Case: Cory Electric “Frankly speaking, Jeff, I didn’t think we would stand a chance in winning this $20 million program.

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Case: Cory Electric “Frankly speaking, Jeff, I didn’t think we
would stand a chance in winning this $20 million program. I was
really surprised when they said that they’d like to accept our bid
and begin negotiations. As Chief contract administrator, you will
head up the negotiation team, “remarked Gus Bell, vice president
and general manager of Cory Electric. “You have two weeks to
prepare your data and line up your team. I want to see you when
you’re ready to go”. Jeff Stokes was chief contract negotiator for
Cory Electric, a $250- million-a year electrical components
manufacturer serving virtually every major U.S industry. Cory
Electric had a well-established matrix structure that had withstood
fifteen years of testing. Job casting standards were well
established, but did include some “fat” upon the discretion of the
functional manager. Two weeks later, Jeff met with Gus Bell to
discuss the negotiation process. Gus Bell: “Have you selected an
appropriate team? You had better make sure that you’re covered on
all sides” Jeff: “There will be four, plus myself, at the
negotiating table; the programme manager, the chief engineer who
developed the engineering labour packages; the chief manufacturing
engineer who developed the production labour package; and a pricing
specialist who has been on the proposal since the kick-off meeting.
We have a strong team and should be able to handle any questions”
Gus Bell: “Okay, I’II take your word for it. I have my own
checklist for contract negotiations. I want you to come back with a
guaranteed fee of $1.6 million for our stockholders. Have you
worked out the possible situations based on the negotiated costs?”
Jeff: “Yes! Our minimum position is $20 million plus an 8 percent
profit. Of course, this profit percentage will vary depending on
the negotiated cost. We can bid the programme at $15 million cost;
that’s $5 million below our target cost and still book a 1.6
million profit by overrunning the cost-plus-fee contract. Here is a
list of the possible cases. See Exhibit one below. Jeff: “I’ve read
over all terms and conditions, and so have all the project office
personnel as well as the key functional managers. The only major
item is that the customer wants us to qualify some few vendors as
sources for raw material procurement. We have included in the
package the cost of qualifying two new raw material suppliers” Gus
Bell: “Where are the weak points in our proposal? I’m sure we have
some” Jeff: “Last month, the customer sent in a finding team to go
over all of our labour justifications. The impression that I get
from our people is that we’re covered all the way round. The only
major problem might be where we’ll be performing on our learning
curve. We put into the proposal 45 percent learning curve
efficiency. The customer has indicated that we should be up around
50 to 55 percent efficiency based on our previous contracts with
him. Unfortunately, those contracts the customer referred to were
four years old. Several of the employees who worked on those
programs have left the company. Others are assigned to on-going
projects here at Cory. I estimate that we could put together about
10 percent of people we used previously. That learning curve
percentage will be a big point for disagreements. We finished off
the previous programs with the customer at 35 percent learning
curve position. I don’t see how they can expect us to be smarter,
given these circumstances.” Gus Bell: “If that’s the only weakness,
then we’re in good shape. It sounds like we have a fool proof audit
trail. That’s good! What’s your negotiation sequence going to be?
Jeff: “I’d like to negotiate the bottom line only, but that’s a
dream. We’ll probably negotiate the raw materials, the man-hours
and the learning curve, the overhead rate, and finally the profit
percentage. Hopefully, we can do it in that order.” Gus Bell: “Do
you think that we’ll be able to negotiate a cost above our minimum
position?” Jeff: “Our proposal was $22.2 million. I don’t foresee
any problem that will prevent us from coming out ahead of the
minimum position. The 5 percent change in learning curve efficiency
amounts to approximately $ 1 million. We should be well covered.
“The first move will be up to them. I expect that they’ll come in
with an offer of $ 18 to $19 million. Using the binary chop
procedure, that’ll give us our guaranteed minimum position. Gus
Bell: “Do you know the guys who you’ll be negotiating with?” Jeff:
“Yes, I’ve dealt with them before. The last time, the negotiations
took three days. I think we both got what we wanted. I expect this
one to go just smoothly” Gus Bell: “Okay, Jeff. I’m convinced we’re
prepared for negotiations. Have a good trip” The negotiations began
at 9:00 A .M on Monday morning. The customer countered the original
proposal of $22.2 million with an offer of $15 million. After six
solid hours of arguments, Jeff and his team adjourned. Jeff
immediately called Gus Bell at Cory Electric. Jeff: “Their
counteroffer to our bid is absurd. They’ve asked us to make a
counteroffer to their offer. We can’t do that. The instant we give
them a counter-offer, we are in fact giving credibility to their
absurd bid. Now, they’re claiming that, if we don’t give them a
counteroffer, then we’re not bargaining in good faith. I think
we’re in trouble” Gus Bell: “Has the customer done their homework
to justify their bid?” Jeff: “Yes, very well”. Tomorrow we’re going
to discuss every element of the proposal, task by task. Unless
something drastically changes in their position within the next day
or two, contract negotiations will probably take up to a month” Gus
Bell: “Perhaps this is one program that should be negotiated at the
top levels of management. Find out if the person that you’re
negotiating with reports to a vice president and general manager,
as you do. If not, break off contract negotiations until the
customer gives us someone at your level. We’ll negotiate this at my
level, if necessary.” Source: John Wiley & Sons Inc.
QUESTION
For the above case study, create a PERT schedule with the key
activities for the $20 million contract negotiation project. There
should be between SIX (6) to TEN (10) activities identified from
the case study. Additional relevant activities may be included.
Create an AON network diagram and find the critical path using
slack once estimated activity time is established.