We are, once more, in our very particular world of the Project Businesses (Construction & Infrastructure, Power & Renewable Energy, Oil & Gas, Water treatment, desalination etc) were we will reflect on negotiating the payment terms on contracts for Complex Projects. The Project Business is known for less repetitive business opportunities, non-standardized – heavily negotiated – contracts and a complex execution environment (EPC, Design-Build, customized equipment supply & installation etc).
Starting point for negotiating payment terms
When the time comes for negotiating the payment terms, the usual starting point is to have the Employer say “We are willing to give you an advance payment but then we’ll pay you when the project is completed.”
As the lead negotiator, what should
you do next?
- Go back to your management to ask if they can
- Throw all your arguments at the Employer?
- Make this a deal-breaker and leave the negotiation
temporarily to build the pressure?
In fact, you shouldn’t even think
about what to do next! You should already have been prepared for this
situation! It is a classic negotiation subject and above point from the Employer
is a classic.
We will split our analysis into three
steps “Prepare”, “Act” and “Conclude”. We will do this exercise from the
viewpoint of a specialist equipment contractor. The arguments can be adapted to
other circumstances – like for a civil contractor – but it is important to
understand that there is no “one size fits all”. Each negotiation case is different;
that’s, in fact, the fun of it.
What to prepare for?
You could prepare the arguments favorable to your case in negotiating the payment terms. We often overlook to prepare for what we are going to ask to the Employer. We should ask open-ended questions to let the Employer explain their interests (beyond their positions). Not only their interests, but also their fears. And also prepare questions that help them walk the path to considering your and the Project’s interests.
Some examples of probing questions:
- Why is paying only-at-completion important for you?
- What bad experiences you had while paying progress milestones?
- What are you trying to achieve by keeping the cash out of Contractor’s hands?
- How, in your opinion, should Contractor behave when paying its suppliers and subcontractors?
If you ask these questions at the
right timing and with the right tone, they will reveal the thought process,
emotions and fears of the Employer. You will be able to check the hypothesis
that you have established during preparation and gather as much information as
You need to properly spell out
your context and THEIR context. For our practical case:
- The Employer is a SPC (Special Purpose Company) relying on Project Finance. Your contract will be entirely paid from a loan that is committed upfront. How the loan will be disbursed needs to be established and the Contractor’s payment terms are an important contributor. Disbursed loans will lead to a higher IDC cost for the Employer (IDC = interest during construction).
- Times are hard for Contractors, especially when it comes to cash. Since the last financial crisis, Contractors are struggling to get cash neutral (or even exposure neutral) payment terms. This will enable the Contractor to finance its ongoing business activities automatically without running to the banks.
Typically, there are more contextual aspects. But, for this example of negotiating the payment terms, I would like to keep it fairly simple. If that is possible anyway in a Complex Project environment…
What is an Accusation Audit? It’s
an exercise where you put yourself in the Employer’s position during the
preparation for a negotiation. You will think of, and express, all the
objections and accusations the Employer could typically throw at the Contractor.
You will use that material to state it yourself when negotiating the payment terms and preempt any accusations during the negotiation. Counter-intuitive but very powerful. When you wanted to get back to communication mode after a discussion with your boy/girlfriend you may have said: “I have been an idiot. Maybe we can talk about it”. Now, try to apply this also on Complex Project Negotiation with phrases like the following:
- “Contractors think first about getting the money
from their Employers and only thereafter about doing their job.”
- “Contractors that have already been paid may not
finish the works till the end.”
- “Money is your power; if you give it to the
Contractor, you may be entirely in their hands with still some work to be done.”
These examples are clearly linked
to the fears the PM of Employers have. These fears can even come from unrelated
problems with their plumber in their house. I bet they didn’t have the same
legal arsenal for a small job with their plumber, no bank guarantees, no
reputation check etc.
We could have made a longer title: ACTive listening.
“First five minutes”
people are overprepared to make their own case. They can’t rest their mind
before they have put all their arguments on the table. On top of that, they
want to do that in one go, without dialogue or taking into consideration what
the other person is thinking. Don’t be like that! Calmly wait for the Employer to
expose their point of view. And, help to keep the disclosure moving with the
techniques of mirroring and labelling.
Mirroring is repeating the 3 most
critical words of what the Employer just said. For example, when the Employer
says “We want to keep the control by holding back the payments” you can say “keep
the control” and pause. The Employer will automatically pick up his story and
elaborate further. Because he feels in control and you are really listening.
Labelling is a technique of
validating the other party’s emotions:
- “It seems like you feel strongly about controlling the Contractor.”
- “It looks like you have had some bad experience with Contractors before.”
- “It sounds like we are a big, powerful Contractor with plenty of resources.”
voice and body language are particularly important in this situation. You
cannot give any suggestion of sarcasm, lack of respect, disdain for their
arguments. Don’t be inspired by a political debate. Remember, these people are
not trying to convince the other party. They even prefer to keep opposing and
convince you vote to vote for them.
Make a parallel when negotiating payment terms
Sometime, it is good to make a parallel. The calibrated question “How do you believe the Contractor should pay its suppliers and subcontractors?” mentioned earlier has this purpose. It will trigger the Employer’s thought process, to think about your situation. As Daniel Kahneman explains in his book “Thinking, fast and slow” it will make a move from instinctive and emotional (“system 1”) to slower, more deliberative, and more logical (“system 2”) reflections.
may see that, not timely paying the suppliers and subcontractors, can put the
Contractor AND the PROJECT in a difficult position: liens, suppliers holding
back on delivering, subcontractors not prioritizing the project etc.
Achieve (tactical) empathy
All the above actions are meant
to turn the situation from adversarial to collaborative thanks to empathy. Only
after you have achieved that situation, you can really start working on bending
their reality to something that is workable for you.
Maybe start with “No”.
You may consider using a “no-oriented question” to break the ice: “I guess you can’t pay me the whole contract amount upfront, can you?” You will get a straight “No”.
Experience and studies show that,
due to overexposure to “yes-oriented questions”, people become defensive when
asked a question where they are supposed to reply yes. “No-oriented questions”
give a feeling of power and make people relax, more open and listening.
Now you may come with the label
you had prepared on beforehand: “You may see us a big, powerful Contractor with
plenty of resources.” And start the bending.
The turning point
Maybe they nod “no” with their head.
Or they may even say “yes, we are considering you for this job because you are
a strong Contractor”.
Then you go:
“But, just imagine we do this on all projects. We accept all Employers to pay us late. We therefore pre-finance all the projects we are involved in. What will that do to our stock price? How long will we stay a healthy company? We will soon become a weak, cash hungry company. The interest rates we have to pay on all those loans will rise until the point that nobody wants to lend us anymore. In this project you already have the financing. Why then do we need to refinance during the construction phase? Isn’t there another way for you to have sufficient control over us as Contractor?”
Now that (i) you have shown to
understand where they are coming from (their interests) and (ii) they empathize
with your situation, … finally …, you can bring your arguments!
Come with the arguments
You can tell them that the bank
guarantees – like the Performance Bond – are there to oblige you to perform the
contract until the end.
Usually, defensive Employers ask
high bonding amounts and lousy payment terms. They want “belt and
suspenders”. If that was not the case, you may now agree to increase the Performance
Bond amount in exchange for progressive payment terms.
With more difficult Employers,
you can use another calibrated question:
“What are you trying to achieve
by keeping the cash out of Contractor’s hands?” <pause and wait for their
reply or their prolonged silence>
“Ok, from what you already told
me, I understand keeping the money gives you control. But do you imagine the
adverse effects for the Contractor’s Project Manager?”
“She/He will have to improve her/his
net cash position by ordering material and goods as late as possible, delaying
payment to subcontractors, etc. Consuming all the Project float in an attempt
to make the cash flow reasonable. And, we all know how this story usually ends…
project delays and conflict.”
Then you bring back the
intermediate milestone payments on the table:
- Design milestones;
- Main raw materials purchase milestones;
- Equipment sub-component purchase order milestones
Patience when negotiation payment terms
In Complex Project Negotiation, it may take a long time to conclude when negotiating the payment terms. It is usually one of the first subject to start with. And, the subject remains open till one of the last. Be patient!
Pivot to other subjects when the discussion becomes too heated or people are just repeating their positions. And walk the above path several times during consecutive negotiation sessions. You can only gradually make someone move from a position to pay everything at the end to paying progressively.
Negotiating reasonable progress milestones is not easy but vital for Contractors. You should not make the payment terms a deal-breaker, confront their positions, throw the arguments before actively listening to their concerns. Unfortunately, that’s what happens most of the time, a real fight.
Instead, you should walk a path of
carefully selected steps starting with active listening (enhanced with mirrors,
labels, calibrated questions), moving through tactical empathy and then bending
All this requires patience and skills that most negotiators are not trained for. You need to practice, become self-conscious, get training and coaching. We hope the above was helpful for that and continue to support you.