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

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.

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

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  1. NCMA Cape Canaveral Chapter Winter Educational Conference Negotiating for Profit/Fee:Lessons Learned & Best PracticesMarch 4, 2010 By:Gregory A. Garrett, CPCM, C.P.M., PMPManaging Director & Practice LeaderGovernment Contractor ServicesNavigant Consulting, Inc.

  2. 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

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

  4. Increasing Federal Government Spending & Transactions (FY ‘00 – ’09) * * *Does not include the $787 Billion American Recovery and Reinvestment Act (ARRA) “Stimulus Act”.

  5. 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

  6. 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

  7. Exercise – Q&A • How important are contract negotiation skills to ensure business success? • How well do you negotiate? • 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.

  8. The Contract Negotiator’s Competencies Model Reference Text: Contract Negotiations, by Gregory A. Garrett, CCH, Inc. (2005), pg. 14.

  9. 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

  10. Skills to Win: Self-Assessment Survey • I am a person of high integrity. • 1 2 3 4 5 • I always act as a true business professional, especially in contract negotiations. • 1 2 3 4 5 • I ensure all of my business partners and team members act honestly, ethically, and legally, especially when involved in contract negotiations and contract formation. • 1 2 3 4 5  • I verbally communicate clearly and concisely. • 1 2 3 4 5 • I am an effective and persuasive contract negotiator. • 1 2 3 4 5

  11. Skills to Win: Self-Assessment Survey (Cont’d) 6. My written communications are professional, timely, and appropriate. 1 2 3 4 5 7. I am an excellent team leader. 1 2 3 4 5 8. I consistently build high performance teams, which meet or exceed contract requirements. 1 2 3 4 5 9. I am willing to compromise when necessary to solve problems. 1 2 3 4 5 10.  I confront the issues, not the person, in a problem-solving environment. 1 2 3 4 5

  12. 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 2 3 4 5 12. I am able to achieve my desired financial results in contract negotiations. 1 2 3 4 5  13. I understand various cost estimating techniques, numerous pricing models, and how to apply each when negotiating financial arrangements. 1 2 3 4 5 14. I understand generally accepted accounting practices and how to apply them when negotiating deals. 1 2 3 4 5 15. I am highly computer literate, especially with electronic sales tools, and/or electronic procurement tools. 1 2 3 4 5

  13. 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 2 3 4 5 17. I understand the contract management process and have extensive education, experience, and professional training in contract management. 1 2 3 4 5 18. I have extensive education, experience, and training in contract law.   1 2 3 4 5 19. I have extensive education, experience, and training in our organization's products and services. 1 2 3 4 5  20. I am considered a technical expert in one or more areas. 1 2 3 4 5 

  14. Skills to Win – Self-Assessment Survey Worksheet Skills to Win: Self-Assessment Survey (Cont’d) 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: _______________________________

  15. Skills to Win: Self-Assessment Survey (Cont’d) Skills to WinSelf-Assessment SurveyScoring 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.

  16. Contract NegotiationA 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 Reference Text: Contract Negotiations, by Gregory A. Garrett, CCH, Inc. (2005), pgs. 53-54.

  17. Contract Negotiation Process Reference Text: Contract Negotiations, by Gregory A. Garrett, CCH, Inc. (2005), pg. 61.

  18. Contract NegotiationsEssential Elements Key Inputs Tools & Techniques Desired Outputs • Solicitation (RFP,RFQ, etc.) • Bid or Proposal • Buyer’s sourceselection process • Seller's past performance • ·Previous contracts • ·Competitor Profile • Business Ethics/ Standards of Conduct Guidelines • ·Market and Industry practices • Contract or Walk away • Oral presentations • Highly skilled contract negotiators • Legal Review • ·  Business Case Approval • ·  Contract Negotiation Formation Process • Plan negotiations • Conduct negotiations • Document the negotiation and Form the Contract Reference Text: Contract Negotiations, by Gregory A. Garrett, CCH, Inc. (2005), pg. 56.

  19. 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

  20. Negotiating Profit/Fee vs. Risk (Types of Contracts) FFP FP/EPA FPI T&M CS CR CPIF CPAF CPFF CPPC** (Buyer’s Risk & Level of Oversight) (Low) (High) (Seller’s Risk & Opportunity for Profit/Fee) (High) (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

  21. Checklist of BuyerContract Negotiation Best Practices • (The Buyer Should: ) • Know what you want – lowest price or best value • State your requirements in performance terms and evaluate accordingly • Conduct market research about potential sources before selection • Evaluate potential sources promptly and dispassionately • Follow the evaluation criteria stated in the solicitation: management, technical, and price • Develop organizational policies to guide and facilitate the source selection process • Use a weighting system to determine which evaluation criteria are most important • Obtain independent estimates from consultants or outside experts to assist in source selection • Use past performance as a key aspect of source selection, and verify data accuracy • Use oral presentations of proposals by sellers to improve and expedite the source selection process Reference Text: Contract Negotiations, by Gregory A. Garrett, CCH, Inc. (2005), pg. 85.

  22. Checklist of Contract Negotiation Best Practices • (The Buyer and Seller Should: ) • Understand that contract negotiation is a process, usually involving a team effort • Select and train highly skilled negotiators to lead the contract negotiation process • Know market and industry practices • Prepare yourself and your team • Know the other party • Know the big picture • Identify and prioritize objectives • Create options – be flexible in your planning • Examine alternatives • Select your negotiation strategy, tactics, and counter tactics • Develop a solid and approved team negotiation plan • Use an agenda during contract negotiation Reference Text: Contract Negotiations, by Gregory A. Garrett, CCH, Inc. (2005), pg. 86.

  23. Checklist of Contract Negotiation Best Practices (Cont’d) • (The Buyer and Seller Should: ) • Set the right tone at the start of the negotiation • Maintain your focus on your objectives • Use interim summaries to keep on track • Do not be too predictable in your tactics • Document your agreement throughout the process • Know when to walk away • Prepare a negotiation results summary • Obtain required reviews and approvals • Provide copies of the contract to all affected parties • Document negotiation lessons learned and best practices • Prepare a transition plan for contract administration • Understand that everything affects price • Understand the Ts and Cs have cost, risk, and value • Know what is negotiable and what is not Reference Text: Contract Negotiations, by Gregory A. Garrett, CCH, Inc. (2005), pg. 86.

  24. 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 gregg.garrett@navigantconsulting.com

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