Negotiation

Negotiation during the Project Management
As a project Manager you must be facing real challenges while tracking the status or when it comes to execution as per the plan or when you are supposed to start the next phase of the project, the previous phase not finished on time. I think the last scenario is the one usually it happens in case of Finish to Start dependency. In any of these situations, one common constraint or the challenge you face in the real world is that you can’t push the committed delivery date or reduction in scope. How to overcome these situations? Negotiation plays a vital role to overcome the challenge.
When I was Project Manager for one of the projects a few years back, the typical challenge came in front of me with respect to the delivery of product. I was heading the Testing function and we all know that this is the last phase of the life cycle before deployment or handing over to the customer. The product was from the IT industry and typical water fall life cycle was used. The delivery date was committed to the customer on 31st Dec (Internal date was 27th Dec with 3 days of reserve) assuming that there is no stopper defect detected during the last minute. We were supposed to get the build on 30th Nov and the testing was supposed to start on 1st Dec. But on 20th Nov we came to know that there is a delay of 13 days from the development team. The figure 13 days came after the re-estimation by the respective project manager. When I heard this news, the first thing it came to my mind was, I am going to miss the New Year party. From my side to deliver the product after testing to customer even after consuming that 3 days reserve, I will not be able to deliver on 31st Dec. At this point of time option left to me was to cut down the testing which leads to compromise on quality and indirectly de-scope which is not a good decision or to run the testing with fast tracking which was not possible after analysing the critical path or to increase the resource which is crashing. Here the best option was to increase the resource even though there will be increase in the cost and reduction in the profit margin. I reworked on the resource planning so as to meet the 31st Dec milestone. This demanded about 3 resources additional. When I submitted the data to my supervisor the answer was refusal and demanding to work on weekends and over time with the available resources. I was against this, as this will decrease the quality of the deliverables and de-motivate the team because there is no fault from their side. Now the negotiation started with my supervisor with data, how compromising in the quality of testing results in the increase of rework cost and also the reputation of the organisation. There was a long discussion and analysis between me and my supervisor by playing with triple constraint and cost of quality. Ultimately my proposal was honoured and got the approval of 3 resources with desired skill.
How? Negotiate with right data and showing the win-win situation considering the short term and long term business perspective. As a Project Manager learn to negotiate from the project interest point of view and of course with right data and right assumption.

Point of Total Assumption (PTA):

Analytical questions
from Procurement Management knowledge area
Will you be surprised to see questions related to
calculations from the Procurement Management knowledge area in PMP exams? Don’t
worry; they are all simple use simple logic. To make it understandable here are
some sample questions with details.


Q1: A cost-plus-percentage-cost (CPPC) contract
has an estimated cost of $120,000 with an agreed profit of 10% of the costs.
The actual cost of the project is $130,000. What is the total reimbursement to
the seller?






$143,000
$142,000
$140,000
$132,000





Q2: A cost-plus-incentive-fee (CPIF) contract
has an estimated cost of $150,000 with a predetermined fee of $15,000 and a
share ratio of 80/20. The actual cost of the project is $130,000. How much profit
does the seller make?






$31,000
$19,000
$15,000
none of the above





Q3: A
fixed-price-plus-incentive-fee (FPI) contract has a target cost of $130,000,
a target profit of $15,000, a target price of $145,000, a ceiling price of
$160,000, and a share ratio of 80/20. The actual cost of the project was
$150,000. How much profit does the seller make?






$10,000
$15,000
$0
$5,000



Q4: A fixed-price-plus-incentive-fee (FPI) contract has a
target cost of $150,000, a target profit of $30,000, a target price of $180,000,
a ceiling price of $200,000, and a share ratio of 60/40. The actual cost of the
project was $210,000. Calculate the final fee and the final price.
Q5: A fixed-price-plus-incentive-fee (FPI) contract has a
target cost of $9,000,000, a target profit of $850,000, a ceiling price of $12,500,000,
and a share ratio of 70/30. The actual cost of the project was $8,000,000. Calculate
the final fee and the final price.
Q6: A Cost-plus-incentive-fee (CPIF) contract has a estimated
cost of $210,000, a fee of $25,000, and
a share ratio of 80/20. The actual cost of the project was $200,000. Calculate
the final fee and the final price.


Answers
Q1: Estimated
Cost= $120,000
Actual
Cost= $130,000
Agreed
Profit=10%
Reimbursement
amount= Actual cost+% profit of actual cost=$130,000+(10% of $130,000)= $143,000
Q2: Estimated Cost= $150,000
Predetermined
fee=$15,000
Share
Ratio=80/20( 80 is for the Buyer and 20 is for the seller)
Actual
Cost= $130,000
Saving=Estimated
Cost-Actual cost=$20,000
Profit to seller is Predetermined fee + (Share ratio
of seller*Savings) = $15,000+(20%*$20,000)= $19,000
Q3: Target
Cost=$130,000
Target
Fee=$15,000
Target
Price=$145,000
Ceiling
Price=$160,000
Share
Ratio=80/20( 80 is for the Buyer and 20 is for the seller)
Actual
Cost=$150,000
Here,
the actual cost is less than the ceiling price. So to calculate the profit,
consider the actual cost.
Profit=(Actual
cost-Target Price)*Seller Ratio=($150,000-$145,000)*20%= $10,000
Q4: Target
Cost= $150,000
Target
Fee=$30,000
Target
Price=$180,000
Ceiling
Price=$200,000
Share
Ratio=60/40(60 is for the Buyer and 40 is for the seller)
Actual
Cost=$210,000
Here
Actual cost is more than the target price and also higher than the ceiling
price. So the seller is in
trouble. Let’s see how much he gets?
Final
Fee=((Target cost-Actual Cost)*Seller ratio)+Target
fee=(($150,000-$210,000)*40%+$30,000=(-$60,000*40%)+$30,000= -$24,000+$30,000=$6,000
Final
Price=Actual cost+Final Fee=$210,000+$6,000=$216,000. But this is more than the
ceiling price. So the final price is $200,000
J
Q5: Target
Cost= $9,000,000
Target
Fee=$850,000
Target
Price=$9,850,000
Ceiling
Price=$12,500,000
Share
Ratio=70/30(70 is for the Buyer and 30 is for the seller)
Actual
Cost=$8,000,000
Here
Actual cost is less than the target price and also lesser than the ceiling
price. Let’s see how much seller
gets?
Final
Fee=((Target cost-Actual Cost)*Seller ratio)+Target fee=(($9,000,000- $8,000,000)*30%+$850,000=($1,000,000*30%)+$850,000=
$300,000+$850,000=$1,150,000
Final
Price=Actual cost+Final Fee=$8,000,000+$1,150,000=$9,150,000.
Q6: Estimated
Cost= $210,000
Predetermined
fee=$25,000
Share
Ratio=80/20(80 is for the Buyer and 20 is for the seller)
Actual
Cost= $200,000
Saving=Estimated
Cost-Actual cost = $10,000
Final
Fee= (Saving*Seller Ratio)+Predetermined fee=($10,000*20%)+$25,000=$2,000+$25,000=
$27,000
Final Price=Actual cost+Final
Fee=$200,000+$27,000=$227,000
Point of Total Assumption (PTA):
This applies to only Fixed price incentive fee contracts and refers
to the amount above which the seller bears all the loss of a cost overrun. This
happens due to mismanagement. Seller will sometimes monitor their actual cost
against the PTA to make sure they are still receiving a profit for completing the
project.
Formula is PTA=((Ceiling Price-Target Price)/Buyer’s share ratio))+
Target Cost

Project Management Plan vs Project Documents

The following table provides the glimpse of difference
between Project Management Plan and Project Documents.

This is based on PMBoK 5th edition.

PMP Formulas

Formulas to be known
for the PMP examinations
Here is the table having important formulas to be known for
the examination

If you observe in the above table, EAC is calculated in 4
different ways depending on the situation. Here is the explanation.
1. EAC=BAC/CPI
: This is used when there is no variance from the BAC occurred or you are going
to carry out the project at the same rate of money spending.
2. EAC=AC+ETC:
This is used when the original estimate is faulty or damaged.
3. EAC=AC+(BAC-EV):
This is basically actual cost plus the remaining worth of work to be
accomplished or the situation is of atypical in nature.
4. EAC=AC+(BAC-EV)/SPI*CPI:
This is used when the situation is typical with cost performance is very bad
and the completion date to be hit.