61837756 59516912 pm0018 project contract management

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Contract Management in Projects

Master of Business Administration-

MBA Semester IV

PM0018 Contract Management in

Projects

Assignment Set-1

Question 1. Describe the four basic elements of a contract

A contract is a binding agreement between two or more parties.

Once signed, this agreement can be enforced by either a court of

law or binding arbitration. Because legal contracts cannot be

signed under duress, there is the "mirror image" standard of

binding agreement. This simply means that each party must be

as willing to sign the agreement as the other. The concept of

"breach of contract" is recognized by state and federal laws

and is a valid reason for litigation.

Mutual Consent

To enter into a binding contract, there must be mutual

consent and understanding between the parties. This means

there must be a certain amount of conceptualization about the

contract's terms. This is why legal contracts are so long and

filled with what people refer to as "lawyer-speak." All the fine

print is putting into words the concepts of the contract so there

is no wiggle room for interpretation.

Agreement

This is known as the "offer and acceptance" element of the

contract. It is just as it sounds. One party will make an offer,

and the other party will accept the offer. This is what makes a

contract take shape. If one party makes an offer and the other

party makes a counteroffer, an agreement has not beenmade. This is usually seen as a rejection of the offer. If the

unteroffer is rejected, the original offer does not necessarily

stand anymore.

Exchange

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This is one of the very basic elements of a contract. Each of the

parties must bring to the table some form of product, service or

legal tender to have a mutual exchange. This means that a

contract can involve any of these exchanges. Employment

contracts involve a business exchanging a salary and

benefits for the work services of a new employee. Sales

contracts involve the exchange of goods for the promise of

payment from a customer. In most cases, contracts are only

enforceable after one of the parties has fulfilled his share

of the exchange. For instance, the new employee mentioned

above would have a difficult time suing his employer for not

paying him if he failed to show up for work.

No Public Policy Violation

Even if a contract meets all other necessary elements, violating

public policy will automatically invalidate it. For instance, if

prostitution is against the law in a certain city, a contract in

which a woman agrees to sleep with a man for a specified

amount of money would be invalidated because it violates

public policy.

Question 2. Describe the characteristics and legal issues of

Lump-Sum Turn Key type (LSTK) contract

Lump-sum contracts (also called Lump-sum fixed price or Fixedprice contracts)

In a lump-sum or fixed price contract, the prime contractor agrees tocomplete the project, as described in the contract documents, for a fixedprice. For firm fixed-price contracts, once a contract is in place thecontractor is responsible for any cost-overruns. In this case, the buyer isresponsible for providing a complete definition of what is required andschedule for delivery. The price provided by the seller is going to includean estimate of its costs and its profit. If the sellers costs are less thanthe costs included in its fixed price, the seller earns additional profit. If

the sellers costs are more than the costs included in its fixed price, theseller earns less profit.

Fixed-price contracts are adopted and are effective when the scope ofwork is well-defined. Fixed-price contracts shift at least some of theuncertainty associated with a project to the contractor. The evident

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advantage of a Fixed-price contract is that it encourages efficiency in thecontractors work since the level of profit realized depends on acontractors ability to control costs. Fixed-price contracts are among theeasiest to administer if change orders are not required. However, theycan result in relatively inflexible project activities, with significantinstitutional disincentives to modifying activities once work hascommenced as per the contract.

Variations of Fixed price contracts:

Other forms of fixed-price contracts allow variances or change orders ifconditions are significantly different from what the original statement ofwork described. The example of the latter variety is a fixed pricecontract having some items of work having a fixed price per unit of theseitems. For these items, the price per unit is fixed, but their sub-total costwill depend of the number of units of work that get built. A portion of thefixed price applied for items of work that cannot be quantified in thebeginning can adopt this mode of Unit prices. This is discussed later inthis section under the heading Unit Price Contracts.

Another variation is that if a project has a long duration, the fixed pricecontract might include an allowance for future labor and materialescalation costs. Escalation provisions for labor and materials costs arefrequently tied to relevant indices that are published by the federalgovernment. Some public sector undertakings in India (e.g. NuclearPower Corporation of India Ltd.) allow escalations for projects having acompletion period of longer than twelve (12) months, and do not allowescalation if the period is less than twelve months. It must be noted herethat theoretically, the escalation can result in either an increase in thefixed price or a decrease in the fixed price depending on how the indicesvary.

EPC contracts:

EPC refers to Engineer, Procure and Construct, which implies that thethree scope elements which we discussed earlier in this section viz.design, procurement and construction are in the EPC contractors scope.D-B contracts have the nature of EPC contracts except that financing isinvariably involved for the contractor in the case of EPC contract. AlsoEPC contracts are usually of the Lump-Sum Turn Key type (LSTK).

Lump-sum turnkey (LSTK) EPC contracting is now popular world-wide asa project delivery system for large process and power facilities.Examples are steel mills, LNG facilities, petroleum and petrochemicalfacilities, power plants. It is also being adopted for large infrastructuredevelopments such as airports, water treatment facilities and

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telecommunication systems. While the term LSTK implies a fixed pricefor the whole contract, one must understand that several variations ofthe EPC mode of contracting are in vogue. The contract price issue canhowever vary from fixed price to a hybrid price.

LSTK EPC contracts offer the following benefits:

It meets the primary expectation of the owner which is that theowner looks to the EPC contractor as a single point of responsibility(SPR) for all facets of the project from basic design throughcommissioning and start-up. The project owner has thereforepreferred to transfer more risk to the EPC contractor, understandingthat this risk allocation carries a higher price tag. Examples of somerisks which are handled by owner even in a D-B contract, but aretransferred to the contractor in a EPC contract are:

Contractor should account for existing site conditions (includingsub-surface conditions)

Even risk for some force-majeure conditions can be transferredto contractor

If the scope of the contract is well defined, the potential forsignificant changes is very low. Without the risk of significantchanges, the schedule for performing the work is unlikely to change.In this case, a fixed-price contract is usually the best approach. Moststandard materials are procured using a fixed-price contractapproach since the scope of work and the schedule objectives areeasy to define.

If the design of engineered materials can be finalized prior to the need ofacquiring them, they can also be procured using a fixed-price approach.Engineering equipment could also be acquired using a fixed- pricecontract if it is possible to articulate sufficient performance objectives forthe project.

The drawbacks of the LSTK EPC contract are as under:

It provides less incentive for a contractor to minimize scheduleduration than is the case for reimbursable contracts. In addition,

fixed-price suppliers and contractors often minimize qualitymanagement activities in order to reduce costs, which can result inquality problems. Therefore, the project manager needs tomaintain close oversight during the project.

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Renegotiations of the price might come into play since fixed-pricecontractors are reluctant to proceed with any work associated witha change request before resolving the cost of the change. Thesenegotiations might have a negative impact on the schedule of theproject.

Characteristics and legal issues of LSTK EPC contracts:

We now review a few of the noteworthy characteristics and legal issuesconcerned with LSTK EPC contracts, the understanding of which isnecessary in order to reap the benefits that this project delivery systemcan provide:

Design

In a LSTK EPC contract, the responsibility for basic and detaileddesign rests with the contractor. Owner gives the design criteria

and contractor gives his price based on his basic and detaileddesign, which in turn are based on owners design criteria. Inpractice, the design criteria can vary from generic through broadto very detailed. If owner gives very clear design criteria, hebecomes responsible for design deficiencies. If owners designcriteria are ambiguous, then the contractor should clarify thisambiguity prior to submitting his price. If the design criteria arecritical to the project, he should ensure that it is made part of thecontract. Otherwise, different interpretations of the design criteriaby owner and contractor can lead to disputes affecting both theschedule and cost of the project. This can only be prevented by

pre-contract negotiations, scope review and clarification sessions,agreement on preliminary P & I d s (Process and Instrumentationdiagrams) and design drafts. Such pre-contract discussions shouldnot be restricted to project personnel only, but should include endusers of the project like operation personnel.

Changes or Variations

Even when design criteria are clear, EPC contracts allow forvariations (see note on FIDIC in this section). The impact that achange will have on the project will depend on the timing of the

change e.g. a change in the P & I d at the design stage will haveless adverse impact than at the construction stage. This meansthat changes should be addressed early.

Schedule delay

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Owner regards schedule as contractors responsibility in a LSTKEPC contract. However, for the owner to claim compensation forschedule delay from the contractor, he must prove that thecontractor delayed a work on the critical path of the schedule.Similarly, the contractor will have to keep producing a time-impactanalysis of each delay throughout the course of the project in orderto claim the right to be given an extension in the projectcompletion schedule as well as any financial compensation hemay desire from the owner.

Force majeure

These are occurrences beyond the control of either owner or contractore.g. war, terrorism, labor strikes, radiation, changes in the law, naturalcatastrophes. However, precise terms regarding force majeureconditions also need to be included in the contract. These terms shouldalso address whether only time extension will be given for occurrence ofsuch events or whether financial compensation will also be allowed.

Owner controlled activities

Notwithstanding the single point responsibility to be owned by the LSTKEPC contractor, the owner is also responsible for his actions, some ofwhich are:

adequate site access

Assurance that basic design issues are addressed. This is usually

handled by the protocol of owner formally affixing his signature onthe basic design document prepared by the contractor conveyingowners formal approval of the same

facilities for commissioning like raw material feed, water, powerand other utilities as applicable which are usually in owners scope.

Payment and performance assurances

EPC contractor is invariably bound for performance by a Bankguarantee for satisfactory performance of the project for a period

(usually one to one and a half years) termed as the Defect LiabilityPeriod. For the owner, this is a mechanism to cover defective work oreven late project delivery.

In some contracts, contractor can get his payment assurance for workdone by owner agreeing to open a letter of credit in favor of the

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contractor. However, this is usually for delivery of costly equipment orimported equipment.

Insurance

Insurance companies offer several options to both owner andcontractor. Examples are LD insurance, cost over-run insurance,insurance for even some force majeure items etc. Insurance is animportant risk mitigation mechanism adopted by owners andcontractors in EPC contracts. However, the fine print of insurancepolicies must be scrutinized to understand complex policy terms,deductibles, exclusions which limit the coverage etc.

Conclusion about LSTK EPC contract:

EPC projects offer a mutually beneficial and exciting form of projectdelivery for both the owner and the contractor. However, project ownersshould not mistake the LSTK EPC approach as a license to do anythingthey want without the threat of increase in project cost or delay inproject schedule. They must discharge their responsibilities withouthindering the work of the contractor. Both owner and contractor mustrealize that the goal of LSTK EPC contract is to allow the work to proceedwithout disruption due to changes throughout the implementation of theproject. Otherwise many of the benefits of this mode of project deliverywill not be realized.

Q 3. Write short note on the following bidding methods:

a. International/Global Competitive Bidding (ICB).b. Limited International Competitive Bidding (LIB).c. National Competitive Bidding (NCB).

a. International/Global Competitive Bidding (ICB).

International Competitive Bidding (ICB)In ICB, we (as Employer or Purchaser) invite open bids for works andgoods (through wide advertisement in electronic as well as print media)from Contractors and Suppliers across the globe, which are eligible toperform the contract. That is why it is also called Global Competitive

Bidding.

Requirements for ICB

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(a)Advertisement: we (as Employer or Purchaser) have to publishthe Invitation for Prequalification of works/Invitation for Bids (IFB)in widely seen websites such as United Nations developmentBusiness online (UNDB online), and in the Development GatewaysdgMarket to attract the attention of the foreign contractors andsuppliers,. The Invitation for prequalification/ IFB shall containdetails regarding the scope of the ICB, the address and telephonenumbers of the officer from whom details could be got (or the/pre-qualification/bidding documents are available), the website wherethe detailed Invitation for pre-qualification/IFB and pre-qualification/bidding documents are available, the last date andtime, the place for submission of the pre-qualificationapplications/bids. To ensure further wide publicity, we could alsosend copy of the Invitation for pre-qualification/IFB to theEmbassies and Trade representatives of the countries from wherewe can expect participation in the bid. All the countries have theirEmbassies and Trade representatives in New Delhi. We should alsopublish the Invitation for prequalification/ IFB in national newspaper(s) having wide circulation in metros and principal cities ofIndia and also in the region where the procurement is being made.We should also publish the Invitation for pre-qualification/IFB inappropriate Trade Journals published in the country. These actionswill ensure adequate publicity and we could expect bettercompetition and thus economic and efficient procurement.

(b) Pre-qualification document (for works): The pre-qualificationdocument shall include sufficient details regarding eligibility,method of submission of pre-qualification documents, details of

documents/ information to be furnished, qualification criteria to besatisfied, evaluation methodology, preparation of the list of pre-qualified applicants and notification of the list of approved pre-qualified bidders.

(c)Period for submission of pre-qualification documents: Thepre-qualification submission period, that is the period from thedate of publication of the Invitation for pre-qualification in thepress or the date of making available the document for sale(whichever is later) shall be sufficiently large, depending on the

size and complexity of the proposed contract to enable theprospective applicants to obtain the pre-qualification document,study the field conditions, collect field data, compile thequalification and other required information and then submitprequalification applications. A period between 45 to 60 days

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depending on the size and complexity of contracts is consideredreasonable.

(d)Bidding document (for works and goods): The biddingdocument shall include sufficient details regarding eligibility,method of submission of bids, bid security (amount and currency)

to be furnished, period for submission of bids, qualification criteriato be satisfied, evaluation methodology, securities to besubmitted, award of contract etc. It shall also includeinternationally accepted Conditions of Contract, such as thosedeveloped by Federation Internationale Des Ingenieurs-Conseils(FIDIC) and Institution of Engineers, U.K.

(e)Bidding period (for works): The bidding period, that is theperiod from the date of issue of the bid document to pre-qualifiedbidders to the last date stipulated for the submission of the

prequalification document, shall be sufficiently large, depending onthe size and complexity of the proposed contract to enable theprospective bidders to obtain the bidding document, study the fieldconditions, collect field data, work out reasonable rates and thensubmit meaningful bids. A period between 45 to 60 days or evenmore in case of large and complex contracts is consideredreasonable.

(f) Bidding period (for goods): The bidding period, that is theperiod from the date of publication of the IFB in the press or from

the date of making available the document for sale (whichever islater) to the last date for submission of bids, shall be sufficientlylarge, depending on the size and complexity of the proposedcontract to enable the prospective bidder to obtain the biddingdocument, study the same, work out the reasonable rates andthen submit meaningful bids. A period between 45 to 60 days isconsidered reasonable.

Steps for ICB

(a) Works with pre-qualification:We, as the Employer, have to take the followingessential steps:

Notification and advertising for submission of pre-qualification applications;

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Issue/sale of pre-qualification documents to prospectivebidders;

Submission of pre-qualification applications by theprospective bidders;

Opening of pre-qualification applications;

Evaluation of pre-qualification applications;

Preparation of the list of pre-qualified bidders; Issue the bidding document to the pre-qualified bidders;

Submission of bids by pre-qualified bidders;

Evaluation of the bids;

Selection of lowest evaluated responsive bid;

Contract award and signing of the contract with theContractor;

Contract performance by the Contractor;

(b) Works and goods without pre-qualification (post-qualification):

We, as the Employer/ Purchaser, have to take followingessential steps:

Notification and advertising;

Issue/sale of the bidding document to the prospectivebidders;

Submission of bids by prospective bidders;


Selection of lowest evaluated responsive bid based onpost-qualification;

Contract award and signing of Agreement with the

Contractor/ Supplier[6]; Contract performance by Contractor/Supplier;

B. Limited International Competitive Bidding (LIB).

In this method of procurement, we (as Purchasers) invite bids for goodsfrom selected Suppliers, who are the only known manufacturers, whocan manufacture and supply the required goods. Here we do not issueadvertisement through press or any other means. Since the bidding isopen for a few selected manufacturers, no domestic preference is

allowed. As in the case of the ICB, the bidders can submit bid in anyinternationally convertible currency and they are paid in the samecurrency.

This method of procurement is for goods. It is usually adopted:

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(a) Where the cost of goods to be procured are small (usually less thanthe equivalent of 200,000 US dollars(b) It is reliably known that there are limited number of suppliers ofparticular goods; and

(c) There are other reasons justifying departure from full ICB procedures

Requirements of LIB

(a) Advertisement: Since we invite the bids from limited number ofpotential suppliers, advertisement as in the case of ICB is not required.We have to ensure that the list of potential suppliers is broad enough toensure receipt of competitive bids;

(b) Bidding document: We have to prepare the Bidding document withall the details as in the case of ICB;

(c) Bidding period: The requirement of bidding period is the same asthat of ICB;

Steps for LIB

We as Purchasers have to take the following essential steps forLIB:

o Issue/sale of the bidding document to the potential suppliers;

o Submission of bids by the potential suppliers;

o Evaluation of the bids;o Selection of lowest evaluated responsive bid based on post-

qualification;o Contract award and signing of contract agreement with the

Supplier;o Contract performance by the Supplier;

C. National Competitive Bidding (NCB).

As the name itself suggests we as Employer or Purchaser, invite bids forworks and goods (through advertisement in electronic and print mediawithin the country). However foreign firms, if they want can participatein the bidding process provided they accept the bidding conditions. Thebidders have to submit their bids in national currency only and paymentwould also be made in national currency.

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We select NCB method of procurement for works and goods under thefollowing circumstances:

a. Contract values are lower than the threshold fixed for ICB;b. Where the works are spread out geographically (different

villages or towns in a district) or spread over time with

staggered period of starting, may be because of lack ofavailability of land or lack of financial resources;c. Where the works are labour intensive (that is deployment of

huge labour force is necessary, which may not interest aforeign contractor)

d. Where the goods are available nationally at prices below theinternational market because of high transportation costs;

e. Where foreign firms are not likely to be interested to take upthe works or make supply;

Requirements of NCB

(a) Advertisement:The Invitation for pre-qualification/IFB shall containdetails regarding the scope of the NCB, the address and telephonenumbers of the officer from whom details could be got (or the/pre-qualification/ bidding documents are available), the website where thedetailed Invitation for pre-qualification/IFB and pre-qualification/biddingdocuments are available, the last date and time, the place forsubmission of the pre-qualification applications/bids. The Invitation forpre-qualification/IFB shall be published in national news paper(s) havingwide circulation in metros and principal cities of India and the regionwhere the procurement is being made. We should also publish the

Invitation for pre-qualification/IFB in appropriate Trade Journalsdepending on the value of proposed procurement. These will ensureadequate publicity and we could expect better competition.

(b) Pre-qualification document (for works):The pre-qualificationdocument should include sufficient details regarding eligibility, methodof submission of pre-qualification documents, details of documents/information to be furnished, qualification criteria to be satisfied,evaluation methodology, preparation of the list of pre-qualifiedapplicants and notification of the list of approved pre-qualified bidders.

(c) Period for submission of pre-qualification documents:The pre-qualification submission period, that is the period from the date ofpublication of the Invitation for pre-qualification in the press or the datemaking available the document for sale (whichever is later) shall besufficiently large, depending on the size and complexity of the proposed

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contract to enable the prospective applicants to obtain the pre-qualification document, study the field conditions, collect field data,compile the qualification and other required information and then submitpre-qualification applications. A period between 30 to 45 days dependingon the size and complexity of contracts is considered as reasonable

(d) Bidding document (for works and goods): The biddingdocument shall include sufficient details regarding eligibility, method ofsubmission of bids, bid security (amount and currency) to be furnished,period for submission of bids, qualification criteria to be satisfied,evaluation methodology, securities to be submitted, award of contractetc. It should also include simplified Conditions of Contract, such asthose of Institute of Civil Engineers, UK;

(e) Bidding period (for works): The bidding period, that is the periodfrom the date of issue of the bid document to pre-qualified bidders shallbe adequate, depending on the size and complexity of the proposed

contract to enable the prospective bidders to obtain the biddingdocument, study the field conditions, collect field data and then submitmeaningful bids. A period between 30 to 45 days or even more in case oflarge and complex contracts is considered reasonable.

(f) Bidding period (for goods): The bidding period, that is the periodfrom the date of publication of the IFB in the press nor from the date ofmaking available the document for sale (whichever is later) should beadequate, depending on the size and complexity of the proposedcontract to enable the prospective bidder to obtain the biddingdocument, study the same and then submit meaningful bids. Here also a

period between 30 to 45 days is considered reasonable.

Steps for NCB

We have to take the following steps for NCB that are essentially thesame as of ICB and are reproduced hereunder:

(a) Works with pre-qualification:

The following are the essential steps:

Notification and advertising for submission of pre-qualification applications by the prospective bidders;

Issue/sale of pre-qualification documents;

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Submission of pre-qualification applications by theprospective bidders;

Opening of pre-qualification applications;

Evaluation of pre-qualification applications;

Preparation of the list of pre-qualified bidders;

Issue of the bidding document to the pre-qualified bidders;

Submission of bids by pre-qualified bidders; Evaluation of the bids;

Selection of lowest evaluated responsive bid;

Contract award and signing of agreement with the selectedcontractor;

Contract performance by the Contractor;

(b) Works and goods without pre-qualification (post-qualification):

The following are the essential steps:

Notification and advertising;

Issue/sale of the bidding document to the prospectivebidders;

Submission of bids by prospective bidders;


Selection of lowest evaluated responsive bid based on post-qualification;

Contract award and signing of the agreement with theselected Contractor/ Supplier;

Contract performance by the Contractor/Supply.

Question 4. List the advantages of referring adispute to arbitration.

Advantages of Arbitration: The advantages of referring a dispute toarbitration are (compared to those through the courts:

The speed of conducting arbitration proceedings;

The cost of dispute resolution is less for both the parties to

the contract; The convenience of fixing the hearing dates;

The informal atmosphere which prevails during hearings;

The option to select Arbitrators;

Availability of expertise in the Arbitrators particularlyrequired for most engineering contracts;

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The privacy in the hearings, since court hearings are open togeneral public;

The finality of award, as in most cases the decision of theArbitrator is binding and cannot be challenged in courtsexcept on limited grounds;

Consent awards are possible with the consent of the parties

to the contract during the arbitration proceedings; The presence of the arbitration clause is a safeguard for fair

deal by the Employer and the bidder can offer mostcompetitive bids;

Q.5. Write a short note on the following types ofmergers:

a. Product extension merger.b. Conglomeration.

c. Horizontal mergerd. Purchase mergere. Consolidation merger

Product Extension MergerAccording to definition, product extension merger takes place betweentwo business organizations that deal in products that are related to eachother and operate in the same market. The product extension mergerallows the merging companies to group together their products and getaccess to a bigger set of consumers. This ensures that they earn higherprofits.

Example of Product Extension Merger The acquisition of Mobil ink Telecom Inc. by Broadcom is a properexample of product extension merger. Broadcom deals in themanufacturing Bluetooth personal area network hardware systems andchips for IEEE 802.11b wireless LAN.

Mobil ink Telecom Inc. deals in the manufacturing of product designsmeant for handsets that are equipped with the Global System for MobileCommunications technology. It is also in the process of being certified toproduce wireless networking chips that have high speed and General

Packet Radio Service technology. It is expected that the pro

c. Horizontal merger

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A horizontal merger is when two companies competing in the samemarket merge or join together. This type of merger can either have avery large effect or little to no effect on the market. When two extremelysmall companies combine, or horizontally merge, the results of themerger are less noticeable. These smaller horizontal mergers are verycommon. If a small local drug store were to horizontally merge withanother local drugstore, the effect of this merger on the drugstoremarket would be minimal. In a large horizontal merger, however, theresulting ripple effects can be felt throughout the market sector andsometimes throughout the whole economy.

Large horizontal mergers are often perceived as anticompetitive. If onecompany holding twenty percent of the market share combines withanother company also holding twenty percent of the market share, theircombined share holding will then increase to forty percent. This largehorizontal merger has now given the new company an unfair marketadvantage over its competitors.

Question 6. Describe in brief the majorcomponents of planning negotiation

Planning for Negotiations

A complex negotiation requires specific planning to be successful.Without planning, a negotiator cannot possibly have the informationrequired to argue positions effectively in a complex negotiation.

Sufficient time needs to be committed upfront to the planning for acomplex negotiation.

o Establish specific objectives and also the range of those

objectives. Failure to do this will lead to agreeing tosomething that is not in your companys best interest, ordelaying the negotiation process. Buyers objective may be achieving a unit price of Rs.100/=; committing the supplierto a delivery time of 8 weeks; some control over the way inwhich parties execute the contract; persuade supplier to givemaximum cooperation to him compared to buyers

competitors; develop a sound and continuing relationshipwith competent suppliers. Objectives may need to becategorized as must have and would like to have.

o Analyze the other partys Strengths and Weaknesses as well

as your own. This will help you to formulate convincing

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arguments or support for your positions. The negotiatorshould also identify areas of flexibility within those positions.Gathering sufficient information about the other party is veryimportant. This may not be difficult for items which you arealready purchasing. Otherwise, you must peruse trade journals, government reports, annual reports, commercialdatabases, internet or resort to direct enquiries to supplierspersonnel.

o Understand the other partys needs e.g. if supplier desires

market share and volume, he will want the whole contractand not part contract; if supplier is supplying to the buyer forthe first time and wants to cultivate the buyer with an eye onfuture business, he will not mind to receive a small contract.When one party has an issue or requirement that is notimportant to the other, then parties will likely reachagreement.

o Differentiate between facts and issues. Facts are reality or

truth and cannot be a negotiation issue. Issues are items ortopics to resolve during a negotiation and are to be identifiedin advance.

o Establish a position on each issue. The negotiator should

develop a range of positions on an issue a minimumacceptable position, a maximum or ideal outcome, a mostlikely targeted position.

Example 1

Fig.7.3 illustrates this by an example.

Example 2

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Example 1 shows agreement cannot be reached

Example 2 shows that Rs.110 to Rs.120 is the range in which agreementwill be reached. This range is called Bargaining zone or Settlement zoneor ZOPA (Zone of Potential Agreement)

Developing Negotiation ranges for a Purchase price per unit

o Develop negotiating Strategy and Tactics. These are two

dimensions of the negotiating process.o Strategy has a long term focus and is a predetermined

approach or a prepared plan of action to achieve a specificgoal or objective to potentially find and make an agreementor contract in a negotiation with another party or parties.

o Tactics refer to the art or skill of employing available means

to accomplish an objective or strategy. Tactics shouldsupport the strategy. Tactics can also be viewed as the

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detailed methods employed by negotiators to gainadvantage over other parties. Tactics should support thestrategy.

o Brief other personnel in the organization who are

participating in the negotiations as well as those who areaffected by the negotiations. Briefing prevents unwantedsurprises during face-to-face negotiations.

o Practice the negotiation. Holding a mock or simulated

negotiation may help substantially for a complex andcompetitive negotiation.

Power positions in Negotiations

Power is simply the ability to influence another person or organization. Ahas power over B if A can get B to do things that directly benefit A. Useof power employed by the parties can influence the outcome of anegotiation and hence its use can be part of the negotiating strategy.

Individuals and organizations bring different sources of power to thenegotiating table.

We review the sources of power as under

o Informational power: This comes from access to facts,data and other arguments. This power relies more onpersuasion.

o Reward power: Here, the party is in a position to offer tothe second party something that the second party considers

a reward e.g. award of a large value contract by the firstparty. One fall out of this power is that the second party mayget conditioned to rewards

o Coercive power: If A can give something to B, A can alsotake away something from B. One fall out of this power isthat this can lead to retaliation from B when the powerstructure shifts. Hence, prior to using this power, the buyermust consider the willingness of the supplier to comply.

o Legitimate power: This power stems from the position heldby the party e.g. ministers, political office holders, prominentcompanies. This power relies more on persuasion.

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o Expert power: This power stems from the expertise of aperson. Non-experts will not challenge an expert in thesubject. This power relies more on persuasion.

o Referent power: This stems from the personal qualities andattributes of an individual honesty, charisma, friendliness,

sensitivity can be strong sources of power. This power canbe used when referent is aware that a counterpart has anattraction to the referent.

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