Negotiation is a science that requires preparation if you are to have any chance of succeeding. To realize your part of a win-win outcome in every negotiation, identifying your project cost and profit margin is essential. Knowing these two components of a project fee will help ensure the desired outcome.Before a client ever receives your fee proposal, most have already established a specific fee amount they are willing to pay for your services. If your proposal should exceed that threshold, you’ll have to negotiate to get your fee.What's the best way to prepare for such a negotiation? The most critical piece of information to identify in a negotiation would be the estimated project cost, exclusive of profit, to complete the project. This figure is otherwise known as the project "break-even" cost.You can determine this cost in several ways, and you would do well to investigate and compare the results of each method. One of the best methods is to review projects of similar type and of comparable size and complexity. If you have kept accurate project cost accounting records, you will have an excellent resource to evaluate and help you build the fee you may need to negotiate. You will need to determine the actual, final percentage of profitability for these projects to ascertain whether the fees were adequate to complete the project(s) and still earn a "reasonable" profit. Two other useful methods to define the break-even cost of project delivery are the "top-down" fee budgeting approach (for public-sector projects) and the "bottom-up" approach (for private-sector projects).Public-sector project fees are usually fixed, up front, as a percentage of the owner’s construction budget. On public-sector projects, therefore, the top-down method helps you to define whether the fee given is sufficient to provide the required scope of services and the defined deliverables.
Working down through this process will provide you with an estimate of the hours the given fee will accommodate. If your calculations indicate that the fee will not provide an adequate number of hours to provide the services required, before declining the project you could negotiate for a reduced scope of services to match the available hours within the given fee. To determine the scope the given fee will support, you need to determine your break-even cost. Because the top-down method uses "billing" rates (profit included), you will need to then switch to the bottom-up method to calculate your break-even cost.Even though the bottom-up method is applicable primarily to private-sector projects, it’s also a useful tool for defining the break-even cost of delivering a public-sector project for a given fee. This method uses "break-even" rates (exclusive of profit) to determine the actual project cost. With the bottom-up fee budgeting method, the profit is added as the last step in defining the total fee to be negotiated.
In other words, you get to establish the percentage of profit to be added to the break-even cost.Beginning a negotiation with knowledge of the project break-even cost and profit margin gives you the power to "control" the negotiation. The control I refer to is the power to make an informed decision at each stage of the negotiation. For instance, if the client’s offer is less than your calculated fee, you have several options. You can negotiate for a reduced scope. You can reduce the percentage of your profit. You could ask for time to discuss the offer with your key team members. Or you can, as a final resort, say, “Thanks, but no thanks” and terminate the negotiation. Whether both parties make an informed decision to accept the terms of the scope and fee amount negotiated or whether they "shut down" the negotiation, any one of these options would result in a win-win outcome.Some circumstances could lead you to accept a fee with a reduced profit, but I cannot understand why anyone would agree to a fee with a zero profit or one that is less than their project break-even cost. Negotiating a fee without the above preparation and knowledge, however, increases the chances are that such a possibility could occur.