1. Negotiating for Profit/Fee: Lessons Learned & Best Practices March 4, 2010 By: Gregory A. Garrett, CPCM, C.P.M., PMP Managing Director & Practice Leader Government Contractor Services Navigant Consulting, Inc. NCMA Cape Canaveral Chapter Winter Educational Conference

2. Negotiating for Profit/Fee: Lessons Learned & Best Practices Key Topics of Discussion:  The World We Live  The Need for Contract Negotiation Skills * Q&A – Exercise  Contract Negotiation Competencies – The Skills to Win * Self-Assessment Survey  Negotiating Profit/Fee * Lessons Learned * Best Practices Page 2

3. “The World We Live In” From: “Optimizing the Federal Government’s Supply Chains,” by Gregory A. Garrett, NCMA, Contract Management Magazine, April 2009. Page 3

4. Increasing Federal Government Spending & Transactions (FY ‘00 – ’09) Page 4 *Does not include the $787 Billion American Recovery and Reinvestment Act (ARRA) “Stimulus Act”. * *

5. U.S. Federal Government Supply Chain Challenges  The U.S. government is not a business  The mission of the government is serious and complex  The Federal Acquisition process is overly regulated, expensive, and slow  Federal Government Contractors are increasing their subcontracting  The Federal Acquisition Workforce is understaffed and needs training Page 5

6. Contract Negotiation Skills Gap Key Facts Many of the Master Contract Negotiators in both the public and private business sectors, have retired, or retiring, or are retirement eligible by 2012 During the past 10 years, there had been a significant increase in the complexity of contracts and related projects making it more challenging to negotiate a good deal at a fair and reasonable price Recent U.S. Government Procurement Policies are placing more financial risk on government prime contracts and subcontractors Page 6

7. Exercise – Q&A 1.How important are contract negotiation skills to ensure business success? 2.How well do you negotiate? 3.Does your organization have the number and level of skilled master contract negotiators needed? Reference Text: Contract Negotiations, by Gregory A. Garrett, CCH, Inc. (2005), pg. 12. Page 7

8. The Contract Negotiator’s Competencies Model Reference Text: Contract Negotiations, by Gregory A. Garrett, CCH, Inc. (2005), pg. 14. Page 8

9. Skills to Win: Self-Assessment Survey Complete the 20 question – Skills to Win: Self-Assessment Survey (1 = Low Skills to 5 = High Skills) Summarize and add-up your score on the survey worksheet Compare your result to the Self-Assessment Survey Scoring table Page 9

10. Skills to Win: Self-Assessment Survey 1.I am a person of high integrity. 1 2 3 4 5 2.I always act as a true business professional, especially in contract negotiations. 1 2 3 4 5 3.I ensure all of my business partners and team members act honestly, ethically, and legally, especially when involved in contract negotiations and contract formation. 1 2 3 4 5 4.I verbally communicate clearly and concisely. 1 2 3 4 5 5.I am an effective and persuasive contract negotiator. 1 2 3 4 5 Page 10

11. Skills to Win: Self-Assessment Survey (Cont’d) 6.My written communications are professional, timely, and appropriate. 1 2 3 4 5 7.I am an excellent team leader. 1 2 3 4 5 8.I consistently build high performance teams, which meet or exceed contract requirements. 1 2 3 4 5 9.I am willing to compromise when necessary to solve problems. 1 2 3 4 5 10. I confront the issues, not the person, in a problem-solving environment. 1 2 3 4 5 Page 11

12. Skills to Win: Self-Assessment Survey (Cont’d) 11.I recognize the power of strategies, tactics, and counter tactics and use them frequently in contract negotiations. 1 2 3 4 5 12.I am able to achieve my desired financial results in contract negotiations. 1 2 3 4 5 13.I understand various cost estimating techniques, numerous pricing models, and how to apply each when negotiating financial arrangements. 1 2 3 4 5 14.I understand generally accepted accounting practices and how to apply them when negotiating deals. 1 2 3 4 5 15.I am highly computer literate, especially with electronic sales tools, and/or electronic procurement tools. 1 2 3 4 5 Page 12

13. Skills to Win: Self-Assessment Survey (Cont’d) 16.I am knowledgeable of e-marketplaces, vertical and horizontal trade exchanges, e-auctions, and how to use them to buy or sell products/services. 1 2 3 4 5 17.I understand the contract management process and have extensive education, experience, and professional training in contract management. 1 2 3 4 5 18.I have extensive education, experience, and training in contract law. 1 2 3 4 5 19.I have extensive education, experience, and training in our organization's products and services. 1 2 3 4 5 20.I am considered a technical expert in one or more areas. 1 2 3 4 5 Page 13

14. Skills to Win: Self-Assessment Survey (Cont’d) Skills to Win – Self-Assessment Survey Worksheet Questions #Self-Assessment Score (1-5) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Grand Total Score: _______________________________ Page 14

15. Skills to Win: Self-Assessment Survey (Cont’d) Skills to Win Self-Assessment Survey Scoring 90+: You have the knowledge and skills of a master contract negotiator. 80 - 90: You have the potential to become a master contract negotiator, after reviewing the specialized skill areas and determining in which areas you need to improve your skills. You are an intermediate contract negotiator. 65 - 79: You have basic understanding of successful contract negotiation skills. You need to improve numerous skills to reach a higher level of mastery of contract negotiations. You are an apprentice contract negotiator. 0 - 64: You have taken the first step to becoming a master contract negotiator. You have a lot of specialized skills areas you need to improve. With time, dedication, and support (education, experience, and training) you can become a master contract negotiator. Page 15

16. Contract Negotiation A Complex Human Activity Master the art and science, or soft and hard skills, required to become a master negotiator Possess the intellectual ability to comprehend factors shaping and characterizing the negotiation. Be able to adapt strategies, tactics, and counter tactics in a dynamic environment Understand their own personalities and personal ethics and values Know their products and services, desired terms and conditions, and pricing strategy Be able to lead a diverse multi-functional team to achieve a successful outcome Successful contract negotiator must: Reference Text: Contract Negotiations, by Gregory A. Garrett, CCH, Inc. (2005), pgs. 53-54. Page 16

17. Contract Negotiation Process Plan the NegotiationConduct the NegotiationDocument the Negotiation and Form the Contract 1.Prepare yourself and your team 2.Know the other party 3.Know the big picture 4.Identify objectives 5.Prioritize objectives 6.Create options 7.Select fair standards 8.Examine alternatives 9.Select your strategy, tactics, and counter tactics 10.Develop a solid and approved team negotiation plan 11.Determine who has authority 12.Prepare the facility 13.Use an agenda 14.Introduce the team 15.Set the right tone 16.Exchange information 17.Focus on objectives 18.Use strategy, tactics, and countertactics 19.Make counteroffers 20.Document the agreement or know when to walk away 21.Prepare the negotiation memorandum 22.Send the memorandum to the other party 23.Offer to write the contract 24.Prepare the contract 25.Prepare negotiation results summary 26.Obtain required reviews and approvals 27.Send the contracts to the other party for signature 28.Provide copies of the contract to affected organizations 29.Document lessons learned 30.Prepare the contract administration plan Reference Text: Contract Negotiations, by Gregory A. Garrett, CCH, Inc. (2005), pg. 61. Page 17

18. Contract Negotiations Essential Elements Reference Text: Contract Negotiations, by Gregory A. Garrett, CCH, Inc. (2005), pg. 56. Key InputsTools & TechniquesDesired Outputs  Solicitation (RFP, RFQ, etc.)  Bid or Proposal  Buyer’s source selection process  Seller's past performance  Previous contracts  Competitor Profile Business Ethics/ Standards of Conduct Guidelines  Market and Industry practices  Oral presentations  Highly skilled contract negotiators  Legal Review  Business Case Approval  Contract Negotiation Formation Process o Plan negotiations o Conduct negotiations o Document the negotiation and Form the Contract  Contract or Walk away Page 18

19. Sources of Major Risk in Cost Estimating, Negotiating Profit/Fee, and Contract Pricing Sources of Major Risk Uncertainty and risk in cost estimating, negotiating profit/fee, and contract pricing arise from six main sources:  Lack of buyer understanding of its requirements  Shortcomings of human language and differing interpretations  Behavior of parties  Haste  Deception  Poor cost estimating, negotiating, and pricing practices Reference Text pg. 14 Page 19

20. Negotiating Profit/Fee vs. Risk Page 20 FFP Fixed-priceT&M*Cost-reimbursement (Types of Contracts) FP/EPAFPIT&MCSCRCPIFCPAFCPFFCPPC** (High) (Low) (High) (Buyer’s Risk & Level of Oversight) (Seller’s Risk & Opportunity for Profit/Fee) *T&M contracts typically involve higher levels of risk for buyers **Illegal in government contracting ***FAR 15.4 15% of estimated cost Fee Limit for Research & Development 10% of estimated cost Fee Limit for all others, except 6% of estimated cost Fee Limit for Architect & Engineering Profit (No Limits)Profit (Time) No Fee (Material)Fee (Limitations)***

21. Checklist of Buyer Contract Negotiation Best Practices (The Buyer Should: )  Know what you want – lowest price or best value  State your requirements in performance terms and evaluate accordingly  Conduct market research about potential sources before selection  Evaluate potential sources promptly and dispassionately  Follow the evaluation criteria stated in the solicitation: management, technical, and price  Develop organizational policies to guide and facilitate the source selection process  Use a weighting system to determine which evaluation criteria are most important  Obtain independent estimates from consultants or outside experts to assist in source selection  Use past performance as a key aspect of source selection, and verify data accuracy  Use oral presentations of proposals by sellers to improve and expedite the source selection process Reference Text: Contract Negotiations, by Gregory A. Garrett, CCH, Inc. (2005), pg. 85. Page 21

22. Checklist of Contract Negotiation Best Practices (The Buyer and Seller Should: )  Understand that contract negotiation is a process, usually involving a team effort  Select and train highly skilled negotiators to lead the contract negotiation process  Know market and industry practices  Prepare yourself and your team  Know the other party  Know the big picture  Identify and prioritize objectives  Create options – be flexible in your planning  Examine alternatives  Select your negotiation strategy, tactics, and counter tactics  Develop a solid and approved team negotiation plan  Use an agenda during contract negotiation Reference Text: Contract Negotiations, by Gregory A. Garrett, CCH, Inc. (2005), pg. 86. Page 22

23. Checklist of Contract Negotiation Best Practices (Cont’d) (The Buyer and Seller Should: )  Set the right tone at the start of the negotiation  Maintain your focus on your objectives  Use interim summaries to keep on track  Do not be too predictable in your tactics  Document your agreement throughout the process  Know when to walk away  Prepare a negotiation results summary  Obtain required reviews and approvals  Provide copies of the contract to all affected parties  Document negotiation lessons learned and best practices  Prepare a transition plan for contract administration  Understand that everything affects price  Understand the Ts and Cs have cost, risk, and value  Know what is negotiable and what is not Reference Text: Contract Negotiations, by Gregory A. Garrett, CCH, Inc. (2005), pg. 86. Page 23

24. Questions and/or Comments Thank You Gregory A. Garrett, CPCM, C.P.M., PMP Managing Director & Practice Leader Government Contractor Services Navigant Consulting, Inc. 703-734-5953 gregg.garrett@navigantconsulting.com Page 24