No free lunch in negotiation of project contracts

No free lunch in negotiation

In economics, people are familiar with the “no free lunch” theorem. It means that, whatever goods and services are provided, they must be paid for by someone. During contract negotiation, I often faced the situation that parties asked additional concessions without any reason or argument, just to close the deal. This came mostly from Employers because, in the current buyers’ market, they have most power. But the same could also come from Contractors when they have a strong position. It is important to understand that, asking a concession from your counterpart without giving anything in return, is detrimental to the entire negotiation process. As you will see from this post, there should be no free lunch in negotiation either.

Easy analogy of no free lunch in negotiation

To make this perfectly clear, let me start with a non-controversial analogy based on holiday experiences:

A couple of years ago, on transatlantic flights, each passenger could take a luggage of 32 kg. Airline operators quietly reduced it to 23 kg at some point of time. Now, on the latest flight I am taking, you have to pay for every luggage you take.

Of course, these additional payments could make passengers upset. But, one can also look at it from a more practical point of view. Over the years, airport taxes have increased substantially. Airline operators, under heavy pressure (e.g. by low cost companies), have lowered their part of the ticket price. The biggest driver for the airliner’s cost is the weight the plane is carrying. It determines the amount of fuel required which represents the biggest part of the variable costs.

Before, ticket prices obviously included the cost impact of “free luggage”. And there was no incentive for passengers to take less kilos. I could take a big amount of books on holidays and might not read them all. Now that luggage has to be paid for, one starts thinking about it: shall I take a reasonable amount of books, maybe rather paperbacks? Or, shall I buy some books or magazines at my destination instead?

Both passengers and airline operators optimize ticket prices when the impact of the luggage weight on the costs is understood.

Risks of asking unilateral concessions

Let’s face it, there is no free lunch in negotiation either. Here are some consequences when asking unilateral or unjustified concessions at the end of a negotiation:

  • Everbody will quickly know that in your company, country or culture, it is a habit to give a last-minute negotiation discount. So people calculate it in form the start. My son never wants to wake up the first time I call him. So, I do it 10 minutes earlier and let him stay in bed a bit more.
  • In case you really push your counterpart a bit further to give that final concession without anything in return… he will be in for revenge. Such concession can be a discount, but not only. It can also be a painful carve-out on the limits of liability, an additional year of warranty, worse payment conditions etc. Revenge is a meal best served cold. Not a good ending of a negotiation. No win-win mood. And, we all know what that does for long term relationships.

What to do instead ?

Don’t ask for unilateral concessions… and also do not give any. For many of us, it will be a change of mentality. Of course, you have to continue “defending” the interests of the company you are representing. But look beyond your own interests. Actively listen to the interests of your counterpart. The outcome of a negotiation can only be optimized by finding solutions that generate more value for one party (or both) than they cost for the parties. Allocate the cost correctly and share the upsides.

When someone asks you a unilateral concessions, don’t panic. Think what you still want from her/him and ask it in return. As a reminder, the right way to give a concession is as follows: “if you can give X to us, we are willing to provide Y”. Start with what you expect from your counterpart as a condition for your concession. When you say “I will give you Y if you give me X”, your counterpart will have stopped listening after you say “I will give you Y” and “forget” the concession that is required from their own side.

Conclusion

Very simple: there is no free lunch in negotiation! No one-sided concessions should be asked nor given. Well-chosen bi-lateral concessions generate value and lead to project optimization.

From their respective going-in positions, parties should work hard to understand the interests of the other party. Concessions should maximize value for both parties. This optimization process will automatically stop when the parties can no longer find sufficient value to be exchanged, when concessions can’t be matched anymore.

Negotiation is a regular subject on this blog. Click here to see other negotiation topics.

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