AfiTaC - CONTRACT and RISK Mgmt + NEGOTIATION = better RESULTS on your Projects

Perception in contract negotiations

In this post we will describe how important perception in contract negotiations actually is:

How are you perceived by your counterpart during contract negotiations?
How impacting is that perception?
Is it enough to “have it right” and then spend time arguing about it?

Project Negotiation, practical tips for negotiating payment terms

“It is the taste in the mouth that counts”

As a kid, I had a knack for creating nice sentence for concepts I was defending. One of these was the title above. I used it in situations where, in vigorous discussions with my parents, they ended up accepting my arguments but not the way they were presented. This happened on stupid discussions on issues like “Whether it is egoistic (not) to have children.” They defended that living a life just for yourself is egoistic; my brother and I made the case that, because of overpopulation, having kids was in fact the egoistic act. Not really world-changing discussions but good practice for techniques to convince. Over time, I realized that “pure argumentation” was not the most successful approach.

Much later, during my professional life, on one of these long negotiations, I debriefed with the young lawyer on my side during a pause :

“Man, you have all the right arguments”, I told him.
A satisfied smile appeared on his face.
“But they are not buying it”, I continued.
“??? Yes, they are a bit slow to understand!”
“They are rather getting the feeling that you are teaching them a lesson, that you feel superior to them.”
“They don’t want to be in such an unequal position. So, they resist and do not give in.”
“Even if they think you are right. Nothing to do with the quality of your arguments. If I, or any other person from our side, will propose the same, they will accept it”.

So, we agreed he would go “low profile” for a while. I would – a bit later on so that the situation was less obvious – test our counterparts willingness to accept what my lawyer had been arguing for. And yes, when I proposed the same, they accepted it immediately. Almost to make an implicit statement: “to you we are willing to give it, but not to him”. The moral of this story is:

During negotiation, always avoid situations of perceived superiority. Especially if you are working on the Contractor’s side towards the Employer.

The other party’s perception in contract negotiations

Avoid fighting a battle for the best arguments. Avoid that words and intentions can be misinterpreted by the other party during the negotiations. Top negotiators know that it is there duty to avoid any misunderstandings in the first place. For multi-cultural or international negotiations the challenge is even bigger, but the issue ever more important.

Top negotiators avoid wrong perception in contract negotiations by doing the following:

Formulate your ideas in the most simple, clear and precise way. Use simple vocabulary and short sentences.
Make your case with the help of calibrated questions (as can be seen in the example about negotiating payment terms).
Always check upfront that you morally stand by what you are going to say. If someone would make that proposal to you, finding yourself in a similar position as your counterpart, would you neither feel offended nor mistreated? If your back-office / management pushes you in a direction that you don’t agree with, argue rather with them than getting in trouble with your counterpart.
Double/triple check how the other party is understanding you.
Avoid the “you’re right” trap, as brilliantly explained by Chris Voss.

Conclusion

The way you are perceived is extremely important during contract negotiations, probably even more than the quality of your arguments. You need to be self-conscious about this. It is a far better approach to be a “curious person asking questions” than a “brilliant orator / lecturer”. Such a behavior change also corresponds to the maturity shift that good negotiators make when becoming more experienced.

During your next negotiations, always be on looking after yourself: are you relying too much on argumentation?

Contract/Negotiation training

About AfiTaC

AfiTaC.com is the blog on commercial and contractual subjects for the Project Businesses (Construction, Infrastructure, Oil & Gas, Power & Renewable, Water Supply & Sanitation, etc). Its objective is to stimulate reflection, learning, convergence to balanced contracts and positive dispute resolution. You can subscribe to our newsletter by writing to “newsletter@afitac.com”. You can also connect to our LinkedIn page. Engagement with the readers is what keeps us going. So, don’t hesitate to exchange with us by commenting here below, liking our publication on LinkedIn and writing to us “info@afitac.com”.

Act of God in Force Majeure clauses

When reading for the first time a typical Force Majeure Clause, most people are surprised to find the term “Act of God” therein. Contracts between businesses shouldn’t be mixed with religion, should they? Don’t worry, at the end of this article, it will all be much clearer. When watching the one-but-last “Tour de France” stage (cycling) in the Alps in 2019, I became inspired to write about that provision.

“Living like God in France”

In Dutch language, there is an expression “living like God in France”. With a bit of a twisted interpretation – I admit – one could say “God is living in France”. Note: all this is meant to be read in a figurative way.

The events that occurred during that stage were very emotional for the French. After 30 or so km, the local racer that is currently the best in riding uphill – Thibaut Pinot – had to leave the race with a, very uncommon for cyclists, muscle strain. This brought to an end French hopes that he could win the 3-weeks race and bring a first French victory in several decades.

But, not to worry, another French racer was still in the lead – Julian Alaphilippe. Unfortunately, later that day, he couldn’t follow one more attack to his leadership and was pushed “virtually” out of the yellow (leadership) jersey. Virtually means, in this context, to become the leader if delays remain the same when reaching that day’s finish line.

Act of God

So much French emotion in one single race – losing hope to have a national win after many years, which would (almost) be worth more than winning the football world championship – even brought some of the television commentators to tears.

So, to bring all these emotions to an abrupt end, an extreme weather event took the race by surprise. Images came in from the consequences of a localized hailstorm. On the road, some ten kilometers before the racers current position, one could see a massive accumulation of white hail, inundations and even muddy landslides.

Back to contracts

Force Majeure is an unexpected event preventing someone from doing something what is written in a legal agreement / contract and could not have reasonably be avoided or overcome. It should be beyond the contractual Party’s control and not substantially attributable to the other Party. When a Force Majeure event is recognized, the practical result is an extension of time corresponding to the consequences of the Force Majeure event.

Typically, the Force Majeure definition in contracts includes some explicitly cases, including “Act of God”. Act of God, as per the definition of Cambridge Dictionary, is “an event such as a very bad storm that cannot be prevented or controlled and usually cannot be insured against”. This is in contrast to other Force Majeure events that are the act of persons such as war, terrorism, strike, etc.

So, when an such an Act of God struck the Tour de France, the directors of the Tour had to take action quickly and “suspend” the race. Clearly, this suspension could not be just for the duration of the hail storm, which was very short. It should cover the consequences of the Force Majeure event, i.e. the impossibility to cycle on the road to the destination. In this particular case, times of the riders were taken – retroactively – at the top of the last climb before the Act of God and the race would only be resumed the next day.

A word of regret

Famous contractual concepts as “Force Majeure” and “Act of God” are gradually been taken out of contracts and replaced by alternative wording.

Force Majeure has been replaced in the 2017 “rainbow suite” from FIDIC by the term “Exceptional Event”. That’s a pity for one of the last remaining French terms. Should we also start replacing FIDIC by IFCE? The latter would be the abbreviation of the International Federation of Consulting Engineers, replacing the acronym for its French name Fédération Internationale Des Ingénieurs-Conseils.

A bit of tradition can also be fun!

Contract/Negotiation training

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Bid / No Bid, decide with the head or with the heart?

Sales people are enthusiastic – rightfully so – and therefore would take Bid / No Bid decisions with the heart. Decisions with the heart are normally good for motivation. And this is essential to fight hard on a tender with lots of strong competitors. But should we really follow (only) the heart? And are all the hearts of the team beating in tune?

Certainly not! Bidding is an expensive activity. Companies have to control the costs of this “overhead” activity to remain competitive. Consequently, resources are limited and choices have to be made. A bit of objectivity in making the choices is more than welcome.

Typically, companies organize a Bid / No Bid meeting before starting to work. In the following post, we had explained how Contract Risk Scoring can help you:

Contract Risk Scoring, how can it help you in your decision process?

Let’s see what Paul Rigo, a colleague adviser based in Australia, has to say on the subject (original message on Linkedin):

To Bid or Not to Bid – That is the question

Given the current market conditions, it is tempting for businesses to submit a proposal for every opportunity that they become aware of.

Such a simplistic approach is often not the best use of finite resources or one that will lead to securing the package of work.

Contract/Negotiation training

The following are some key considerations when deciding whether to bid or not to bid:

Why do we want to do this package of work?
Is it a strategically important opportunity for us in terms of customer or market?
Does the work have a future? Is it commercially viable? Is it funded?
Do we have the best people available to successfully deliver the work?
Is it a commercially attractive package of work for us?
Are the customer’s expectations of cost and schedule achievable?
If a competitive bid, how many competitors are there?
What will the proposal cost to prepare?
What happens if we do NOT bid?
Have we undertaken proper risk assessments for the work and for our business should we secure the work?

These considerations are a useful starting point for the type of questions / analysis which needs to be undertaken before a decision to bid or not to bid is taken.

Click here to read other publications on bidding / tendering on this blog.

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Contract Management & Music, The Rolling Stones on contract negotiation

Well, I have nothing particular with the Rolling Stones. But their music and lyrics seems to be good inspiration for contract management. We’ve seen it before with “Satisfaction”. And this time, they are going to give us a little lesson about contract negotiation with their song “You Can’t Always Get What You Want”.

If you want to listen while you read, click on the You Tube link here below.

Positional Negotiation

… always get what you want
… always get what you want

One type of negotiators you may encounter is the positional negotiator. Usually these are people that have important roles inside the company they are working in. In their (small) world, they are used to people doing what they want. But, such persons are not so used to negotiation, are not so good at it. “Positional negotiation” is quite a simplistic form of trying to strike a deal.

I bet you know some people like that. Some made it to president. Here are some of their characteristics:

They are concerned only with getting the result THEY want.
This, by being consistently “hard on the issues” and “hard on the people” they negotiate with.
Therefore, they do not take into account the needs/interest of the other party.
And, have no concern for maintaining on-going relationships.

And I went down to the demonstration
To get my fair share of abuse
Singing, “We’re gonna vent our frustration
If we don’t, we’re going to blow a 50-amp fuse”

Their negotiations frequently end in dispute and deadlock. Negotiations are a demonstration of their power. As their counterpart, you get a lesson of what you have to do, what you have to accept.

Should they succeed in getting what they want, at the other party’s expense, the “agreement” is likely to fall apart. This, because people feel abused after the negotiation. They feel they are going to blow up. So, they are geared up for sweet revenge – to vent their frustration – whenever they get an opportunity. Even at their own expense. That’s when “win-lose” negotiations turn into “lose-lose”.

I was standing in line with Mr. Jimmy
And man, did he look pretty ill …
I sung my song to Mr. Jimmy
Yeah, and he said one word to me, and that was “death”

Is negotiation like playing poker?

You got the message about positional negotiation, I hope. Anyway, all negotiation experts agree that positional negotiation is not a good long-term strategy. But, what should you do instead?

I saw her today at the reception …
She was practiced at the art of deception

We are all so good at “the art of deception”. Generally, people compare negotiation to a poker game. A bit of luck and a lot of bluff. “If the other party knows what cards you have in your hand, how can you win?” That’s also is the WRONG approach.

As Keld Jensen says, a renowned negotiation expert, the true ingredients for a successful negotiation are trust (“Tru$tCurrency”), looking together at the situation and jointly finding the 42% of untapped value of “NegoEconomics”.

Principled Negotiators

No, you can’t always get what you want …
But if you try sometimes
Well, you might find
You get what you need

What should you try, then?

Fortunately, at Harvard, already several decades ago – but, hey, it takes time for people to change – they have developed an entirely different way to negotiate. It all started with the excellent book by Ury and Fisher, “Getting to Yes”.

Ury and Fisher propose a different approach, “Principled Negotiators” with the following characteristics:

A “Principled Negotiator” ensures that all parties leave the table feeling they have got the best deal of the day.
They do this by being “hard on the issues” and “soft on the people”.
And, they don’t allow others to bully them.
Using constructive tactics to achieve outcomes.
And building solid relationships.
To achieve this, they plan and prepare themselves thoroughly.

By actively listening, such negotiators try to understand what – beyond declared positions – are the other party’s interest. They do this by asking calibrated questions. Chris Voss, a former FBI hostage negotiator, is a master of this. By deeply understanding your counterpart’s situation, you can generate a lot of options. Therefrom, you can draw, with objective criteria, the solution that generates the most value for all parties together. And, then you share this generated value in a “win-win” solution. You will see, you will get what you need … and your counterpart also. Probably even more than you need. Otherwise, it’s better to walk away from the deal and try something different (usually called a “Batna” = best alternative to a negotiated agreement).

Wooh!
Ah you can’t always get what you want (no no)
…mmm but if you try sometimes, you just might find
You just might find you get what you need
Ah yeah! Ah yeah! Yeah

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Letters of credit: what impact for the contract manager?

This publication on letters of credit was prepared by Marc Louet. Marc is a freelance consultant in Contract & Claim Management.

It was originally published on www.contractence.fr, the French blog on contract management by Jean Charles Savornin. Jean-Charles is the author of several books on contract management, the latest of which is “Putting leadership into your projects (published in French)”.

Letters of credit

Both a payment guarantee and a way of paying, the letter of credit (L/C) or documentary credit is a banking tool that is well known to exporters and importers. We can summarize the rules by saying that an L/C is an undertaking by the buyer’s bank to pay the seller when the seller sends him the documents detailed in the L/C without requiring the buyer’s agreement.

These documents are intended to attest to the seller’s proper performance of its obligations and typically include invoice, packing list, transport document, insurance certificate, certificate of origin, etc. The documents must be consistent with each other and scrupulously comply with the conditions set out in the L/C. These conditions are often difficult to meet.

What impact can the choice of an L/C as a payment method and guarantee have on contract management?

As a payment guarantee, the L/C is usually one of the conditions for the entry into force of the contract or the start of the contractual time periods. Any delay in its issuance could therefore have a mechanical effect on the project planning and generate a first claim situation.

Considering that it is not the buyer but his bank that opens the L/C, it will be in the buyer’s best interest to secure the subject in advance. A good practice is to attach to the contract a model of L/C on which the parties agree and which has been validated by the buyer’s bank (remember that the bank is not required to obey its customers and that L/C is a commitment independent from the contract…).

Discrepancies in documents

One of the key principles of L/Cs is that banks are only required to pay if the documents are strictly in accordance with the terms of the L/C. If they are not, the banks may request instructions from the buyer or even refuse to pay and return the documents to the seller. If the documents are incorrect, the risk is that there is a delay in payment, the duration of which depends on the buyer and its bank (I have known of some that lasted up to 1 year!) but for which responsibility can be shared between the seller, a third party (the carrier or insurer who has not provided all the details requested) and the buyer who has not obtained from the bank that it accepts and pays promptly, based on the incorrect documents. Between the needs of the on-site teams and the warning signals sent by your controller, I let you imagine the discussions that will proliferate on the clause “suspension in the event of late payment”…

The management of the contract, its changes and their impact

Before addressing this question, the first point to be stressed is that the L/C is independent from the contract. If the contract evolves, the L/C will have to be modified accordingly. And this implies having the bank’s agreement to do so.

This having been mentioned, let us imagine that an amendment with an increase in the contract price must urgently be implemented (e.g. repair/replacement of a damaged part). You may have difficulty obtaining the necessary L/C amendment if your customer does not have sufficient credit lines with its bank or if the bank is itself subject to credit restrictions (typical case of countries with low currency reserves). Again, expect discrepancies between the project’s operational needs and financial risk control.

Letter of credit at the end of the contract

Finally, let’s analyze what can happen at the very end of the contract (not considering the warranty period). Let’s imagine that you too have already known a customer who shows unwillingness to sign the acceptance reports even though he has put the equipment into production. But that, this time, thanks to a well negotiated contract, you will be able to invoice your last term with a report signed only by you on the basis of the deemed acceptance clause … If this clause is not transcribed in the terms of the LC, you will quickly see that it is as if it does not exist …

And what will happen with your last-minute claim in which you have put your extra costs, which have been validated “on the fly” by the customer? You may well realize that they will never be paid. Instead of financial compensation you should have offset these additional costs otherwise, for example by trading them for a reduction in your commitments.

As you understood from the above examples, the contract management can be strongly impacted by the need to have a letter of credit. Without questioning its usefulness in situations where the risks of non-payment are high, or where exchange regulations are stringent, a letter of credit can generate difficulties that the contract manager should not be underestimating.

PS: To simplify reading, I avoided in this article some aspects of letters of credit. Such as the difference between letters of credit and documentary credit or the complexity added by the L/C confirmation on the management of irregularities. I would be happy to answer any questions you may have and thank you in advance for your comments and feedback.

Click here to consult other publications related to Contract Management on this blog.

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Contract Management & Technology: feedback from IACCM Europe Conference

A lot of talk on the IACCM Europe Conference was about technology (this post is not publicity; I have no commercial interest in any of the companies mentioned):

Virtual assistants “Alexa-like” to work on contracts with a demo by APPTUS;
Smart / self-executing contracts;
Shredding contracts to data with AI (artificial intelligence) with a demo by Exari;
Negotiation between AI machines taking some “bad” human characteristics out of the equation and seeking for an optimized result for both parties.

Many of these things will undoubtedly make our future. But, when the problems are still quite basic – as can be seen in my previous posts on negotiation and risk management – solutions should also be very pragmatic for immediate use by most companies.

One solution that I can immediately see implemented in many organizations, from small law firms to the sales & legal departments of multinationals, is “ClauseBase”. This recent start-up (www.clausebase.com) provides a handy tool to build up a contract from a set of clauses that form the bricks. The tool automatically corrects grammar, references etc. to avoid the annoying work of making a consistent contract out of separate clauses. Let’s admit it, that is usually time consuming and a source of errors. ClauseBase is also integrated with DeepL for translation and currently covers English, French and Dutch. What I find particularly interesting is that companies can make a template with optional clauses to adapt to the reality of a specific project and still guarantee consistency. In my opinion, this can also be suitable for medium size companies that do not have a permanent legal department. They are better off preparing standard documents with a library of clauses available to their sales department for adaptation to each specific project. Specific adapted user roles can be chosen. The monthly fees vary accordingly (from 29 to 99 Euro/month, if I remember well). It is also possible to send a link via email to have a third party or a sales rep, without a license, fill out a pre-formatted contract with data while selecting certain options. I’ve even been told that it can even be used on a website to create options for customers when doing online business with you. That’s smart!

Click here for me publications related to IACCM on this blog.

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Risk Management: feedback from IACCM Europe Conference

Here are the takeaways on the subject of risk management from the IACCM Europe Conference 2019. It is based on the following sessions:

“Risk allocation & acceptance as a source of value creation and leakage in contracts” by Walter Akers.
A panel discussion about “risk allocation – when is it ‘good’ driving performance versus ‘bad’ undermining performance” with Natalia Ombach, Walter Akers and Tim Cummins
“Contract management and dispute resolution strategies” by Nicolas Gould.

Contracts and Risk

Contracts are all about risk allocation and risk transfer. Risk is to be seen as the fruit of uncertainty, positive or negative. A party should be rewarded for its ability to manage uncertainty. Very often, risk transfer is an illusion, on the paper, until that risk actually manifests itself. Tim mentioned that much of the conversation on contracts was a complete waste of time, that it should be more focused on quality assurance. When looking at what can go wrong, we fail to see recurrent patterns. in the reality, most of the problems are about scope.

Economic view on Risk

Contracts should be economic instruments to realize or protect value. In an economic view, it makes sense to shift your uncertainties, against compensation, to the party that can solve a problem for a better value than you can. Natalia warned that some risks can however not be managed and should then be monitored and mitigated in other ways.

Walter reminded us of the general principle that “risk is best allocated to the party best placed to handle it”. This means that it shouldn’t be allocated to the weakest party in the negotiation or the one that is most desperate to get the contract… yet, that is what happens so often.

Project price, cost and risk

Signing contracts just on the basis of the price, Walter said, is like asking the butcher to do you a complicated surgery. Yes, he has the knives and knows how to cut … but …

Every clause in the contract has something to do with risk, directly or indirectly.

The project price is the cost of the project plus the risk. It makes therefore economic sense to allocate risk to the party best able to handle it.

Suggested approach on Risk Management

Walter’s suggested approach is as follows:

Identify the risks;
Allocate the risk to the party best placed to handle it;
Never suffer from the illusion that risks can be transferred in totality. For example in an EPC Contract: shifting all the risk/uncertainty to the Contractor; it will come back, as a boomerang, to the Employer if the EPC Contractor goes bankrupt.

The whole contract management system should be designed around risk sharing.

Focus on EPC Contract Risks

Shift in Owner’s behavior

Nicolas Gould made a focus on EPC Contract’s Risks. Originally, Owners wanted control. But now, whenever a new risk is identified, it is passed on to the supply chain. And, as long as a Contractor doesn’t go into bankruptcy, he must fulfill the contract. According to the “fitness for purpose” principles, if things go wrong, even if the Contractor has been designed and built the project carefully, he will remain responsible.

Claims and their roots

Nicolas mentioned 3 causes for claims:

project uncertainties (such as complexity beyond the expectations of the parties),
process problems, and
people issues.

The roots go back to unclear risk allocation. Claims under EPC are normally for:

Employer’s instructed variations
Constructive variations
Delay in Employer approvals
Access to the site
Feed availability (for a power plant: supply of water, gas etc)
Lacking utilities
Unavailability on the off-taker side (power to the grid)
Force Majeure
Acts of prevention

5 steps towards a successful project

For Nicolas, the following 5 steps are needed for success:

Properly setting-up the project: follow the specs + seek clarification + schedule the project + apply the contract + appoint the DAB + establish the role of the Engineer or the Employer’s representative;
Running the project: this is about having a proper programme + progress meetings about the real subjects + applying the payment procedures + process & substantiation;
Managing change: build-up of the contract price + standards for measuring change + being aware of time bars and notices;
Avoiding disputes: honestly implement value changes with variation orders + understand the programme + identify facts and supporting evidence;
Dispute management: only as a last resort.

Conclusions

The many examples provided during the event and the arguments extracted above show that, across businesses and over the past decades, people – Employers, Contractors and Engineers – continue to make the same mistakes: lacking proper risk management & allocation + not identifying, acknowledging and speaking about the real problems when there is still time to mitigate. Usually, the parties are technically knowledgeable, are not so good at communicating and really bad at using the contract.

Click here for other articles about risk on this blog.

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Negotiation: feedback from IACCM Europe Conference

Here are the takeaways on the subject of negotiation from the IACCM Europe Conference 2019. I attended the following sessions:

Tiffany Kemp and Keld Jensen shared some “negotiation experiences from the trenches”.
Tiffany also had a session about “The perils of fighting on two fronts at once: why stakeholder management is critical to negotiation success”.
Keld brought us a short form of his “SMARTnership negotiation workshop”

Trust in negotiation

Keld stressed the importance of trust in negotiation. The higher the level of trust, the better the results and the lower the transactional costs.

In complex negotiations, there is no luxury of time to build up trust. Therefore, we need to verbalize trust:

Confirming the need for trust;
Say what people will do when trust is falling;
Establishing a “code of conduct” in negotiation: the parties should be honest and transparent, shouldn’t lie nor bluff etc.

Such a “code of conduct” actually increases honesty. If we are reminded to be good, we actually do that. Most people don’t want to lie or bluff. This code of conduct is like a contract for negotiating the contract and usually established a week before.

Someone from the public was wondering what would be the consequences of breaching this code of conduct: “negotiation is as an audition for the performance of the real contract”. If people already fail on what they agreed in their “code of conduct”, they will probably not reach an agreement anyway.

Stakeholder management

In her session on stakeholder management, Tiffany mentioned that collaborative behavior is far less practiced than collaborative theory is preached.

A common idea for negotiators is that “negotiation with counterparts is OK but the internal stakeholders make their life terrible”. She encourages people to make a RACI matrix or responsibility assignment matrix for the stakeholders in a negotiation on each of the key deal points. The RACI letters stand for Responsible, Accountable, Consulted and Informed.

SMARTnership negotiation workshop

We do contracts to create financial benefit. We have to make sure that the counterpart is successful and happy but not at our expense. At the start of a negotiation, we have to be able to say to the counterpart: “we are here to try to improve your profit, reduce your risks and manage liability”. And vice versa for the counterpart.

Facts from Keld:

According to studies, 42% of the value present is not captured in negotiations.
Trust has plummeted with 55% in the last 20 years.

Can you price trust? Yes. Keld showed it with an example of the price reduction required to make us shift from a long-standing appreciated supplier to an alternative supplier of whom we dislike the sales representative: 5%, 7%, 10%, …? Depends. But there is definitely a value linked to trust.

Unfortunately, many people still see negotiation as a zero-sum game, as haggling, as a competition. The party that is getting less is unhappy and up for revenge. Even partnerships are typically based on limited disclosure and minimal trust.

Keld’s concept of SMARTnership is to find the true potential creating added value through 346 variables across industries. The goal is to find asymmetric differences. But this exercise requires trust and transparance. Typically, people negotiate on too few variables: price … and few more.

Conclusions

At an inquiry at the World Economic Forum, negotiation came out as the fifth most important skill regardless of the job one is in.

One of the reasons why even experienced negotiators never become good at it is … because they don’t like to negotiate.

Better to start liking it! Some training or coaching will sure help.

Click here for other articles about negotiation on this blog.

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IACCM Europe Conference 2019, some takeaways

As promised, I will share some takeaways from the IACCM Europe Conference held in Madrid form 13-15 May 2019 on my blog. Of course, I could tell you how great it was, a real networking event etc. But that brings nothing to the readers than regret of not being there. No worries, I will try to give you some feedback useful for those not present. In case anything is not clear, please reach out to me.

In separate posts, I will focus on 3 subjects close to my hart (click on the respective words to access them): negotiation, risk management and contract management & technology.

It was a special event as IACCM, the International Association for Contract & Commercial Management, was celebrating its 20^th birthday.

20 years ago, there was no visibility for CCM’s (Contract & Commercial Managers). Everyone considered she/he was doing a different job. IACCM has been able to show similarities and bring consistency within its ever-growing member group (> 55k). This through research, establishing a Body of Knowledge and networking.

A new trend is the interest of the academic world. The University of Leeds Business School & Law School is a good example because they are setting-up a MSc / LLM in Commercial and Contract Management. Others are showing interest and ready to follow.

Satisfied, yes I am, with this year’s IACCM Europe conference. See you next year in London.

Click here for me publications related to IACCM on this blog.

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Power to negotiate contracts: Are you “too big to fail” or do you “fail to be big”?

Let’s put ourselves in the position of a Contractor, whether big or small. We are at the tendering/pre-award stage in a public tender or a direct negotiation. When receiving the Contract draft from the Employer, from what I see, there are two types of behaviors when it comes to the power to negotiate contracts corresponding to two very distinct profiles:

“Too big to fail”,
“Fail to be big”.

For the moment, just words, but let’s dig a bit deeper into the subject:

“Too big to fail”

This is the attitude we find in big contractors (unless they are desperate and close to bankruptcy). They consider that each-and-every-contract should be taken individually to contribute to the results of the company. Also, the individual contracts should not endanger the health of the whole portfolio. While Customer see them as “big, powerful companies”, they work on a project-by-project basis.

To do this, they have an “army” of internal Subject Matter Experts (SMEs) on all issues from technical to commercial (including legal, tax, insurance, financial etc). Their problem is that these SMEs are very good at identifying the risks for their specific subject but not to look at the overall picture. They usually have “golden rules” or contract standards, training programs, risk review processes etc.

The result is that the Commercial & Contract Manager (CCM) is overloaded with good recommendations that she/he cannot implement, all at the same time, even with power to negotiate. This would upset the Customer, show a lack of focus and make the contract negotiation extremely time consuming. The challenge is to find strong CCMs that can interact with the SMEs. They need to challenge the SMEs on the need for all those comments, to find “lean” solutions that can be acceptable for the Customer.

Sometimes contracts are lost because of excessive deal-breakers and not only due to price or technical issues.

“Fail to be big”

On the other hand, we have small and medium size companies who don’t have any of these specialized resources and lack the power to negotiate their contracts.

They often deal with the big companies of the preceding chapter. Most probably with their procurement department. The legal department of these big companies, in spite of the “good contracting standards” for their own sales, has taken pleasure in producing completely biased procurement contracts. The small and medium companies are “invited not to change anything” to these contracts.

Accepting these standard terms means no rights for the Contractor (no suspension, no termination, no limits of liability) and excessive rights for the Employer (broad indemnification rights). When things go well, the parties will not even look at the contract. But when things go wrong, the contract aggravates the situation by a pure “attack” and “defense” situation.

If it would come to a dispute, arbitrators and judges, in application of the law, may not have a lot of sympathy for contracts that are not the result of mutual agreement but were forced by one strong party on the other weaker party (“take it or leave it”). Unfortunately, smaller companies often “fail”/go bankrupt before they reach that point. And then, the boomerang of unbalanced contracts comes right back at the big companies.

Usually, these small companies do not have any “red flag” mechanisms like a risk review meeting (before tender submittal) or a contract risk scoring process leading to well-informed decisions.

Conclusions

If your company is in either of the above situations, the challenge is to find the personnel that can handle this and identify those commercial & contractual comments that are worth fighting for, will create balanced contracts and that will make a serious difference in case things go wrong.

I strongly recommend that you think about your situation and keep moving/improving: setting up a contract risk scoring to rank the issues in order of priority, taking informed decisions by well trained staff, acknowledging and mitigating residual risks, pro-actively “defend” one’s position etc. An ostrich strategy has never been a good long-term solution.

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