Last edited 15 Sep 2020

Negotiated contract

In order to procure a building, a client will normally have to appoint a number of suppliers. There are a number of procedures that can be adopted to select and appoint suppliers.

Open procedures.
Selective procedures.
Negotiated procedures.
Serial procedures.
Framework procedures.

Each has its own advantages and disadvantages which must be considered in relation to the particular objectives and scope of the project.

Some of these procedures involve competitive bidding between multiple contractors, whereas the negotiated procedure involves negotiations with just one pre-selected contractor.

In competitive bidding, a contract is agreed following a tendering process where the award is often made to the cheapest (or best value) tender. The concept of negotiation generally allows more flexibility for the client to select a contractor on a basis other than the lowest bid. Negotiated contracts are generally agreed between a contractor and client that have experience of working together and have a relationship built on trust.

Negotiating with a single supplier may be particularly appropriate for highly-specialist works where there may only be a limited number of potential suppliers, or for extending the scope of an existing contract. It can give the client the confidence of working with a supplier they already know, can reduce the duration and costs of tendering and can allow early supplier involvement.

As the design documents very often have not been completed at the negotiation stage, a cost plus contract or cost reimbursable contract is commonly used for negotiated tenders. This allows for the reimbursement of the contractor for the costs incurred during construction, such as labour, equipment and materials, as well as profit and overhead charges for the management of the project.

However, despite having the advantage of being more flexible, negotiated contracts can also be less attractive for clients who may see the lack of competitive tendering as driving up costs; though it is often the case that a strong working relationship with a contractor whose practice is well-known may more than make up for this over the duration of the project.

Negotiated contracts may not be permitted by some organisations due to the perceived lack of accountability. On public projects, or projects that include a publicly-funded element it may be necessary to advertise contracts.

Advantages:

Client has flexibility in terms of choosing their preferred contractor.
Time and cost savings involved in removing the tendering process.
It can allow early supplier involvement.
Contractor’s costs and pricing are more transparent as they are not seeking to win the bid purely on the lowest tender.

Disadvantages:

There are fewer options for the client to choose between and so there may be less innovation.
The costs may be driven up by the lack of competitive bidding.
There is a heavy reliance on trust between the parties.
Unless it is carefully structured and controlled, the negotiation process can create an adversarial atmosphere, even before the contract has been awarded.
It can be seen as anti-competitive and exclusive, with the potential for ‘cozy’ relationships to develop between the client and the supplier.