Frankly speaking,Jeff, I didn’t think we would stand a chance in winning this $20million program. I was really surprised when they said that they’dlike to accept our bid and begin negotiations. As Chief contractadministrator, you will head up the negotiation team, “remarked GusBell, vice president and general manager of Cory Electric. “Youhave two weeks to prepare your data and line up your team. I wantto see you when you’re ready to go”. Jeff Stokes was chief contractnegotiator for Cory Electric, a $250- million-a year electricalcomponents manufacturer serving virtually every major U.S industry.Cory Electric had a well-established matrix structure that hadwithstood fifteen years of testing. Job casting standards were wellestablished, but did include some “fat” upon the discretion of thefunctional manager.

Two weeks later, Jeff met with GusBell to discuss the negotiation process.

Gus Bell: “Have youselected an appropriate team? You had better make sure that you’recovered on all sides”

Jeff: “There will be four, plus myself, at thenegotiating table; the programme manager, the chief engineer whodeveloped the engineering labour packages; the chief manufacturingengineer who developed the production labour package; and a pricingspecialist who has been on the proposal since the kick-off meeting.We have a strong team and should be able to handle anyquestions”.

Jeff: “Yes! Our minimum position is $20 millionplus an 8 percent profit. Of course, this profit percentage willvary depending on the negotiated cost. We can bid the programme at$15 million cost; that’s $5 million below our target cost and stillbook a 1.6 million profit by overrunning the cost-plus-feecontract. Here is a list of the possible cases. See Exhibit onebelow

Jeff:“I’ve read over all terms and conditions, and so have allthe project office personnel as well as the key functionalmanagers. The only major item is that the customer wants us toqualify some few vendors as sources for raw material procurement.We have included in the package the cost of qualifying two new rawmaterial suppliers”

Gus Bell: “Where arethe weak points in our proposal? I’m sure we have some”

Jeff: “Last month, the customer sent in a findingteam to go over all of our labour justifications. The impressionthat I get from our people is that we’re covered all the way round.The only major problem might be where we’ll be performing on ourlearning curve. We put into the proposal 45 percent learning curveefficiency. The customer has indicated that we should be up around50 to 55 percent efficiency based on our previous contracts withhim. Unfortunately, those contracts the customer referred to werefour years old. Several of the employees who worked on thoseprograms have left the company. Others are assigned to on-goingprojects here at Cory. I estimate that we could put together about10 percent of people we used previously. That learning curvepercentage will be a big point for disagreements. We finished offthe previous programs with the customer at 35 percent learningcurve position. I don’t see how they can expect us to be smarter,given these circumstances.”

GusBell: “If that’s the only weakness, then we’re in goodshape. It sounds like we have a fool proof audit trail. That’sgood! What’s your negotiation sequence going to be?

Jeff: “I’d like to negotiate the bottom line only,but that’s a dream. We’ll probably negotiate the raw materials, theman-hours and the learning curve, the overhead rate, and finallythe profit percentage. Hopefully, we can do it in that order.”

Gus Bell: “Do youthink that we’ll be able to negotiate a cost above our minimumposition?”

Jeff: “Our proposal was $22.2 million. I don’tforesee any problem that will prevent us from coming out ahead ofthe minimum position. The 5 percent change in learning curveefficiency amounts to approximately $ 1 million. We should be wellcovered.

“The first move willbe up to them. I expect that they’ll come in with an offer of $ 18to $19 million. Using the binary chop procedure, that’ll give usour guaranteed minimum position.

Gus Bell: “Do youknow the guys who you’ll be negotiating with?”

Jeff: “Yes, I’ve dealt with them before. The lasttime, the negotiations took three days. I think we both got what wewanted. I expect this one to go just smoothly”

Gus Bell: “Okay,Jeff. I’m convinced we’re prepared for negotiations. Have a goodtrip”

The negotiationsbegan at 9:00 A .M on Monday morning. The customer countered theoriginal proposal of $22.2 million with an offer of $15 million.After six solid hours of arguments, Jeff and his team adjourned.Jeff immediately called Gus Bell at Cory Electric.

Jeff: “Their counteroffer to our bid is absurd.They’ve asked us to make a counteroffer to their offer. We can’t dothat. The instant we give them a counter-offer, we are in factgiving credibility to their absurd bid. Now, they’re claiming that,if we don’t give them a counteroffer, then we’re not bargaining ingood faith. I think we’re in trouble”

Gus Bell: “Has thecustomer done their homework to justify their bid?”

Jeff: “Yes, very well”. Tomorrow we’re going todiscuss every element of the proposal, task by task. Unlesssomething drastically changes in their position within the next dayor two, contract negotiations will probably take up to a month”

GusBell: “Perhaps this is one program that should benegotiated at the top levels of management. Find out if the personthat you’re negotiating with reports to a vice president andgeneral manager, as you do. If not, break off contract negotiationsuntil the customer gives us someone at your level. We’ll negotiatethis at my level, if necessary.”

Source: John Wiley & Sons Inc

Gus Bell: “Okay, I’II take your word for it. Ihave my own checklist for contract negotiations. I want you to comeback with a guaranteed fee of $1.6 million for our stockholders.Have you worked out the possible situations based on the negotiatedcosts?”

Analyse the various types of Gantt charts Gus bell andJeff can use to schedule preparations for the abovenegotiation.