8.8 Negotiation Simulation: An Example

This construction negotiation game simulates a contract negotiation between a utility, "CMG Gas" and a design/construct firm, "Pipeline Constructors, Inc."The negotiation involves only two parties but multiple issues. Participants in the game are assigned to represent one party or the other and to negotiate with a designated partner. In a class setting, numerous negotiating partners are created. The following overview from the CMG Gas participants' instructions describes the setting for the game:

CMG Gas has the opportunity to provide natural gas to an automobile factory under construction. Service will require a new sixteen mile pipeline through farms and light forest. The terrain is hilly with moderate slopes, and equipment access is relatively good. The pipeline is to be buried three feet deep. Construction of the pipeline itself will be contracted to a qualified design/construction firm, while required compression stations and ancillary work will be done by CMG Gas. As project manager for CMG Gas, you are about to enter negotiations with a local contractor, "Pipeline Constructors, Inc." This firm is the only local contractor qualified to handle such a large project. If a suitable contract agreement cannot be reached, then you will have to break off negotiations soon and turn to another company.

The Pipeline Constructors, Inc. instructions offers a similar overview.

To focus the negotiations, the issues to be decided in the contract are already defined:

A final contract requires an agreement on each of these issues, represented on a form signed by both negotiators.

As a further aid, each participant is provided with additional information and a scoring system to indicate the relative desirability of different contract agreements. Additional information includes items such as estimated construction cost and expected duration as well as company policies such as desired reporting formats or work arrangements. This information may be revealed or withheld from the other party depending upon an individual's negotiating strategy. The numerical scoring system includes point totals for different agreements on specific issues, including interactions among the various issues. For example, the amount of points received by Pipeline Constructors, Inc. for a bonus for early completion increases as the completion date become later. An earlier completion becomes more likely with a later completion date, and hence the probability of receiving a bonus increases, so the resulting point total likewise increases.

The two firms have differing perceptions of the desirability of different agreements. In some cases, their views will be directly conflicting. For example, increases in a flat fee imply greater profits for Pipeline Constructors, Inc. and greater costs for CMG Gas. In some cases, one party may feel strongly about a particular issue, whereas the other is not particularly concerned. For example, CMG Gas may want a clerk on site, while Pipeline Constructors, Inc. may not care. As described in the previous section, these differences in the evaluation of an issue provide opportunities for negotiators. By conceding an unimportant issue to the other party, a negotiator may trade for progress on an issue that is more important to his or her firm. Examples of instructions to the negotiators appear below.

Instructions to the Pipelines Constructors, Inc. Representative

After examining the project site, your company's estimators are convinced that the project can be completed in thirty-six weeks. In bargaining for the duration, keep two things in mind; the longer past thirty-six weeks the contract duration is, the more money that can be made off the "bonuses for being early" and the chances of being late are reduced. That reduces the risk of paying a "penalty for lateness".

Throughout the project the gas company will want progress reports. These reports take time to compile and therefore the fewer you need to submit, the better. In addition, State law dictates that the Required Standard Report be used unless the contractor and the owner agree otherwise. These standard reports are even more time consuming to produce than more traditional reports.

The State Legislature is considering a law that requires accurate drawings and markers of all pipelines by all utilities. You would prefer not to conform to this uncertain set of requirements, but this is negotiable.

What type of contract and the amount your company will be paid are two of the most important issues in negotiations. In the Flat Fee contract, your company will receive an agreed amount from CMG Gas. Therefore, when there are any delay or cost overruns, it will be the full responsibility of your company. with this type of contract, your company assumes all the risk and will in turn want a higher price. Your estimators believe a cost and contingency amount of 4,500,000 dollars. You would like a higher fee, of course.

With the Cost Plus Contract, the risk is shared by the gas company and your company. With this type of contract, your company will bill CMG Gas for all of its costs, plus a specified percentage of those costs. In this case, cost overruns will be paid by the gas company. Not only does the percentage above cost have to be decided upon but also whether or not your company will allow a Field Clerk from the gas company to be at the job site to monitor reported costs. Whether or not he is around is of no concern to your company since its policy is not to inflate costs. this point can be used as a bargaining weapon.

Finally, your company is worried whether the gas company will obtain the land rights to lay the pipe. Therefore, you should demand a penalty for the potential delay of the project starting date.

Instructions to the CMG Gas Company Representative

In order to satisfy the auto manufacturer, the pipeline must be completed in forty weeks. An earlier completion date will not result in receiving revenue any earlier. Thus, the only reason to bargain for shorter duration is to feel safer about having the project done on time. If the project does exceed the forty week maximum, a penalty will have to be paid to the auto manufacturer. Consequently, if the project exceeds the agreed upon duration, the contractor should pay you a penalty. The penalty for late completion might be related to the project duration. For example, if the duration is agreed to be thirty-six weeks, then the penalty for being late need not be so severe. Also, it is normal that the contractor get a bonus for early completion. Of course, completion before forty weeks doesn't yield any benefit other than your own peace of mind. Try to keep the early bonus as low as possible.

Throughout the project you will want progress reports. The more often these reports are received, the better to monitor the progress. State law dictates that the Required Standard Report be used unless the contractor and the owner agree otherwise. These reports are very detailed and time consuming to review. You would prefer to use the traditional CMG Gas reports.

The state legislature is considering a law that requires accurate drawings and markers of all pipelines by all utilities. For this project it will cost an additional $250,000 to do this now, or $750,000 to do this when the law is passed.

One of the most important issues is the type of contract, and the amount of be paid. The Flat Fee contract means that CMG Gas will pay the contractor a set amount. Therefore, when there are delays and cost overruns, the contractor assumes full responsibility for the individual costs. However, this evasion of risk has to be paid for and results in a higher price. If Flat Fee is chosen, only the contract price is to be determined. Your company's estimators have determined that the project should cost about $5,000,000.

The Cost Plus Percent contract may be cheaper, but the risk is shared. With this type of contract, the contractor will bill the gas company for all costs, plus a specified percentage of those costs. In this case, cost overruns will be paid by the gas company. If this type of contract is chosen, not only must the profit percentage be chosen, but also whether or not a gas company representative will be allowed on site all of the time acting as a Field Clerk, to ensure that a proper amount of material and labor is billed. The usual percentage agreed upon is about ten percent.

Contractors also have a concern whether or not they will receive a penalty if the gas right-of-way is not obtained in time to start the project. In this case, CMG Gas has already secured the right-of-ways. But, if the penalty is too high, this is a dangerous precedent for future negotiations. However, you might try to use this as a bargaining tool.

Example 8-8: An example of a negotiated contract

A typical contract resulting from a simulation of the negotiation between CMG Gas and Pipeline Constructors, Inc. appears in Table 8-6. An agreement with respect to each pre-defined issue is included, and the resulting contract signed by both negotiators.

TABLE 8-6  Example of a Negotiated Contract between CMG Gas and Pipeline Constructors, Inc

Example 8-9: Scoring systems for the negotiated contract games

To measure the performance of the negotiators in the previous example, a scoring system is needed for the representative of Pipeline Constructors, Inc. and another scoring system for the representative of CMG Gas. These scoring systems for the companies associated with the issues described in Example 8-7 are designated as system A.

In order to make the negotiating game viable for classroom use, another set of instructions for each company is described in this example, and the associated scoring systems for the two companies are designated as System B. In each game play, the instructor may choose a different combination of instructions and negotiating teams, leading to four possible combinations of scoring systems for Pipeline Constructors, Inc. and CMG Gas.

Instruction To The Pipeline Constructors, Inc. Representative

In order to help you, your boss has left you with a scoring table for all the issues and alternatives. Two different scoring systems are listed here; you will be assigned to use one or the other. Instructions for scoring system A are included in Section 8.9. The instructions for scoring system B are as follows:

After examining the site, your estimator believes that the project will require 38 weeks. You are happy to conform with any reporting or pipeline marking system, since your computer based project control and design systems can easily produce these submissions. You would prefer to delay the start of the contract as long as possible, since your forces are busy on another job; hence, you do not want to impose a penalty for late start. Try to maximize the amount of points, as they reflect profit brought into your company, or a cost savings. In Parts 3 and 4, be sure to use the project duration agreed upon to calculate your score. Finally, do not discuss your scoring system with the CMG Gas representative; this is proprietary information!

SCORING FOR PIPELINE CONSTRUCTORS, INC.

NOTE: NA means not acceptable and the deal will not be approved by your boss with any of these provisions. also, the alternatives listed are the only ones in the context of this problem; no other alternatives are acceptable.

1. COMPLETION DATE

2. REPORTS

3. PENALTY FOR LATENESS ($ PER DAY)

4. BONUS FOR BEING EARLY ($ PER DAY)

5. CONFORM TO PENDING LEGISLATION (MARKING PIPELINES)

6. HOW OFTEN FOR THE PROGRESS REPORTS

7. CONTRACT TYPE

8. FLAT FEE ($)

9. IF COST PLUS X%

10. GAS CO. FIELD CLERK ON SITE

11. PENALTY FOR DELAYED STARTING DATE DUE TO GAS COMPANY ERROR ($ PER DAY)

Instructions to the CMG Gas Company Representative

In order to help you, your boss has left you with a scoring table for all the issues and alternatives. Two different scoring systems are listed here; you will be assigned to use one or the other. Instructions for scoring system A are included in Section 8.9. The instructions for scoring system B are described as follows:

Your contract with the automobile company provides an incentive for completion of the pipeline earlier than 38 weeks and a penalty for completion after 38 weeks. To insure timely completion of the project, you would like to receive detailed project reports as often as possible.

Try to maximize the number of points from the final contract provisions; this corresponds to minimizing costs. Do not discuss your scoring systems with Pipeline Constructors, Inc.

SCORING SYSTEM FOR CMG GAS

NOTE: NA means not acceptable and the deal will not be approved by your boss with any of these provisions. If you can't negotiate a contract, your score will be +450. Also, the alternatives listed are the only ones in the context of this problem no other alternatives are acceptable.

1. DURATION

2. REPORTS

3. PENALTY FOR LATENESS ($ PER DAY)

4. BONUS FOR BEING EARLY ($ PER DAY)

5. CONFORM TO PENDING LEGISLATION (MARKING PIPELINES)

6. HOW OFTEN FOR THE PROGRESS REPORTS

7. CONTRACT TYPE

8. FLAT FEE ($)

9. IF COST PLUS X%

10. GAS CO. FIELD CLERK ON SITE

11. PENALTY FOR DELAYED STARTING DATE DUE TO UNAVAILABLE RIGHT-OF-WAYS ($ PER DAY)

8.9 Resolution of Contract Disputes

Once a contract is reached, a variety of problems may emerge during the course of work. Disputes may arise over quality of work, over responsibility for delays, over appropriate payments due to changed conditions, or a multitude of other considerations. Resolution of contract disputes is an important task for project managers. The mechanism for contract dispute resolution can be specified in the original contract or, less desireably, decided when a dispute arises.

The most prominent mechanism for dispute resolution is adjudication in a court of law. This process tends to be expensive and time consuming since it involves legal representation and waiting in queues of cases for available court times. Any party to a contract can bring a suit. In adjudication, the dispute is decided by a neutral, third party with no necessary specialized expertise in the disputed subject. After all, it is not a prerequisite for judges to be familiar with construction procedures! Legal procedures are highly structured with rigid, formal rules for presentations and fact finding. On the positive side, legal adjudication strives for consistency and predictability of results. The results of previous cases are published and can be used as precedents for resolution of new disputes.

Negotiation among the contract parties is a second important dispute resolution mechanism. These negotiations can involve the same sorts of concerns and issues as with the original contracts. Negotiation typically does not involve third parties such as judges. The negotiation process is usually informal, unstructured and relatively inexpensive. If an agreement is not reached between the parties, then adjudication is a possible remedy.

A third dispute resolution mechanism is the resort to arbitration or mediation and conciliation. In these procedures, a third party serves a central role in the resolution. These outside parties are usually chosen by mutually agreement of the parties involved and will have specialized knowledge of the dispute subject. In arbitration, the third party may make a decision which is binding on the participants. In mediation and conciliation, the third party serves only as a facilitator to help the participants reach a mutually acceptable resolution. Like negotiation, these procedures can be informal and unstructured.

Finally, the high cost of adjudication has inspired a series of non-traditional dispute resolution mechanisms that have some of the characteristics of judicial proceedings. These mechanisms include:

Some of these procedures may be court sponsored or required for particular types of disputes.

While these various disputes resolution mechanisms involve varying costs, it is important to note that the most important mechanism for reducing costs and problems in dispute resolution is the reasonableness of the initial contract among the parties as well as the competence of the project manager.

8.10 References

1. Au, T., R.L. Bostleman and E.W. Parti, "Construction Management Game-Deterministic Model," Asce Journal of the Construction Division, Vol. 95, 1969, pp. 25-38.
2. Building Research Advisory Board, Exploratory Study on Responsibility, Liability and Accountability for Risks in Construction, National Academy of Sciences, Washington, D.C., 1978.
3. Construction Industry Cost Effectiveness Project, "Contractual Arrangements," Report A-7, The Business Roundtable, New York, October 1982.
4. Dudziak, W. and C. Hendrickson, "A Negotiating Simulation Game," ASCE Journal of Management in Engineering, Vol. 4, No. 2, 1988.
5. Graham, P.H., "Owner Management of Risk in Construction Contracts," Current Practice in Cost Estimating and Cost Control, Proceedings of an ASCE Conference, Austin, Texas, April 1983, pp. 207-215.
6. Green, E.D., "Getting Out of Court -- Private Resolution of Civil Disputes," Boston Bar Journal, May-June 1986, pp. 11-20.
7. Park, William R., The Strategy of Contracting for Profit, 2nd Edition, Prentice-Hall, Englewood Cliffs, NJ, 1986.
8. Raiffa, Howard, The Art and Science of Negotiation, Harvard University Press, Cambridge, MA, 1982.
9. Walker, N., E.N. Walker and T.K. Rohdenburg, Legal Pitfalls in Architecture, Engineering and Building Construction, 2nd Edition, McGraw-Hill Book Co., New York, 1979.