Negotiating Contract Pricing with the DoD: What to Expect

Preparation is your secret weapon when you're gearing up to negotiate a contract with the Department of Defense (DoD). Yet it's surprising how often both sides come to the negotiation underprepared—potentially leaving value, money or both on the table. One key dimension of your prep work should be understanding your customer's negotiation style. Luckily for you, the DoD's recommended bargaining techniques are publicly available on the Defense Acquisition University (DAU) website as the DAU Contract Pricing Reference Guide.

Let's explore the highlights of Chapter 6, "Ten Rules for Bargaining Success," from Volume 5, “Negotiation Techniques.” But first, we’ll lay some fast groundwork on working with the DoD:

What Can You Negotiate in a DoD Contract?

You might be surprised by the flexibility within DoD contracts. While price is often the first thing that comes to mind that’s negotiable, it's just the tip of the iceberg: 

Delivery schedules, performance metrics and even the scope of work are all fair game. For instance, you could propose an innovative technical approach that seems to be outside the initial scope parameters—but if you can prove the approach will save the agency time and money over the long haul, your scope may be able to expand.

Contract type is another area that is ripe for discussion. If a firm-fixed-price contract doesn't align with the project's uncertainties, you might suggest a cost-plus arrangement that better distributes risk.

Don't forget about intellectual property rights. Depending on the nature of your work, you may be able to retain certain rights to technologies you develop during the project for use in future contracts.

DoD Contract Price Negotiation Examples

When negotiating a DoD contract price, you'll want to consider a range of tactics. You might leverage cost breakdowns to identify areas for material expansion or reduction. Or discuss potential mitigation strategies if you’re proposing new technologies that are as yet unproven.

Perhaps you'll propose alternative pricing models, such as performance-based incentives. For example, you might challenge proposed rates when discussing labor costs by providing justification based on employee experience and market benchmarks. You could also negotiate staffing levels to optimize costs without compromising quality. Regarding material costs, you might suggest backup sourcing options or negotiate bulk discounts for large-volume purchases.

For development projects, you could propose a phased approach with incremental funding to manage risk. You might also negotiate terms for technology transfer or agree on a rigorous testing process to minimize costly design changes down the line.

What is the DoD’s Primary Objective in Pricing Negotiations?

The DoD's objective shifts depending on whether you're in the pre-negotiation or negotiation phase:

Pre-negotiation Objective

In the pre-negotiation phase, the DoD aims to establish its initial negotiation position. This helps the contracting officer (CO) determine a fair and reasonable price. The respective DoD agency involved will analyze your proposal, considering all relevant information such as audit report results and independent government cost estimates—the agency’s best estimation of fair costs in a contract. The CO will then set a fair and reasonable price for the bid.

Negotiation Objective

During negotiations, the DoD's primary goal is to secure a contract that provides the greatest incentive for your efficient and economical performance. The agency involved is not just looking for the lowest price, but the best overall value. They're aiming for a win-win scenario that motivates you to deliver high-quality goods or services while ensuring taxpayer dollars are spent wisely.

Ten Rules for Negotiation Success with the DoD

Rule No. 1: Be Prepared

DAU says: “Poor preparation leads to poor contracts that require constant clarification, continuous modification, and of course, more negotiation.”

Government negotiators would do well to understand contractors' solutions as much as possible through market research and direct communication with the contractor. These activities are vital to assessing a fair and reasonable value.

Takeaway for contractors: Document, document, document.

Lack of preparation on the contractor side often comes down to insufficient cost or pricing documentation (or the failure to capture this data in a centralized location where others can find it later). Documentation can be especially hard to track down when needed long after the original proposal pricing is done, for tasks such as negotiating change orders or responding to Cost Accounting Standards (CAS) noncompliance claims on a current program.

Best practices for storing documentation are essential. To help maintain records for future use, leveraging a software solution that captures your cost/pricing data can help.

If finding the time to prepare for each negotiation is a factor, internally audit your systems. Are there areas slowing you down? Certain software solutions can streamline much of your current manual contract processes, offering "What-If" scenarios to help you analyze multiple pricing options quickly.

Rule No. 2: Aim High

DAU says: “Negotiators, like people in general, are naturally more aware of the pressures and limitations affecting them than they are of the pressures and limitations affecting other negotiators. As a result, buyers are often willing to pay more than necessary, while sellers are often willing to accept less than necessary.”

Takeaway for contractors: Stay positive yet be aware of your limitations, but don’t sell yourself short.

This rule is based on empirical evidence that the higher the negotiator’s expectations, the better the negotiator will ultimately perform. However, as a contractor, you must be careful, as certain constraints around “aiming too high” could result in severe penalties. While many negotiators come in with high hopes, skilled negotiators are also keenly aware of their opponent's weaknesses.

Rule No. 3: Give Yourself Room to Compromise

DAU says: "Compromise is essential to successfully conducting most negotiations."

The whole point of “aiming high” in rule two is to help with rule number three. If the contractor’s opening position is too close to their objective, there isn't much room for negotiation.

Takeaway for contractors: Planning for compromise is critical, so ensure you have the right efficiencies to give you that time.

In developing contract pricing, it’s helpful to run several different scenarios to fully understand any compromises that may have to be made. The ability to quickly run and analyze a variety of positions will permit you to, as DAU puts it, "demonstrate flexibility in making the concessions needed to reach a mutually satisfactory result."

Rule No. 4: Put the Pressure on the Contractor

DAU says: "Because of the pressure inherent in every negotiation, success stems in large part from the ability of a negotiator to increase pressure on the other negotiator while simultaneously limiting the pressure on themselves." 

Takeaway for contractors: Stay the course. 

It can feel like there isn’t much a contractor can do here. Sure, you can walk away from the potential business (more on this in rule 10), but that’s not always a realistic option.

The best thing a contractor can do is be flexible and ready for anything. If the government tries to change requirements, terms or conditions, have processes, procedures and back-office systems in place that can best equip you to handle those situations quickly and accurately.

Rule No. 5: Do Not Volunteer Weaknesses

DAU says: “Never volunteer information that would weaken your negotiating position." 

The rule goes on to say, “You can normally adhere to this rule by carefully wording statements or by avoiding a direct response to a direct question.”

Takeaway for contractors: Keep asking questions until you get a direct answer.

The guide makes this rule very clear: pointing out your weaknesses (even to show good faith) is advised against. So why would a contractor do the opposite? Do everything possible to avoid volunteering weaknesses. When prodding for vulnerabilities in your opposition, always listen to the answers; if you sense a weakness, keep asking questions.

Rule No. 6: Use Concessions Wisely

DAU says: "The concessions that you make, when you make them and how you make them will all significantly affect the outcome of the negotiation."

The DAU guide advises negotiators to be conservative with concession amounts, get something in return for their concessions, and be wary of “equal concession” and “splitting-the-difference” traps.

Takeaway for contractors: Take the DAU's advice.

Remember not to concede too much too soon or all at once. Referring back to Rule No. 3, “Give yourself room to compromise.” If you do have to concede, start with one individual concession at a time and always ask for something in exchange. Keep your objectives in mind, and don’t be distracted by offered concessions that don't add real value to your side.

Rule No. 7: Say It Right

DAU says: "The importance of good interpersonal relationships cannot be overemphasized." 

The gist of this rule is to balance being personable with maintaining a professional demeanor and focusing on your party's objective.

Takeaway for contractors: Diplomacy and graciousness can often bring wins.

This rule is pretty self-explanatory. Be polite. Don’t interrupt. Be cautious about expressing unrelated opinions. Remember that a negotiator speaks for the numbers, and even if the numbers are impeccable, how they are presented can make all the difference.

Rule No. 8: Satisfy Non-Price Issues

DAU says: "Most negotiations will not end in agreement unless both the price and non-price issues are satisfied."

Be aware of non-price issues important to the other side and build value without sacrificing dollars.

Takeaway for contractors: Provide crystal-clear pricing justification that is quickly understood and accepted, freeing up time to research and discuss non-price issues.

Price is usually the most accessible starting point in negotiations. Dedicated government contract pricing software helps present pricing logic in easy-to-trace formats, dramatically decreasing price negotiation time and disputes. This will free up time to focus on non-price issues.

Rule No. 9: Use the Power of Patience

DAU says: "Quite often, the extra negotiating time taken by patient negotiators translates into thousands and even millions of dollars in additional concessions."

The guide advises government negotiators to use patience to put stress upon the contractor, display resolve and dissipate emotions that may cloud judgement.

Takeaway for contractors: Practice patience yourself and see if there are areas where you can use time to your advantage, such as on other proposals.

Like Rule No. 4, the government holds a lot of the cards here. As a contractor dealing with the pressures of building business and increasing revenue, you know that prolonging the time it takes to award the bid can tip the scales in favor of the agency. In stalemates where you have no more room to make reasonable concessions, take this waiting time to work on more bids in case the current one is unsuccessful.

Rule No. 10:  Be Willing to Turn Away from or Resume Negotiations

DAU says: "Good negotiators are neither afraid to walk away from bad deals nor too proud to return to the negotiation table once they realize a better deal cannot be obtained."

Takeaway for contractors: Stay professional, objective and leave your ego at home.

With all the work a buyer and offeror put into a proposal, the last thing anyone wants is a stalemate in negotiations.

Deadlocks are frequently caused by personality conflicts, so it’s sometimes necessary to change principal negotiators to help the process along. Taking a break between negotiation sessions sometimes helps to collect further support for the position or to answer questions. Exhaust all reasonable options before removing yourself from the negotiation. 

Both Sides Can Win

Remember, your end goal is always to create a win-win situation for your contracting firm and your prospective DoD partner. This is no easy feat, but with savvy and tenacity, you both can actually walk away victorious.