Procurement – contracts and Negotiation
Procurement – Negotiation
The exam usually has only one or two questions about contract negotiations. Procurement may or may not involve negotiations. The project manager may be involved during negotiations to clarify project requirements, and if for no other reason than to protect the relationship with the other side. Many projects go bad because of how negotiations were handled.
Objectives of Negotiation
The objectives of negotiation are to:
- Obtain a fair and reasonable price
- Develop a good relationship with the seller
The second item surprises most people. If you press too strongly during negotiations and the negotiations turn from a win-win (preferable) situation to a win-lose situation, the seller will be less concerned with completing the work than with recovering what they lost in negotiation.
If negotiations are win-lose (in favor of the buyer), the buyer’s project manager will have to spend time making sure that the seller does not add extra costs, propose unnecessary work or initiate other activities to “win” back what they lost during negotiation.
This is another topic that can be included on the exam, that is not covered in the PMBOK® Guide. You should be familiar with the following types of negotiation tactics. Do not memorize them. Simply be able to pick the negotiation tactic being used in a situation.
- Attacks “If you don’t know the details of your own company, perhaps you should get out of the business!”
- Personal Insults “If you do not understand what you are doing, perhaps you should find another job!”
- Good Guy/Bad Guy One person is helpful to the other side while another is difficult to deal with.
- Deadline “We have a flight leaving at 5 p.m. today and must finish negotiations before that time.”
- Lying Not telling the truth. This may be obvious or hidden.
- Limited Authority “I can’t agree to shorten the schedule by six months. I only have been authorized to offer three months.” Limited authority statements may or may not be true.
- Missing Man “Only my boss can agree to that request, and he isn’t here. Why don’t we agree to only do ____? I can agree to that.”
- Fair and Reasonable “Let’s be fair and reasonable. Accept this offer as it stands.”
- Delay “Let us revisit this issue the next time we get together.” This may also take the form of never actually getting down to negotiating until the last day of a planned visit.
- Extreme Demands “We planned to give you a computer manufactured in 1988 to meet the requirement to deliver ‘a computer’ in the contract.”
- Withdrawal This can either be an emotional withdrawal or a physical withdrawal and can show a lessening of interest.
- Fait Accompli A done deal. “These government terms and conditions must be in all our contracts.”
Main Items to Negotiate
The main items to address while negotiating a contract are:
- Applicable law—Under whose law will the contract fall
- Technical and business management approaches
- Contract financing
- Payments and price
Remember that price may not be the primary selection criteria or the primary negotiating item. Also note that this list may differ from the real world.
What Is a Contract?
When you think of the word contract, what comes to mind? If you are like many others, you will think of all the legal words such as indemnification, intellectual property and other legal small print. People often think of only the preprinted or standard contract—boilerplate contracts—supplied to them from the contracts or legal departments. They are only partially correct.
The word contract actually refers to the entire agreement between both parties. Therefore, it includes boilerplate language, but it also includes business terms regarding payments, reporting requirements, marketing literature, the proposal, and the contract statement of work—all the requirements of the project.
Many project managers and business professionals think that the only relevant part of a contract is the contract statement of work, because they are naturally most familiar with that aspect of the contract. However, the contract statement of work does not include all the requirements. In fact, some of the boilerplate language can be more relevant than the contract statement of work.
For example, think of a project to develop new software. Who owns the resulting program? Who owns the resulting program if it contains modules or pieces of programs previously used and planned for future reuse? How do you protect your rights and ensure that all source code is delivered? The ownership clause in a contract for such services might be more relevant than the contract statement of work itself.
A contract is a legally binding document. Therefore, all terms and conditions in the contract must be met. One cannot choose to not conform or to not do something required in the contract. Changes to the contract are made formally in writing.
What Do You Need to Have a Legal Contract?
- An offer
- Consideration Something of value, not necessarily money
- Legal capacity Separate legal parties, competent parties
- Legal purpose You cannot have a contract for the sale of illegal goods
A contract, offer or acceptance may be oral or written, though written is preferred.
Try out this story. You need plumbing work done on your home. You contact a plumber, who sends you a price with a notice that says, “If you want me to do the work on your home, send me a copy of the design drawings.” Three weeks later, that plumber shows up at your home to start work, but you are surprised as you signed a contract with another plumber. The plumber says that you also have a contract with him because you sent the drawings.
Is the plumber right?
Yes; acceptance can be an action or it can be verbal. You have a difficult situation on your hands and you will likely have to pay this plumber something. The trick is to avoid these situations by understanding contracts.
Contract Management Plan
Whereas the procurement management plan will address how all procurements on a project will be managed, the contract management plan is specific to one contract and talks only about contract administration. Imagine you have a 100 page contract. A trick used by contract professionals is to summarize the key milestones, reporting and other requirements of the contract that both the buyer and seller have to meet.
The result is a list (referring back to the detailed contract) of all the to-do items in the contract.
Contract administration consists of assuring that the performance of both parties to the contract meets contractual requirements. This is an important area on the exam.
You have to know what to watch out for, what the project manager should do, that all things in the contract must be done, however small, and that the project manager must help uphold all parts of the contract, not just the project scope.
Take a moment and think of what work must be done during contract administration and try the next exercises.
Describe what needs to occur during contract administration.
Actions during this process may include:
- Review invoices
- Complete integrated change control
- Make and handle changes
- Authorize payments
- Interpret what is and what is not in the contract
- Interpret what the contract means
- Resolve disputes
- Make sure only authorized people are communicating with the seller
- Deal with the contract manager regarding changes and contract compliance
- Hold meetings
- Report on performance
- Monitor cost, schedule and technical performance against the contract including all of its components
- terms and conditions, contract statement of work, etc.)
- Understand the legal implications of action taken
- Control quality
- Review claims
- Authorize the seller’s work at the appropriate time
- Keep records
- Disseminate changes to the appropriate parties
- Verify scope
- Identify risks
- Monitor and control risk
Now the hard part. The exam will require you to know that your management efforts are different under each form of contract, meaning there will be different things you will need to do depending on the type of contract you have. Be wary, not only does this apply to the real world but there could be up to seven questions that require you to understand this. So let’s try an exercise. Spend a lot of time making sure you understand this topic.
Hopefully, you have built a strong working relationship with the seller. That means you are working well with each other. What if the seller has financial troubles, changes owners, or did not include in their own estimate major pieces of the work? The good relationship can go bad in an instant. Describe what specific things you must watch out for (spend your time managing) during contract administration for each of the three main forms of contracts, no matter what the relationship between the buyer and seller.Think about your real-world experience.
This is not a complete list! Think of what other actions may be taken.
In most projects where a contract is used, another person controls the contract. This person may be called the contract manager or contract administrator and, in many cases, IS THE ONLY ONE WITH AUTHORITY TO CHANGE THE CONTRACT.
We have already said that the contract includes the contract statement of work. You can see the potential for conflict between the contract manager and the project manager.
This type of conflict is frequently a subject of exam questions.