BEST PRACTICE ADVICE IN POST TENDER NEGOTIATIONS

INTRODUCTION

Post tender negotiations is a purchasing strategy that should be considered in all acquisitions. The purpose is to obtain the optimal solution and commercial arrangements, and not merely accept the lowest priced technically complying offer made at the time of tendering.

It is essential, however, that before post tender negotiations commence, a clear plan and strategy is developed and the negotiation team is fully briefed.

It is also essential that there is equality of opportunity to short listed tenderers during negotiations. Short listed tenderers are those which satisfy mandatory and desirable criteria and offer acceptable solutions, on initial assessment. This can be achieved by ensuring that the following occurs:

• when some changes to the user requirements (which does not substantially alter the specification) become necessary or desirable during the negotiation phase, shortlisted tenderers have the opportunity to revise their offer; and
• the same general questions and propositions are put to shortlisted tenderers (e.g. the opportunity to improve the solution tendered and/or reduce the costs as a last and final offer).

This does not preclude questions of clarification which may be specific to a particular tender.
A record should be kept of the negotiation process for audit purposes. However, details should be brief and limited to:

• date and time of communications (e.g. meetings, phone calls, correspondence);
• persons present or addresses;
• topics discussed; and
• outcomes.

At the conclusion of the negotiations the potential contractor should be requested to document their understanding of the negotiations in a letter as their latest offer. Details of the meeting are to be managed as Commercial-In-Confidence in accordance with Departmental policy.

Only people with negotiation training and experience should lead and conduct negotiations, otherwise the more experienced tenderers may be able to use their skills and obtain a significant advantage.

BACKGROUND

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. However, although lower costs are a likely outcome of post tender negotiations, it should not be seen merely as a mechanism for lowering the price.

DISCUSSION

Advantages

Post tender negotiations provide organization buyers with the opportunity to:

• increase the number of complying offers (providing greater competition);
• reduce risk to both parties;
• eliminate unnecessary 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 tender bid; and
• opportunities for partnership.

Ethical and Probity Issues

Opposition to post tender negotiation is usually based on ethical considerations. This issue can be addressed through pre-tender briefings. These arrangements involve supplying prospective tenderers with copies of draft Request for Tender documents before tenders are called. Discussions can then take place at either a briefing conference and/or through individual interviews to seek clarification on technical and commercial matters, to explore opportunities to open up the specification, or to remove features which can reduce costs without affecting functionality and performance.

Concerns about post tender negotiations can also be diminished by declaring the evaluation criteria and methodology either during the pre tender stage or at the time the tender is advertised. This action demonstrates a department’s intention to be honest, open and fair, and give tenderers the opportunity to prepare a bid which best matches criteria considered to be the most important by the buyer.

It is also essential that there is equality of opportunity to shortlisted tenderers during negotiations. This can be achieved by ensuring that the following occurs:

• when some changes to the user requirements (which does not substantially alter the specification) become necessary or desirable during the negotiation phase, all short-listed tenderers have the opportunity to revise their offer;
• the same general questions and propositions are put to all shortlisted tenderers (e.g. the opportunity to improve the solution tendered and/or reduce the costs as a last and final offer). This does not preclude questions of clarification which may be specific to a particular tender.

The development of supply partnerships or strategic alliances also requires the traditional "arm’s length" basis of tendering to change. Suppliers must be seen as trusted parties and not adversaries. Post tender negotiation will facilitate this approach to doing business, and Australian suppliers will have the most to gain from this arrangement.

Negotiations on Price

Price is an obvious focus for post 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.

It is possible that suppliers will anticipate the prospect of a price-orientated negotiation and artificially inflate their initial bids accordingly. Departments need to take this into account when planning a purchase and when preparing for negotiations. However, there are factors that militate against such an approach by suppliers. For example, negotiations will not always occur and, when they do, price may very well be a key criterion for shortlisting. Artificially inflated prices may quickly take the supplier(s) offer out of consideration.

Role of Accredited Purchasing Units (APUs)

APUs should be made aware of any activities involving post tender negotiations in their department, and maintain a "watching brief" on the process. This should only involve the project manager informing the APU that negotiations will be taking place shortly with a shortlist of tenders. The APU would need to know who will be involved in the negotiations and satisfy itself that the people involved have the necessary skills, experience and training.

Record Keeping

A record should be kept of the negotiation process for all audit purposes. The negotiation process may be conducted by mail, or where a meeting is involved, details should be brief and limited to:

• date and time of meetings;
• persons present or addresses;
• topics discussed; and
• outcomes.

It is also essential for the potential contractor to document their understanding of the negotiations in a letter as their latest offer. Minutes of meetings, however, should not be exchanged as they may create legal difficulties at some time in the future.

Training and Experience

It is advisable that only people with negotiation training and experience lead and conduct negotiations.

Guidelines

Negotiations for large or complex acquisitions should involve a planning and a negotiating team. Annex A provides some guidelines on how the process should be managed.

Areas for negotiating are wide ranging and some are detailed in Annex B and some key factors in negotiating techniques and negotiations in Annex C.

Annex A

PLANNED APPROACH TO NEGOTIATIONS

1. Responsibilities of the Negotiating Officer/Team

When negotiating the terms and conditions of contracts the negotiating officer should seek to achieve the following objectives:

reach agreement on terms and conditions which are fair and reasonable to both parties;
ensure that the other parties to the negotiations are aware that any agreements which are reached are subject to ratification according to the appropriate delegations;
ensure that the competitive element is maintained wherever possible i.e. ensure ensure that information given in confidence by potential suppliers is not revealed to other parties to the negotiations. In addition, all parties must be advised that no decision has been made in regard to awarding the contract

Negotiating officers should be aware that in all contracts with potential contractors, they are representative of the end-users or technical and commercial department. Any dealings with them which could have or be seen to have the effect of compromising the impartiality of officers must be assiduously avoided.

2. Pre-Negotiation Phase

In most instances negotiations are conducted by a team comprising representatives from the users and specialist advisers as required such as an accountant, technical specialist and legal.

Before entering into formal negotiations with potential contractors, adequate preparation is essential to ensure that the negotiating team has:

• complete understanding of the contractual requirements of the department, and the response offered by potential contractors (i.e. current situation);
• knowledge of the prevailing market situation in relation to the requirement;
• a unified team approach in dealings with potential contracts (what we want to get or areas to explore); and
• a base position from which to negotiate and a strategy for negotiation.
  

The first aim of the Negotiating officer/team in preparing for negotiations is to obtain a detailed knowledge of the department’s requirements and non-negotiable outcomes. The second aim is to fully understand the offers made by the potential contractors. All aspects of offers which are unclear must be investigated and clarified. Also, terms and conditions of a (potential) contractor’s offer must be evaluated in relation to the total contract price. The conditions prevailing in the market which may have a bearing on the offers made by (potential) contractors (e.g. recession or boom in the economy generally or in particular industries; fluctuations in prices of inputs to production) should also be considered. It may be necessary for the negotiating team to meet and clarify these issues prior to commencement of the negotiations.
Negotiations should be based on full consideration of all relevant aspects including:

• ability of the offer to fulfil the requirement;
• contract terms and conditions; and
• relevant organization policies.

In this regard, the Team Leader must make it clear who in the team has prime carriage of negotiating the various aspects, e.g. solutions, terms and conditions, etc. Any differences of opinion between team members must be settled by discussing away from the negotiating table so as to present at all times a united approach to other party(s) to the negotiations.

As a further step in preparation, the team should determine in advance appropriate objectives, and establish a minimum and maximum limit for each such objective, i.e. "room to negotiate" around each target objective. Objectives represent "preferred settlements" and taken together they represent a package covering possible negotiable aspects of the purchase. The team will need to determine in advance the appropriate degree to which each objective needs to be specified for possible disputed aspects, i.e. rank the objectives. Setting out to decrease the potential contractor’s offer by a certain per cent or to secure the best possible price is not a sufficient objective.

The Team Leader should also analyse the potential contractor’s objectives and thereby seek to assess what the potential contractor’s minimum and maximum offers might be. This approach should assist in assessment of the potential contractor’s true position.

Once objectives have been determined, the Team Leader should formulate a strategy to achieve them. The following principles should be observed:

• always keep your particular objective (in relation to the aspect of the negotiation under discussion) in mind;
• ensure that the planned strategy is flexible and adaptable to changing circumstances;
  instead of renewing an approach along the same line or in the same form after it has failed, consider the possibility of approaching it from a different angle; and
• ensure that a way exists to reach an equitable compromise without loss of face by either side.

Before the actual negotiations begin, the seating arrangements should be determined. The best seating arrangement, for all parties, is to have both teams facing each other down the sides of an oblong table, with the team leader for one side facing the other team leader, flanked by the respective team members. These team members, however, should not be paired off across the table according to their areas of expertise. Instead, they should be placed at opposite ends of the table so that all discussions go across the negotiating team leaders.

3. Negotiation - First Step

As a first step in negotiation the presentation order of the issues is agreed by the parties. The alternatives are:

• the issues can be negotiated one at a time and a resolution reached prior to moving to the next issue; or
• all the issues can be established and discussed individually, without resolving any single issue until the full extent of the contentious issues and associated concessions is apparent to both parties.

4. Negotiation - Technique

Members of a negotiating team should avoid questions which antagonise the other party, create a feeling of inferiority or cause other unfavourable reactions. When a question is unanswered, the person should not be left floundering indefinitely, but it should be made obvious that the setting aside of the question is acknowledged and the issue raised may be the subject of later discussion.

If agreement on a particular issue cannot be reached, the issue should be deferred - the point of difference should be summarised and the matter set aside for the time being. If several consecutive issues cannot be resolved, it may be necessary to change the approach in order to develop a pattern of agreement.

Consideration should be given to having a summary of the facts and agreements reached at each stage of the negotiation. In lengthy negotiations, summaries and conclusions may be required at various intervals, in particular, when a major point of issue has been resolved or has been exhaustively analysed without resolution and the issue is to be deferred until later the negotiations are recessed for a period of time. However, throughout the negotiations, minutes of meetings between the representatives of the Tender Committee or department and Suppliers should not be exchanged as they may create legal difficulties at some time in the future.

Negotiating teams should ensure that where competitive offers have been obtained, a "competitive situation" is maintained throughout pre-contract award negotiations. All team members should be aware that an invitation to negotiate with one potential contractor should not preclude negotiations with others. Accordingly, wherever possible during a pre-contract award negotiation the firm should be referred to as the "tenderer" or "company", rather than as the "contractor".

Negotiating teams should bear in mind that negotiations are not necessarily concluded when the prices and delivery schedule have been agreed upon - it is just as important to reach agreement on all the relevant terms and conditions expected to be applicable to the contract.

Except where they would be inappropriate (e.g. in the case of large value or complex contracts requiring more detailed and more relevant terms and conditions, or where a major overseas acquisition is being negotiated) if standard conditions are not acceptable to the (potential) contractor, attempts should be made to modify them so that they are suitable to both parties. Completely new clauses should be avoided unless there are unique features of the contract being negotiated which prevent the standard conditions or modified form being used.

Negotiating teams must ensure that there is no conflict between the various conditions to be included in the contract. This is best achieved if each clause is treated as a part of the whole contract and not as a separate entity.

In some instances, negotiating teams will comprise a legal officer who will provide legal advice and draft new and/or amended contract clauses. In large valued or complex contracts requiring considerable amendments to the standard contract terms and conditions, the solicitor will prepare the final contract which is agreed to by both parties. The contract should be an entire agreement namely include all contractual issues (with no ambiguities) required for the purchase.
5. Post-Negotiation Phase

At the conclusion of negotiations of a contract there must always be a signed contract or Heads of Agreement which includes all terms and conditions agreed.

Annex B

EXAMPLES OF POSSIBLE NEGOTIABLE ITEMS/ISSUES INCLUDE:

• acceptance testing
• access to premises
• alternatives offered
• arbitration
• buyer-furnished equipment, services or consumables
• cancellation terms
• charging for consumables
• completion dates
• defects liability
• delivery dates
• determination of contract cost
• discounts
• documentation requirements
• duration of contract
• freight terms and packaging; freight escalation; verification of costs
• functions and performance
• guarantees and warranties
• incentives for suppliers
• installation and commissioning
• insurance
• life cycle support
• liquidated damages
• maintenance
• order quantity and packaging
• ownership of intellectual property, where appropriate
• payment terms and arrangements; method; timing
• performance bonds; bank guarantees; retention monies
• price and price variations
• production schedules
• profit or return on investment
• quality management; certification; required tests; cost of testing
• sources of particular components, sub-assemblies or service
• specification changes
• new generation technology

Annex C

KEY FACTORS IN NEGOTIATION TECHNIQUES

The factors listed below will be relevant to most post tender negotiations.

Planning and Preparation

• Ensure you have the authority to negotiate and that you understand the limits of that authority.
• Establish a negotiating team and arrange to call on expert advice when necessary. In particular, seek early involvement of a solicitor where legal advice may be required.
• Ensure the team completely understands both the requirement and the responses offered by bidders.
• Ensure that those leading the negotiation team are suitably trained and experienced in conducting negotiations.
• Determine and agree on negotiating technique and tactics and the roles of each team member and review these when necessary.
• Prioritise aims and establish logical limits, where appropriate, for each factor to be negotiated.
• Learn what you can about the supplier's operations and reputation.
• Understand and know the market and what it offers and the benefits the successful supplier may expect.
• Obtain information about members of the suppliers' negotiating teams and the approach to negotiation that they may adopt, and adjust your approach accordingly.
• Make sure you understand the authority given to the suppliers' negotiators.
• Ensure effective methods of decision-making and communication are established within your own organisation and with the supplier.
• Establish an appropriate method of recording agreements.
• Plan to allow adequate time to avoid pressure for hasty decisions.
• Identify nonnegotiable items.
• Conducting Negotiations
• 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 need 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.
• When dealing with a breach of contract (i.e. post contract), ensure that you have the necessary resources, training and experience available. Make clear that you do not waive any other legal rights that your organisation may have.