What Suppliers Need to Know About Government Contract Negotiations

Did you know?

The Federal Acquisition Regulation (FAR) states that any contract awarded using a method other than sealed bidding procedures is considered a negotiated contract.

 That means that, if you submit even a single proposal to a federal, state or even local government entity, you need to be prepared to engage in a bargaining exchange. While many contracts are awarded based on the price you offer in your original RFP response – and Simplified Acquisitions rarely require sit-down, face-to-face negotiations – public sector agencies will frequently initiate contract negotiation proceedings in either…  

• Competitive environments where a short list of candidates is initially selected based on past performance records and other “tradeoff” advantages detailed in the written proposal. The agencies then reconvene with each vendor within this “competitive range” to negotiate pricing terms based on the scope of work and identify the lowest cost/best value option.
• Sole source environments where there is only one approved vendor (i.e. AbilityOne designated contracts at the Federal and DoD levels) or one qualified vendor (i.e. only one company with the equipment or expertise to fully satisfy project requirements). Since there is no price competition in these scenarios, government agencies rely on negotiations to meet best price/best value standards.  

That being said, there has also been an increase in negotiations for IT solicitations at the state level. A NASCIO-NASPO joint task force has spent the last few years considering ways in which state agencies can introduce and/or improve negotiation processes for contract awards that would have otherwise been reliant solely on suppliers’ initially proposed pricing terms. They have specifically focused on IT procurements that are reliant on agile project structures versus the traditional “waterfall” project implementation framework. However, such actions to evolve negotiation practices are not new.  

Government agencies are constantly seeking ways to improve their return on investment (ROI), which means they strive to extract the most value from their vendors, starting with contract negotiations when warranted. If you want to ensure a mutually beneficial outcome the next time you’re invited to negotiate a contract with a government agency, take heed of this advice:  

• Know your bottom line before you sit down at the table. There will be times when the government’s proposed contract pricing terms just don’t sync with your own. That’s why you negotiate. However, it doesn’t benefit you – or the customer – if you can’t at least break even from the negotiated project. Though you may be willing to absorb some costs to get your foot in the door and build a performance record, agreeing to terms below your bottom line could lead to financial strain and resource limitations that will ultimately hurt your project performance. Be comfortable walking away if you are set to lose money on this opportunity.
• Set your anchor. You know your bottom line, but you also need to know your target price. This is akin to buying a house or even a car. You know that the buyer is going to attempt to drive down the price, so establish a reasonable starting point – your anchor – for backwards negotiations. You’ll be more likely to hit the target price, and target profit margin, by doing so.
• Let the government agency representatives talk first (if possible). See what's on the mind of the customer and/or contracting officer before you dive into your point of view. Let them share their proposed number first. By doing so, you’ll understand if project has been descoped – or requirements added – since the initial solicitation. If non-pricing terms have changed, such as quantities, deadlines, liability conditions, etc., then your planned anchor price may have to change to reflect the new requirements. Plus, if they offer their proposed pricing structure first, then you can avoid lowballing your anchor. If you were planning to start at $1M and they are comfortable starting at $1.25M, then obviously it benefits you to make some fast adjustments.     

Final tip: Be flexible. Don’t get upset or offended if you feel that the procurement official, or the customer, is trying to drive a hard bargain. The goal of negotiations is to achieve mutually acceptable contract terms and equally valuable outcomes. For you, that may be profitability on this project; for the government, that may be achieving project requirements for the lowest cost possible. So, ask for a break if you feel that you’re hitting a wall (before you lose your cool and the opportunity).  

Once you take a step back from the table, it will be easier to re-evaluate the pros and cons of the current contract terms and weigh your options with a clear head. Unfortunately, that may result in you stepping away from this particular contract opportunity completely. However, passing on this contract could open up the door – and free your resources – for a better opportunity in the near future; an opportunity whose contract terms align with both your goals and the government’s.