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Lower That Lowest Quote

September 30, 2012

Negotiation beyond L1

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For a moment, think like the government: Make two dogs fight against each other and pay only for the fight, while letting them go home tired and wounded. They wanted to fight, right?

Let us suppose a prestigious project has been developed (on paper) by an authority. The government is bound to tender. Or they want to tender this one: So in due process the tender has been put out, bid against, opened, and the lowest bidder is a small but ambitious company whereas second lowest bidder is a big firm that has been working on various similar projects and also extended some pre-tender technical help to this authority. Now, L1 and L2 both would really love to do the project.

The client, for some reason, feels the fees should be even lesser. The bidders are called to negotiate. In this process, the consultant/ their representative have to go though first round of negotiation, then second, and then finally to the last person in Authority. At each level they are asked to honour the person or post opposite and reduce their fees further. Therefore the already low fees have to be lowered thrice at least.

In most cases, the small company will go down as much as they can for the project they had already, legally, won by bidding the lowest; and somehow do the work. Happy they are doing it, considering it a portfolio building exercise, but at the same time feeling the resentment over the fact that their reasonable profit was taken away from them. In this process the client is deemed inconsiderate, and the consultants are easily frustrated when there are (invariable) demands of extra work.

Or they will refuse to do the project, passing the buck to the second lowest bidder.

In the event the bigger company is asked to negotiate towards an even lower sum, here is what can happen…

Scenario 1: With their huge portfolio combined with their big overheads, and the standards they would like to maintain, they will decide not to get down in the pit if there was no profit, therefore saving everyone in the market.

Scenario 2: They will decide to take the bait due to prestige of the project and the work they have already put in. Hence, they will still do some justice to the work, but would need to burden other paying projects – hurting their profitability. In innumerable cases the project manager ends up in a divorce for working all the time.

Scenario 3: Retendering. Everyone knows the lowest quote, and will try to lower it further. Everyone will get a little cautious and really come up with their best price, thereby setting a low benchmark for all projects of that nature in the future.

Client Strategy (or lack thereof): Pay the least fees.

Result: In Myopia the client wins. In long-term, everyone loses.

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