past negotiations, but most importantly serves as a stepping stone for
future negotiations. The agreements forged in the early
stages are subject to renegotiation and adaptation almost
as a norm, as variation and change orders, claims, accidents and many other disturbances typically trigger renego-

tiations during implementation regardless of how detailed

an initial project contract is.
Moreover, even the simplest projects require interactive,
either joint or separate decision making in obvious contrast
to the arms-length trade apparent in, e.g., well-developed
retail markets, or the managerial ideal of unequivocal
authority. Conception of the parallel investment (buyer
perspective) and sales and delivery (seller perspective) processes as a single negotiation process, coupled with the language, tools and the frame of thought of NAA unites the
perspectives of various responsible individuals at dierent
stages and sides of a project. The enduring divide between
the project marketing and project management phases
practically dissolves from a negotiation perspective.
Despite the overarching importance of negotiations in
project business, project negotiations have received very little attention in the academia. Odd as it is, a partial explanation could simply be that research has lacked a shared
systematic framework to facilitate study into the subject.
The proposed negotiation analytic approach represents a
theoretical and methodological framework that could serve
to bridge this gap and direct future inquiries into the subject on both empirical and theoretical levels.
Towards this end, we reviewed the theoretical foundations of NAA, and subjected an empirical case study to a
descriptive and explanatory analysis through NAA. It
seems that the approach oers a logically consistent and
practically applicable framework for studying project negotiations. The approach strikes a balance between theoretical rigor and practical value that seems particularly
suited for the project business discipline, which, as of
today, remains a practice-oriented eld of study [29]. In
contrast, the eld of decision making theory contains an
abundance of profound theoretizing that has had little or
no impact on practice. A balanced, intermediary frame
of thought appears promising to develop project negotiating practices, which, broadly speaking, have been documented to be far from optimal.
A main advantage of NAA is its conceptual clarity,
which facilitates systematic analysis. Although creativity,
experience and sound intuition are at least as important
to successful negotiation as any amount of analysis, it
seems some rational analysis is necessary to correct peoples (detrimental) intuitions and to force people to reexamine their (false) assumptions [10]. The downside is that
since the approach relies heavily on the ideal of rational
behaviour [14], it does not emphasize issues that arise from
focusing on interpersonal and cultural styles, on atmosphere, on personality and psychoanalytic motivation or
a host of other softer aspects of negotiation [30]. Under
the assumption of rational decision making, negotiating
parties always calculate, i.e., dene their objectives, enumerate their alternatives, evaluate the alternatives against
the objectives and choose the best, or optimum alternative [31]. Yet it seems reasonable to argue that behavioural
and cultural issues can be subjected to NAA as well as
empirical experimentation, once researchers begin to

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understand the rational ideal and its practical applications

in the project business context.
As the next logical step on the research agenda the study
rst and foremost proposes to expand the scope of application to prescriptive uses, i.e., the development of advice to
project practitioners in on-going negotiations. Earlier simulated experiments have also documented that, contrary to
peoples common beliefs, people on average are not very
good at negotiating optimal outcomes [13]. Project developers, investors, lawyers, managers and marketers all
spend much of their time negotiating. Yet, most project
negotiators have had little formal training on the subject,
and individuals predominantly rely on implicit knowledge,
personal capabilities and situational factors in crafting
agreements [25]. NAA oers a promising framework for
developing negotiating skills, for turning implicit experience into explicit expertise, and for transferring best practices from one context to another through a common
abstraction. Ideally, practitioners could prepare more systematically for negotiations, develop more condence in
their client interaction, and stimulate unconventional, even
creative thinking. Fig. 3 illustrates the application of NAA
in the form of a preliminary phase model, including the primary content of negotiation analysis at each step. The representation describes and proposes in broad outline how
NAA might be adopted as a tool to guide thinking on project negotiations and applied in an on-going, manner in a
stream of recurring joint decision making.
First, negotiation structure refers to a kind of pre-negotiations, or intelligence phase, where the focus is on the perceptions of the zone for possible agreement (ZOPA) ahead
of the actual negotiations. The negotiating parties, their
interest, the issues under negotiation, possible levels of resolution for each issue and the best alternatives the parties
may choose to pursue outside of the negotiations enact
the ZOPA, which provides the basic premises of the negotiation planning. Second, negotiation strategy represents a
stage where the negotiating parties set their overall objectives for the given negotiation, adopt a basic behavioural
orientation (claiming, creating), and conduct any amount
of what-if analysis to plan and prepare for the actual

11

negotiations. In the third and nal stage, negotiated agreement, the parties converge on and package an agreement,
which ideally leaves no unrealized gains and is fair (and
therefore durable). Finally, the parties implement the contract, monitor and control the implementation, leading to
further negotiations in consequence. Any negotiated agreement basically embodies the formal results of past negotiations and serves as the starting point for future
negotiations, within any particular project or even between
successive projects.
The NAA framework also opens up a number of other,
attractive venues for future research. An important related
concern which arises in applying the NAA framework is
the extent to which information on the other parties interests, BATNAs, and so forth can be obtained in reality.
Gathering accurate information on these negotiation elements is obviously critical to success for negotiators or
their supporting analysts, but at the same time remarkably
dicult. An interesting direction for future research would
be to study how dierent negotiation strategies, contract
schemes or other elements positively inuence open, honest
sharing of information. Based on prior research on the subject, it is possible to assert that open sharing of information
and other forms of collaboration are potentially protable
for all parties concerned [13]. In principle, it makes sense to
engage project negotiations with a default anticipation of
the counterparts being trustworthy, and to elicit open, reciprocal sharing of information by being open towards others. Nevertheless, collaboration pays o as long as the
other party is open and forthcoming as well. If the other
party acts as an antagonist, it is better to adopt a similar
strategy: tit-for-tat. Within the scope of this study, the
WTC case provided tentative evidence of the benets of a
collaborative approach advocated under the label of win
win approach by many project business proponents. The
case captures the essence of a winwin approach in the
open, reciprocal sharing of information and in the performance-based compensation scheme.
Finally, by clarifying some fundamental thinking about
the cooperative-competitive dynamics of project business,
the approach could contribute to improved understanding

Negotiation Structure
Parties, interests
Contract set
BATNAs

Negotiated Agreement

Negotiation Strategy

Documentation
Efficiency, fairness
Implementation

Milestone objectives
Behavioural orientation
What-if analysis

Fig. 3. Key stages of the negotiation analysis approach.

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of the distinctive features of dierent project delivery and

procurement models. As an elementary exercise, the
approach helped describe, and explain the underlying
rationale of the motives for transforming face-to-face negotiations into reverse auctions and vice versa (corresponding
to the deterministic and constructive approaches established within project marketing literature). The incitement
for further research is that the understanding of dierent
negotiation and contracting schemes can benet from the
basic premise of self-interest seeking parties capable of
negotiating and crafting joint agreements for mutual benet. It seems viable that NAA could be used to analyze for
example dierent bidding protocols, strategic misrepresentations, tactical moves away from the table, as well as the
possible roles and eects of third parties such as project
consultants to negotiations.
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