CHAPTER

6

The Game of Negotiation

Like it or not, you are a negotiator like everybody else. This is a fact of life; everybody is negotiating all the time. You discuss a raise in your salary or position (or both) with your boss. You try to agree with a stranger on a price for his house. Two lawyers try to settle a lawsuit arising from a small fight or car accident. A group of power equipment manufacturing companies plan a joint venture for bidding for a steam power plant. A police commissioner of the city meets with union leaders to avert a transit strike. The Indian Minister for External Affairs sits down with his Pakistani counterpart to seek an agreement for limiting nuclear missile use against each other. All of these are negotiations.

Everyone negotiates for something with someone every day. We negotiate even when we are not thinking about it. A husband negotiates with his wife about where to go for dinner and with his child about when he should go to bed. Negotiation is the basic and only means of getting what you want from others; here, the point to remember is that one party is trying to negotiate what the party already has. It is back-and-forth communication designed to reach an agreement—when you and the other side have some interests that are shared and others that are opposed.

6.1 Fifteen Tactics and Countertactics to Win the Negotiation “Game”

We are negotiating all throughout our life. There is not a single moment when we are not doing it. Somebody is negotiating somewhere on some matter, and these matters may include personal, professional, and diplomatic issues. We even negotiate when we ask for a higher salary, benefits, or to transfer to another business unit or department. We negotiate employment terms and conditions, including salary, roles, and responsibilities with the future employer. We negotiate at home with children on matters of their interests; we often lose all such negotiation battles because children are very persuasive.

Countries often negotiate on matters of common interests, including creating trade-free zones, entering into double taxation avoidance agreements, and lesser duties on some commodities, or they negotiate to resolve disputes, including decisions on whether or not to isolate border areas from armies, to promote nuclear weapons for their first use by one country on the other, and so forth.

A successful professional negotiator understands the importance of cultural differences and prepares negotiations keeping these differences in mind. In India, while shopping in local markets, it is a tradition to ask for a double-digit discount; but in some other countries, it is not the tradition at all.

Negotiations cannot be avoided, as others will inevitably drag us into the negotiations.

This chapter will touch on traditional negotiation tactics and countertactics. We will explain the need for these tactics and countertactics. Negotiations are effective ways to arrive at conclusions, where all parties will agree to the outcome of the negotiations, but sheer information to participate as a negotiator may create feelings of insecurity about the results. The one who is strongest in negotiations will turn the results in their favor.

Negotiation has long endured an image problem. It evokes emotions related to conflict, dishonesty, and stress. A popular view of negotiation holds that it is merely the evolved version of barbarian welfare, where the more powerful, better armed, and psychologically superior negotiator engages only in winner-takes-all brutality. (Menard, 2004)

It is a back-and-forth communication designed to reach an agreement when you and the other side have some interests that are shared and others that are opposed (as well as some that may simply be different). More and more occasions require negotiation; conflict is a growth industry (Fisher, Ury, & Patton, 2011). Negotiation is a process of reaching an agreement, including terms and conditions, considerations, and scope of work, where such conclusions are acceptable to the negotiating parties.

6.1.1 Reject the First Offer

This is the first thing you can say even without having a detailed look at the offer. If you are salesperson, then you have heard this already: The customer says, “Your offer is many times their estimate and they will not be able to proceed further. Kindly correct the offer before we react to it.” The customer does not have to put much effort in to get the first-level discount here and major corrections from the bidder. A countertactic is to dig for more strategic information on the submitted offer from the customer to know if they are bluffing or not. This tactic is mastered by the customer, as you might not be shortlisted further for evaluation if they are honest and not bluffing. The bidder should be ready to offer corrections after knowing the strategic points, where the customer is quoting the bidder's offer higher than their estimate.

6.1.2 Overlooking

When you are being pulled into a negotiation, you have two choices: you can overlook the request, or you can cancel the request. When your customer is trying to get hold of you to negotiate for an improvement in terms and conditions or for reduction in pricing, you may behave as if you didn't even hear their request.

This is especially easy for contractors to do, if you are trying to negotiate by email or fax. Ignorance is the popular tactic followed by contractors (or sometimes by the customer if the contractor is looking for a change order during project execution). Generally, this approach is followed by a trainee negotiator and is not useful except in delaying the real negotiation.

6.1.3 Deflect

When you negotiate for a reduction in price and an improvement in terms and conditions, a common tactic is to deflect your attention to another business issue for which you might not be responsible. It is very common that when a contractor is discussing something with the customer's technical person, they will try to divert attention to commercial issues, which may include payment issues or any other issue. On the contrary, when discussing with the customer's commercial team, the contractor may say, “I can't really discuss price until I understand how the technical arrangement will work and the value that you are seeking to get out of the arrangement.” A countertactic is to negotiate collectively and not in isolation.

6.1.4 Deferral

When you negotiate for an improvement in pricing or terms, a contractor representative will often say, “I gave you the best price/terms that I am allowed to give. I'll have to check with senior management to see if we can do any better.” This is where the contractor creates the impression that nothing further can be accomplished through the conversation; the contractor gets you to stop negotiating in the hopes that you will not ask again before awarding the order or contract. Hammer down such requests by saying that, “We are deciding the order shortly and you have to inform us of your final decision within the next few hours.” This will shift the pressure to the contractor, and allow you to know the bottom-line offer.

6.1.5 No Negotiation

This is not a tactic, but a regulatory requirement laid by the government. Here the customer is the government organization, and as they are using public money, they cannot negotiate at their discretion. Government organizations are supposed to give all the bidders a fair chance, irrespective of the official's inclination toward any specific bidder. For high-value contracts, the bidding process is also a two-phase process, where the bidders are qualified technically and commercially, and, at last, the price bid of technically shortlisted bidders is opened. Whoever is lowest will get the order.

6.1.6 Splitting the Difference

This approach especially is used when both sides of the party are not ready to accept the other party's opinion or claim completely. This approach is often used when we are executing the project and a dispute arises for reasons such as an unclear and improperly written contract order, where the contract order deliverable is not identified clearly and in detail. Such a situation is normally handled by splitting the share between the contracting parties; it may be 50–50 or any other ratio. The first challenge is to bring all the affected parties to the table, as nobody is ready to accept the responsibility for the unidentified deliverable. This approach can also be used in other phases of the project. Normally, a “splitting the difference” tactic is used when negotiating parties found that it was nobody's fault or obligation. Therefore, in order to arrive at the conclusion, it is agreed upon to share the costs. However, the one who makes the offer to the other party will have to leave it to other party to agree or not, so the first party may have the less effective position.

You never want to be the first to offer to split the difference. It transfers veto power to the other side and may worsen your position (Menard, 2004).

6.1.7 Negotiation After Award

The least desirable negotiation leaves an unpleasant taste with the contracting parties. Such a negotiation is generally carried out when one party realizes that they are at a loss and they have agreed to a contract price that is lower. The reason could be due to current market fluctuations, currency variations, budget problems, or some other reason. Such negotiations are least preferable. These negotiations hurt the reputation of the initiator after the contract award for unjustified reasons and are rarely successful.

6.1.8 Electronic Auctions

Electronic auctions are the latest negotiation tactics, most popular with organizations lacking an experienced and professional negotiator or project procurement teams. Many companies have come up providing these auction services at a nominal fee. Perceived benefits include saving time, effort, and money. Electronic auctions exist in various formats (e.g., Dutch auction, English auction, reverse auction, etc.). Generally, these are conducted after everything has been agreed to, including technical scope and commercial requirements, but excluding the price. As a rule of auctions, e-agreements are signed before logging onto the system. Other advantages of electronic auctions are that prospective contracting parties don't have to be face to face to negotiate a contract.

Good organizations need to decide wisely before implementing such auctions, as they can definitely get the better price (contractors are under pressure to be the lowest to win the contract) compared to traditional negotiations, but they create increased chances of claims during execution from contractors. Also, this is being misused by some small organizations.

6.1.9 Persuasion

Persuasion is important for all dealings, as nothing can be achieved without persuasion. A professional negotiator especially needs to be persuasive, because contractors know that weak procurement negotiators only ask for improvements to pricing or terms once, and often end up awarding the order or contract to the contractor. The negotiator should be determined enough to ask again and again, and again if necessary. By showing how important it is to get what you want, you will increase your chances of getting it.

6.1.10 Counteroffer

This is common negotiation tactic where customers smartly throw counteroffers to the contractor as a take-it-or-leave-it option. Sometimes it is good to make the counteroffer, but other times it is better to hide the target price.

6.1.11 Good Buyer, Bad Buyer

The “good buyer, bad buyer” tactic is very common and should be understood from the perspective of the seller, who is discussing a potential order with the buyer. The main feature of this tactic is that it is always played by a pair of buyers; the “good buyer” is always the one facing the seller, whereas the “bad buyer” (normally a deciding authority) is behind the scenes (i.e., the one who will never give any comfort to the seller).

The good guy/bad guy tactic is arguably the most barefaced. Virtually everyone has used it or has been abused by it (Menard, 2004).

The two main objectives of this tactic are:

1)To win the contractor's trust by being a good buyer (i.e., a good buyer has a good attitude, is open to understanding the contractor's issues, and is ready to understand the terms and conditions, or even the cost/pricing submitted by the contractor); and

2)The bad buyer generates fear during discussions with the salesperson. The bad buyer normally creates negative feelings in the mind of a salesperson, and hence the salesperson will take the feedback provided by the bad buyer seriously, as the bad buyer provides no assurance to the seller of getting the purchase order from the buying organization. The bad buyer may not be true and/or honest in discussions with the seller, but the selling organization has no option left but to believe the feedback provided by the bad buyer.

Roles can be better understood if you put yourself in a situation where you play the role of good buyer by front-ending the supplier, inviting quotations, and determining first-level scope clarifications and negotiation while your boss plays the role of the bad buyer who will appear in the final negotiation meeting. (You need to inform the supplier that your boss is the final authority and you can create more insecurity in the mind of the supplier by revealing that your boss doesn't like the supplier before the final negotiation meeting.)

The only countertactic to handle such negotiations is that if the bad buyer is present in the meeting, the contractor should not be afraid of facing them, and rather be more attentive toward the good buyer. The contractor should keep cool and calm and try to discuss issues only with the good buyer. Also, when a bad buyer is behind the scenes, the contractor should bring them out.

6.1.12 Demeaning

This approach is followed by some professional negotiators, but is often the customer's person who is higher in authority or the decision maker in the process. In this approach, the customer is not ready to give any respect to the contractor or his organization and is trying to keep the entire ground during negotiations. Such negotiators may keep the contractors waiting in the reception area for hours, or sometimes they offer a chair lower in height. If you find yourself in such a scenario, refuse such demeaning conditions politely and ask for another chair; also, the best approach to handle such negotiators is to treat the negotiator the same way, but with humility. And if you have to wait for more than 20 or 30 minutes, then you must notify him that you are leaving as you have another meeting lined up with another client, or you should not give him a sense of importance once the negotiation starts.

6.1.13 Exigency

This is the approach of professional negotiators when there has been a deadlock and the contractor is not ready to offer any further discount in terms and conditions or pricing. In such scenarios, normally the direct contact will call up the contractor and ask for his final offer, stating that the management approval meeting has started and the customer will decide in another hour. Because this urgent situation puts the pressure entirely on the contractor's shoulders, most often, the contractor offers a better discount as they treat this as their final chance; otherwise, they might lose the prospective contract order. The best approach to handling such urgencies is that you need to sense the buyer is bluffing; if so, then ask for more time, like five to eight hours to respond.

6.1.14 Authority Limits

This is one of the tactics applied by the customer when the customer senses that the contractor is not moving an inch. Normally, the customer's procurement person states that they are not authorized to negotiate contracts over a particular value or cannot approve the contracts beyond a particular value, and if the contractor keeps the same offer, then he has to start from scratch and has to discuss the complete package with the customer's higher management. Naturally, the contractor feels trapped for two reasons: (1) the contractor is tempted to have the order immediately, maybe even on the customer's terms; and (2) the contractor doesn't want to start all over again.

6.1.15 Surprise

The surprise approach is also sometimes used by professional negotiators. In such cases, the contractor is made comfortable by notifying them that they have won the contract, and when the customer senses that the contractor is comfortable, he surprises him with either additional terms and conditions or a price adjustment. This approach is commonly followed by human resources departments, where an incomplete offer only mentioning the role and price is made to the prospective employee, but the all of the company's policies are kept hidden until such a time when the employee comes for the appointment letter.

All of these tactics and countertactics are used by one party with the other party. Since these are traditional negotiation tactics that everybody knows, they might not be very useful.

6.2 Project Phases Where Negotiation Strategies Decide Desired Results

Project business organizations can have many phases and these can be any number based on the organization's internal decisions to deal with projects. But, for simplicity and better understanding, we will divide projects into three phases, namely: pre-award, execution, and warranty.

6.2.1 Pre-Award

In this project phase, illustrated in Figure 6.1, the customer is discussing possible project requirements, including scope of work, deadline to project completion, licensing requirements, environmental clearances, health and safety instructions, and all other deliverables. Once all is agreed upon, the time comes to shake hands and sign the contract order.

The output of this phase will become the input to the execution phase, the warranty phase, and based on the contract agreement, work will be performed by the contractor and verified by the customer.

6.2.2 Execution

This is the phase where the contract agreement will become input to the execution phase. Now it's the contractor's turn to perform against the agreed upon deliverable, and the customer will verify the scope. This is the phase where all work is being done and performance reporting is initiated against the contract deliverables. During the execution phase, if the contractor is not performing well as per the contract, the customer has to look for other available options to get the project work done.

6.2.3 Warranty Phase

During the warranty phase, the contractor has performed against the contract and has handed over the work to the customer. If the work is acceptable by the customer, then the contractor has nothing to perform against the contract except to comply with the warranty requirements of the contract agreement. Normally, warranties are back to back, which means end customer warranty requirements are passed on to the end contractor to avoid all the risk of the intermediate customer or contractors.

Now, we keep these three project phases in mind and make an attempt to understand who has the upper hand in negotiation and during which project phase.

6.3 How and When to Negotiate Power Shifts During the Project

We are not living in a perfect world, where the customer always has the upper hand in negotiations just because they are customers.

There will be times when the customer can influence the results of the negotiations, and other times when the contractor will influence the results.

Therefore, it is important to understand who will influence results of the negotiations, and in which phase of the project. If we are aware of this power-shift curve in advance, then we will be able to decide our moves and steps carefully before starting negotiations.

It is evident from the curve shown in Figure 6.2 that the customer has the upper hand in the negotiation during the pre-award, as all of the bidders are in competition with one another.

On the contrary, the contractor becomes more and more powerful during the execution phase, as his or her involvement at the site increases as the project progresses. If we have squeezed our contractors to the maximum possible extent during pre-award, then this is the contractor's turn to trap us by submitting claims even for a small change, such as small changes to scope of work, terms and conditions, or some other reasons. Also, once the contractors are mobilized at the site, they get to know how their performance will affect the project and what is important for the customer on the project. There, the contractor will make an attempt to tap all these opportunities, including additional work or big opportunities to recover for accepting small changes, which are sometimes totally unjustified, and the customer has no choice but to pay for these small changes.

You might ask why the customer would pay a mobilized contractor a large amount for accepting small changes.

One answer is in the question itself, which is that no one can meet the schedule better than the mobilized contractor, and the second answer is that the customer is lacking all the time to go back into the market and get this small change executed from a new contractor.

Termination of contracted work is definitely the least desired option, not only because of schedule constraints, but sometimes we have no other option, as the contractor has a monopoly in the market and is the sole source, or maybe the end customer's preference for the project. Also, beyond the threshold point as marked in the power-shift curve shown in Figure 6.2, the customer does not have much influence on the contractor. As the project acceptance date approaches, the project executing company has to meet the deadline agreed upon with the end customer, otherwise there will be huge losses and the project executing company has to pay high liquidated damages to the end customer. The liquidated damages or penalties may be many times the contract value of the nonperforming contractor. Moreover, this means less repeat business in the future from the end customer.

So, what will make the contractor perform beyond the threshold point? (The threshold point can be understood, in referring to Figure 6.2, as the point of intersection where the powers between buyer and seller meet during the execution stage and once the contract is awarded to the seller.)

Some may say we will go to arbitration and, thereafter, into litigation if required; these are the last options to confront disputes when negotiation fails. The process of arbitration is lengthy. If the decision awarded by the arbitrator is not acceptable to any party, then they can approach the court of law and further delay reaching a conclusion. There is no time to go through such a process when executing the project. So what should really motivate the contractor is consideration in terms of bonuses and incentives for mitigation measures. These are the only measures that can motivate the nonperforming contractor to start performing and finally achieve project milestones. Once the work is completed, the project is handed over to the end client. Therefore, the only priority during execution is to get the work done. Disputes between the contracting parties should be halted until then, and if required, the affected party should approach the arbitrator and subsequently the litigation.

The third major phase of any project involves a period for complying with the warranty requirements agreed upon under the main contract with the end customer. This is the phase where the contractor will decidedly have the upper hand, as no payment is withheld by the customer except as agreed upon under the contract. If you analyze this situation, the contractor has already created a buffer for these retentions while submitting the offer to you as their risk mitigation strategy. So, the retention or performance bank guarantee amount withheld by the customer is only a bonus for them, which they might like to have or they just don't care about it.

6.4 Negotiations Are Not Enough—Let's Understand Why

Negotiation tactics were very successful in the twentieth century, but not as much today. This is the era when we need to devise new tools and tactics to achieve better results.

Let's have a look at why negotiation tactics are not generating desired results.

6.4.1 Obsolete Tactics

Today, company executives are coming from top business schools where they have played roles in all of these traditional negotiation tactics and have mastered the art and science of them. Therefore, they know how to handle these negotiation tactics and come out as successful negotiators. We would not be wrong to say that these tactics have become obsolete in today's scenarios. Even if the executive is not experienced enough to handle these tactics the first time, they will recover losses from future projects. Therefore, it is advisable not to use these tactics when you want a long-term relationship.

6.4.2 Constrained Project Schedules

Project completion periods have shrunk compared to earlier days, hence the time lines for negotiations and placement of the order. Therefore, this is the time when you are not allowed to have a procurement order placement cycle time of 16 to 20 weeks. Today, procurement is supposed to place the contracts as soon as they have the approved purchase requisition, as the rest of the project milestones can be achieved once the resources have been mobilized to site.

6.4.3 Relationships Are Important

As time lines for completing projects have shortened considerably compared to the last decade, when time to completion may have been as much as five years. Now, we have only three to four years. Therefore, it is not desirable to do repetitive negotiations for different projects with the same party for similar requirements all over again. Vendor development efforts are part of the project procurement team and customer development is part of the sales team. Therefore, procurement personnel are tempted to misuse the contractor strategy to develop the customer, and the sales team is tempted to have the contract agreement from the new customer. In such a scenario, if the procurement personnel are strong enough in negotiations, they will influence the results and the contractor will have to make some sacrifices to have the contract order. Here, the procurement professional has achieved the targets in the short term even without much negotiation, but in the long term, the customer will have troubles due to more execution claims planned for them by the new contractor. Due to all this, the mutual relationship will be at stake once these claims are on the table for solutions. Therefore, a better approach is to create a long-term business relationship.

6.4.4 More Execution Claims

First timers fail to negotiate a better contract, as they are not familiarized with enterprise environmental factors. Enterprise environmental factors can be understood as including, but not limited to, the working style within the organization, the procedures to be followed for negotiation, negotiation authority with the buyer, approval hierarchy to be followed, and other issues that may impact the results of negotiations. If one party takes a loss on account of these factors, then there will be more claims going back and forth during the project execution stage, especially when this party has more influence to drive the results of negotiations in their favor.

6.4.5 Arbitration and Litigation

If the contracting parties are not satisfied with the contractual obligations and considerations created under the contract order because disputes have arisen during execution, then there will be more arbitration cases and, subsequently, increased litigation issues. Therefore, the attempt is to have more long-term relationships and fewer arbitration issues.

In view of what has been discussed, it is clear that we have no choice but to promote win-win situations for each involved party. The rules of the game have changed, and squeezing the contractor is no longer the preferred method, until or unless you don't have any choices left. Now, single-digit discounts are being considered a good discount, irrespective of the part of the world you are operating in.

6.5 So, What Are the Options?

Squeezing the contractor is no longer preferred because even if the contractor accepts the order under pressure irrespective of the customer's negotiation tactic, the contractor will very likely not perform well against the performance standards, as nothing comes for free. Gone are the days when negotiations used to generate better results and enhance direct revenue for organizations.

In fact, negotiation approaches are changing minute by minute. Now, negotiations are being conducted by having a long-term view, which not only includes the present project in hand, but also future projects. Therefore, contracting parties will make every effort to create better relationships, making project business profitable and ensuring sustainability.

6.5.1 Long-Term Agreements (LTAs)

The only possible solution to the issues discussed above is to create long-term relationships. Long-term agreements (LTAs) are the future of relationships between the customer and the contractor.

In long-term agreements, price, terms, and conditions are already agreed to, so the customer doesn't have to discuss the same standard set of terms and conditions again and again; hence, there is a reduction in order placement time, cost, and efforts. However, project-specific additional terms and conditions will be discussed, even if required for small changes.

6.5.2 LTAs Timing

In the project business, long-term agreements (LTAs) are made by the organization at the proposal stage, when the customer is bidding for a specific project, and even before that, in some cases, especially when the customer is only doing one kind of project, like engineering, procurement, and construction (EPC) companies doing only power projects. However, different industries can have different approaches or different nomenclatures in these agreements; the idea is only to secure more business through collaborations.

6.5.3 LTAs Structure

The long-term agreement structure solely depends on the organization's contractual arrangement with clients because of the associated risks.

If the organization is doing lump-sum turnkey (LSTK) projects, then they would definitely like to pass on the risks associated in executing the LSTK projects. Otherwise, for cost-reimbursable contracts, the EPC organizations may take a business call to have the LTAs on the LSTK approach or on a cost-reimbursable basis with their contractors.

This LTA structure solely depends on the kind of arrangement the organization would like to have with their contractor, whether they want to exploit the opportunities by taking more risks or to transfer the risks to contractors and just play it safe.

6.5.4 How LTAs Work

The approach is very simple. Where the long-term agreements are already agreed upon between the contracting parties, they will become the framework for entering future contracts. The future contracts can be for the same project or for different projects of the EPC company.

We would not be wrong to say that LTAs are at the heart of specific contracts and everything depends on them. The LTAs can be agreed upon for projects coming up in different parts of the globe or for different project locations within the same country. LTAs for projects conducted in different locations may be affected in terms of law, place of arbitration, transportation costs, and licensing requirements, among other factors that should be considered while framing long-term agreements.

Whereas the customer saves on time, effort, and money in agreeing on a long-term agreement, the contractor shares the same benefit. In addition, the contractor is subject to less competition in the market while quoting for individual projects, creating a win-win situation.

6.5.5 Benefits of LTAs

6.5.5.1 Savings on Time

The main benefit of these agreements is that they save time, which matters in enhancing the chances to win the project during the proposal/bidding phase. Also, time is saved in executing the projects if they have already agreed to terms and conditions beforehand. The contracting parties are experienced enough with one another's requirements, style of operating, and what matters for them. Therefore, if you are successful in saving time during bidding or execution, this will create additional free floats in the project, leading to projects completed comfortably on time and with an enhanced reputation in the eyes of the customer.

6.5.5.2 Savings on Effort

We have definitely put forth fewer efforts if we have agreed to everything beforehand. We can use this energy to create more time for value creation, which, again, enhances reputation.

6.5.5.3 Savings on Cost

As a project business contracting company, we have spent fewer man-hours during execution; therefore, we will be successful in saving on overhead costs, which would otherwise be required to maintain more manpower to discuss contracts during execution. This leads to competitive prices for the customer and more savings for contracting parties. This will also enhance the chances of winning more projects.

6.5.5.4 Relationship Remains Intact

The heat generated during negotiating the contracts is avoided, and the relationship is maintained. As negotiation is required for agreeing upon the long-term agreement, it is required only once. Here, the contracting parties are more than customer or contractor because they know they have to work for all other projects as well, and small issues can be ignored.

6.5.5.5 No Execution Claims

The main benefit of long-term agreements is that there will be no claims during the execution or any other phase of the project. Therefore, closing the project will be faster, easier, and without any renegotiations. There can be claims for the first time on the first project, but those will be eliminated completely for future projects, as the involved parties will be more aligned on expectations, requirements, and ways of working.

6.5.5.6 Repeat Business and Less Arbitration/Litigation

Such arrangements will definitely ensure repeat business as long as the long-term agreements are valid and not limited by any regulatory requirements for public projects.

Because the contracting parties have been experienced enough in executing the project under the long-term frame agreements, there are fewer issues of arbitration or litigation since both have already worked together to define the LTA.

6.5.6 Limitations of LTAs

Long-term agreements are better than the traditional approach of agreeing to contracts every time based on the specific project requirements. As everything has its pros and cons associated with it, similarly, long-term agreements too have cons. Some of the limitations include the following:

6.5.6.1 Good for Standard Project Requirements

Long-term agreements are useful only when you have a standard set of deliverables, which is hardly the case, as every project is unique in nature, including location, deliverables, and so forth.

6.5.6.2 Additional Terms and Conditions Agreements

Most often, the customer also has customers, and therefore, to avoid risks or to transfer the project risks to the contractor, a good approach is to have back-to-back arrangements, which means that obligations of the end customer are passed onto the contractor and then the intermediate customer is safe from any associated risks. It is very difficult to agree upon project-specific terms and conditions with the same price.

6.5.6.3 Regional Laws and Limitations

Projects of highly complex natures, which may involve building nuclear power plants in any country, have their associated law limitations that may require use of local contents (local contents refers to material and services arranged from the country where the project is being executed) to be utilized for the project. Such local laws may require 80% use of local material and services, or in some cases, 100%. There can also be limitations related to licensing and inspections of the material being imported into the country, so these long-term agreements may not be useful or viable in such countries if the contractor is not able to fulfill the regional or local law requirements.

6.5.6.4 Compliance with Laws

In almost all countries, there are laws that say to avoid any monopoly. You have to maintain a competitive bidding process, especially when dealing with government projects. In government projects, such agreements are rarely possible. Therefore, pre-existing or long-term contracts are not of much use. Time, effort, and money are spent in freezing the contracts in compliance with anti-competition laws or local regulatory requirements.

6.5.6.5 Risk of Being Beaten by Competition

When long-term agreements are long enough, supposing more than a year, the chances of becoming uncompetitive are higher. As the market for commodities and currency is dynamic, the cost of raw material is changing all the time. The consequences might be lost customers, especially due to price fluctuations, in the case of a downfall in prices of raw materials. Therefore, while agreeing to long-term agreements, it is desirable to agree on market fluctuations in the prices and not to agree on a lump-sum basis, which can make long-term agreements ineffective and useless. Special effort is required during negotiating long-term agreements to avoid such situations.

6.6 Let's Collaborate

This is the era in which more effort, time, and money is being spent to increase customer-contractor collaborations.

These days, customers and contractors sit on the same side of the table and are attacking differences collectively. They think of unresolved points as a common problem, where both parties are contributing to finding the solution.

Customer-contractors are no longer walking away from the negotiation table because of heated arguments. They now treat differences as a common problem.

The customer treats the contractor as a business associate starting from the proposal stage. Collaborating as early as possible can take the form of a memorandum of understanding (MoU), a customer relationship agreement (CRA), or anything else, but the target is to achieve a common goal.

Now customers are not wholly and completely dependent on the independent cost estimators for making a proposal to their customers, rather they are collaborating with their contractors as early as possible, where they are going ahead collectively and have a shared interest to win the project from the end customer. So, if the contractor's customer secured a contract from the end customer, then the contractor will also get their share for supporting the proposal phase and doesn't have to compete with others during the project execution phase.

The crux of such collaborations early on in the project is: “If I win, you will also win, so let's collaborate!”