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How to Ethically Negotiate Contract Price

Written by: Brett Lyndon – Pro Leaders Academy

As a facilitator teaching Government employees procurement and contract management, I am regularly questioned about Government’s ability to negotiate the price of a contract. In response, I decided to address the issue in this forum so others can gain a deeper insight into this area.

Before conducting your procurement activity, you will typically be given a fixed budget to work with to secure the required goods or services on behalf of the Government.  But what happens when all tenders received in response to your Request for Tender/Offer (RFT/RFO) or your preferred provider’s tender price exceed your budget?  What do you do then?

You have three options available to you in this situation.

  1. De-scope, that is reduce the amount of goods or services being requested to fit within your allocated budget.
  2. Request additional funds; or
  3. Negotiate on price.

Ethical behaviour principles would guide us to not use our superior bargaining power to attempt to gain an unfair market advantage when negotiating with Small to Medium Enterprises (SMEs).  Some people believe that it is perhaps un-principled to negotiate price or even that Government is not allowed to negotiate the price of a contract.

We could, however, use ethics to argue the other side of the matter and ask the following questions. Is it right to blindly accept the first price presented by the Tenderer when we know the price is most likely inflated to begin with? To put it another way, do you pay the original asking or sticker price for a car or house you are purchasing? Why then do so may people insist on not negotiating price in the best interests of the Government and Public?

My searches of the Public Governance, Performance and Accountability (PGPA) Act, PGPA Rule and Commonwealth Procurement Rules (CPRs) found no reference to not negotiating on the price of a contract. In fact, the Department of Finance ‘Buy Right’ site addresses negotiation in the $80,000 to $200,000 and $200,000 to $1,000,000 categories and states the following:

  • You may not have any significant issues for clarification. Usually minor issues can be dealt with through email.
  • Your negotiation is generally about finalising the contract details. There may be opportunity to refine some details such as:
    • price, rates or fees
    • schedule and delivery
    • performance including key performance indicators (KPIs)
    • service levels
    • security requirements
    • ICT integration
  • Negotiations may not necessarily be about getting a cheaper price. The preferred supplier has made an offer in their tender that you have judged as providing value for money. If you push the supplier too low you may not get a satisfactory outcome or achieve the anticipated value for money. However you may be able to find economies through refining requirements and processes.

Ensure that the effort expended in your negotiations is commensurate with the potential benefits.

So, there is clearly no governmental policy to say price cannot be negotiated. That does not mean that your department or business unit does not have an official policy of not negotiating on contract price. If you are unsure, do your research and ask questions. If people tell you no you cannot negotiate on price, ask where it is in writing just to be sure.

Now that we have that matter sorted out, how do we go about this in a way that doesn’t present us in a way that could be perceived as trying to use our superior bargaining position to bully the vendor into reducing their prices? Simply we need to be very careful and approach the matter tactfully.

Find out how to do this in next month’s edition.

 

NOTE: The content of this article is intended to provide a general guide to the subject matter, and specialist advice should be sought about your specific circumstances. The content must not be relied upon as legal, technical, financial or other professional advice.

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