NEGOTIATING THE CONTRACT

Procurement people, especially inexperienced ones, find negotiations difficult, seemingly complex and often intimidating. However, negotiations are an integral part of the RFP process. The simple act of adding a negotiations step to your evaluation process will reduce the risks of failure, improve the quality of the proposals, improve your understanding of the proposals, and, in many situations, lower the price. This step invariably costs little yet provides much value.

With all these benefits, you’d expect negotiations to be greeted with enthusiasm. This is often not the case. Many agencies have only recently discovered the power of using RFPs instead of bids. Even fewer agencies build competitive negotiations or best and final offers into their processes

Most publications about RFPs deal only briefly with competitive negotiations, often in the context of Best and Final Offers. Sometimes, this step is omitted in a description of the RFP process.

There are several seemingly valid reasons for this oversight:

• Few people understand the role of competitive negotiations in the RFP process.
• This process is ignored by many agencies.
• Many procurement people are unaware of this tool.
• Little training is provided for this skill.
• A majority of procurement people do not like to negotiate.
• In some jurisdictions, the laws do not permit or are interpreted not to permit negotiations.

When competitive negotiations are used, they produce revised proposals. Often these revised proposals are submitted as “best and final offers”. In some jurisdictions, such as Idaho, negotiations are conducted as the final step in the procurement process and lead not to a revised proposal but to a contract.

In the remainder of this section, we provide some basic information and several views of this building block:

• We discuss legal and policy considerations from the perspective of the Model Procurement Code.
• We introduce a buyer’s perspective. Negotiations can be scary.
• We discuss the negotiation process.
• We look at this building block as it is practiced.

Legal and Policy Considerations

In the beginning, there was the Model Procurement Code.

Public sector procurement is subject to many different, often confusing, statutes, regulations, policies and guidelines. The fundamental purpose for this body of rules and expertise is to ensure that competition thrives in a fair and equitable environment - to provide a level playing field and ensure that value is received for taxpayer dollars.

Unfortunately, negotiations are also subject to confusing rules, policies and laws. It is one of the most poorly understood elements of public procurement. In 1979, the American Bar Association introduced its Model Procurement Code. At the time, this was a groundbreaking document. Since then, the MPC has had a profound influence on public sector procurement. Unfortunately, the original MPC spent little time on negotiations. It only provided a few words of direction on the subject. Recently, a revised MPC was issued. However, the negotiation section was virtually unchanged. Here is what it said:[i]

Discussions with Responsible Offerors and Revisions to Proposals. As provided in the Request for Proposals, and under regulations, discussions may be conducted with responsible offerors who submit proposals determined to be reasonably susceptible of being selected for award for the purpose of clarification to assure full understanding of, and responsiveness to, the solicitation requirements. Offerors shall be accorded fair and equal treatment with respect to any opportunity for discussion and revision of proposals, and such revisions may be permitted after submissions and prior to award for the purpose of obtaining best and final offers. In conducting discussions, there shall be no disclosure of any information derived from proposals submitted by competing offerors.

The Commentary section also remained unchanged:

(1)    Subsection (6) provides the procurement official an opportunity to make certain that offerors fully understand the solicitation requirements and provides offerors and opportunity to clarify proposals where necessary so as to assure responsiveness to the solicitation. Price discussions can best be conducted when there is a mutual understanding of the contractual requirements.  Clarifications are intended to promote exchanges between the [State] and an offeror that may occur when an award is contemplated without discussions, for example, to resolve minor or clerical errors or ambiguities in proposals.

(2)    When discussions or negotiations are contemplated after the receipt of proposals which are expected to lead to the revision of proposal or to best and final offers, fair and equitable treatment of competitors dictates that negotiations be conducted in accordance with ethical business standards. Auction techniques shall be prohibited in discussions with offerors under the competitive seal proposal method. There must be a cut-off for the submission of revised proposals and final offers.. Both Subsection (4) and Subsection (6) are intended to provide that prices; technical solutions; unique technologies; innovative use of commercial items, design construction, or operating techniques; or other aspects of proposals submitted by one offeror must not be disclosed to competing offerors. Safeguards against abuse in the conduct of negotiations  must be strictly observed to maintain the essential integrity of the process. Procedures should be specific in regulations in order to achieve these objectives.

The private sector is not subject to the same policies, laws, and regulations. Their negotiation strategies can incorporate auction techniques, unequal treatment, and disclosure of information about competing offers - all prohibited in the public sector.

The 1979 Model Procurement Code set the direction for public sector negotiations. Since then, some of the concepts have evolved and new procedures have been tried

Defining the Terms of Reference

Before we can even discuss this topic, we have to agree on some definitions. Now most people understand  the meaning of “negotiate”,  “clarify” and “discuss”. However, these terms have specific meanings related to procurement. These meaning are more legalistic and somewhat different that the day-to-day usage.

In most jurisdictions, “Clarify” is used to indicate that the offeror will have the opportunity to remove minor errors or provide additional information to resolve ambiguities. A clarification is not a major revision to the proposal. So, when you clarify, you fix the small stuff. This fundamental aspect seems clear and has been adopted in many jurisdictions.

In writing the commentary on this issue in the Model Procurement Code, the lawyers do  their best to make this simple concept difficult to understand. If you carefully analyze the words, you will conclude that they intended that “clarifications” be an exchange of information between the buyer and offeror to resolve minor or clerical errors or ambiguities in proposals. And that “clarifications” are not “negotiations”.

Alaska has found some words which explain this concept in a simple and straightforward manner:[ii]

During the evaluation process, the procurement officer or the PEC may communicate with an offeror to clarify uncertainties or eliminate confusion. This communication may not result in a material or substantial change to the proposal, but it may result in an adjustment to the procurement officer or PEC’s evaluation.

In California, they’ve defined the term formally:[iii]

Clarification: Discussions of a solicitation response with a supplier that may eliminate minor administrative or other irregularities, informalities or apparent clerical mistakes and that can be achieved by explanation or substantiation. Clarification does not give the supplier an opportunity to revise or modify its solicitation response except to the extent that correction of apparent clerical mistakes results in revision.

Massachusetts has provided some direction in their Procurement Handbook to ensure that departments will permit corrections and clarifications, to ensure that all the suppliers are treated fairly and equally, and to ensure that a “clarification” does not become a material revision to the proposal:[iv]

• … a procuring department has full discretion of  determine whether to allow a response correction or clarification . .  .

• … the procuring department must provide the same opportunity for clarification of the identified response section to all bidders that submitted responses..

• …No correction or clarification of response prices, terms and conditions or the submission of supplemental information  prejudicial to the interests of other bidders or to fair competition shall be permitted….

“Discuss” is often used in procurement documents instead of “negotiate”. This confusing use of “discuss” can be traced to the Model Procurement Code’s phrase “discussions or negotiations”. In many places, “discuss” means “negotiate”.

“Negotiate” is used to describe the bargaining process when the buyers and offerors sit down and review the proposal. Usually, these discussion lead to a better understanding by both parties and the submission of a revised proposal..

There are several concepts embedded in “negotiations”.

First, it is bargaining. Here is the definition used in California:[v]

Negotiation: The act of communicating with a supplier orally or in writing for the purpose of determining the acceptability of a supplier’s bid, as permitted by law. May provide the supplier an opportunity to revise or modify its p rice as the result of discussions where it benefits the State to accept a different firm offer form the supplier.

Second, the bargaining is not done with all offerors but with those likely to be selected for award:[vi]

Offerors submitting proposals may be afforded an opportunity for discussion and revision of proposals. Revisions may be permitted after submissions of proposals and prior to award for the purpose of obtaining best and final offers. Negotiations may be conducted with responsible offerors who submit proposals found to be reasonably likely to be selected for award.

Third, all offerors must receive fair and equal treatments. So, if you negotiate with one, or “hold discussions”, you must do it with all who are similar:[vii]

The procurement officer or PEC may give offerors whose proposals are reasonably susceptible for award the opportunity to meet with the procurement officer or PEC, as set out in 2 AAC 12.290. If you hold discussions under 2 AAC 12.290 you must offer an opportunity to participate in the discussions to all those deemed reasonably susceptible for award.

Negotiations can be far-reaching. In many jurisdictions, you can negotiate anything in the RFP or proposal that improves the value to the State. Typically, you cannot negotiate changes to prescribed contract terms and conditions, or expand the scope of the RFP.^.[viii]

Negotiations Can be Scary

In some organizations, negotiation is regarded as the poor, neglected step-child of the RFP process. The reasons for this are related more to psychology than RFPs or procurement:

1.         Many procurement people receive little if any training.

They aren’t taught how to negotiate; they don’t know about tactics; the don’t structure an effective process; they lose control of the meetings. Lack of training usually carries with it lack of confidence and, therefore, avoidance of the process.

2.         The supplier is better prepared.

Most procurement people “own” the process. They aren’t the subject experts. The supplier is the expert about the product and service, and has an inherent advantage. Also, suppliers are extremely knowledgeable about contract issues related to their products, service and industry. Many procurement officers have sat in a meeting and concluded that the supplier’s team is much more knowledgeable about the details of the implementation, the risks, the negotiation process and contract issues than the buyers. Lack of a knowledgeable negotiation team is a barrier to effective negotiations and erodes the confidence of the procurement person managing the process.

3.     Roles and responsibilities are poorly defined.

Often the buyers’ team is unsure of its role. How much authority do they really have? Can they end negotiations due to an impasse and will their senior management support them? Or will senior management override their process and decisions? Are they acting within the law? Often, the negotiation team doesn’t know how to treat the suppliers, as an adversary or as a potential partner?

4.     Many people find negotiations awkward.

As individuals, many of us regard face-to-face discussions to resolve differences as difficult and awkward. Many people simply do not like to negotiate, whether it’s a major contract or purchase of a new car. They find the process intimidating, and somewhat unseemly or demeaning. They don’t see negotiations as an import part of a process - one designed to acquire “best value” in a fair and open manner.             

All of these shortcomings related to lack of training, lack of confidence and lack of an effective process can be overcome.

Negotiations are valuable. They do much more than provide lower prices. The Victoria Government Purchasing Agency has a great perspective on negotiations:[ix]

Post tender competitive parallel negotiations with two or more short listed tenderers is a purchasing strategy that provides substantial benefits to both buyer and seller and is usually used for high value and/or complex acquisitions. The objective is to seek the optimal solution and commercial arrangements, and not merely accept the lowest priced technically complying offer made at the time of tendering. This technique also maintains a competitive market situation throughout the evaluation process which sustains purchasing leverage . . .

There are many solid reasons for negotiating changes to suppliers’ proposals:[x]

·         increase the number of complying offers (providing greater competition)

·         reduce risk to both parties

·         eliminate unnecessary costs

·         reduce costs

·         improve benefits (better quality, performance, delivery etc.)

·         identify alternative solutions

·         clarify requirements and proposals

·         create better understanding and relationships between the parties

·         improve the contract

·         improve the tender bid

·         opportunities for partnership

The Negotiation Process

By this point in the RFP process, most of the work has been done. You’ve worked with the user group to develop specifications; you’ve written a procurement plan; the RFP has been issued and proposals  received. You’ve done most of the evaluation and all that remains is to negotiate the final details with, at most, a few suppliers.

The negotiation process is similar in many different jurisdictions. Typically, as part of the evaluation, the strengths and weaknesses of each proposal are identified. Clarifications of ambiguous or omitted terms have been received. Based on this information, the offers are divided into two groups: those within the competitive range and those outside the competitive range. All those inside have been judged as capable of providing an acceptable solution.

Now its time to negotiate. You prepare a negotiation plan, and identify the negotiating team and each person’s role in the process. You then meet with the offeror to discuss their proposal, to seek a common understanding of the problems and issues, and to resolve disagreements. Usually the discussions are documented and to formalize the results, you call for a best and final offer. This permits each of the suppliers with whom you have been negotiating to submit a revised  proposal. In some organizations, the request for best and final offers  follows a written notice from the buyers about deficiencies and concerns in the original proposal.

Abermarle County (VA) has developed an 8-page guide for its procurement people describing the procedure for conducting negotiations:[xi]

The following are general guidelines for conducting negotiations, during which

the selection committee should:

Control: Control all discussions.

• Identify deficiencies: Advise the vendor of deficiencies in its proposal so it has the opportunity to satisfy the RFP’s requirements. (See section 16-8 below)

• Resolve uncertainties: Attempt to resolve any uncertainties concerning the technical proposal and other terms and conditions of the proposal. (See section 16-8 below)

• Resolve mistakes: Resolve any suspected mistakes by calling them to the vendor’s attention as specifically as possible, without disclosing information concerning other vendors’ proposals or the evaluation process. (See section 16-8 below)

• Opportunity to revise: Provide the vendor a reasonable opportunity to submit any cost, price, technical or other revisions to its proposal that may result from the interviews (goods or nonprofessional services only).

• Cost or price: Inform a vendor that its cost or price is considered to be too high or unrealistic (goods or nonprofessional services only).

Negotiation is a four step process:[xii]

1. Preparation

2. Fact Finding

3. Bargaining

4. Agreement

In many jurisdictions, negotiations are not restricted. Any element of the procurement can be negotiated so long as in doing the review, all offerors are treated in a fair and equal manner. However, radical changes in scope can end in litigation initiated by aggrieved suppliers.

In California, their Acquisition Manual sets the scope of negotiations:[xiii]

Negotiations are conducted on all  procurement transactions as permitted by law and when practical, as determined by the Buyer (and the Buyer’s management). . . Negotiations may address all aspects of the anticipated contractual arrangement (or change) including technical requirements, contract terms and conditions and/or price. ..

Only people with training and experience in negotiations should lead these efforts.

1.     Preparation

Preparation involves assembling a negotiation team, knowing the details of the proposal being considered, and establishing the boundaries of an acceptable agreement. The team, in turn, identifies a negotiation strategy and objectives, and develops a negotiation  plan.

Usually, negotiations are conducted by a team consisting of user representatives, technical specialists, sometimes a lawyer, and a procurement officer.

As part of the pre-negotiation preparation, before meeting with any offer, the team has to do its homework.   It has to develop a complete understanding of the contractual requirements and the offerors response in its proposal, a unified team approach to various topics, and a position from which to negotiate. The team usually identifies its negotiating objectives and a minimum and maximum limit for each objectives.

All of this information is often incorporated into a Negotiation Plan - a written document prepared by the chief negotiator describing the objectives for the negotiations and the corresponding rationale.

In developing a Negotiation Plan, the following questions should be answered:[xiv]

• With whom am I negotiating?
• What are the key issues?
• What am I trying to accomplish?
• What are the strengths, weaknesses and deficiencies of the proposal?
• What is the negotiating environment?
• What is the negotiating process?
• What information do I need?
• What is my negotiating strategy?
• How will the agreement be reached?
• How will the agreement be implemented?                                               

2.     Fact finding

Fact finding is when each side asks questions to ensure that they share a common understanding of the requirements, RFP, and the offer. It is to obtain both clarifications and additional information on issues of concern to either party. At the end of this phase, both parties should agree on the specifications, requirements or statement of work.

3.     Bargaining

This is the difficult step. It is during the bargaining phase that each party puts forward its negotiating positions and seeks resolution of disagreements. Usually, the agenda is set by the chief negotiator and often deals with the most important issues first.

There are many different tactics which can be employed during this process. Some are ethical, others are borderline. Some are dangerous and can jeopardize the process. These tactics are available to both sides and astute negotiators quickly recognize their use and diffuse their effectiveness. Tactics include the classical “good guy/bad guy” routine; intentionally delaying the process; claiming a lack of negotiation authority, and bluffing.

Price is always an issue in negotiations. Often it is the most important issue and sometimes it is the only issue. Many procurement officials, especially in smaller agencies, are at a disadvantage when they negotiate. They think it is somehow wrong to challenge prices, or for a supplier to set prices to generate large profits. These buyers are not effective as negotiators. Here is the advice that Victoria Government Purchasing Board gives to all procurement officers in their government:[xv]

Price is an obvious focus for tender negotiations. However, it should not be regarded as unethical for a buyer to challenge the prices quoted. It is not immoral or wrong for a supplier to price a bid to the highest level which the market or purchaser can withstand. The seller has a responsibility to maximise company profits and departments have a corresponding duty to minimise cost/expenditure to an extent compatible with the purchase of a reliable product and/or service. Price negotiation should be done in a professional, objective and forthright manner.

Conducting negotiations is a vast topic addressed by books, articles, training courses, professional associations. Treatment of this topic in more than a cursory manner is beyond a text dealing with RFPs. As an illustration of some of the factors and issues that may arise in conducting negotiations, consider the following list of good negotiating tactics:

Conducting Negotiations[xvi]

·         Aim for a good result for buyer and supplier.

·         Agree on the issues and the way to proceed.

·         Maintain confidentiality and treat suppliers fairly.

·         Be careful about using tactics which may undermine your own negotiating position.

·         Ensure the bidder is fully aware of, and understands, the real requirements.

·         Ensure that the competitive element is maintained whenever possible, e.g. that inappropriate information regarding the contract or order is not revealed to other competing parties.

·         Do not give the supplier the impression that the contract/order is a certainty.

·         Maintain an ethical approach according to the standards of conduct both expected by and required of you.

·         Ensure your overall strategy is flexible and adaptable to changing circumstances, but seek to settle differences within your team outside the negotiation venue.

·         Behave so that ways exist for both sides to reach agreement without loss of face.

·         Aim to use negotiating techniques which better enable you to find common ground with the other party, e.g. discuss the argument/rationale both for and against the views adopted by either party on a particular issue. This approach can help in more easily obtaining all the relevant facts, considering all available points of view, and providing a summary of views.

·         Recess to caucus when the team needs to confer privately.

·         Be open-minded and make concessions when good reason exists to do so.

·         Look for long-term consequences.

·         Use standard forms of agreement whenever possible. Where they are modified or new clauses written, legal advice may be necessary to ensure the changes achieve the intended results. Ensure changes are considered in the light of the whole document.

·         Be careful not to reject offers which you may wish to accept later.

·         Make clear that negotiations are 'subject to contract' until you are ready to commit your organisation.

·         Ensure that the essential terms have been actually agreed to and entered into the contract document.

4. Agreement

Once the major issues have been negotiated and resolved, the details usually fall into place. And once there is agreement on all the items, the negotiations are concluded and the contract signed.

Upon completion of negotiations, the chief negotiator writes a Negotiation Memorandum which often contains the following:

• Identification of the proposal and the players
• Summary of the negotiation objective, results, and the proposal
• Important details for each negotiated item

In some jurisdictions, the final step after completing negotiations is for the offeror to modify its proposal – in essence, to submit a Best and Final Offer. This revised proposal is then given to the evaluators so they can prepare their final report.

Bridging the Gap[xvii]

Consider this example - you receive three proposals for the county enterprise financial system:

• Proposal A meets or exceeds all of the stated requirements and has most of the desired optional features but is $250,000 over budget.
• Proposal B meets all of the stated requirements, a few of the desired optional features and is within the program budget.
• Proposal C meets most of the stated requirements, a few of the desired optional features and is half the price of its nearest competitor.

What do you do?  Score the proposals, using your handy-dandy price formula and award the contract?  Big mistake!  Proposal A is obviously the best alternative but it is too expensive.  Proposal B is probably OK but it represents old technology.  Proposal C misses the mark but it will leave money in the budget for consultants to fix it.

Many procurements officers ignore one of the most important features of the RFP process, NEGOTIATION!  If you are not negotiating, you are not taking advantage of the RFP process.

The term “competition negotiation” became part of the Armed Services Procurement Act of 1984 as “competition proposal”.  One of the key features of the RFP process is our ability to negotiate proposal revision.

The American Bar Association Model Procurement Code for State and Local Governments is the foundation for many state and local government procurement codes.  Model Procurement Code RFP process permits discussions and best and final offers.  The NIGP Dictionary of Terms defines “discussions” as “an oral or written exchange of information, other that simple clarifications, for the purpose of obtaining information essential for determining the acceptability of a proposal, or to provide the offeror an opportunity to revise its proposal.  Discussions are negotiations and negotiating is bargaining to reach mutual agreement.

There are some important rules for negotiating.  Negotiations must be fair, allowing all offerors who are in the competitive range or reasonably susceptible for award to participate.  Avoid revealing details from competing offers.  Point out all significant weaknesses to each offeror and encourage improving the offer.  Avoid auctioning techniques to make all offers equal.

Negotiations are not easy.  They require planning and patience.  Let’s set up a negotiating strategy for our three proposals:

Proposal A meets or exceeds all of the stated requirements and has most of the desired optional features but is $250,000 over budget. Although it exceeds our budget, it appears to be our best proposal.  The purpose of the RFP process is to award the contract to the most advantageous offer.  This could very well be it!  When negotiating, we should the offeror that its proposal exceeds budget and discuss methods for reducing the price, without sacrificing any required or highly desired features.  If all else fails we might seek more money.

Proposal B meets all of the stated requirements, a few of the desired optional features and is within the program budget. This proposal meets our current requirements but represents old technology that may be obsolete in a few years.  We may want to seek some assurance that the contractor will provide maintenance and upgrades for ten years and customization, additional options and other features and price concessions.

Proposal C meets most of the stated requirements, a few of the desired optional features and is half the price of its nearest competitor. This offer may be well be not susceptible for award.  It does not meet our minimum requirements and has few desired options.  Chances are, the offer cannot be improved enough to win the contract.  If we choose to negotiate, we have a lot of work to do.  We need to point out all significant weaknesses and recommend improvements.  We should also encourage additional desired options.

Best and final offers or final proposal revisions come after, repeat, after negotiations.  This is the formal process for obtaining written confirmation of the discussions.  This is our “meeting of the minds”.  Once we receive the best and final offers, we can return the proposals to our evaluation committee and let them recommend the most advantageous offer.

Do’s and Don’ts

There are some do’s and don’ts to competitive negotiations:

Don’t negotiate with just one offeror, unless you have not reasonable choice.  Competitive negotiations require competition.  To be fair, we should negotiate with all offerors who are susceptible for award or are in the competitive range.[xviii]

Don’t negotiate with offerors who are not susceptible for award.  Negotiations should be efficient.  Don’t waste the valuable time of your negotiators and evaluators.  Release the unacceptable offerors to seek other business opportunities.

Do negotiate to improve weaknesses but don’t compare details from each proposal.  Our goal is to help each offeror meet our requirements, not to match up with a competitor.

Do appoint a negotiation team.  Evaluators evaluate and negotiators negotiate.  Assemble a competent negotiation team with technical advisors.  The team leader should be a skilled and competent procurement negotiator.

Do plan the negotiation strategy.  Identify weaknesses and desired characteristics.  Study your offerors and identify their needs.  Hint: Money is not the only motivator for prospective contractors.  Understand the environment.  The more you know, the better you will do.

Don’t try to negotiate the same things with each offeror.  Each proposal is different and demands a different negotiation strategy.  Discuss price only when price is a weakness.  In many situations, we can expect price to climb as we negotiate to improve weaknesses.

Do keep good notes.  It is acceptable to request the contractor take notes, for approval by the government negotiators.

Don’t lose control of negotiations.  Appoint a competent and skilled negotiation team leader.  Negotiate in government offices.  Regulate team dialog.  Don’t join prospective contractors for lunch or drinks.  This is business.

Do negotiate for mutual understanding and “win-win” solutions.

Don’t negotiate if you don’t need to.  If you number one offer meets government requirements and does not require improvements, leave it alone and award the contract.

Don’t issue “Surprise BAFO’s”.  The Best and Final Offer should only be requested after negotiations are done.

We are just scratching the surface.  This article is not the consummate guide to government negotiating.  If anything, this article should make you curious and encourage you to become a good negotiator.  There are many good negotiation books and workshops.

Please remember, if you are just evaluating proposals and awarding contracts, without negotiation, you are only doing half the procurement.  Negotiations bridge the gap between what the government requires and what to offeror proposes.