Negotiating a Contract

Transcription

1 Negotiating a Contract When most people hear the word negotiation, they usually think of large, complicated and official deliberations, such as the formation of a trade agreement or a corporate merger. But if you think about it, negotiation extends to nearly every relationship in your professional life. In addition to the client, you might negotiate with your business unit manager over schedules or needed project resources. Or with your team members about a work deadline. Perhaps you negotiate with subconsultants over fees, scope, design solutions, schedule or coordination issues. You might negotiate with vendors about a quality problem. Or with a public official concerning a code interpretation or permit. And you probably negotiate with contractors over change orders, substitutions, delays, RFIs and quality of work. In a negotiation, interested parties typically share an overall objective but disagree on some relating issues. A goal of negotiation is to reach a compromise on these differences and arrive at an outcome that is satisfactory to all parties. When negotiating design contracts, architects and engineers are offering clients a complex, long-term service that requires a great deal of trust and communication. The initial negotiation of the contract sets the stage and the tone for the ongoing, back and forth negotiating that runs throughout the life of a project. Good negotiations define and clarify each party s expectations. So, before entering the contract negotiation process, you need to be clear on what you want to get out of the project and prepare your strategy accordingly. Successful planning on your part may set up the firm for higher fees, a more expansive workscope and more equitable risk sharing. Preparing for the negotiation also gives you an opportunity to consider the project s risks the what-ifs and worst-cases and to think about how to deal with and discuss those situations with the client. Negotiation also establishes the dynamics between the parties to the agreement. Although many believe contract negotiation is an adversarial procedure, it doesn t have to be. In fact, it shouldn t be. Negotiation is little more than working to resolve a series of differences. And who is better suited to do this than an architect or engineer? You routinely analyze issues, come up with options and design creative solutions that must satisfy multiple and often diverse parties of interest. If you negotiate with a sense of fair play and graciousness, you can set the tone for a long-term and mutually beneficial association. The skills and techniques of effective negotiation are learnable; no one is born with a negotiating gene. On the following pages we offer suggestions to help you prepare for and conduct successful contract negotiations. (See Further Reading for additional resources.) Preparing To Negotiate Walking into a contract negotiation session without having done your homework, identified your priorities, thought about the concessions you are willing to make and the items you don t want to concede almost guarantees that you ll fail. If you re not prepared, you may not understand the strengths and weaknesses

2 Negotiating a Contract 2 of your positions or those of the other party. As a result, you may not be able to formulate convincing arguments to support your own positions or rebut the other side s arguments. In addition, if you shortchange the planning process, you probably haven t set clear objectives that can serve as standards by which to evaluate offers, counteroffers and concessions. Consequently, you may end up agreeing to something you later find is not to your advantage. Or you may become confused and defensive and delay the process, frustrating the other party and possibly jeopardizing the contract. Effective planning for contract negotiations means: > > Reviewing the Contract. This book will help you in that process. If you re going into contract negotiations, you need a working understanding of the document and its language so that you can discuss it knowledgeably and modify it to fit the needs of both parties to the agreement. Try to get your own contract on the table first. This allows you to create appropriate expectations with the client and to introduce issues that are important to you. Your client might not accept your contract but may allow it to serve as a framework for negotiation. If you re working from a client-drafted agreement, be prepared to do some major detail work revising the document. When examining client-generated agreements, you will benefit from the services of your firm s attorney, insurance broker and risk manager. You may also find it helpful to have a contract review methodology in mind. (See How to Review Client-Generated Agreements.) > > Defining Your Goals. To negotiate effectively, you need to know what your business goals are and why. Usually a negotiation involves one or two major goals and several secondary issues. For example, your central goals probably relate to your fee, schedule and scope of work. But there might be other issues, such as the prestige of an assignment, the opportunity to establish a long-term relationship with the client, your strategic marketing plan or a need to keep staff employed. In addition, your firm s lawyer, insurance broker or financial manager might hand you a list of things to worry about: indemnities in the contract, insurance requirements or billing and payment terms. Make a list and prioritize the items. > > Identifying Your Interests. Successful negotiations focus on both parties interests, rather than just on the positions taken. Interests are the underlying concerns, needs, desires or fears behind a negotiator s position the factors that motivate the negotiator to take that position. Although negotiators may have difficulty satisfying each other s specific positions, an understanding of the underlying interests may allow them to create solutions that meet those interests. A key word to help identify your interests is why. Ask yourself not only What do I want from this negotiation? but also Why do I want that? and Why is it important? For example, say you ve identified a subconsultant for a particular job, but the client asks you to use someone you ve never worked with before. Your position is that you want to hire the person of your own choosing. If you ask yourself why, the answer might be that you work well with the subconsultant or are worried about the potential liability of working with someone you don t know. Once you understand your underlying interest, you can negotiate with your client to address your concerns, perhaps by having the client contract with the consultant directly or indemnify you for claims involving his or her consultant. > > Establishing Your Alternatives. Not all negotiations are successful, and you need to plan for this possible outcome. What can you do should the negotiation fail? Is there another project you might pursue? Another market sector? Consider all your alternatives. Brainstorm and list ideas, even if they seem silly, until you believe you have at least one good, viable choice that is available regardless of any negotiation. Knowing your alternatives gives you a great deal more than an emergency escape plan; it gives you the freedom and the courage to develop an innovative and ambitious approach to your negotiations.

3 Negotiating a Contract 3 > > Analyzing the Other Party. Understanding the other party, the issues at hand and the circumstances surrounding them can make a big difference in your negotiations. You might study the other party s business history for useful clues. Information about the organization can typically be obtained through channels such as Dun and Bradstreet, newspapers, Internet search engines, public records of legal judgments, plus the company s own website, stock reports and annual reports. You also need to find out exactly with whom you ll be negotiating and learn as much as you can about the individual(s), as well as the primary decision maker. You ll want to discover as much as possible about the other party s: > > Current resources, interests and needs > > Business and personal objectives > > Reputation and negotiation style > > Previous negotiations, successful and otherwise > > Options > > Authority level for making an agreement > > Likely negotiation strategy and tactics > > Organizational culture > > Financial history > > Market issues Gathering Supporting Data An important aspect of successful negotiation is being able to present a case clearly and to marshal ample supporting facts and arguments; another is the ability to refute the other party s arguments with effective counterarguments. Do you have salary surveys, construction cost data and other evidence to support your negotiating position? If you can back up a fee or schedule proposal with supporting information, it s much harder for your client to refuse your request. Ask yourself: > > What facts support my case? > > What records, files or data sources support my arguments? > > Are there other parties or experts who can help me clarify the facts? > > Have others negotiated these issues under similar circumstances? Can I talk to those negotiators about their strategies both successful and unsuccessful? > > How can I respond to the other party s probable arguments and be more creative in addressing common issues and interests?

4 Negotiating a Contract 4 > > How can I develop and present the facts so they are most convincing? > > What visual aides, pictures, charts, graphs, expert testimony and the like would be most effective for presenting my case? In addition to specific project information, you should collect and have available sufficient data to back up all aspects of your negotiation. For instance, consider having on hand a resume of each project team member, as well as a history of your organization. You should also be prepared to refer to your firm s financial statements or use them to justify specific financial positions. Besides cost data for salaries, you may need to justify your multipliers or other aspects of your overhead. Doing so may require the use of outside information. There are several national surveys on financial statistics for design firms available. (See Additional Resources.) Developing Negotiation Strategies Most people find it easier to negotiate if they have a specific game plan a general approach that they can follow no matter what else happens. Planning ahead helps you frame your proposals and craft your messages without undue pressure. Your negotiation strategy should be sufficiently simple so that you can easily remember the main points. It should also have a flexible approach you need to be able to listen effectively to the other party, relate his or her thinking to your own interests and make adjustments to your plans accordingly. Try to envision what a successful agreement might look like. What will it take to implement an agreement? What issues would need to be resolved? What would persuade each party to accept a proposed agreement? Developing an effective negotiation strategy includes the following steps: > > Decide on a Negotiating Team. One of your most important decisions is who should participate in the session. In complex negotiations, such as for contracts, try to have no fewer than two but no more than four people on your team. Some negotiators prefer to leave a back door open. For example, they may choose to leave a senior person behind so they can call for a time out in order to defer to him or her if backed into a corner or if they need time to consider a proposal. > > Select your team with an eye towards expertise. If you re negotiating workscope, someone on the negotiation team should be able to address all aspects of the scope of services being proposed. If you re negotiating financial issues multipliers, for example, for price structures on reimbursables you ll want to include someone who can handle them. In addition, many firms feel it is important to have a person on the team who has the authority to make any necessary financial commitments. Finally, it may sound counterintuitive, but it s probably not a good idea to include your attorney on a negotiating team. Having an attorney present can change the atmosphere of a negotiation session; it can become more formal and more confrontational. In most instances, you and the client can work out the basic terms of the agreement and then bring in the attorneys to finalize it. > > Compare Interests. Take the time to look at the interests of all parties to the agreement. Where are there similarities and differences? Your answer will identify the issues for which you need to prepare. Look for areas of agreement, areas of minor disagreement, areas of complete disagreement and potential issues

5 Negotiating a Contract 5 to which you must respond. Your goal is to offer the other party options, not ultimatums. Remember, while you might not be able to obtain your position, it is often possible to satisfy your underlying interests. For example, let s suppose that while your position is that you won t accept your client s 90-day payment terms, your underlying interest is tending a cash-flow problem. But perhaps your client has his or her own reasons for the 90-day payment terms. Would a small retainer be acceptable instead? Don t limit yourself to just one option. Be creative in thinking of a number of ways to accomplish your goals and realize your interests. > > Assess Leverage. There are several factors that will seriously affect the strength of your position at the bargaining table. Are you or the other party in a hurry to reach agreement? If you re in a great rush, the party across the table from you can easily pressure you into signing a less-than-perfect deal. On the other hand, if the other party is under serious time constraints, you may be in a better position. Do you offer unique experience, capabilities and services? If the other party believes you will provide something that is no different from that available from other resources, you ll have very little bargaining strength. But if you have capabilities and experience that are hard to find, the other party is much more likely to agree to your requests. How badly do you need a particular outcome? If you are unable to make payroll this week, you re not in a good bargaining position. Thinking through these questions often tells you where the power lies in a negotiation. If you have no other alternatives, you ll be in a weaker position. Often, after thinking through these questions, you ll find you re in a more powerful position than you had first thought. > > Decide on Your Deal Makers and Deal Breakers. These are terms or provisions that you decide must be included in the agreement (a properly defined standard of care, for example) or that you cannot accept (an indemnity that is not limited to your negligence). (See Deal Makers and Deal Breakers.) > > Prepare Your Concessions. It s important to enter a negotiation prepared to make concessions. Otherwise, you can t expect the other party to make concessions to you. You should know what you re willing to give up in exchange for other allowances. Could you lower your fee by a certain percentage? Agree to a tighter schedule? Can you reduce markups on reimbursables or multipliers on labor rates? Can you give away ownership of documents in exchange for the copyright and an indemnity? Are there things you can do for the other party that would cost you little or nothing but are very valuable to the client? Here is an opportunity for you to sweeten the deal by offering additional concessions which the other party may not even have asked for. For example, you might be prepared to provide CADD files or maintain a project website. Additionally, you should create a list of what the other party can do for you. There are many ways to be compensated in addition to money. For example, a client could agree to pay your invoices more quickly or provide a good reference or an introduction to another client. > > Set an Agenda. You need a plan as to when and how to approach the issues to be negotiated. Most clients want to talk fee early on. Although money may be an important part of a negotiation, it s only one of several concerns that need to be negotiated. Price is usually the last item you should discuss, because it is dependent on all the other factors. In fact, each of these factors is dependent on the others. > > Scope: Too many clients simply want a price for your services without defining the specifics of their program or their requirements for the project. But until you have a clearly delineated scope one that reflects the details and challenges of the specific project you and your client shouldn t begin to talk about price.

6 Negotiating a Contract 6 > > Schedule: Once again, you can t determine a price until you know what the schedule will be. How quickly does the client want it done? The faster the client wants it, the more it s probably going to cost. > > Team: Who will be working on the project? Before you talk fee, you ll want to identify specific members of your design team as well as specific members of other teams who will work on the project. Principals and other top people have high billing rates for a reason. If the client wants them, you ll need to price accordingly. > > Risk: What risks are you being asked to assume? What kind of liability does this project involve? If you are expected to assume risk not normally yours, you need to be compensated for taking that risk. There are many alternatives and trade-offs available to you to manage these risks. If the client s budget is so restrictive that you have to reduce the scope of your services, your exposure to loss is probably increased. You may be able to counteract this additional risk with the inclusion of certain contract provisions in your terms and conditions assuming the scope is not reduced to such an extent that it creates a public safety concern. If the client is unwilling to accept such provisions, you might discuss an appropriate fee to account for the heightened risk. Or talk about expanding the services you offer, which would reduce the unknowns and the risks arising from them. > > Quality: If the client wants a Rolls Royce, he or she has to be prepared to pay for it. Mind you, lessthan-rolls-royce quality doesn t mean sloppy work or mistakes. But it does mean fewer design alternatives, fewer meetings, the use of generic details and so on. > > Payment Terms: What payment terms are the client offering? If you re being asked to accept 90-day terms and no markup on reimbursable expenses, you may want to increase your fee to compensate. On the other hand, if the client is willing to pay you a retainer and to pay all invoices in 30 days, you might agree to make other concessions. > > Fee: Only after you ve discussed the preceding issues can you reasonably discuss price. Many successful design negotiators won t nail down their understanding on the fee until they are ready to reach agreement on all issues. In the end, contract negotiation is really just an exercise in problem solving. And while it isn t that difficult, negotiation is important. It s the foundation on which your relationship with your client will be built, a process by which you and your client will set forth reasonable and mutually agreed upon ground rules for the project. And once you understand that process, it s a skill you can readily develop or refine. The information contained herein is intended for informational purposes only and does not constitute legal advice. For legal advice, seek the services of a competent attorney. Any descriptions of insurance provisions are general overviews only. THE INSURANCE POLICIES, NOT THIS DOCUMENT, FORM THE CONTRACT BETWEEN THE INSURED AND THE INSURANCE COMPANY. The policies contain limits, exclusions and conditions that are not listed in this document. All coverages are subject to individual underwriting judgments and to state legal requirements. Design Professional Published by the Design Professional unit of XL Group 30 Ragsdale Drive, Suite 201, Monterey, CA xldp.com XL Group is the global brand used by XLGroup plc s insurance subsidiaries. In the U.S., coverages are underwritten by the following XL Group plc insurance companies: Greenwich Insurance Company, Indian Harbor Insurance Company and XL Specialty Insurance Company. Not all of the insurers do business in all jurisdictions, nor is coverage not available in all jurisdictions. is a trademark of XL Group plc companies