How Government Agencies Can Streamline Pricing Negotiations with Contractors

Written by: Micheal Weaver

Every government agency that posts requests for proposals (RFPs) must learn the art and science of negotiating with contractors.

When government agencies seek to have contractors bid for their contracts, they operate within the Federal Acquisition Regulation (FAR).

The FAR states that any contract awarded using a method other than sealed bidding—awards based on contractors' initial and confidential bid amounts—is considered a negotiated contract. As a result, agencies must become well-versed in negotiation procedures and regulations for prime contracts (including subcontracts).

Whether it's an hourly rate negotiation or something more complex, a negotiation always entails mutual sacrifices. But a successful negotiation should also optimize the interests of each party. With that goal in mind, it helps to categorize a negotiation as competitive or non-competitive.

In a competitive negotiation, a Contracting Officer (CO) can review multiple offers and negotiate the best choice, typically based on price or value. In a non-competitive negotiation, the CO will be more limited because they'll be bargaining with only one supplier.

No matter the scenario, using a few simple techniques can enhance the government's position and streamline the process. The tips in this article can help agencies save money and avoid frustration while improving the outcome of any negotiation.

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The Federal agency's negotiating team should be highly effective at communicating and have an excellent grasp of "questions to ask your contractor." Larger teams often struggle to maintain control during negotiations, and communication in larger groups can quickly become muddled, taking up more time and resources. That’s why it’s best to include only essential people.

For more minor, less complex contracts, the CO or contract specialist may be the only agency representative the agency needs. Because smaller contracts typically involve straightforward requirements, standard goods or services and lower dollar values, they often require less negotiation.

It's common for an agency to identify its own objectives for a negotiation. It's better if the agency can also understand the contractor's goals. But the best approach is for the agency's team to put themselves in the contractor's shoes and visualize the approach they will take.

What is price analysis in government contracting? Agencies can look to the proposal for insight into the contractor's pricing strategy. Extensive details on pricing typically indicate less wiggle room than in more generalized proposals. Other valuable sources of information include past price negotiation memoranda (PNMs) and insights from associates who have had previous dealings with the contractor.

As agencies conduct research, they can reflect on the contractor's stated and understated priorities and consider how these factors influence the negotiation. Even though contracts are primarily a revenue source, other business objectives may be involved. Contractors may seek to secure a more significant market share, enter a new field, improve their cash flow or land ongoing government business.

Finally, agencies should notice the constraints the contractor is facing and how these will affect the negotiation. Contractors often face:

• Financial constraints. A contractor may be operating on tight margins or have cash flow issues that will lessen their willingness to negotiate on price.
• Resource limitations. A firm may be experiencing a workforce shortage or have limited access to the specialized skills that a contract will require.
• Timing pressures. If the contractor has committed to other work in the same timeframe, they may have difficulty meeting the project schedule.
• Technical limitations. The firm may lack the technology needed to complete the project, and bringing its systems up to speed may require too much investment.

By understanding these pressures, government agencies can tailor their negotiation strategies to the needs of each contractor. This preparation increases the chances of a fruitful negotiation that will benefit both parties.

Each party in a negotiation brings different strengths and vulnerabilities to the table. Occasionally, an agency may have bargaining power because it's the only government customer for a particular product. On the other hand, a contractor may be the sole supplier or have greater knowledge of the market.

Time constraints, viable alternatives and the relative importance of the contract can also give one party an advantage over another. In either case, bargaining power doesn't have to be real—even a perceived advantage can affect the outcome of a negotiation.

The higher an agency's expectations for the negotiation, the better its team will ultimately perform. Expectations influence behavior—and behavior influences the result. In psychology, the Pygmalion effect is a principle by which higher expectations lead to improved performance in others.

Another important effect to consider during negotiations is the anchoring effect. The agency's first offer will often serve as an “anchor” that influences the entire negotiation process. By making a smart, strategic initial offer, an agency can shift the range of possible outcomes in its favor.

Still, agencies should be prepared to make concessions. Setting an opening position too close to the ultimate objective will leave less room for flexibility. An agency's initial offer should be close to its goal but still far enough away that there's room to compromise.

Contractors generally expect to make compromises during a negotiation. If an agency opens too low, it may be seen as rigid and unyielding. This perception could frustrate the contractor and hinder a successful outcome. Instead, every agency should develop a variety of positions. Making concessions can help an agency appear fair and reasonable and encourage the contractor to make concessions in return—ultimately leading to a contract that benefits both parties.

Here's how to negotiate contractor rates: Agencies may want to begin with a lower initial offer—without squeezing their lowest point—and negotiate up. Meanwhile, contractors will usually start high and come down during the process. Sometimes, the agency may have to tell a contractor they are too expensive and ask for a better offer. That's an expected part of the negotiation process.

Throughout a negotiation, time is the enemy, but patience is an agency's weapon. Hastiness can result in mistakes and an unfavorable outcome. On the other hand, patience softens expectations, encourages flexibility and gives the other party adequate time to accept tough choices.

Establishing deadlines for the other party also helps force concessions. However, agencies should challenge any deadlines the contractor tries to impose on them. If possible, the agency team should call for a break if they believe the process is moving too quickly.

It's essential to set an objective ahead of the negotiation, but it's also critical for the agency to establish a walk-away point, or the very minimum they are willing to accept. This entails considering viable alternatives and establishing the outside parameters of the agency's objectives ahead of time.

After completing this exercise, the agency will enter the negotiation with a deeper understanding of what they need to achieve a successful outcome. By being willing to walk away, the agency will inevitably put pressure on the contracting firm and gain a strategic advantage.

In an ideal scenario, the agency team will keep their stress low while increasing pressure on the contractor. To achieve this goal, the agency's team should focus less on their own limitations and concentrate more on the contractor's constraints.

The agency should identify specific pressures the contractor may be facing. Simply believing that the other side faces unknown pressures will also help the agency's case. As they communicate throughout the negotiation, the agency's team should listen and watch for cues that signal stress points.

Securing a contract at a reasonable price would be a successful negotiation outcome for a government agency. However, creating a high-value solution for both parties is the best result. This win-win outcome will lead to high-quality performance, timely delivery and a mutually beneficial long-term relationship. Although agencies need to secure a fair price, they should also focus on building a strong rapport with the other party.

For an easier, more efficient way to manage proposals, change orders and revisions, consider a government contract pricing platform, such as Deltek ProPricer, that simplifies proposal pricing development accuracy, submission, evaluation, negotiation and audits. If both parties use the same software system, the negotiation process will go even more quickly and smoothly.

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