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Negotiation Tip # 8: Consider All Costs

Negotiation Tip # 8: Consider All Costs
Pat Dickson - Sun Jun 17, 2012 @ 06:35AM
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CONSIDER ALL COSTS

Whenever you are in a dispute, one of the first things you need to do is consider all the potential costs of fighting. In most protracted disputes, I've found a lot of money would have been saved had an accurate cost assessment and settlement offer been made before any blood was drawn. 

Top 8 Negotiation Tips

For example, I remember when Joe, a small contractor client of mine, came to me. He was furious! Joe slammed his fist down on my desk. Then it took him over an hour to tell me about how he'd just received a nasty written ultimatum from his customer, Discount Shopping Center. They wanted $10,000 of free work! The nerve!

Discount was unhappy with how Joe had installed several awnings. They believed he had installed 20 of them about 2 inches too high, and he needed to lower all of them. Joe disagreed. Long story short, the approved drawings allowed room for interpretation.

Of course Discount wanted the awnings lowered at no additional cost. Joe wanted Discount to sign a change order for $10,000. The math behind his $10,000 proposition: There were 20 awnings. Each took 10 man hours to lower. Each man hour was $50 because all his installer work was subject to a union labor agreement between Discount and all the local unions. All Discount contractors performing work on the site were bound to a Project Labor Agreement ("PLA").

Joe felt $10,000 was more than fair. For him, this offered amount only covered what he perceived to be all costs of resolving the dispute. After all, he was forfeiting all profit to make the customer happy. In fact, the $10,000 only covered labor. He hadn't even included things like fuel or materials, granted these amounts were likely under $1,000.  

During the previous month, before Joe came to me and explained the problem, there had already been numerous heated exchanges on site, over the phone, and via email. Now, in writing, his customer was threatening to sue him for $12,000. His alternative was performing the work, for free, within the next two weeks. Another contractor had already agreed to do the work for $12,000, if Joe didn't do it on time. If the other contractor performed the re-install instead of Joe's crew, Discount wanted Joe to pay this other contractor's $12,000 bill. 

"The nerve!" decried Joe. "By suing me for $12,000 they are admitting I'm giving them $2,000!"

"I don't dispute your point."

"What should I do?"

"Do you want an honest answer, or do you want to hear what you want to hear?"

"Oh dear... alright... honest."

"Offer $7,500, and go as low as $5,000."

Joe went from calmed down to immediately red in the face. He stood up and raised his voice.

"What! You are crazy! Forget it. I'm fighting this! Pat, you are good as an in-house lawyer, but I'm taking this to Alan. He isn't afraid to fight!"

Joe stormed off. He hired Alan, his outside counsel, at $500 per hour. Joe and Alan fought the good fight over the next 18 months. Joe won the lawsuit. The court awarded him $10,000.

When the lawsuit was over, Joe took me to lunch. His treat.

"I won the case. Discount is going to pay me $10,000 when I finish the work this week."

"Congratulations! But Joe, why do you look so unhappy?"

"Because, I didn't consider all costs. Had I listened to you, at worst, I'd have only lost $5,000 fighting this case."

"But you are getting the $10,000 change order you wanted. The judge ordered it."

"Alan's legal bill for the whole thing was $25,000. The court didn't give us attorney's fees."

"I'm sorry Joe. Ok, so Alan's help made the whole ordeal cost you $15,000, rather than $5,000."

"Much, much more than that..." sighed Joe.

"How so?"

"$3,000 more for the increased labor rates. Since the dispute started, the union rates for the labor jumped $15 per hour."

"Ok, so $18,000," I calculated aloud.

"No, that's not all. Don't forget the $20,000 in profit I lost when Discount didn't renew it's maintenance contract with me. They even said I lost the maintenance work because I was too litigious."

"Oh dear... $38,000 more."

"No Pat, it doesn't end there..." Joe swallowed. "I lost a bid with the county too. It would have been worth another $30,000 in profit - if it weren't for the lawsuit. I was beat by one point on the bid by the winning contractor. The fact I had to list a pending lawsuit cost me 2 points. Had I just settled this dispute without letting it go to court, I'd have won the bid."

I sighed. Together we said it aloud.

"$68,000."

CONSIDER ALL COSTS!

Negotiation Tip # 9

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