Friday, August 10, 2012

Deconstructing an Offer

Today we step out of theory for a bit and look at a very mundane negotiation; the type each of us faces regularly at home and at work.  Hopefully it will be useful for your own negotiations but naturally I'm going to try tying it to a larger theoretical idea.

Part of the renovations of the school next door to my home included putting up a new fence along the abutting side of my property.  At the start of the project there were two fences there; an old chain-link fence on the school side of the line and a wooden one on ours.  The renovation called for the school to replace the chain-link fence with a new cedar fence.

Our fence is both old and, to use a technical term, cheap.  It was already in rough shape and it sustained some damage during the project.  There was an obvious win-win opportunity here; rather than ask the town to fix the damage to our fence we asked them to remove that section entirely so that when the project is complete there is only one fence -- the new wooden one.

As the date of the fence work approached, my wife and I decided we should also look at replacing our fence that ran along the back of our yard to match the new fence along the side.  This also seemed like a natural win-win since the additional cost for the fencing company to add in another section of the same fence they were installing for the school would be significantly lower than for a new job.  (Their crew and equipment would already be here, and they might get a further volume discount on the fence itself.)

As I contacted the fence company, I knew I was missing some potentially important information.  I knew what the new fence looked like and what it was made of, but I didn't know the wholesale cost or the specific product information that would let me get a bid from another fence company.  I wasn't too worried about that, however, since this was easily findable information (and the fencing company would know that).

I would never begin a large negotiation without having that homework in place but for something relatively small it can make sense to move forward and only spend time getting information if it proves necessary.  As with anything, the benefits have to be weighed against the costs.

The initial quote from the fencer was significantly higher than I'd anticipated.  Without having done my homework I was now in that uncomfortable position of wanting to negotiate them down in price while not knowing what would be a realistic counter-offer.

A useful technique in this situation is simply to ask the other party to explain their offer, providing some context as to why it seems high but not making a counter-offer of your own yet.  I told the company that I'd expected a fairly low cost for the this fence given that they would already have their crew and equipment on site and asked them to break their quote down, including detailing the cost of the fence materials (to them) and labor.

This sort of framing is useful in multiple respects.  First, it sets the other party's expectations that this is a competitive negotiation without becoming hostile or aggressive.  Second, by breaking down their bid into material cost, labor and profit it becomes very hard for the vendor to keep their bid inflated.  Any fence company can confirm their wholesale cost (so it's both fruitless and dangerous for them to lie about it) and labor is also hard to fudge.  Thus, when they come back to me they either need a rationale for the original bid (assuming I wasn't just underestimating the fence cost) or they need to come down in price before I even make a counter-offer.

In this case they did both.  The owner explained that because the school project was a public-sector job they had to pay "prevailing union wages" but that she was willing to come down 10% on the price of the job.  Now I was 99% sure that nothing prevented them from having their crew do a separate job right next to the school job and pay them normal rates (even assuming they actually had to pay higher rates for the fence along the school property line) but I didn't want to accuse her of lying.  So how do we get them to lower their bid further?

If a counterpart is telling you something that you think isn't true in order to justify a higher price, see if you can find a decision that makes sense if they're telling the truth but that they would want to prevent if they aren't.  In this case, I answered that I'd assumed that already being on-site would make the job cheaper for them.  If, in fact, it was making it more expensive then instead of having them do the extra fence we would just wait.  I asked her to give me a quote for doing the work at a later date and said that with the time pressure off we could see how we liked the new fence installed and whether we wanted to replace it after all.  We could also get a couple of other quotes before moving ahead.

If, in fact, they had to pay higher labor costs because of the proximity to the school project then this was the rational response on my end.  If, however, they can pay their normal wage rates it's a terrible outcome for them.  They risk not getting the job at all and if they do get it their costs would be higher.  Rather than accusing anyone of lying I created a situation where if they were lying they would correct the lie themselves.

It seems that my initial assumptions were correct; the fence company could indeed pay normal labor rates for the work on our fence and since they were already there they could take a lower margin on the additional work than would normally make sense.  They called back and said they had "figured out a way" that they could handle the wage issue by making it a separate job and their offer now came in at just over half the original quote.  Calls to two other fencing companies confirmed that this bid was more than competitive; no one else would match it.  One guy even said, "At that price I wouldn't make enough money to cover the cost of coming out there."


2 comments:

  1. Chad,

    long time no hear!
    I like your posts about negotiations. For this particilar one: I like your approach of asking for an explanation but I think I wouldn't have had played the card of "being on site already" right away but would have used this in a second round.
    What's yiur takeaway how this would have impacted the negotiation?

    Alfred (the one from Munich...)

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