Mutual Gains Negotiations
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Introduction to Mutual Gains Negotiations

An Introduction to Mutual Gains Negotiations and
the PennDOT Staff Hour Estimating Guide

I. BACKGROUND

  1. The majority of PennDOT’s Engineering Agreements for Professional Services are negotiated agreements. A cost-plus-fixed-fee contract, as defined by the Federal Acquisition Regulations (FAR), is a cost-reimbursement contract that provides for payment to the contractor of a negotiated fee that is fixed at the inception of the contract. The fixed fee does not vary with actual cost, but may be adjusted as a result of changes in the work to be performed under the contract. The fixed fee amount is the amount that is negotiated based on the level of effort mutually agreed to by both parties.
  2. The primary basis for negotiations of a Cost-Plus-Fixed-Fee contract is Scope Clarification and reasonable level of effort for the pre-determined fixed fee reimbursement. The negotiation, therefore, between PennDOT and the Consultant is to establish a fair and reasonable total project cost. This total cost is derived from scope clarification, establishment of mutual expectations regarding deliverables, schedule, the experience and type of staff to be assigned to the project, the hours by task for those staff classifications, and the fee or profit associated with the work.
  3. PennDOT is undergoing a change in the way consultant services are developed and negotiated. The new methodology is called Mutual Gains Negotiations. Like its name implies, this approach increases the chances of arriving at a fair and reasonable price for professional services for both the consultant and the Department.
  4. Mutual Gains Negotiations recognizes that both parties have interests that must be satisfied if there is to be a successful outcome; therefore, both parties should work collectively to realize those interests. However, it also emphasizes negotiating hard for legitimate interests and exercising alternatives when those interests cannot be achieved; thus everyone will not always “win”.

II. MUTUAL GAINS NEGOTIATIONS OVERVIEW

The negotiations process is serious business. On the one hand, it determines a consultant’s business success, which affects the livelihood of individuals. On the other hand, PennDOT has a legal and fiduciary obligation to safeguard the taxpayers’ hard-earned money. They must ensure that all expenditures result in a reasonable value for the public. Negotiations, therefore, should not be treated as a game where one side wins as much as possible without regard to the interests of the other side.

In order for Mutual Gains Negotiations to be successful, both parties must work together to ensure they have mutual expectations of the scope of services, project complexity, and deliverables before staff hours and a price proposal are generated. To assist with this effort, PennDOT has developed standard procedures for mandatory Scope Clarification Meetings as the first component of this new process.

The second component of the negotiations process is the development of a Staff Hour Estimating Guide. The Guide will establish a range of effort for engineering and environmental tasks. PennDOT and the consultant community are, at this point, focusing their efforts on developing a Staff Hour Estimating Guide for WBS codes for Preliminary Engineering. We will continue to refine the Staff Hour Estimating Guide for all WBS codes.

The Staff Hour Estimating Guide is intended to provide uniform hour estimates for professional services contracts statewide. The initial focus is Preliminary Engineering and Environmental Clearance Tasks. PennDOT and Consultant Project Managers will use the detailed descriptions of the work tasks covered in the Work Breakdown Structure together with the range of staff hours required to negotiate every project task that is covered in the Staff Hour Estimating Guide. In addition, the process will focus upon full and consistent project scoping allowing contracts to be negotiated in a uniform manner throughout the Commonwealth.

Simply stated, the Guide provides a list of WBS Tasks, the unit of measure, the staff hour range, and the basis for the staff hour range. The unit of measure may be different for each task. Examples include the number of sheets for roadway plans, the number of noise receptors, acres of wetland, etc. The “basis for the staff hour range” provides additional details as to what is included in the task to meet the range of hours.

  1. Five Elements of Mutual Gains – There are five elements to the mutual gains approach to negotiations: interests, options, criteria, alternatives and relationships. Figure 1, Mutual Gains, illustrates the five elements of mutual gain. Each is discussed below and useful procedures for the negotiator are recommended. Figure 1
    1. Interests – Know What Is Important. There is a difference between an “interest” and a “position”. Examples of positions are salary caps or a minimum number of staff hours. An interest is the reason for a position. Interests are not always obvious, so careful analysis is necessary in the pre-negotiation stage. For example, the interests of a consulting firm may be exposure to a new client and maintenance of staff levels as well as profitability. PennDOT’s interests include: quality of work and schedule, as well as budget. Know your interests and negotiate hard for them. Understand that positions are simply means to an end and that there may be many positions that can satisfy an interest.

      Each Project Manager (PM) should list the key interests for the project. Some must be satisfied to reach an agreement; others may be desirable, but not essential. Be honest with yourself, and make sure only significant interests are listed. Once your interests are identified, place yourself in the position of the other side and list their likely interests using the same process. Then recognize that other parties who may not be directly involved in the negotiations may have legitimate interests in the outcome. These parties should be consulted prior to negotiations to determine their interests. Identify your mutual interests and work collectively with your business partner to understand those mutual interests.
    2. Options – Be Creative. This process begins once you understand your own interests and have anticipated the other side’s interests. Or, more importantly, where those interests are likely to coincide and where they are likely to conflict. Where there is likely to be conflict, brainstorm options with your team to present in the negotiations. Many bottom-line dollar issues can be resolved by preparing creative options for issues such as the scope of services, deliverables and schedule. Have options available before negotiations begin.

      During negotiations, be forthcoming with your interests and try to get the other side to do likewise. Do not get hung up on positions. Seek to understand the interests behind positions and convince the other side that there may be more than one way to satisfy its interests. Try collective brainstorming, with both sides working to satisfy both sets of interests. This process is the essence of mutual gains negotiations.

      Be creative. For example, if there is likely to be an impasse on staff hours, will changes in the scope or schedule overcome the problem?
    3. Criteria – Be Prepared. Both sides should prepare properly for negotiations. The more thorough the preparation, the more quickly an agreement can be reached and work can begin. A good rule of thumb is to spend at least as much as much time preparing for negotiations as you expect to spend during actual negotiations.

      There is a wealth of legitimate criteria available to help overcome roadblocks in negotiations. PennDOT has extensive data on salary rates, overhead rates, direct expenses and staff hour estimating. It is in the interest of both parties to review the available data carefully and to use it in negotiations as a beginning point for agreement. Remember that other criteria may be useful also such as a firm’s own experience or industry averages.

      Both PMs should learn as much as possible about the other side prior to beginning negotiations. The PennDOT PM should read submitted material carefully, visit the firm’s website, obtain and read its brochures and newsletters, and talk to colleagues who have worked with the firm and its nominated PM. The consultant PM should learn about the District, the office involved and the PennDOT PM assigned to the project. He/She should become familiar with the Consultant Agreement Section (CAS) staff and learn the negotiating philosophy of the District he/she will be dealing with. The consultant PM must know PennDOT’s policies about any issues likely to come up in negotiations.
    4. Alternatives – Protect Interests. Each side should have a good idea of what its Best Alternative to a Negotiated Agreement (BATNA) is. A strong BATNA is real power in negotiations. For example, assume you are buying a car. Once you have done thorough research, know the worth of the car you want and have a price from another dealer, you have all the power in negotiations. If you cannot reach a deal, you have a good alternative. Your BATNA will determine your walk-away position. Neither consulting firms nor PennDOT should be forced into poor business deals as a result of negotiations. While the mutual gains approach to negotiations does not advocate that either party walk away from negotiations, that option should be carefully evaluated and exercised when necessary. Otherwise, one party may hold unfair power over the other. Because this element of mutual gains negotiations is available, there must be no stigma or damage to the relationship attached if a firm chooses to exercise its BATNA.

      It is not the intent of mutual gains negotiations to encourage terminated negotiations; rather it is to ensure that both parties reach well-thought-out business decisions. While everyone wants negotiations to be successful, there may come a point where an agreement cannot be achieved. Know that point before beginning negotiations.

      Evaluate all consequences of not reaching an agreement. For PennDOT, it could mean project delays because it will be necessary to go through the negotiating process with the second-ranked firm. Anticipate this alternative by learning about the number-two ranked firm. It is, however, inappropriate to have any discussions with the second-ranked firm until negotiations are officially terminated with the first-ranked firm.

      For the consultant, the loss of business should be evaluated against the current backlog of work and other potential contracts. Any potential ill will that may be generated with PennDOT should be factored into the consideration.

      A thorough analysis of your BATNA allows you to determine your walk-away position. What interests and bottom-line price must be achieved in the negotiations for an agreement? Deliberately formulate an answer to this question before negotiations. Making a walk-away decision in the heat of negotiations is usually a mistake.
    5. Relationships – Work Together. Remember that negotiations are only the beginning of an important relationship. Once a deal is struck and a project completed successfully, future projects may result for the consulting firm involved. Long-term relationships are equally important to both consulting firms and to PennDOT; it is important that negotiations do not damage those relationships. It requires professional skill to negotiate hard for your interests while maintaining positive relationships. It requires excellent communications and going the extra mile to view the issues from the perspective of the other side.

      Remember, each side enters negotiations with certain preconceptions about the other side. Some are accurate and some may be inaccurate. Carefully evaluate your own preconceptions, and be willing to alter them if they prove to be false. Understand that the other side has preconceptions about you, and they may or may not be correct.

      Many use negotiation techniques that are really nothing but game-playing. Such techniques, in the long run, will damage relationships. Remember, “winning” does not require that the other side “lose.” Be open and honest and avoid playing games. The Project Manager (PM) must approach negotiations with the attitude that both sides have a right to fulfill their interests. Work as hard to satisfy the other side’s interests as you do to satisfy your own.

      Ultimately a relationship of trust and respect is established by being clear and honest with the other party, not by giving in. You should not sacrifice an important interest for the sake of maintaining a relationship. Being cooperative does not mean giving up your interests or settling for an agreement that is not as good as your BATNA.
  2. Know What Is Negotiable – The first step in contract preparations is to clearly understand what is “on the table”, or negotiable. In this section, each negotiable issue is described in greater detail (see Figure 2). Figure 2
    1. Scope of Services. Both parties must agree to the scope. Even though a standard scope of services is used, the provisions of that scope are negotiable. The consultant may have proposed an innovative approach that should be considered, or PennDOT may have some special concerns. Both PMs must understand the scope and be prepared to clarify it as necessary in negotiations. A field visit with key PennDOT and consultant staff prior to beginning negotiations will prove helpful in reaching a common understanding of project issues and requirements.
    2. Staff Hours. The PennDOT PM should prepare an independent staff hour estimate of the project prior to negotiations for use in evaluating the consultant’s estimate of hours. The PennDOT Staff Hour Estimating Guide (Guide) should be the starting point for both PennDOT and the consultant to develop a particular project’s estimate of hours. A good secondary check on hour estimates may be to compare the Guide’s estimate with those of similar projects – taking into account differences in complexity, location, scope, etc. The objective of mutual gains negotiations is to avoid game-playing. Deliberately estimating high or low, whether it is PennDOT or the consultant, does not achieve this important goal of the mutual gains principles.
    3. Distribution of Staff Hours. Not only are the total staff hours important, so is the distribution of staff hours. It is necessary to have sufficient hours of key staff in the project, and the requirements identified during Scope Clarification may or may not point out the need for more experienced staff to work above the range of values found in the Guide. Conversely, the Scope Clarification may identify a reduction in the anticipated level of effort of more experienced staff. Another point to remember is that while very experienced staff may receive higher wages, they should be more productive and, consequently, work fewer hours.
    4. Staffing. Addition to or elimination of selected staff members from the nominated team is a negotiable issue. However, the nominated team plays a large part in selection. Location of staff may also be an issue and is negotiable.
    5. Cost of Services and Rates. Both PMs should review Publication 93 and understand the parameters of negotiating salaries, salary escalation, and direct expenses.
    6. Subcontract Costs. Subcontracts can be a significant cost factor in a contract. The costs of subconsultant services and associated rates are as negotiable for subconsultants as they are for the prime consultant. Subconsultant costs must be carefully prepared and reviewed prior to negotiations.
    7. Schedule. The schedule may have a direct impact on the price of the project. Both PMs should review the schedule carefully and be prepared to offer refinements, as appropriate.
    8. Method of Compensation. In evaluating what is negotiable, the project compensation method, as advertised, cannot be altered. Care should be taken not to alter contract elements to the extent that the selection process may be questioned. The method of compensation may be pre-determined during the Statement of Interest. There are four methods of reimbursement commonly used by PennDOT, listed in Publication 93.
        1. Lump sum
        2. Cost plus fixed fee
        3. Cost plus net fee
        4. Specific rates of compensation
        5. Cost per unit of work

III. USING MUTUAL GAINS

Once a negotiation strategy has been determined and preparations have been made, the negotiation process itself can begin. Figure 3, Using Mutual Gains, offers some suggestions for conducting successful negotiations.Figure 3

  1. Select Negotiators. The negotiators for both sides should be introduced and their relative roles made clear to all. Negotiators should have the authority from their organization to make decisions. Going back to the boss to get authority for a decision only delays the process, and it may be seen as a delaying tactic. The selected negotiators should participate throughout the process. PennDOT negotiators sometimes tend to compartmentalize negotiations; that is, one group negotiates rates, one staff hours, and so on. Some districts operate in teams and rely heavily on the Consultant Agreement Section staff for information on contractual issues. It may be appropriate to bring in specialists at key points in the process. Good decisions are best made, however, when one person leads the entire process and has authority to revisit previously negotiated elements, if necessary, before a final agreement is reached.
  2. Start Right. One of the first steps during actual negotiations is to agree on how the negotiations are going to be conducted and to establish a deadline for an agreement. Take time at the beginning to get to know the individuals on the other side and to establish a degree of familiarity and trust. Work to foster cooperation and rapport. Do not try to use negotiation strategies to give yourself some sort of advantage. This behavior will be viewed as game-playing and unprofessional. If the other side attempts such tactics, clearly explain that you will not negotiate under such circumstances.
  3. Communicate. Communication is essential to successful negotiations. A key communication skill in negotiating is listening. Earnestly try to understand the other side’s viewpoint. Criticizing the other side is a sure way to shut down communications. Do not be secretive during negotiations. Be willing to share appropriate information and useful data. Good communication does not mean agreeing with the other side. Mean what you say, and don’t equivocate with bad news. Be direct and honest. Always maintain a professional approach. Negotiations can be stressful, but you should minimize your emotional reactions and be understanding of emotional reactions from others. Stay calm, and separate people issues from substantive issues.
  4. Apply a Mutual Gains Strategy. Become skilled in the use of mutual-gains techniques previously discussed. Throughout the process, both parties should be open to reasoned arguments. A “take it or leave it” position from the outset is not negotiations. Both parties should negotiate in good faith. The end result of the mutual gains negotiating technique is to obtain a fair price for both PennDOT and the consultant. Throughout negotiations, therefore, keep in mind that agreement on a bottom line price is the objective, not the mechanics of reaching it.
  5. Document Negotiations. There will be many agreements and understandings reached during the process of negotiations. When appropriate, the contract or scope of services should be revised to reflect these agreements. However, there will also be many minor issues discussed that may not warrant revisions in the contract but are important to document. The comments column in the standard staff hour estimating forms can be used to document understandings reached for levels-of-effort issues. Other understandings can be documented with negotiations reports, letters or memoranda to file. The CAS staff should be consulted if the appropriate method of documentation is not clear.

    Regardless of the method, documentation is useful. As work on a project proceeds, issues may arise that were discussed during contract negotiations, or work may be added or deleted. Good documentation of the negotiations can avoid confusion during the project. And, when organizations change staff or a new Project Manager takes over before a project is completed, the “gentleman’s agreements” reached in contract negotiations may be lost unless they have been properly documented.

IV. NEGOTIATIONS PROCESS OUTLINE

  1. Initial Submittal by the Consultant. – The top-ranked consultant will receive instructions for the submittal of comments on the scope of services, a detailed staff hour estimate, and a fee proposal (see Figure 4 below). Figure 4

    Both the Department and consultant should ensure that the Scope of Services is clearly understood – before preparing the staff hour estimate. The estimate should include any/all changes to the initial scope identified during Scope Clarification.

    PennDOT and the consultant, utilizing the Guide, will develop the hour estimates simultaneously. Care should be taken by both parties to provide clear and concise estimates, with detailed explanations and sufficient back-up to facilitate negotiations.

    Once PennDOT and the consultant have completed their estimates of hours, a negotiations meeting can be established where each party shares their estimates with their business partner and negotiates for the project’s mutual interests.
  2. Scope Clarification Meetings. – Mutual Gains Negotiations places great emphasis upon both parties meeting and agreeing to the project complexity, scope, and mutual expectations of deliverables and plan presentation. PennDOT has developed a process that outlines the procedures to be followed to ensure that Scope Clarification meetings become a routine part of all contract negotiations.

    The first step in contract preparations is to clearly understand the level of complexity and the expectations with regard to plan preparation and deliverables. It is understood that although a standard scope of services may be outlined through the WBS codes, some aspect of the scope may be negotiable. Both Project Managers must understand the scope and be prepared to clarify it as necessary in negotiations. A scoping meeting with all necessary technical experts will be held and all parties will mutually agree to the scope. In some cases, a field visit with key PennDOT and consultant staff prior to beginning negotiations may prove beneficial for complex projects.

    Only after the scope is agreed to, the hours estimate will be prepared using the new Guide. For 80 percent of the projects, the hours for each task should fall within the accepted range as per the Guide and the overall time for contract execution should be significantly decreased.
  3. Negotiation of Scope of Services. – The final negotiated scope of services should be tailored to ensure a mutual understanding of the project. During this negotiation process each task and sub-task should be discussed to determine how it is to be accomplished, the nature of the deliverable, and its format. If the consultant’s understanding is not in accord with that of the Department, discussion should be conducted to arrive at a mutual understanding of the services to be accomplished, the method by which it will be accomplished, and the nature of the final product. Either party to the negotiations should feel free to request written confirmation in the form of modification of the scope to reflect agreed-to terms.

    The scope of services is one of the major factors affecting the fee for consultant services since it defines the nature and volume of work to be performed. A well written scope of services established the tasks to be performed, materials to be delivered, meetings to be attended, schedule to be met, equipment that will be used, standards that will be followed, and responsibilities of both the consultant and the Department.

    The detail established in the scope of services sets the stage for subsequent negotiations. A detailed and thorough scope of services leads to an understanding of the services needed to complete the assigned project as well as an understanding of the sequence of tasks to be accomplished. This allows for informed development of the staff-hour estimates and project fee.
  4. Negotiation of Work Effort. – The object of this process is to ensure that the proposed staff hours are reasonable for the specific project. It is also critical to determine if a reasonable distribution of work among various levels of staff is proposed to ensure the most economical staffing commensurate with the complexity of the project.

Upon receipt by the Department of Consultant’s staff hour estimate, the Department’s estimate shall be provided to the consultant. The Consultant’s staff hour estimate should be compared with the Department’s and the differences evaluated. Discussions will be conducted with the Consultant to resolve differences between the Department and consultant staff hour estimates. As with the entire negotiations process, a record of the key points discussed and the resulting resolution should be kept.

The basis for an accurate staff hour estimate is a well-developed scope of services. With such a basis, a series of tasks and sub-tasks may be readily identified as staffing elements. Those elements should be used for both the Department and consultant estimates for ease of reconciliation.

The published typical ranges of staff hour effort should be treated as only a beginning point. Each project must be evaluated separately to determine a fair estimate of required staff hours. The basis for the estimate should be the specific requirements for the project under consideration together with a history of actual staff requirements for past projects with similar requirements. Where specific requirements cannot be identified during the negotiation phase, a provisional estimate will be made to serve as the basis of the contract.

Following are the major items relating to work effort requiring negotiation:

    1. Scope Clarification Meeting Notes/Understanding
    2. Staff hours, overtime, survey crew days, etc.
    3. Levels of personnel required
    4. Distribution of work among levels of personnel
    5. Subconsultants (Quality of work effort, personnel)
    6. Delineation of work to be provided by consultant, the Department, or others

V. SUMMARY

PennDOT and the consultant community (through ACEC/PA) have entered into a partnership to utilize Mutual Gains Negotiations for negotiating consultant agreements.

Mutual Gains Negotiations is a collaborative approach to negotiating contracts that focus on consensus-based decision making. A mutual understanding of project scope and each others interests is critical to success.

Through this partnership, PennDOT and the consultant community have developed a Staff Hour Estimating Guide (Guide) and will continue to refine the Guide and the negotiations process as we learn from each other.