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." [4] 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:

 Duration
The final contract must specify a required completion date.
 Penalty for Late Completion
The final contract may include a daily penalty for late project
completion on the part of the contractor.
 Bonus for Early Completion
The final contract may include a daily bonus for early project
completion.
 Report Format
Contractor progress reports will either conform to the traditional
CMG Gas format or to a new format proposed by the state.
 Frequency of Progress Reports
Progress reports can be required daily, weekly, bi-weekly or monthly.
 Conform to Pending Legislation Regarding Pipeline Marking
State legislation is pending to require special markings and drawings
 for pipelines. The parties have to decide whether to conform to this
pending legislation.
 Contract Type
The construction contract may be a flat fee, a cost plus a percentage
profit, or a guaranteed maximum with cost plus a percentage profit
below the maximum.
 Amount of Flat Fee
If the contract is a flat fee, the dollar amount must be specified.
 Percentage of Profit
If the contract involves a percentage profit, then the percentage must
be agreed upon.
 CMG Gas Clerk on Site
The contract may specify that a CMG Gas Clerk may be on site and
have access to all accounts or that only progress reports are made by
Pipeline Constructors, Inc.
 Penalty for Late Starting Date
CMG Gas is responsible for obtaining right-of-way agreements for
the new pipeline. The parties may agree to a daily penalty if CMG
Gas cannot obtain these agreements.

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
Duration 38 weeks
Penalty for Late Completion $6,800 per day
Bonus for Early Completion $0 per day
traditional CMG
Report Format
form
Frequency of Progress Reports weekly
Conform to Pending Pipeline Marking
yes
Legislation
Contract Type flat fee
Amount of Flat Fee $5,050,000
Percentage of Profit Not applicable
CMG Gas Clerk on Site yes
Penalty for Late Starting Date $3,000 per day
Signed:

CMG Gas
Representative

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. [5]

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
System A System B
Under 36 Weeks NA NA
36 weeks 0 NA
37 weeks +5 -10
38 weeks +10 0
39 weeks +20 +10
40 weeks +40 +20
2. REPORTS
State Standard
-20 0
Report
-5 0
CMG Reports

3. PENALTY FOR LATENESS ($ PER DAY)

DURATION (WEEKS)
Scoring System A 36 37 38 39 40
Scoring System B 37 38 39 40 41
0 - 999 -1 -1 -1 0 0
1,000 - 1,999 -2 -2 -2 -1 0
2,000 - 2,999 -4 -3 -3 -2 -1
3,000 - 3,999 -6 -5 -4 -3 -1
4,000 - 4,999 -8 -7 -5 -4 -2
5,000 - 5,999 -11 -9 -7 -5 -2
6,000 - 6,999 -14 -12 -9 -6 -3
7,000 - 7,999 -18 -14 -11 -7 -3
Over 8,000 NA NA NA NA NA

4. BONUS FOR BEING EARLY ($ PER DAY)

Scoring System A 36 37 38 39 40
Scoring System B 37 38 39 40 41
0 - 999 0 0 0 0 2
1,000 - 1,999 0 0 2 2 2
2,000 - 2,999 0 2 4 4 4
3,000 - 3,999 1 4 6 6 8
4,000 - 4,999 2 6 8 10 12
5,000 - 5,999 3 8 10 14 16
6,000 - 6,999 4 10 14 18 22
7,000 - 7,999 5 12 18 24 28
8,000 - 8,999 6 14 22 28 36
9,000 - 9,999 7 16 26 32 40
Over 10,000 8 18 30 36 45

5. CONFORM TO PENDING LEGISLATION (MARKING PIPELINES)

A B
Yes +5 +10
No +15 +10

6. HOW OFTEN FOR THE PROGRESS REPORTS

A B
Daily NA 0
Weekly -20 0
Bi-weekly -10 0
Monthly -6 0

7. CONTRACT TYPE
 A B
Flat Fee 5 5
Cost + X% +25 +25
If Flat Fee do part 8 and skip parts 9 and 10.
If Cost + X% do parts 9 and 10 and skip part 8.

8. FLAT FEE ($)

A B
-15 for each
NA
Below 4,500,000 10,000
+1 for each
Over 4,500,000 +2 for each
10,000
10,000

9. IF COST PLUS X%
A B
Below 6% NA NA
6% +250 NA
7% +375 +300
8% +450 +330
9% +475 +360
10% +500 +400
11% +525 +440
12% +550 +480
13% +600 +540
14% +725 +600
Over 14% +900 +800

10. GAS CO. FIELD CLERK ON SITE

A B
Yes 0 0
No 0 +10

11. PENALTY FOR DELAYED STARTING DATE DUE TO GAS COMPANY

ERROR ($ PER DAY)
A B
0 - 499 NA NA
500 - 1499 -6 -10
1500 - 2499 -4 -7
1500 - 3499 -2 -5
3500 - 4499 -1 -3
4500 - 5499 0 -1
5500 - 6499 +1 0
6500 - 7499 +2 +3
7500 or more +4 +6

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 POINTS
System A System B
Over 40 weeks NA -40
40 weeks 0 -10
39 weeks +2 +2
38 weeks +4 +8
37 weeks +5 +14
0-36 weeks +6 +14

2. REPORTS A B
Required Standard
Report +2 0
"Traditional" CMG +10 0
Gas Reports

3. PENALTY FOR LATENESS ($ PER DAY)

DURATION (WEEKS)
Scoring System A 36 37 38 39 40
Scoring System B 38 39 40 41 42
0 - 999 NA NA NA NA NA
1,000 - 1,999 9 7 6 3 0
2,000 - 2,999 10 9 8 5 2
3,000 - 3,999 11 10 9 6 4
4,000 - 4,999 12 11 10 7 5
 5,000 - 5,999 13 12 11 8 6
6,000 - 6,999 14 13 12 9 7
7,000 - 7,999 15 15 13 11 8
8,000 - 8,999 16 15 14 12 9
9,000 - 9,999 17 16 15 13 10
10,000 or more 18 16 15 13 11

4. BONUS FOR BEING EARLY ($ PER DAY)

A B
8000 or more NA -5
7000 - 7999 +3 -2
6000 - 6999 +6 -1
5000 - 5999 +8 0
4000 - 4999 +10 +5
3000 - 3999 +12 +7
2000 - 2999 +13 +9
1000 - 1999 +14 +13
0 - 999 +15 +17

5. CONFORM TO PENDING LEGISLATION (MARKING PIPELINES)

A B
Yes +25 0
No -25 NA

6. HOW OFTEN FOR THE PROGRESS REPORTS

A B
Daily +45 +50
Weekly +50 +30
Bi-weekly +30 +10
Monthly NA +5

7. CONTRACT TYPE
A B
Flat Fee 25 25
Cost + X% 0 0
If Flat Fee do part 8 and skip parts 9 and 10.
If Cost + X% do parts 9 and 10 and skip part 8.

8. FLAT FEE ($)

A B
NA NA
+1 for each +1 for each
Over 5,000,000
10,000 10,000
0 - 5,000,000
below below
5,000,000 5,000,000

9. IF COST PLUS X%
 A B
Below 5% +950 +700
5% +800 +660
6% +700 +620
7% +600 +590
8% +550 +570
9% +525 +550
10% +500 +535
11% +475 +500
12% +450 +440
13% +400 +380
14% +300 +300
15% +200 +100
Over 14% NA +10

10. GAS CO. FIELD CLERK ON SITE

A B
Yes +20 +10
No +5 0

11. PENALTY FOR DELAYED STARTING DATE DUE TO UNAVAILABLE

RIGHT-OF-WAYS ($ PER DAY)
A B
0 - 1,999 +10 +3
2,000 - 3,999 +8 +2
4,000 - 5,999 +6 +1
6,000 - 7,999 +4 0
8,000 - 9,999 +2 -10
10,000 or more NA -20

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