Contracting Principles and Practices
Performance-based contracting is aimed at ensuring that contract activities are accomplished as per the agreement between contracting parties. No payments are made without successful task completion. This comes with several benefits and challenges such as focus on the partner’s activities. To ensure that there is contract success; consideration has to be made on the sellers through identification and implementation of various selection criteria. Similarly, the buyer has to engage in several activities and produce various outputs at each stage of the contract negotiation process.
Any business transaction that entails an agreement between at least two parties should be subject to a performance contract. According to Garrett (2015), effective contract negotiation skills can be a good step towards good business performance in any industry. At the same time, contracts come with many challenges and potential failure traps, in which a novice negotiator can be trapped. In most cases, savvy business negotiators can take advantage of novice negotiators to get away with business deals that benefit them way more than they should. It is, therefore, essential for any would-be entrepreneur to understand the concept of contract negotiation, the skills required for effective contract negotiation and the benefits that such negotiation can bring on board to an organizational business environment. Understanding the types of contracts available can also help entrepreneurs to identify their situational business needs and thus select the right kinds of contracts to get in to.
Performance-based contracts are also referred to as outcome-based contracts. These are contracts that enable contracting parties to define what is to be achieved within the contract terms as the condition of payment for services and/ or products. This enables businesses to work with pre-screened contractors and to get best value services and products for what they pay. A large share of the contract responsibility in this regard is transferred to the contractor. In this way, the efficiency of contract performance is enhanced in that service delivery is achieved faster and in better quality. It raises the accountability of the contract parties to the achievement of contract goals and objectives by enhancing the transparency in service delivery and partner focus on the contractor.
This type of contracting comes with many benefits to the parties involved. For one, it enhances performance by having clear set goals and expectations. With PBC, each of the contract parties describes the deliverables expected from the other by the end of the contract term. Payment is made based on the performance of the party under consideration. Because of these set goals and expectations, such contracts enable the parties to focus on the task ahead of them instead of focusing on the contracting partner’s behaviors. It also reduces risks to acceptable limits since the payment is based on performance. In other types of contracting processes, payments made without consideration of the performance of parties in the contract terms have the potential of lowering efficiency in service delivery. In any business, the objective is to attain profitability. As such, protecting the finances of an organization should come as one of the objectives of contract negotiation processes. A performance-based contract would also avoid costs and align the interests of the project partner to the business’s goals. The contract partner has to be clear in their understanding of the project vision and goals while working to know their place in the accomplishment of the project goals and objectives.
In spite of the many advantages of performance-based contracting, such contracts also come with various challenges. For instance, defining acceptability limits in the contract can be challenging. As much as the deliverables are stipulated, it can be difficult to explain them qualitatively within the contract negotiation context. Likewise, such a contract has a high dependence on the activities of the contract partner. Since payment is based on the performance of the parties, understanding the context of the contract and the capacity to perform is dependent on the activities of the contracting parties. It is also likely for such contracts to face high levels of uncertainty due to the difficulty in predicting costs. The contract negotiation costs are likewise higher than when working on other types of contracts.
Competencies of a Successful Negotiator
For one to be considered a successful negotiator, they should have skills which enable them to gain business growth and profitability through the contracts they negotiate. Garrett describes three levels of mastery concerning contract negotiation. These levels include apprentice, intermediate, and master. As one gets into business and begins to learn the ropes of the business environment, their negotiation skills are at the apprenticeship level, and they can easily be taken advantage of by the masters in business negotiations. Moving from apprenticeship to mastery requires a build-up of a set of skills categorized into hard and soft skills. The hard skills for contract negotiation include computer literacy, financial or analytical skills, contract management skills, and product or technical skills (Garrett 2015). The technical skills are a precondition for effective negotiation since one can only project the true value of a service, product, or agreement when they are completely aware of the value that it gives. Similarly, financial skills would be necessary to enable the negotiator to identify the financial dynamics of a process and eventually make the right decision based on the potential financial value of the agreement on the business.
The soft skills, on the other hand, entail aspects such as integrity, verbal and non- verbal communication skills, leadership, and interpersonal relations. Contract negotiation is a communication-based process, and the ability of the negotiator to build a rapport between them and the other parties to the contract can be essential towards gaining their trusts. Similarly, a trustworthy negotiator will be more likely to engage in transparent negotiations. Interpersonal skills also foster effective communications between parties to a contract hence their relevance to the contract negotiator’s skill set. Garrett (2015) asserts that for one to move from the apprenticeship stage to the mastery stage, they should possess at least three of the four skills in each category. Kelchner (2018) summarizes these skills into 10 points including verbal communication, problem solving and active listening. To some extent, this might be a difficult process; hence, many people take time to move from being an apprentice negotiator to being a master. Any person desiring to be a master at contract negotiations should be willing to give up some of the time and learn the ropes of contract negotiation. One of the recommended practices is to engage in the process of self-examination and come up with approaches for self-improvement.
Contract Negotiation Process
The contract negotiation process begins with the identification of an organizational problem to be solved. According to Garrett, contract negotiation is spread through three stages defined as the pre-award stage, the award phase, and the post-award phase. Each of these phases is characterized by specific activities in which the buyer and the seller engage to come up with solutions towards the organizational challenge identified. The pre-award phase is further divided into three steps including procurement planning, solicitation planning, and actual solicitation. For the buyer, procurement planning entails activities such as product description, market analysis, statement of the scope, assumptions and constraints, and description of the procurement resources. The output for this initial stage includes a procurement plan and statement of work. From here, the buyer moves on to the solicitation planning stage which entails an exploration of the statement of work and development of a procurement plan document. The outputs of the stage include evaluation criteria, the statement of work updates and the procurement documents for the task at hand. In the third stage of the pre-award phase, the buyer is tasked with advertising and hosting bidder conferences, giving the output of proposals.
After the pre-award phase, the next step in the contract negotiation process is the selection phase. This phase entails development of evaluation standards and criteria and delivery of organizational policies on contracts. The output in this stage is a contract between the buyer and the seller. The phase is followed by the contract administration stage which involves contact analysis and planning, performance review, payment system planning, and dispute management systems operations. At the end of the contract administration phase, the buyer comes up with the contract payment, complete charges, contract documentation, and the completion of work documentation. Finally, the contract termination phase comes with activities such as acceptance and final payment, contract close-out and other documentation. For the seller, the contract negotiation process entails pre-sales activities, bid placement, proposals submission, implementation, and termination. The activities in each of these phases correspond to what is presented by the buyer.
Source Selection Criteria
For a buyer to be able to ensure their goals are met in the contract, selecting the right sellers for contract implementation is a crucial activity. A set of criteria can be used by buyers to determine the potential efficacy of the seller and subsequently settle for the best among many sellers. The source selection criteria can include a statement of the buyers’ expected attributes in a potential seller. One of the first criteria is the understanding of need. A seller who understands the buyer’s need as per their proposal is more suited to completing the contract than one who has an incomplete understanding. Another criterion commonly considered is integrity. Just as the buyer needs the integrity to possess good negotiation skills, the seller should also have good integrity to be able to agree to a mutually beneficial contract.
Other selection criteria include overall project costs, risk consideration, management approach, and the technical approach to task completion. The buyer has to consider the lifetime costs of the project versus the value promised by the contractors. The most suitable parties would be those who can perform the requested tasks at the least cost and still produce outstanding quality. Regarding risk, the buyer needs to understand how the seller has embedded risk management into their proposal. The risk assigned to the seller within their statement of work describes the potential of the seller to perform effectively. Similarly, the management and technical approaches to work determine the potential for successful project completion hence has to be considered.
Contract negotiations are an inescapable part of business operations. For success in any business environment, the entrepreneur should possess excellent contract negotiation skills which would enable them to benefit from business relationships with others. When working with performance-based contracts, in particular, the buyer has to be very specific in regards to the work expectations. The contract negotiation process begins with a need and ends with completion of the work agreement. For the process to progress as expected and come to a meaningful conclusion, the buyer has to take into consideration various attributes of the seller based on pre-developed selection criteria.
Garrett GA 2015. World class contracting 6th ed. Wolcers Kluwer.
Kelchner, L. (2018, January 31st). Top 10 effective negotiation skills. Hearst Newspapers, LLC. Retrieved from smallbusiness.chron.com/top-ten-effective-negotiation-skills-31534.html