UNIVERSITY OF LUSAKA

• SCHOOL OF GRADUATE STUDIES

• COURSE : CONTRACT MANAGEMENT

• Lecture : Good Practice & Contract Negotiations

• LECTURER : DR.Eng. M.K.Nsefu

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 Contracts Negotiations

Contract negotiation is the process through which two or more parties

deliberate over the contents of a contract to reach a legally binding
agreement on the terms of their relationship.

The main goal of contract negotiations is for each party to be satisfied

with the rights and obligations assigned to them.

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 Contracts Negotiations

Contract negotiation is a very important aspect of contract management.

Delays in contract generation or execution can slow a business down, for
example, but they are unlikely to have a material impact on that
business’s bottom line.

A poorly conducted negotiation, on the other hand, can saddle a company

with arduous legal obligations for years.

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 What can be negotiated?
The following are things that can be negotiated. a) Price
b) Technical Proposal
c) Risk Transfer
d) Payment Schedule
e) Scheduling
f) Warranties
g) Service Level Agreements (SLAs)
h) Service and Maintenance
i) Training
j) Upgrades.
 Contracts Negotiations

Commercial Affinity

“[Commercial Affinity] is the attractive force that keeps the parties

together. It results from the desire by each party to continue doing
business with the other because it is economically sensible to do so…. [If
they can’t satisfy each other’s needs], they just walk away from the
relationship.

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 Contracts Negotiations

Minimal Legal Terms Scottish approach:

Contracts should emphasize free market economics rather than legalities.

Minimalist approach that includes:

• Goods or services and their price

• Intellectual Property Rights (including indemnification)
• Terms implied by law but not written into the contract 5

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 Contracts Negotiations

BASIC PRINCIPLE, WITHOUT WHICH NEGOTIATION IS

IMPOSSIBLE

Successful negotiation requires compromise from both sides. Both

parties must gain something, and both parties must lose something. You
must be prepared to give something up to which you believe you are
entitled.
You cannot expect to defeat your opponent or "win" a negotiation by
either the power of your negotiating skills or the compelling force of
your logic. This is not to say that good negotiating ability is irrelevant. In
most cases, a range of possible outcomes exists. A skilled negotiator
often can achieve a settlement near the top of the range.

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 Negotiation Principles and Ethics
• WB (2018) defines ethics as a system of moral
principles or values, the rules or standards
governing a person’s behavior or the
conducting of an activity. Thus, ethics
establishes the means of doing what is right,
fair and honest.
 Negotiation Principles and Ethics
• Empathy - Would I want to be treated this way if I was the
Bidder/Proposer?
• Publicity – Would I be happy if my actions were exposed to
public scrutiny?
• Professional – Would I advise colleagues to undertake a
Negotiation in the same manner?
• Impact – Will my approach to Negotiation negatively impact
how a Bidder/Proposer works with the client post contract
award?
• Complaints – Is my approach to Negotiation likely to give
rise to a formal complaint for not following an ethical
approach based on the international standard Core
Procurement Principles?
 Contracts Negotiations

BASIC PRINCIPLE, WITHOUT WHICH NEGOTIATION IS

IMPOSSIBLE

Successful negotiation requires compromise from both sides. Both

parties must gain something, and both parties must lose something. You
must be prepared to give something up to which you believe you are
entitled.
You cannot expect to defeat your opponent or "win" a negotiation by
either the power of your negotiating skills or the compelling force of
your logic. This is not to say that good negotiating ability is irrelevant. In
most cases, a range of possible outcomes exists. A skilled negotiator
often can achieve a settlement near the top of the range.

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 Contracts Negotiations

Some of the more common reasons for negotiating in Contract Management are
listed below.

Before a contract is entered into:

• to clarify issues between the parties

• to develop the relationship and deepen understanding between parties

• to improve on the current offer (e.g. price, conditions, service levels)

• where unusual or complex circumstances exist, and these need to be explored

by the parties.

• when substantial risks are involved in the procurement and parties look to
reduce or transfer the risk exposure.

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 Contracts Negotiations

Some of the more common reasons for negotiating in procurement are

listed below. Before a contract is entered into:

During the operation of a contract:

• when there are concerns over supplier performance, it is preferable to
negotiate and solve the problem rather than litigate.

• when variations to the contract are contemplated, it will be necessary to

negotiate the terms and conditions for the variation.

• when unusual or complex circumstances arise, and these need to be

explored by the parties.

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 Balance of power in the negotiation
Three crucial variables determine the balance of power when
conducting a negotiation. These are power, time and information.

Power

Power It is important to make a realistic assessment of the power

relationship in any Contract Negotiation.

Sometimes the balance of power will sit with the agency, simply because
of the sheer size of government and the large buying power that it
represents.

Sometimes the balance of power is in the supplier’s favour where the

agency is a small customer or a supplier has an actual monopoly, a
geographical monopoly or a virtual monopoly position in the market.

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 Balance of power in the negotiation
Three crucial variables determine the balance of power when
conducting a negotiation. These are power, time and information.

Power relationships between agencies and large corporate suppliers tend

to be more equal, whilst the balance of power when agencies deal with
small-to-medium enterprises (SMEs) tends to favour the agencies.

Being the powerful party in a negotiation is, in itself, neither good nor
bad, ethical or unethical. However, any market power must not be
misused to damage, eliminate or exclude competitors from the market.

Agencies can increase their negotiating power by identifying a number

of alternative products/services that could meet their requirements and by
having a range of possible suppliers, thus reducing their dependence on
buying a particular item from a particular seller.

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 Balance of power in the negotiation
Three crucial variables determine the balance of power when
conducting a negotiation. These are power, time and information.
Time
Most people describe negotiation as if it were an event. This implies that
it has a definite start and finish within a fixed time frame.

In fact, negotiation is a process not an event and the actual starting point
of a negotiation is always long before the start of the formal face-to-face
negotiating phase.

In the preparation phase it is wise to gather as much information as

possible both about the agency’s interests and alternatives and the
interests and alternatives of the supplier. After the formal negotiating
phase has finished and an agreement has been reached it must be
documented, formally agreed, implemented and monitored.

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 Balance of power in the negotiation
Three crucial variables determine the balance of power when
conducting a negotiation. These are power, time and information.
Time
Generally, good outcomes in procurement negotiations cannot be
achieved in tight time frames.
It is worth investing the time that is necessary to explore issues, identify
the needs and interests behind expressed positions and develop creative
and innovative solutions of mutual benefit to the negotiation.
Time is a valuable commodity in a procurement negotiation. The agency
can best use available time to improve its negotiating position
substantially by gathering useful information which allows the
development of alternatives to the solution being proposed by the
supplier with whom the current negotiation is taking place.

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 Balance of power in the negotiation
Three crucial variables determine the balance of power when conducting a
negotiation. These are power, time and information.

Information
Information is at the heart of a negotiation. Adequate attention to
gathering information during the preparation phase of a negotiation
can significantly enhance the likelihood of a mutually satisfactory
agreement being reached during the formal phase of the
negotiation.

During the formal phase, it can be a common strategy for parties to

try to conceal their true interests and priorities.

The chance of obtaining accurate information from an experienced

negotiator during an adversarial negotiation is quite low.

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 Balance of power in the negotiation
Three crucial variables determine the balance of power when
conducting a negotiation. These are power, time and information.

Information
Information is normally easiest to gather during the
preparation phase before the formal negotiation begins.

The more information about the other party’s financial

situation, real priorities, needs, deadlines, costs and
organizational pressures, the easier it will be to develop
negotiating proposals which address these issues and the
stronger the negotiating position will be.

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 Negotiation Planning Steps
• Step One – Set your Objectives

• The first step in Negotiation planning is to set the objectives. The

negotiator should critically think about the objectives of the
Negotiation. When setting the objectives, the following should be
considered.
• a) What do is to be achieved?
• b) What are long-term objectives?
• c) What is the impact of achieving the objectives?
d) What are the Bidders/Proposers objectives?

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 Negotiation Planning Steps
• Step Two – Set your Negotiation Parameters
• The second step in Negotiation planning is to set the parameters.
When setting the parameters, the following should be considered.
• a) Setting ideal position;
• b) Set realistic or fallback position;
• c) Set the walkaway position. This is key if you want to achieve
what you planned otherwise it is too easy to make a mistake or to
overlook something in the heat of the Negotiation.

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 Negotiation Planning Steps
• Step Three – Identify Issues and Priorities

• The third step in Negotiation planning is to identify the potential

issues and to priorities these issues so that the negotiating team is
fully prepared. Critical and analytical is imperative at this stage.

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 Negotiation Planning Steps
• Step Four – Set your Targets
• The fourth step in Negotiation planning is to set your negotiating
targets. There should be clarity in terms of short term value or
establishing long term relationship.
• There is need to set up a SWOT analysis. Think of the real external
opportunities and threats as the walk away positions on both
sides. True power in any Negotiation is having developed a good
walk away alternative. Understanding this may not get what is
required, but it will prevent agreeing to a not so favorable
outcome. At this stage, the Negotiator should. a) Determine what
is the worst-case scenario for each issue identified; b) Determine
what is the best-case scenario for each issue identified; and c)
What is the combined and / or cumulative position.

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 Negotiation Planning Steps
• Step Five – Calculate the cost of Concessions
• The fifth step in Negotiation planning is to calculate the cost of
concessions. This helps determine when to agree to concessions
being offered or to give a concession. Below are things that should
be considered.
• a) Be precise as small figures, compounded, can make a massive
difference to the overall deal;
• b) Convert percentages into a monetary value;
• c) Consider the impact of internal costs as well as external costs;
d) The costs of concessions are not always financial they can set
uneasy precedents that have further impacts at later stages of the
Negotiation.

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 Negotiation Planning Steps
• Step Six – Identify the BATNA

• The final step in Negotiation planning is to identify the Best

Alternative to a Negotiated Agreement (BATNA). To identify the
BATNA the first thing that should be done is to list everything that
could be done if agreement is not reached. Then explore each of
the options and try to improve on them and then finally choose
your best option which is the BATNA.

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 Negotiation Planning Steps
• Step Six – Identify the BATNA

• The final step in Negotiation planning is to identify the Best

Alternative to a Negotiated Agreement (BATNA). To identify the
BATNA the first thing that should be done is to list everything that
could be done if agreement is not reached. Then explore each of
the options and try to improve on them and then finally choose
your best option which is the BATNA.

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 When things don’t go according to plan

Sometimes the procurement negotiation simply does not run according to

plan.

Provided below is some information to assist when things do not go

according to plan.

Breaking deadlocks - A deadlock exists when negotiations reach an

impasse or stalemate. Both sides appear to have exhausted all possible
concessions which might get the negotiation moving again.

Deadlocks can be recognised because there is no progress, frustration

levels rise, emotions become more heated and there is a sense of going
over old ground over and over.

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 When things don’t go according to plan

Deadlocks can be broken in two main ways:

changing something – making the situation different

explaining something – making the situation seem different.

Break-throughs can be encouraged by pursuing some of the following

options:
• lead negotiators for both sides meet informally in a neutral
environment
• team leaders meet informally as above

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 Common Barriers to Successful
Negotiations
• Viewing Negotiations as a confrontation

• Trying to “Win” at all costs

– It’s a solution that should benefit both parties not a win lose
confrontation
• Being Emotional

– It’s important to maintain control

• Not trying to understand the other person’s perspective

• Blaming the other person

 When things don’t go according to plan
form sub-groups to thrash out issues from various areas of the
negotiation such as technical, financial, product testing etc
• redefine the problem and then both parties work together to brainstorm
possible solutions
• bring in an outside ‘expert’ to give a different perspective on the
problem
• repeat the agency’s position and add new support or a new angle
• change the subject to more easily resolved issues and then return to the
deadlock issue
• suggest a recess for both parties to consider more fully the other party’s
position
• offer a minor (pre-planned) concession as a gesture
• offer to trade concessions.

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Tips on How to Negotiate Contracts with Vendors and Service Providers

“Contract managers must know how to structure healthy

vendor contracts and relationships. Project Managers
should take the key steps that will ensure that a new or
renewed contract will not turn out to be a “nightmare”
contract”

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 Contract Performance Metrics

When performance slips, consider comparisons to industry standards as

a way to get the attention of your contractor or vendor. Standards can
bolster the following performance management steps:

• Review service levels in light of published standards

• Question performance slips and request a corrective plan

• Establish a time frame for performance improvement

• Escalate continued performance problems.

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 Contract Performance Metrics

Comparisons of performance to industry/projects peer groups are often

useful to better understand the value proposition put forth by the vendor.

For major outsourcing or procurement activities, Gartner(2012)

recommends the inclusion of contract language to address price
calibration points, to ensure opportunities for price adjustment based on
market conditions.

Action Item: Calibrate service performance by using benchmark data to

ensure that industry standard service levels are being met.

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 Service-Level Agreements

Almost every Project contract that is written could be improved by

including or enhancing a section on expected performance or
service-level agreements (SLAs) covering the performance of the
vendor and its product or service.
Expectations should be quantifiable and specific, and penalties or
rewards must be included to ensure effectiveness.
Too often, Project Managers argue with suppliers about what type of
performance was expected and whether or not the supplier agreed to
certain standards within the contract.
To eliminate ambiguity and provide clarity as to what is expected, it is
important that this be spelled out within the contract and agreed to by
both parties.
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 Service-Level Agreements

Performance expectations may take many forms, depending on the

product or service being acquired. Measurement areas may include:

•Delivery schedules of the supplier for material

• Performance and Service metrics of the particular service/product
— how should it perform?
Many contracts use “weasel words” such as “the product should
perform substantially as follows ....” That makes any performance
guarantees worthless. Care should be taken to remove such words
from the contract before signing.

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 Service-Level Agreements

For each defined service level, the following components should be

taken into consideration when formulating an enforceable SLA:

definition, time frame, assumptions, responsibilities, service level,

measurement formula, measurement reporting period, data sources,
escalation, contractual exceptions, penalty and reward definition,
penalty and reward formula, and notes.

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 Improving Financial Terms

Every contract manager wants to obtain the best possible pricing, but
beware of locking in long-term rates for technologies that could
experience rapid price declines. One smart way to protect your
enterprise is by calibrating current pricing with industry market pricing
for similar services.
Long-term contracts often end up with high comparative costs after
18 to 36 months. Volatile technologies present particularly high risks
in setting price levels. What are your options after the contract is in
place?
• Your No. 1 weapon is comparative pricing • Threaten to cut back all
add-on work or additional acquisitions • Look for anticipated
productivity gains • Expect add-ons to be priced at market value.

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 Improving Financial Terms

If the contract does not contain an annual or biannual price

calibration clause, don’t give up hope. Favorable price adjustment
may still be attainable by discussing the “facts” of the price decline
with your vendor.

In some cases, it may make economic sense to terminate the

contract, pay the termination penalty and establish a new contract
with more-aggressive rates. Don’t forget to include a price calibration
clause in the new contract. Usually, your current vendor will not pass
up a chance to renegotiate to avoid losing your business.

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 Preparing for Contract Negotiations

Enterprises that do their “homework” before

negotiation will typically obtain pricing that is 15
percent to 25 percent better than those that do not.

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 Proactively Avoiding Problem Relationships

Project Managers that address potential problem relationships before signing

or renewing their contracts will minimize the potential for adverse impact in the
future.

Problem relationships are definitely difficult to deal with, so the best way to
approach them is to avoid them altogether. That can best be accomplished
when negotiating new or renewal contracts.

During contract negotiations, vendors wishing to book new revenue have a

vested interest in eliminating any barriers to doing so.

If problem relationships already exist, vendors have more incentive to fix them,
or the business may go somewhere else.

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 Proactively Avoiding Problem Relationships

If contract negotiations are imminent and relationship problems have

occurred in the past, take time to clear the air before the negotiations
begin. Project Managers actions include:

• Meet with account representatives and other vendor personnel that

will be servicing the account, and gain confidence that working
relationships will function well.

• If you are fairly certain that problem relationships will exist after the
completion of contract negotiations, request that the vendor assign
different personnel to service your account or look to source to a
different vendor
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 Proactively Avoiding Problem Relationships

• For service contracts, the right project manager can make or break
the project. Ask to interview the proposed project manager, and build
in protections in case that project manager has to be replaced prior
to completion of the contract.

• As with all good contracts, build in escalation clauses to handle

unforeseen problems.

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 Recommendations

• The entire Project Team Members who have the responsibilities for
contracts, must be aware of the negotiation process; the suppliers must
be well informed about the terms, conditions and other factors
necessary to enhance effective negotiation on sourcing of materials.

• It should be noted that the negotiation process should creates a win –

win situation where both parties will have a fair deal to reflect on the
principles of total quality management.

• The organization must also ensure that adequate training and

information are made available to the negotiation team. This will
ensure maximum benefit to the organization.
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 Recommendations

• On big and complex projects, the negotiation team must

comprise of the following:
• Team leader
• Critic
• Relator
• Expert
• Builder
• Observer

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 Factors for success
– Legitimacy of your case Negotiation Skills

– Confidence in presenting it
– Courtesy to the other party
– Adaptation to the other party’s style
– Rapport
– Incentives and trade offs
– Research the bigger picture
 Recommendations

Recognize that many problems encountered in managing

nightmare contracts are a direct result of poor communications.

• Frequently assess the strengths and weaknesses of your service

provider or vendor, and consider how to maximize strengths.

• Determine the profitability of the contract, and know when to

push and when to back off on pricing issues.

• Recognize the risks of contract default.

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 Recommendations

. Clarify terms for all contract modifications.

• Remember, all things are negotiable

• Actively and aggressively pursue every new contract

negotiation or renewal as a means to improve vendor relations
and to amend unfavorable terms and conditions .

• Always negotiate for the current contract cycle and the next
one to facilitate continuity and best-in-class contract
management.

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 Recommendations

• Include a section on expected performance or service-level

agreements in all new contract negotiations or renewals.

• Include specific contract language to take mergers,

acquisitions and divestitures into consideration.

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 THE END

• THANK YOU

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