Payment Terms Negotiation for Projects – practical tips

Introduction

For our world of Project Businesses (Construction & Infrastructure, Power & Renewable Energy, Oil & Gas, Water treatment, desalination etc), let’s talk about the negotiating of payment terms !

The Project Businesses are known for less repetitive business opportunities, non-standardized – heavily negotiated – contracts within a complex execution environment (EPC, Design-Build, customized equipment supply & installation etc).

Starting point for negotiating payment terms

When the time is right for negotiating the payment terms, the usual starting point is that the Employer says:

“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 do you do next?

• Go back to your management to ask if they can accept this?
• Throw all your arguments at the Employer?
• Make this a deal-breaker and leave the negotiation temporarily to build some pressure?

Hey, you shouldn’t even think about what to do next!

You should already be prepared for this situation! It is a classic negotiation subject and the remark of the Employer is a “déjà vu”.

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.

A. Prepare

A.1. What to prepare for? Questions !

You could prepare the arguments to make your case for negotiating the payment terms, couldn’t you?

Oups, we often overlook to prepare the questions we are going to ask to the Employer.

We should ask open-ended questions to let the Employer explain their interests (beyond their positions). And, not only their interests, but also their fears. We should also prepare calibrated questions that will help your counterpart to walk the path towards considering your interest and the Project’s interests. Some examples of probing questions:

• Why is paying only-at-completion important for you?
• What bad experiences did you have when you were paying progress milestones?
• What are you trying to achieve by keeping the cash out of Contractor’s hands?
• In your opinion, how should main contractors behave regarding the payment of their suppliers and subcontractors?

If you ask these questions at the right time and with the right tone, they will reveal the reasoning, the emotions and the fears of the Employer. You will be able to check the assumptions you’ve made during the preparation phase. And, you can gather as much information as possible. And, then … adapt and adjust.

When I give negotiation courses, I am always surprised that, as soon as we do a negotiation exercise, the trainees forget about the questions and go back to “argumentation mode”. You need to force yourselves to ask questions!

A.2. Context

You need to properly spell out your context and THEIR context. For this practical case:

• We consider that 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 remain cash neutral (or, even better, to obtain exposure neutral payment terms). This will enable the Contractor to finance its ongoing business activities, without running to the banks.

Typically, we have more contextual aspects. But, for this example of negotiating payment terms, I would like to keep it fairly simple.

A.3. Accusation Audit

What the h… is an Accusation Audit?

An Accusation Audit is an exercise (during the negotiation preparation phase) where you put yourself in your counterpart’s shoes. You will think of, and express, all the objections and accusations your counterpart could typically throw at you.

You will use the results of the Accusation Audit to state yourself the accusations in the midst of the negotiation.

Its like a preemptive strike! Counter-intuitive but very powerful.

What did you say when you wanted to get back to communication mode after a discussion with your boyfriend/girlfriend? “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.”
• “Money is your power! If you give it to the Contractor, you may end up entirely in their hands with still some work to be done.”

These examples are clearly linked to the fears PMs working for Employers have. Their 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.

B. Act

We could have made a longer title: ACTive listening.

B.1. “First five minutes”

Usually, people are over-prepared 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 this in one go, without dialogue, without 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 them to keep the disclosure moving with the techniques of mirroring and labeling.

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 feels that you are really listening.

Labeling is a technique of validating the other party’s emotions:

• “It seems like controlling the Contractor is important for you.”
• “It looks like you had some bad experiences with Contractors before.”
• “It sounds like we are a big, powerful Contractor with plenty of resources.”

Your 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 political debates. Remember: politicians are not trying to convince the other party. They rather prefer to keep opposing while, at the same time, convincing you vote to vote for them. In negotiation, you have to work with your counterpart.

B.2. Make a parallel when negotiating payment terms

Sometimes it is good to make a parallel. The calibrated question “How do you believe contractors should pay their suppliers and subcontractors?” has that 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 them move from instinctive and emotional (“system 1”) thinking to slower, more deliberative, and more logical (“system 2”) reflections.

The Employer may see that, not timely paying the suppliers and subcontractors, can put the Contractor AND the PROJECT in a difficult situation: liens, suppliers holding back on delivering, subcontractors not prioritizing the project etc.

B.3. 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 empathy, you can really start working on bending their reality to something workable for you.

What we do

C. Conclude

C.1. Why not 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?” … And 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” provide 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.

C.2. 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 that all Employers 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 will have to pay on all those loans will rise sky-high… until the point that nobody wants to lend us anymore. In this project you already have the financing. Why 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 that you understand where they are coming from (i.e. their interests) and (ii) they empathize with your situation, … finally … you can bring your arguments!

C.3. Come with your arguments on payment terms

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 want a lot of bank guarantees and bad payment terms. They want “belt and suspenders”. If your counterpart is more reasonable, you now may agree to increase the Performance Bond amount in exchange for better 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 that 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 the cash flow by ordering material and goods as late as possible, by delaying payments to subcontractors, etc. They will consume all the Project float in their planning to make the cash flow reasonable. And … we all know how this story goes … project delays and disputes.”

Then you bring back those intermediate milestone payments on the table:

• Design milestones;
• Materials purchase milestones;
• Equipment purchase milestones etc.

C.4. Patience when negotiation payment terms !

It may take a long time to conclude while negotiating payment terms. It’s usually one of the first subject to start with and one of the last to close. Be patient!

Pivot to other subjects when the discussions become too heated or when people are just repeating their positions. Walk the path we’ve explained several times during the negotiation sessions. You can only gradually make someone move from a position to pay everything as-late-as-possible to paying progressively.

Conclusion

Negotiating reasonable progress milestones is not easy! But it is of vital importance to Contractors. You should not make the payment terms a deal-breaker. You should not confront their positions. Don’t throw in your arguments before you have actively listened 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 their reality.

All this requires patience and skills that most negotiators are not trained for. You will need to practice, become self-conscious and get training or coaching. We hope the above was helpful and we will continue to support you.

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”.