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Assume a FFP mod is being negotiated for a noncommercial item over the CCoPD threshold.  Do you start your negotiations out on the topic of the profit percentage, or do you end them on that note?  Why?

"It is better to know the terrain than to map out one path through the forest."  -Roger Fisher, Getting to Yes

"Negotiations are a little like jazz; you improvise to a theme, and you move towards a goal."  Richard Holbrooke

Bonus question: Ever consider sending the other party a filled-out DD Form 1547 weighted guidelines, to keep the discussion flowing and on-track?

"Even if you are on the right track, you'll get run over if you just stand there."  -ConWrite contract writing system (being characteristically cheeky, a long time ago)

Edited by WifWaf
specified "for a noncommercial item"
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30 minutes ago, WifWaf said:

Do you start your negotiations out on the topic of the profit percentage, or do you end them on that note?  Why?

I'm not sure I understand that question. Please clarify.

Are you asking whether to begin the negotiation with a discussion of profit percentage or whether to begin the negotiation of profit with a discussion of profit percentage?

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If you are negotiating an equitable adjustment, I don't think you should begin by discussing profit. If the EA is based on the changes clause, I think you should begin the negotiation with a discussion of the change and the consequent change in cost. Only after you have settled the issue of cost should you go into the issue of profit.

When the time comes to discuss profit, I generally do not like to negotiate profit on the basis of percentage. That's because profit should reflect risk—the higher the risk the higher the profit. Thus, if the estimate of the effect of the change on cost ranges from, say, $1,000,000 to $1,250,000, then I would plot a profit that decreases in amount as the cost settlement amount approaches $1,250,000. The rate of decrease could be linear or nonlinear. I would not utter or acknowledge the word "percentage."

On the other hand, taking what might be an easier path, if the changed work were similar in nature to the work originally specified, I might agree to apply the contract profit percentage to the increase. If the changed work were more challenging, I might agree to a higher percentage. If the changed work were less challenging I would propose a lower percentage.

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I would maybe consider starting negotiations on profit to establish expectations that, by the end of the week, the USG needs to receive the cost/price analyses of any subcontracts that were not analyzed in the proposal.  I would anchor the negotiations by substantially decrementing profit covering all of those subcontracts thusly.  Then I'd table and revisit at the end of all other cost elements.

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23 minutes ago, Vern Edwards said:

That's because profit should reflect risk—the higher the risk the higher the profit.

It's FFP so there's a lot of room to play with risk, and these negotiations are the only time we'll visit what the USG pays for years to come.  I just don't want a feeling of buyer's remorse with every monthly invoice, so how do I communicate my quantification of risk effectively in negotiations with the contractor? 

27 minutes ago, Vern Edwards said:

I would not utter or acknowledge the word "percentage."

I suggest putting all my cards on the table, and just sending my weighted guidelines.  This could be in dollars, sure, but then how could you entertain counterproposals?

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Regarding this...

28 minutes ago, WifWaf said:

I suggest putting all my cards on the table, and just sending my weighted guidelines.

I would never recommend sending your weighted guidelines.  There are too many pitfalls and a good negotiator will be able to shoot down your points without much effort.

This is subjective, but here's my two cents based on experience:  Save profit for last and be prepared to start talking bottom-line pricing before too long.  It's not the norm to come to full agreement on all elements of cost and profit.  Bottom-line negotiations allows each side to get what they need out of the agreement and show whatever profit they want.

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42 minutes ago, Patrick Mathern said:

Save profit for last and be prepared to start talking bottom-line pricing before too long.  It's not the norm to come to full agreement on all elements of cost and profit.  Bottom-line negotiations allows each side to get what they need out of the agreement and show whatever profit they want.

Right!

1 hour ago, Vern Edwards said:

I would not utter or acknowledge the word "percentage."

Me, either.

 

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28 minutes ago, Patrick Mathern said:

I would never recommend sending your weighted guidelines.  There are too many pitfalls and a good negotiator will be able to shoot down your points without much effort.

I have worked with the DOD weighted guidelines since 1975 and have shared my computations with contractors in several negotiations with some positive results and a few laughs. If a CO understands the weighted guidelines method and knows how to use it, he or she need not worry about being shot down. The negotiator for the other side can disagree, and undoubtedly will, but opinions are just opinions.

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46 minutes ago, WifWaf said:

And how did you assess it? 

I used the guidance available at the time, which was not much.

The Weighted Guidelines do not require the use of formal risk assessment techniques. Look at the guidance in DFARS 215.404-71-2 and -3. Also see this:

https://www.dau.edu/tools/Lists/DAUTools/Attachments/122/WGL Extraction.pdf

The WG are just analytical tools. The results you get are just aids to analysis and argument. I used to do three or four of them  for a negotiation,  plugging in different numbers just to see what results I'd get and how convincing I could make them seem, not only to the contractor, but also to the people who would review my file.

It's a game, Dude! PLAY it!

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Yes, well, when you get to the profit part sometimes it feels like 52 Pickup is the name of the game.

Or perhaps one of these: https://en.wikipedia.org/wiki/List_of_games_with_concealed_rules

Anyways, have a great Labor Day all.  I leave you with a final quote:

”The neurotic who learns to laugh at himself may be on his way to self-management; perhaps a cure.”  -Viktor Frankl, Man’s Search for Meaning 

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If you have pre-negotiation objectives, you can track how well you are achieving your overall cost objectives then see how hard you need to press with the profit markup. Why are you scheduling negotiations before your prime provides you it’s cost and price analysis report on its subs proposals? 

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15 hours ago, joel hoffman said:

Why are you scheduling negotiations before your prime provides you it’s cost and price analysis report on its subs proposals?

Hypothetically, assume a (huge) large business with many commercial customers, a culture of compliance on its government pricing side, and a big ol’ sole source or two (or 20).  Like the kind where they get a line item in the President’s Budget every year.

This contractor may have no trouble accepting from a sole-source commercial item supplier prices that satisfy its commercial prime contract customers.  But the USG, having previously approved the Purchasing System to require more extensive analysis, is not satisfied without a CID that provides invoices showing prices paid by other customers to this supplier. The supplier refuses the prime’s requests and, furthermore, when a sub-audit is arranged the supplier slow-rolls it and makes it ineffective.  Here, we have devolved to malicious compliance.

This is not at all the rule but the exception, and that is where my hypothetical tactic of decrementing the profit on those subs’ costs substantially at the outset of negotiations would be useful.  Otherwise, I don’t think I’d start negotiating profit till the end.  We have to meet award schedule, and slow-roll tactics like the one I describe above cannot be allowed to sink the whole deal.

Edited by WifWaf
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1 hour ago, WifWaf said:

Hypothetically, assume a huge business with a ton of commercial customers, a culture of compliance on the government side, and a big ol’ sole source or two (or 20).  Like the kind where they get a line item in the President’s Budget every year.

So what? That didn’t answer my question. If the primes analyses are supposed to be meaningful, I’d want and probably need them while preparing my pre-negotiation objectives. That is, unless I was in a position to independently analyze them (which was the norm in my experience).

Is this pre-pricing or after the fact? You don’t have to provide any more info about the contractor or subject of the mod. Thx. 

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Certainly, 15.405 applies to negotiating a modification. Interestingly: 

 “  (c) The Government’s cost objective and proposed pricing arrangement directly affect the profit or fee objective. Because profit or fee is only one of several interrelated variables, the contracting officer shall not agree on profit or fee without concurrent agreement on cost [and type of contract].“

Of course, the other paragraphs are applicable, too. But this one is directly applicable to the original question. As Stephen Covey said: “Begin with the end in mind”.

Don’t begin with the end. 

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On 9/3/2021 at 10:55 AM, WifWaf said:

Assume a FFP mod is being negotiated over the CCoPD threshold.  Do you start your negotiations out on the topic of the profit percentage, or do you end them on that note?  Why?

I recommend starting any negotiations with an exploration of expectations and responsibilities. From an expectations standpoint, I would describe what the other party can expect from me and what I expect from the other party. Those expectations are largely reciprocal - if an expectation isn't reciprocal, stop to think about why and whether or not it is fair to make that an expectation. Come to an agreement on those expectations first with an understanding between both parties that we're all fallible so when those expectations are broken it's in the collective interest to identify that and correct it immediately.

Sounds like you're on the Government side - I would add that I often see an asymmetry of information/transparency for negotiations over the CCoPD threshold. The Government requires contractors to prepare extensive estimates and provide current, accurate, and complete data in extensive/elaborate proposals, yet I see some Government negotiators reluctant to provide the details behind the Government's estimates to contractors. That baffles me and I think it violates the norm of reciprocity and, consequently, trust during negotiations. One thing I did during every major negotiation was to provide the same information/estimate for every Basis of Estimate (BoE) and put it side-by-side with the contractor's estimate so that we could compare the methodologies, assumptions, and data to talk about which ones held more merit than the others.

That's the other key point in my opinion - focus less on the total/results and more on what the right methodologies, assumptions, and data to use are and let the numbers come out however they come out. I was in a negotiation where we did this and both parties treated the negotiation as a problem solving exercise, not a battle of wills. At one point we came across a BoE where the Government thought a different methodology was more appropriate - after listening to our explanation the contractor agreed. That methodology happened to calculate that the labor effort was significantly lower than the contractor proposed which would result in considerable savings for the Government; however, a day later, the negotiation team realized we used the wrong number in our computations and that the methodology we agreed on now estimated that the effort would take significantly more labor than both the Government's and the contractor's original estimates. I checked the revised math and it was now correct so I accepted the results, much to everyone's dismay - including my own...the delta was not only surprising but significant so a natural inclination could have been to fight it. But I am glad that I didn't because following that single decision, our negotiations proceeded remarkably well - the contractor understood that I meant what I said about my expectations and my responsibility to negotiate a fair and reasonable price (not the lowest price possible).

If you find a way to establish trust and teamwork in your negotiations, when you discuss the topic of profit percentage won't matter.

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For those of you who don't know, Major Matthew Fleharty is a U.S. Air Force officer, a graduate of the U.S. Air Force Academy, where he earned a Bachelor's degree in economics. He is now serving as a Program Element Monitor in the Pentagon after spending a year studying at Harvard, where he earned a Masters degree in public administration. He also earned an MBA at the Naval Postgraduate School.

Before going to Harvard, Matthew served as the chief of an Air Force contracting office. Before that he was the executive officer for the Deputy Assistant Secretary of the Air Force for Acquisition (Major General Holt), and before that he served as a contracting officer with an unlimited warrant in the Global Positioning System Directorate at the Air Force Space and Missile Systems Center.

Matthew is the outstanding example of everything that an acquisition professional should be, as demonstrated by his last post.

 

 

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Fast, neat, average, friendly, good, good…

In addition to what Vern said, Matthew’s undergraduate University had a well establish Honor Code with a tradition and emphasis on Honor and Ethics.

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On 9/3/2021 at 6:54 PM, WifWaf said:

This is not at all the rule but the exception, and that is where my hypothetical tactic of decrementing the profit on those subs’ costs substantially at the outset of negotiations would be useful.  Otherwise, I don’t think I’d start negotiating profit till the end.  We have to meet award schedule, and slow-roll tactics like the one I describe above cannot be allowed to sink the whole deal.

WifWaf, While re-reading your post, I have a couple of questions.

I’m not sure what costs you are intending to decrement the profit on. Since they are commercial items, do you mean ‘decrement the prime’s profit on its (sole source) subcontract costs’ (not the commercial item suppliers’ costs)? 

Also, this is a mod to a FFP order or contract. You said you have previous pricing to help establish your pre-negotiation objectives and presumably your estimate.

I don’t understand why you must first finalize/definitize the modification price in order to “meet [an] award schedule”. 

You say that the sole source supplier or suppliers are purposely dragging their feet in justifying their commercial item pricing, which apparently would delay the schedule if you must pre-price the mod.

Why can’t you now issue it as a change order with notice to proceed, including an NTE obligation based upon some percentage of your estimate, with a definitization schedule, limit on amount of payment before definitization m, etc., etc.? That would encourage the prime and its subs to justify their “over the CCoPD threshold” sole source, commercial item prices.

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