Bidding and winning government construction contracts is different than in the private sector: There’s more room for negotiation in a private sector contract than there is in a government contract.
That being said, sometimes you may find yourself negotiating with a government entity. Whether it’s for a change order or a contract for construction work, being prepared is the best way to negotiate a fair deal for both sides.
How government contracts are different from the private sector
1. The lowest bidder (usually) wins
Government projects usually are awarded to the lowest responsive bidder, which means the bidder with the lowest price who has completed all the information required for the bid submission.
2. Projects are design-bid-build
Design-bid-build projects follow the traditional path of completely designing the project before it goes out to bid. Although this is changing, most government construction projects are sent out to bid to contractors once the design is complete.
3. Prequalification may be required
Some government entities require GCs to be prequalified to bid on their projects. The prequalification process may encompass one project or multiple projects.
Dive deeper: How to Prequalify a General Contractor
4. Emphasis is placed on minority contractors
Many government entities have quotas or goals that they must reach when it comes to hiring minority and disadvantaged businesses. These programs provide these businesses with an opportunity to compete on a fair playing field with other contractors and suppliers. If you qualify for one of these programs, it is to your benefit to register or apply.
5. Projects have prevailing wage rules
Prevailing wage laws, like the federal Davis-Bacon Act, require workers on-site to receive a minimum wage and benefits amount. These amounts often correspond to what unions pay, which may be higher than many nonunion companies pay their workers on private projects.
6. Bonds are required
Bid bonds ensure the contractor will go to contract for the amount of their bid. Payment bonds ensure subcontractors and suppliers get paid. And performance bonds ensure that the project will be completed.
Essential components for successful negotiation
There are two components that are essential for successful contract negotiation: good faith and flexibility.
Good faith means that both parties have a desire to reach an agreement and are being honest in their negotiations. They understand that an agreement has to be fair and reasonable for both sides.
Flexibility requires that both parties understand they aren’t likely to get all that they want, that compromise is part of the negotiation process. Parties should strive to be creative and open to alternatives.
6 traits of great negotiators
- Has integrity: Do what you say you will. Keep your word.
- Capable of making decisions fairly quickly: No one wants the negotiations to drag on, so being able to make decisions quickly is beneficial. The project may be under a deadline that requires a quick decision.
- Thinks affirmatively and looks for ways to get things done: Have a positive attitude and work with the parties on the other side to come to a beneficial agreement for both parties. Don’t try to create a stalemate.
- Able to question and challenge the statements of the opposing party: If you know something they said isn’t true, and you’re able to challenge or question them about it, it helps everyone get to the truth of the situation.
- Has a sense of humor to lighten the atmosphere when needed: When things get tense, a good joke may be just what’s needed.
- Unconcerned about being liked by the other side: Your job is to negotiate and come to a fair agreement. Concerns about being liked could lead you to make concessions that aren’t good for either side.
Preparing for negotiation: A checklist
- Determine who will do the negotiating, an individual or team. Know who has authority to make the final agreement.
- Research and know the other side, their motivations, reputation, and past agreements. This can help you predict how they will respond and can be brought up and used to influence the current agreement.
- Make a list of every issue to be negotiated. Know all the points that you want addressed or changed.
- Categorize each issue based on your flexibility, from “must have” to “can be conceded.” Be clear on your priorities, as you may be able to give up something unimportant to you for something you must have, and you don’t want to do the opposite.
- Set maximums and minimums for each issue. Know your boundaries during the negotiation.
- Clearly understand your authority to negotiate each issue. Know who can make the final decision regarding each issue.
- Research and understand the data, facts, and motivations underlying each issue. The more information you have on the issue, the better.
- Play devil’s advocate to anticipate opposing views and prepare your rebuttal. How will they respond to your offer? What can you say next? Then what? Plan it out with alternatives.
- Determine your best alternative to a negotiated agreement, and if possible, for the other side as well. Know when you will walk away, and try to guess when the other side will. Use this information to recognize when it’s time to table the issue or pause the negotiations.
Negotiating on government projects: Dos and Don’ts
- Always keep in mind your overall negotiation goals and strive for win/win
- Determine the authority of the opposing party
- Use objective standards when possible, such as industry standards or historical experience
- Only make concessions on “can be conceded” points if they bring you closer to an agreement on a “must-have”
- Take notes during the negotiation process and create a memo afterwards detailing what happened
- Don’t make concessions without getting something in return
- Avoid discussing the terms of other contracts
- Don’t bluff — unless you are prepared to have the bluff called
- Never go in unprepared
- Be respectful and don’t treat the other side as inferior or attack them personally — keep the focus on the problem
Pre-award negotiation for federal construction contracts
Negotiations on price and scope are not all that common in government construction contracts, unless it’s a design-build or other type of project, where the scope is more fluid or hasn’t been determined. In most design-bid-build projects, the low bidder wins the contract for the amount they proposed, plus or minus any alternates.
In federal contracts, negotiations are often called discussions and may be referenced in the request for proposal — or RFP — as part of the contracting process. Discussions are exchanges of information between the government and the bidder with the intent of giving the bidder the opportunity to revise their proposal. If discussions are held with one bidder, all bidders within the competitive range should also be included in those discussions.
During discussions, the government may ask for a price breakdown to ensure that everything has been included in the price and to help them negotiate a lower price by comparing apples to apples. Discussions are held in an equitable and not misleading way. The government’s goals include getting the work done with the available funding, providing the best possible value, complying with applicable acquisition laws, and ensuring that the price is fair and reasonable.
Post-award negotiation for federal projects
Post contract award negotiations most commonly deal with change orders or schedule delays. The government’s goals in these negotiations are to do the right thing and be fair and reasonable. They also have to provide documentation that sufficiently shows the need for added funds or time. Contractors that provide detailed information and backup documents regarding the need for a change will have an easier time with post-award negotiations.
The most important piece in these negotiations is ensuring that you’ve followed the contract requirements for notices of claim and changes. Make sure you follow the processes outlined in the contract when these situations come up.
Additional key concepts for price negotiations
Cost and price
In terms of government contracts, cost and price are not the same. The cost includes capital and labor required to complete a contract, including cash, accrued expenses, and inventory reduction. The price is the amount the government will pay the prime contractor for completing the contract. It includes the costs, plus fees and profit.
Price reasonableness and realism
The government is looking for a price that is reasonable and real. Price reasonableness evaluates whether a price is too high. Price realism evaluates whether it is too low. A price that is too low may mean that the contractor does not fully understand the scope of the project.
Always prepare for negotiations on your government projects
While negotiations don’t happen all that often on government construction projects, it does pay to prepare yourself ahead of time.
Make sure you know the issues, the data and information regarding those issues, and whether each one “can be conceded” or is a “must-have.” Preparing ahead of time is the best way to handle any negotiation.