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CORY ELECTRIC “Frankly speaking, Jeff, I didn’t think that we would stand a chance in winning this $20 million program.

CORY ELECTRIC”Frankly speaking, Jeff, I didn’t think that we would stand a chance in winningthis $20 million program. I was really surprised when they said that they’d like toaccept our bid and begin contract negotiations. As chief contract administrator,you’ll head up the negotiating team,” remarked Gus Bell, vice president and generalmanager of Cory Electric. “You have two weeks to prepare the data and lineup 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 yearelectrical components manufacturer serving virtually every major U.S. industry.Cory Electric had a well-established matrix structure that had withstoodfifteen years of testing. Job casting standards were well established, but did includesome “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 surethat you’re covered on all sides.”Jeff: “There will be four, plus myself, at the negotiating table; the program manager,the chief project engineer who developed the engineering labor package; thechief manufacturing engineer who developed the production labor package; anda pricing specialist who has been on the proposal since the kickoff meeting. Wehave a strong team and should be able to handle any questions.”Gus Bell: “Okay, I’ll take your word for it. I have my own checklist for contractnegotiations. I want you to come back with a guaranteed fee of $1.6 million forour stockholders. Have you worked out the possible situations based on the negotiatedcosts?”Jeff: “Yes! Our minimum position is $20 million plus an 8 percent profit. Ofcourse, this profit percentage will vary depending on the negotiated cost. We canbid the program at a $15 million cost; that’s $5 million below our target, and stillbook a $1.6 million profit by overrunning the cost-plus-incentive-fee contract.Here is a list of the possible cases.” (See Exhibit I.)Gus Bell: “If we negotiate a cost overrun fee, make sure that cost accountingknows about it. I don’t want the total fee to be booked as profit if we’re going toneed it later to cover the overrun. Can we justify our overhead rates, general andadministrative costs, and our salary structure?”Jeff: “That’s a problem. You know that 20 percent of our business comes from MitreCorporation. If they fail to renew our contract for another two-year follow-on effort,then our overhead rates will jump drastically. Which overhead rates should I use?”Gus Bell: “Let’s put in a renegotiation clause to protect us against a drasticchange in our business base. Make sure that the customer understands that as partof the terms and conditions. Are there any unusual terms and conditions?”Jeff: “I’ve read over all terms and conditions, and so have all of the project officepersonnel as well as the key functional managers. The only major item is thatthe customer wants us to qualify some new vendors as sources for raw materialprocurement. We have included in the package the cost of qualifying two new rawmaterial 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 fact-finding team to go over all of ourlabor justifications. The impression that I get from our people is that we’re coveredall the way around. The only major problem might be where we’ll be performingon our learning curve. We put into the proposal a 45 percent learningcurve efficiency. The customer has indicated that we should be up around 50 to55 percent efficiency, based on our previous contracts with him. Unfortunately,those contracts the customer referred to were four years old. Several of the employeeswho worked on those programs have left the company. Others are assignedto ongoing projects here at Cory. I estimate that we could put togetherabout 10 percent of the people we used previously. That learning curve percentagewill be a big point for disagreements. We finished off the previous programswith the customer at a 35 percent learning curve position. I don’t see how theycan expect us to be smarter, given these circumstances.”Gus Bell: “If that’s the only weakness, then we’re in good shape. It sounds likewe have a foolproof audit trail. That’s good! What’s your negotiation sequence goingto be?”Jeff: “I’d like to negotiate the bottom line only, but that’s a dream. We’ll probablynegotiate the raw materials, the man-hours and the learning curve, the overheadrate, and, finally, the profit percentage. Hopefully, we can do it in thatorder.”Gus Bell: “Do you think that we’ll be able to negotiate a cost above our minimumposition?”Jeff: “Our proposal was for $22.2 million. I don’t foresee any problem that willprevent us from coming out ahead of the minimum position. The 5 percent changein learning curve efficiency amounts to approximately $1 million. We should bewell covered. “The first move will be up to them. I expect that they’ll come in with an offerof $18 to $19 million. Using the binary chop procedure, that’ll give us ourguaranteed 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 threedays. I think we both got what we wanted. I expect this one to go just assmoothly.”Gus Bell: “Okay, Jeff. I’m convinced we’re prepared for negotiations. Have agood trip.”The negotiations began at 9:00 A.M. on Monday morning. The customercountered 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 immediatelycalled Gus Bell at Cory Electric:Jeff: “Their counter offer to our bid is absurd. They’ve asked us to make a counter offerto 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, ifwe don’t give them a counter offer, then we’re not bargaining in good faith. I thinkwe’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 withinthe 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 levelsof management. Find out if the person that you’re negotiating with reports to avice president and general manager, as you do. If not, break off contract negotiationsuntil the customer gives us someone at your level. We’ll negotiate this at mylevel, if necessary.”1. What is the major problem with this case study?2. How do you think Cory Electric will handle this dilemma?3. What do you think is wrong with the estimates provided by Cory Electric?

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