Order ID 53563633773 Type Essay Writer Level Masters Style APA Sources/References 4 Perfect Number of Pages to Order 5-10 Pages Description/Paper Instructions
Cory Electric Case Study Assignment
“Frankly speaking, Jeff, I didn’t think that 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 contract negotiations. As chief contract administra-tor, you’ll head up the negotiating 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 $750-million-a-year electrical components manufacturer serving virtually every major U.S. industry. Cory Electric had a well-established matrix structure that had withstood 15 years of testing. Job casting standards were well established but did include some fat on 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 pro-gram manager; the chief project engineer who developed the engineering labor package; the chief manufacturing engineer who developed the produc-tion labor package; and a pricing specialist who has been on the proposal since the kickoff meeting. We have a strong team and should be able to handle any questions.”
Gus Bell: “Okay, I’ll take your word for it. I have my own checklist for con-tract 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 program at a $15 million cost—that’s $5 million below our target—and still book a $1.6 million profit by overrunning the cost-plus-incentive-fee con-tract. Here is a list of the possible cases.” (See Table I.)
Gus Bell: “If we negotiate a cost overrun fee, make sure that cost accounting knows about it. I don’t want the total fee to be booked as profit if we’re going to need it later to cover the overrun. Can we justify our overhead rates, general and administrative costs, and our salary structure?”
Jeff: “That’s a problem. You know that 20 percent of our business comes from Mitre Corporation. If they fail to renew our contract for another two-year follow-on effort, then our overhead rates will jump drastically. Which overhead rates should I use?”
Table I Cost positions
Negotiated Fee
Negotiated Cost % Target Fee Overrun Fee Total Fee Total Package
15,000,000 14.00 1,600,000 500,000 2,100,000 17,100,000
16,000,000 12.50 1,600,000 400,000 2,000,000 18,000,000
17,000,000 11.18 1,600,000 300,000 1,900,000 18,900,000
18,000,000 10.00 1,600,000 200,000 1,800,000 19,800,000
19,000,000 8.95 1,600,000 100,000 1,700,000 20,700,000
20,000,000 8.00 1,600,000 0 1,600,000 21,600,000
21,000,000 7.14 1,600,000 –100,000 1,500,000 *22,500,000
22,000,000 6.36 1,600,000 –200,000 1,400,000 23,400,000
23,000,000 5.65 1,600,000 –300,000 1,300,000 24,300,000
24,000,000 5.00 1,600,000 –400,000 1,200,000
Assume total cost will be spent:
21,000,000 7.61
22,000,000 7.27 Minimum position = $20,000,000
23,000,000 6.96 Minimum fee = 1,600,000 = 8% of minimum position
24,000,000 6.67 Sharing ratio = 90%/10%
* Buy-in
Gus Bell: “Let’s put in a renegotiation clause to protect us against a drastic change in our business base. Make sure that the customer understands that as part of the terms and conditions. Are there any unusual terms and conditions?”
Jeff: “I’ve read over all terms and conditions, and so have all of the project office personnel as well as the key functional managers. The only major item is that the customer wants us to qualify some new vendors as sources for raw mate-rial 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 fact-finding team to go over all of our labor justifications. The impression that I get from our people is that we’re covered all the way around. The only major problem might be where we’ll be performing on our learning curve. We put into the proposal a 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, the 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 ongoing projects here at Cory. I estimate that we could put together about 10 per-cent of the 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 a 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 foolproof 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 prob-ably negotiate the raw materials, the man-hours and the learning curve, the over-head 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 mini-
mum position?”Jeff: “Our proposal was for $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 guar-anteed 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 as 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 immedi-ately 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 counterof-fer, 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 posi-tion 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 nego-tiations until the customer gives us someone at your level. We’ll negotiate this at my level, if necessary.”
QUESTIONS
How many people should make up the negotiations team?
What is the role of the project manager?
What items are negotiated during contract negotiations?
What is the order of these items?
Should the negotiating parties be headed up by individuals who are the same rank?
Can a company bid on a contract that is well below its minimum cost estimate? If so, under what circumstances?
RUBRIC
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