Procurement and Disbursement Guidelines

Bulletin No. G-68

August 31, 1987

Arts and Techniques of Negotiation

Purpose and Scope

This bulletin outlines the arts and techniques of negotiations as developed by the Federal government. It should assist state agency personnel who are not routinely involved in negotiations, to give thema better understanding of the negotiation process.

Negotiations as a Procurement Method

Procurement by negotiation may be used only when not prohibited by lawor regulation. For example, statutory law requires that contracts for materials and supplies must be awarded on the basis of formal competition. Contracts for the construction or reconstruction of highways and public buildings must also be awarded on the basis of formal competition. Therefore, as a general rule, these types of contracts may not be obtained through negotiations.

Where competition is not required by law (i.e., service contracts, consultant contracts), the Office of the State Comptroller has required state agencies to obtain competition where the procurement lends itself to competition. However, there are a number of instances where competition is not available because of a number of factors, andthe procurement is made on a sole source basis.

The State Attorney General's opinions have indicated:

--Competitive bids are not required where there is no possibility of

competition.

Where there is no possibility of competition, the procurement can onlybe made through some form of negotiation. Even within a competitive procurement, where price alone is not the only factor considered in making the award, negotiations could occur.

What is Negotiation and When is it Used?

Negotiation is the process of bargaining between buyer and seller. Theobjective is to reach agreement on all terms and conditions of the procurement, including the "subject of the procurement" and the price to be paid.

Bargaining requires communicating, which may be in writing, by telephone, or face to face. Face to face communications may be informal talks or formal conferences.

Negotiations generally are used when:

a. There is no price competition.

b. The prices obtained through competition appear to be irregular or excessive.

c. The prices cannot be established by catalog or in the market place.

d. The prices are not set by law or regulation.

Purpose of Negotiation

The purpose of negotiation is to obtain the goods and services at a price that is fair and reasonable to both the contractor and the state.

Fair and reasonable price is not always determined solely by the

contractor's cost of performance. Other factors which may affect the price include non-monetary advantages which may accrue to the contractor or the contractor's need for business during a slack period. Thus, a contract price may be reasonable under some circumstances even if it is less than the contractor's normal "cost plus a fair profit."

Under a formally advertised procurement, the competitive market price (the price offered by the lowest bidder) generally is considered a fair and reasonable price. The competitive pressures exerted by sellers in a free and open market tend to guarantee a reasonable price.

A negotiated procurement is necessary when the competitive conditions of an open market cannot be obtained. In the absence of competition, the use of price and/or cost analysis are the most frequently used methods in estimating what a fair and reasonable price would be. On a case-by-case basis, it is difficult to tell what a fair and reasonableprice would be. Many factors contribute to this problem, including theindefinite nature of many negotiated procurements, the variations in the abilities of different contractors, and the large part played by subjective judgment in price and/or cost analysis.

Who Negotiates?

There are at least two parties to any negotiation. One party is the representative of the state whose interest is to reach an agreement including a fair and reasonable price for the subject of the procurement and any other requirements of the state, such as timely delivery. The other party (the offeror or contractor) has different objectives and is motivated by factors which are of greater interest to him (i.e., profit).

The negotiations may be conducted by either an individual or a team. The use of a single negotiator requires the person to be as knowledgeable as possible about all aspects of the procurement. It eliminates at-the-table disagreements on the state's side and preventsthe contractor from attempting to split the state's team and thereby undercut its position.

The use of negotiating teams is becoming more prevalent because of theincreasing size, complexity, and value of the equipment bought by the state, especially computer systems. Some of the factors favoring use of a team approach are the psychological advantage of numbers, the need for expertise in various fields in order to evaluate the proposal, and the advantage of having experts able to counter the contractor's arguments and expose any misstatements.

Care must be exercised in the selection of the team. Team members mustunderstand their individual functions in the negotiating process.

Preparation for Negotiation

Every prospective contractor begins negotiations knowing more about his own proposal than the state does. His representatives at the negotiation know the assumptions underlying their cost estimates, the areas where contingencies have been included, and, more important, theactual cost or price level at which they are willing to accept the contract. Only thorough preparation for negotiation can help the statenegotiator balance this advantage.

Preparation involves several important steps:

a. Gathering the facts.

b. Analyzing the facts and the many intangibles that will affect the negotiations.

c. Establishing the state's negotiation objectives based on this analysis.

d. Planning negotiation strategy.

e. Setting parameters (give and take).

Fact Finding

Once the negotiator fully understands what he is buying, his next stepis to analyze the contractor's price or cost proposal. The proposal should be broken apart, and its elements subjected to a more detailed examination. For example:

a. The negotiator should establish the estimated cost of each element of the contract to be used as benchmarks against which the probable cost of performing the contract under the proposed contract can be measured.

b. He will try to isolate the assumptions and judgments the offeror actually has made in moving from the current situation to his estimateof probable future costs.

Fact finding may be accomplished in several ways:

a. If the problems are clearly defined at present, it may be possible to formulate questions to be asked and specific fact analyses to be developed by the specialists in each particular field.

b. Such preliminary conferences are not intended to end in an agreement on anything, although a fact finding session could end in anunderstanding or agreement as to the factual basis from which the offeror forecasted the costs of contract performance.

c. Fact finding may be done as the first stage of a two-stage negotiation session. This will allow the negotiators time to evaluate the facts, establish objectives, and get necessary clearance.

Objectives

Analysis and fact finding should resolve all questions of fact and disagreements about cost or pricing data. Hopefully, the remaining areas of disagreement will be shown and the dollars at issue identified. The differences which should exist are the differences of opinion as to what will happen and differences in the significance attached to particular facts.

It is possible, however, the issues may not be clearly defined. The achievement of a desired cost level depends on how well the offeror can do the job and whether he succeeds in controlling costs. The negotiator should recognize the negotiation is based on estimated cost, and that eventual costs may vary from what looked like accurate estimates at the time of the negotiations.

The negotiator should try to create a situation where it is likely thecontractor can control or reduce costs while at the same time maintainquality and meet delivery timetables.

Analyzing Bargaining Position

The state's relative bargaining position is perhaps the single most important determinant of what overall arrangement the negotiator will be able to achieve. Bargaining position may be defined as the relativestrength or weakness of one party's total position. This, of course, affects its need to compromise in reaching agreement with the other party.

Strength or weakness may result from the following factors:

a. The number of qualified firms competing for the contract, and the number of buyers seeking the contractor's services.

b. The urgency of the contractor's or the state's desire for the contract.

c. The amount of time the state or the contractor has in which to seekagreement.

d. How accurately each party assesses the other party's negotiation objectives and the judgment estimates that support each party's objectives.

e. The external pressures--regulatory, legal, political, economic, public, etc.,--that one party can bring to bear on the other.

f. How accurately each party evaluates the other party's bargaining position.

Negotiation Strategy

A primary goal of negotiation strategy is to strengthen one's own bargaining position. Negotiation strategy may be simply defined as theoverall plan for conducting negotiations at the bargaining table. Planning may include these determinations:

a. The location where the negotiations will be held.

b. The substantive agenda for the bargaining session.

c. Whether to present a counter-offer and, if so, the timing of the initial counter-offer and the relation this bears to the maximum compromise that the state would accept if forced to do so.

d. The arguments the state will raise in support of its position.

e. The tactics the state may use to deal with the individual personalities of the contractor's representatives.

f. Any other techniques the state may use to improve its bargaining position, and thus secure an agreement with the contractor that represents the best overall arrangement.

Location

The negotiator must first decide on a preference for the location of the negotiations. The decision should be based on the circumstances ofthe particular procurement--not on a general practice or on some priorsituation. Each location, of course, has its advantages and disadvantages. Factors involved in this decision would include:

a. The completeness of the back-up information the state has been ableto assemble during the pre-negotiation fact finding and the analytic process.

b. The time available for bargaining.

c. The authority of the company negotiators to deviate from their firm's initial position.

d. The nature of the items being procured.

The negotiator must consider the physical aspects of the proceedings--the conference room, visual and other aids, and availability of separate facilities for private team conferences.

Agenda

The agenda is one of the most useful tools the negotiator has available to get negotiations started on a favorable path. The negotiator should always establish an agenda of issues he wishes to consider with the contractor in the ensuing conference. This helps thenegotiator confine the conference table discussion to important matters.

The advantage of the agenda technique is:

a. Points out the issues to be negotiated.

b. Helps put the contractor in a frame of mind to make concessions.

c. Enable the negotiator to lead and control the negotiation conference.

The agenda technique has this disadvantage, however: it may disclose the state's position on areas of disagreement before the negotiator has fully explored the contractor's position on these same areas. Thus, any agenda should be couched in fairly general terms. As an alternative, the negotiator may wish to develop an agenda for his own control purposes--an agenda he does not show to the contractor.

The negotiator should formulate his strategy prior to actual negotiations only in the most general terms. He should avoid relying on any detailed approaches or techniques that may backfire if the contractor does the unexpected. A good strategy is a flexible one. It provides for alternatives and for bargaining table options that allow the negotiator to take full advantage of what actually transpires there.

Pre-negotiation Review by Higher Level of Authority

Management practice may require the negotiator to touch base with his superior, to tell him abou this objective, how it was developed, and why a contract within an acceptable range of that objective would be areasonable proposition. Most procurement organizations have procedureswhich require some supervisory review prior to start of negotiations or consummation of an agreement. Review will go higher in the organization and be more formal for larger or more important procurements.

The principle is the same regardless of level. The review is conductedso management (the boss) can be assured the negotiator has done his homework thoroughly and is entering into negotiations with a well conceived, realistic, and fair plan.

From the negotiator's point of view, the advantage of the view is the opportunity to get policy guidance and management support in the handling of particular problems.

The review can be a quick run-down of the facts and the objective in five minutes or less if it is a small deal. It can be a formal presentation by the negotiating team to an assemblage of top procurement management. It can be a written justification and request for clearance to proceed. Departmental regulations will set up the requirements.

The negotiator's interest should be in selling management on his intentions, taking care not to box himself in on a specific, single, objective, because the facts and circumstances change in negotiation. He might want to suggest, if no one else does, that he will check backbefore reaching agreement if the arrangement he is prepared to accept is significantly different from any of the alternatives discussed in the pre-negotiation review.

Bargaining Table Factors

The negotiator may want to consider other approaches--whether he uses them or not--in preparing for and conducting a bargaining session. He will want to be familiar with negotiation techniques that are frequently used by contractors and/or techniques that are available tothe state in proper circumstances. Some warnings about bargaining techniques:

a. Not all techniques can be applied in every situation.

b. Some techniques are contradictory.

c. Some can work to the extreme disadvantage of the side that employs them unwisely.

d. A few are dangerous and should be considered only as a last resort.

A negotiator must draw on his own experience and exercise his own judgment in determining which technique to use.

Whether or not he is working with a formal agenda, the negotiator should try to determine the contractor's position on all issues and tounderstand fully the reasons and justifications for each position.

After he has satisfactorily explored the contractor's position, the negotiator may find it necessary to adjust his own initial position oncertain important issues. He may then adopt one of the following approaches in trying to achieve the total agreement:

a. He may attempt to reach tentative agreement on each individual issue in turn and thus build up to a total agreement.

b. He may present a total counter-offer without regard to individual issues.

c. He may present a package counter-offer consisting of those items

which are very important to the state with some concession items whichare apparently important to the contractor, but less important to the state.

A general rule is the contractor should design the sequence of items to be negotiated so as to maximize the effect of the strategies and tactics he plans to use. For example:

a. He may try to gain bargaining strength by exchanging (if necessary)concessions on secondary issues (issues that are relatively less important to the state) for concessions from the contractor on primaryissues (issues that are most important to the state).

b. He should not allow the negotiations to become stalled on a single issue. If agreement cannot be reached on a subject, the negotiator should suggest the parties agree to disagree for the most and move onto the other issues.

c. If the parties fail to reach agreement on several issues in sequence, the negotiator may be wise to change his entire approach. Hemay consider the possibility of achieving total agreement without consideration of individual issues. This technique is generally most useful when only cost, price, and/or contract type are in debate.

d. The negotiator should be extremely careful when moving from one issue to the next, making sure both parties understand the status of negotiation on the first issue.

Many people believe the state should try to avoid making a counter-offer. The party that makes the first counter-offer usually ends up byyielding more than the other party does. The state's initial counter-offer may be faulty, and if the negotiator commits himself to a poor offer, which he must subsequently retract, the may lose stature in thecontractor's eyes. Others believe the state has to make a counter-offer in order to negotiate. They agree, however, the counter-offer should only be made after thorough evaluation and discussion for the

contractor's quotation or proposal and, if possible, after the contractor has revised his original offer. In any event, if opinion isfairly unanimous, the state should avoid making a counter-offer too early.

As a general rule, the negotiator's counter-offer should be a total offer. It should reflect the type of contract he would like to reach with the contractor. This counter-offer should be the most conservative offer possible and one that will permit negotiation of a mutually acceptable price. At the same time, the negotiator must always be able to justify the price of this counter-offer if he is forced to do so. If he cannot defend his counter-offer, it will appearunreasonable and arbitrary. As a result, the negotiator may be placed on the defensive.

The negotiator should also avoid long, drawn out discussions on any one element of his counter-offer. He should not be willing to justify his position by means of a cost break-down unless the contractor agrees to do the same for his counter-offers.

By the process of offer and counter-offer, the negotiator sometimes can predict agreement on the midpoint of difference between his last offer and the contractor's best price. If this is possible, he may offer to split the difference, provided the contractor clearly understands the offer is not intended to serve as a basis for further negotiation. In other words, the negotiator should propose splitting the difference only when he is prepared to take a firm position on this offer.

Once the negotiator has started his best offer or counter-offer, he should be tactfully firm about the equity of his position. He should hold to this position even though another conference may be necessary before the contractor accepts. If the conference must be concluded at this point, the negotiator should make sure the contractor has respectfor the state's position, even though he is not yet ready to accept it. In no event should the negotiator give the impression of being arbitrary, capricious, or unwilling to agree to a price that is fair and reasonable in all respects.

Negotiator's Demeanor

Most important are those aspects of the negotiator's own demeanor and appearance that are within his control. He should ensure his neatness and grooming, his punctual arrival at the conference, and his bargaining table attitude.

Of course, he may alter his attitude to reflect changes in strategies and tactics, but he should always:

a. Be polite, avoid unnecessary interruptions.

b. Use direct, clear, and simple language.

c. Summarize the proceedings at appropriate points.

d. Keep his emotions in check at all times unless, of course, he wantsto display emotion as a tactic.

It is important the negotiations be conducted in an atmosphere of cordiality, friendliness, and mutual trust in which both parties are strongly motivated to reach agreement.

How the negotiator actually plans and conducts a negotiation is his choice. There is not one way to do it. As with anything else, he must establish his own style and do what comes naturally.

He may want to use different approaches with different companies. In most cases, he should use different approaches with the same company, particularly if he deals regularly and repetitively with the same people. It usually is a mistake to become predictable in approaches and reactions.

Evaluation of Opponent

Once the negotiation is under way, one of the very first things the state negotiator must do is evaluate the contractor's representatives.

Two problems are especially worth examining.

a. The representative's authority.

b. Adjustments of strategy to the personality across the table.

The chief function of many representatives sent by a contractor is notto negotiate, but to hold the line, waste time, and give general answers. This is an especially useful device when a contractor is counting on time pressures to force the state into agreement with his initial proposed price. The state negotiator must determine the precise limits of these representatives' authority.

It is suggested the company's top management be contacted before session is opened to get the names and titles of their representatives.

Personality--the second problem for immediate examination--may providethe state negotiator with valuable clues about the strategy and tactics to use. For example, certain tactics are useful with a person who becomes more willing to compromise when tired. But these tactics would probably be useless or even dangerous with a person whose steadfastness grows as his energy diminishes. Nor would a humorous opening remark, calculated to start the bargaining session on a friendly basis, be likely to have the desired effect on a businessman who prides himself on never allowing levity to enter into important financial matters.

Gamemanship

There are many gambits and ploys available in negotiations. Each deserve the most careful consideration. There is nothing wrong with them so long as the negotiator realizes what he is doing and doesn't lose sight of his objectives.

These techniques are summarized as follows:

Tactic Example of Use

Making the other party appear unreasonable. "We've made concessions; now isn't it your turn?" "If you persist in this, we willwrite to your president."

Placing the other party on the defensive. "How can you justify that position--right now, it looks pretty fantastic to me."

Throwing the blame for inability to compromise on a third party. "This would never get past our contract review committee--We'd be right backhere within two weeks, if I let this go by."

The sugar-vinegar tactic. One team member takes an extreme position onan issue by contrast to which the state's actual position (stated by the negotiator) seems far more moderate and conciliatory.

Straw issue technique The build-up of an issue on which the negotiator intends to compromise then use it as proof of his willingness to concede though the other party is unreasonable.

Walk-outs Availability of this tactic depends on actual bargaining position. Its misuse can greatly weaken the position of the user. Correctly used, however, it may discipline an otherwise intractable company.

Recesses To restore communications control, to dissipate an emotionalatmosphere, to discipline the intractable, to divert discussion from areas in which the user is weak, to plan adjustments in negotiation strategy or tactics, to analyze progress of the bargaining session to this point.

Time squeeze "It is Friday afternoon and I've got to catch a plane."

Presenting alternatives Make offers in terms of alternative combinations of profit and contract types; or alternative combinationsof profit and delivery terms.

Agreement and rebuttal "Yes of course...but..." or "Yes for that very reason we feel..."

Negotiation of Total Price

When elements of costs or approaches are controversial, there is nothing to be gained from trying to get the offeror to agree to exclude some or all of the elements from his estimate. The negotiator is better off to conserve his energies and arguments to sell the

counteroffer on the total package. A contractor will concede dollars when he will not concede principles. The total price technique is designed to make it possible for him to do so.

Negotiation of Multi-Item Contracts

Many negotiations will be concerned with several different items or tasks, each of which will be priced out on the contract schedule. In these cases, the negotiator must not lose sight of the values of the different line items during the negotiations. Each of those prices must be reasonable for the product to which it relates. This means thesum of the unit costs for each contract item is the basis for both thestate and the contractor's offers and counteroffers.

Sole Source Negotiation

The most difficult type of negotiation, from the state's point of view, is bargaining on a major procurement with a sole source contractor:

a. Who is aware that they are a sole source.

b. From which the state must make the procurement as stated.

The state's initial bargaining position in these negotiations is usually minimal. But the state's negotiation can take actions to improve chances of negotiating an equitable agreement.

The fact the negotiation is being conducted on a sole source basis heightens the importance of adequate preparation. This is especially true since the contractor, having developed the equipment, will usually know more about it from a technical and cost standpoint than the state.

The following factors are crucial:

a. Price and cost analysis.

b. Evaluation of industry, company, and negotiation personnel.

c. Carefully planned strategy and tactics.

Improving Position Under Sole Source Procurement

Reduce the scope of work by removing fabricators or purchase of certain equipment component parts which could be procured directly by the state from competitive sources. Make future competition on this procurement practicable by obtaining complete manufacturer's drawings.

Make the contractor aware that they are as dependent upon the state asthe state is on them. Even when some companies manufacture commercial lines, they often have state contract divisions, which are totally dependent on state sales. These contractors will very rarely pursue a position on a single procurement, no matter how large, that will jeopardize their chance of getting other contracts.

Pressure from these other agencies may change the prospective of the most obstinate sole source. Such tactics should only be used when theyare proper, legal, and called for by the circumstances.

Use of Policy in Negotiations

State procurement policies are rules for the state negotiator to follow, but they are not necessarily policies and rules which the offeror must live by. The parties to a negotiation may never agree on policies and rules, but even so, can agree on a mutually satisfactory contact at a mutually satisfactory price.

When state policy has a bearing on a position, the negotiator must know why it exists, the circumstances which led to its formulation, and why its application is fair to all concerned in the instant case.

The negotiator should be prepared, without necessarily identifying the

policy, to review in detail the reasons why the policy makes good sense. This obviously would be intended to put the offeror in a position to accept counter-offers even though he might not accept the policy. Conversely, the negotiator should not throw an unexplained policy in an unsupported manner on the table as an obstacle in the path of the company.

Indiscriminate use of citing higher authority can lead to confusion and weakening of the negotiating position. Too much of "it might be a good deal, but I never could get my boss to buy it" will result in thecontractor trying to reach that authority to negotiate directly with him.

So long as the negotiator is operating within the policies and procedures laid down, he need not quote any one. The comments and positions on negotiations must be his and not those of someone higher up the ladder. This is not to say the negotiator should not clear all questionable items with higher authorities; this is what recesses are for.

Some Negotiating Do's and Don'ts

The following list repeats some of the ideas already mentioned and, although not complete, gives the negotiator helpful hints and reminders.

a. Do be discriminating. Accept a good offer. Don't feel you always have to knock something off the offer.

b. Do fight hard on the important points, win the war not the battle. Don't start fights you have no chance of winning or which even if you win, would not be worth the fight.

c. Do remember you generally are in at least as good a negotiating position as the company's representatives. The resources of the state are extensive, and you can gain in diversification of experience in

doing business with many companies what you may lack in depth of knowledge of the single company's situation. The company usually needsyour business at least as much as you need his product or service.

d. Do be courteous, considerate, and do what you say you will. Have integrity.

e. Do know when to talk and when to sit and listen. Stop talking when you've made your point, won your case, or reach agreement.

f. Don't dictate. You represent the state, but you are a reasonable person.

g. Don't ridicule or insult.

h. Don't try to make anyone look bad or prove anyone wrong.

i. Don't be predicatable in your approach.

Concluding Negotiations

It is the state negotiator's responsibility to see to it that a mutualunderstanding has been reached before he terminates the bargaining session. Misunderstanding, at this stage, may make further negotiations necessary.

Putting the essential terms of the agreement into writing as a memorandum of understanding before the conference ends is often a goodidea, especially if the contractor dictates them. The state negotiatorshould also have notes with which to help complete the summary. This memorandum of understanding is even more important when there have been difficulties in reaching an understanding.

Documenting Negotiations

The negotiator prepares a memorandum which takes the reader from the proposal to the negotiation objective and ultimately to the contract price. The memorandum will demonstrate that the negotiated price is fair and reasonable. The transition from one point to the next must beexplained. The negotiator must show the facts and explain the judgements which moved him from proposal to objective agreement.

The negotiator must identify the significant factual data and explanations of how the facts influenced his estimate of future costs,and what factors persuaded him that the number was good to use. He must show the extent to which he did not rely on factual data submitted. He will have to identify that data not used, not relied upon, data that was inaccurate, inco