Negotiating Terms in Contract Management
The role of the Project Manager is to ensure that the negotiated deal best meets the project’s needs. You should be checking such things as:
- identification of all necessary components and work packages,
- delivery dates,
- quality/acceptance criteria,
- guaranteed functionality,
- staffing levels,
- training provision,
- support arrangements,
- adequate resilience,
- guaranteed performance (speed),
- Service levels.
There will also be the commercial arrangements to deal with. You could try to negotiate a good deal on your own, but you will probably do better if you use an experienced Purchasing Manager or Buyer from your organization.
“There are two types of customer – those who pay the full price and those who know they can ask for a discount. If they don’t ask, we don’t mention it.”
In commercial deals, it is common to agree a discount against the vendor’s standard price. Strangely, not all purchasers realize they can ask. There are some vendors who never discount prices – but their sales clerks will not think it strange of you to ask. Often, the vendor will have a target price to achieve, a standard price that is say 25% higher, but be willing to discount say 25% lower to get the sale. That means you might get 40% off the price you were originally told. The larger your organization and the larger your potential contract, the more bargaining power you have. Even the strongest suppliers are willing to barter if the deal is big enough.
The flexibility to discount will depend on what is being sold. If it is software (excluding support and maintenance) the marginal cost to the vendor might be the cost of a CD. Their pricing will be designed to achieve a reasonable return on their original investment overall, but a sale at any price will increase their profit. If they are selling services, they could discount down to the cost of service for their employees’ time. If they are selling hardware or selling on someone else’s product, they cannot go below cost price.
When discussing discounts, check what the discount applies to. A good discount may be offered to the basic price, but that same level of discounting might not be applied to other charges such as training, consultancy, or maintenance. The non-discounted elements might well be far more significant over a period. Watch out for such other charges being expressed as a percentage of the basic price. If annual maintenance is a percentage of the standard purchase price it will cost you, the full amount even if the seller gives you a big discount off the price.
It may be unwise to negotiate too low a price. If the vendor is not getting value from the relationship, you might not get good service and priority. If you are competing for optional resources (e.g. a change in the specification or additional consultancy advice), you might find that the vendor prefers to deploy resources on other more-profitable customers.
You should anticipate the need to negotiate with your suppliers at future points in the lifecycle. Where a key element of your solution is involved, you may find that your bargaining power becomes progressively weaker the harder it would be to change suppliers. Try to anticipate these needs and agree favorable terms in advance – when your power is at its greatest.