Case: Cory Electric "Frankly speaking, Jeff, I didn't think we would stand a chance in winning this $20 million program. I was really surprised when they said that they'd like to accept our bid and begin negotiations. As Chief contract administrator, you will head up the negotiation team, "remarked Gus Bell, vice president and general manager of Cory Electric. "You have two weeks to prepare your data and line up 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 year electrical components manufacturer serving virtually every major U.S industry. Cory Electric had a well-established matrix structure that had withstood fifteen years of testing. Job casting standards were well established, but did include some "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 sure that you're covered on all sides" Jeff: "There will be four, plus myself, at the negotiating table the programme manager, the chief engineer who developed the engineering labour packages the chief manufacturing engineer who developed the production labour package and a pricing specialist who has been on the proposal since the kick-off meeting. We have a strong team and should be able to handle any questions" Gus Bell: "Okay, I'II take your word for it. I have my own checklist for contract negotiations. I want you to come back with a guaranteed fee of $1.6 million for our stockholders. Have you worked out the possible situations based on the negotiated costs?" Jeff: "Yes! Our minimum position is $20 million plus an 8 percent profit. Of course, this profit percentage will vary depending on the negotiated cost. We can bid the programme at $15 million cost that's $5 million below our target cost and still book a 1.6 million profit by overrunning the cost-plus-fee contract. Here is a list of the possible cases. See Exhibit one below. Jeff: "I've read over all terms and conditions, and so have all the project office personnel as well as the key functional managers. The only major item is that the customer wants us to qualify some few vendors as sources for raw material procurement. We have included in the package the cost of qualifying two new raw material 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 finding team to go over all of our labour justifications. The impression that I get from our people is that we're covered all the way round. The only major problem might be where we'll be performing on our learning curve. We put into the proposal 45 percent learning curve efficiency. The customer has indicated that we should be up around 50 to 55 percent efficiency based on our previous contracts with him. Unfortunately, those contracts the customer referred to were four years old. Several of the employees who worked on those programs have left the company. Others are assigned to on-going projects here at Cory. I estimate that we could put together about 10 percent of people we used previously. That learning curve percentage will be a big point for disagreements. We finished off the previous programs with the customer at 35 percent learning curve position. I don't see how they can expect us to be smarter, given these circumstances." Gus Bell: "If that's the only weakness, then we're in good shape. It sounds like we have a fool proof audit trail. That's good! What's your negotiation sequence going to be? Jeff: "I'd like to negotiate the bottom line only, but that's a dream. We'll probably negotiate the raw materials, the man-hours and the learning curve, the overhead rate, and finally the profit percentage. Hopefully, we can do it in that order." Gus Bell: "Do you think that we'll be able to negotiate a cost above our minimum position?" Jeff: "Our proposal was $22.2 million. I don't foresee any problem that will prevent us from coming out ahead of the minimum position. The 5 percent change in learning curve efficiency amounts to approximately $ 1 million. We should be well covered. "The first move will be up to them. I expect that they'll come in with an offer of $ 18 to $19 million. Using the binary chop procedure, that'll give us our guaranteed 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 three days. I think we both got what we wanted. I expect this one to go just smoothly" Gus Bell: "Okay, Jeff. I'm convinced we're prepared for negotiations. Have a good trip" The negotiations began at 9:00 A .M on Monday morning. The customer countered 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 immediately called Gus Bell at Cory Electric. Jeff: "Their counteroffer to our bid is absurd. They've asked us to make a counteroffer to 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, if we don't give them a counteroffer, then we're not bargaining in good faith. I think we'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 within the 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 levels of management. Find out if the person that you're negotiating with reports to a vice president and general manager, as you do. If not, break off contract negotiations until the customer gives us someone at your level. We'll negotiate this at my level, if necessary."

Question 1

For the above case study, design a PERT schedule with the key activities for the $20 million contract negotiation project. There should be between SIX (6) to TEN (10) activities identified from the case study. Additional relevant activities may be included. Create an AON network diagram and find the critical path using slack once estimated activity time is established.

Question 2 Analyse the various types of Gantt charts Gus Bell and Jeff can use to schedule preparations for the above negotiation. Present an example of each type of Gantts Chart from the schedule created in Question 2.

Question 3 "I'd like to negotiate the bottom line only, but that's a dream. We'll probably negotiate the raw materials, the man-hours and the learning curve, the overhead rate, and finally the profit percentage. Hopefully, we can do it in that order." In light of the above statement and considering variability (uncertainty) on man-hours, discuss an appropriate time estimating approach using an example.