Bricker & Eckler LLP: Negotiation—Some More Basics

Negotiation — Some More Basics

Reprinted from March 2003 ohioconstructionlaw.com

Last month we introduced the subject of ADR, Alternative Dispute Resolution. Of the several tools available for resolving disputes, negotiation emerged as the most commonly used. Approached properly, negotiation offers a cost-effective means of reaching resolution over issues that can otherwise bog down a construction project.

This column mentioned two common styles of negotiation: positional bargaining and principled (or interest-based) negotiation. Both styles have a place in the world of ADR, but I hope to demonstrate that principled negotiation is the more rational of the two, and will usually (but not always) produce more satisfying results. This month we will begin an examination of the negotiation process, and over the next several months we will analyze negotiation as both an art and a science.

First, a Scenario. Imagine you are the Superintendent of Always Rosy Schools and are in the process of building a new middle school. The project is a little behind schedule, but your Construction Manager assures you that when winter breaks everyone will catch up. Before you know it, it is June, and you are nervous because completion in time for the new school year is obviously in jeopardy. A meeting is set for the first of next week. You will be sitting down with the Architect, Construction Manager and five prime contractors, most of whom are pointing fingers at each other by now. What will you say? How will you approach a solution to the problem?

First, let’s look at a few basics, and then we’ll come back to Always Rosy.

The Importance of Fundamentals. As we all know, in addition to sophisticated design, special skills and hard work, a successful construction project requires ongoing resolution of a wide variety of disputes. While planning, designing, and constructing a project, you encounter opportunities for gain and risks of loss. The difference between success and failure may turn upon your ability to identify these moments and respond to them promptly and efficiently. You will make many decisions under the pressure of time as the project continues its march toward completion. Have you ever thought about how these many critical decisions are actually made? What processes ensure a good and effective decision? Read on and you will see how these decisions are always the result of a negotiation—if only a negotiation with yourself.

What can you do today to be a more effective negotiator? Like learning any new skill, you have to study the fundamentals and then practice, practice, practice. We all know how to drive a car. But can we maneuver like a Formula I driver? Of course not. These drivers spent years learning the basics of road racing and countless hours developing their skills.

Negotiation is no different.

Everyone is an accomplished negotiator on some level. Negotiating skills begin shortly after birth. When you wanted something as a baby, you might have cried or screamed. You learned quickly how to get what you wanted. While you did not know exactly why, by creating an unpleasant situation for your parents, you were likely to be rewarded with comfort, caring and lots of attention. What you probably didn’t realize as an infant was that by creating such an unpleasant situation, you were actually offering your parents peace and quiet—assuming they understood how to respond. You cried; they held you. You received warmth and comfort; they received peace and quiet—albeit momentarily. But this lesson was short-lived. As you grew older, that approach probably led to an opposite result.

Over the years, we develop our own style of negotiating. Our style will be shaped in part by our personality. However, our style will also be shaped by what we learn about the negotiation process itself and how seriously we work to develop our negotiating skills. Most of a lawyer’s time is spent negotiating. Likewise, in the construction industry, a great deal of time is spent negotiating. Contractors, Construction Managers, Architects, consultants, field workers, and Owners all negotiate during a project—some of them every day, all day long, and some more effectively than others.

A Different Perspective. A Construction Manager may view a problem only from the perspective of the Owner, focusing almost entirely on getting what the Owner wants from a particular negotiation. Understanding what the Owner wants and striving for the Owner’s goals are important. But it is equally important to understand what the other party needs (not wants) from the negotiation and how to deliver that in a way that is acceptable, whether that other party is the Architect, a contractor, or perhaps even an adjoining landowner.

Said another way, negotiation is simply the process of learning what the other party needs and how to provide it in a way that is best for you (or in the case of the Construction Manager, for the Owner). Nothing more. A successful negotiation results when you are well satisfied and the other party finds the resolution acceptable.

Effective negotiation involves many aspects:

Trust – Be trustworthy, not trusting.
Patience – Don’t rush the negotiation, or you will overlook opportunities for mutual gain.
Attitude – Stay positive and try to avoid being reactive.
Knowledge – You can’t know too much about the problem or too much about the other party’s interests. Probe for information; information is power in negotiation
Listening – While your message is important, it is just as important to understand the other party; there is no substitute for careful listening.
Communication – Make sure you understand and are understood; miscommunication can destroy a successful negotiation.
Structure – Plan carefully, research information important to the negotiation, and follow your plan.

Understanding the dynamics and process of negotiation empowers you to negotiate effectively. It is a process you can master; and yet each negotiation should teach you something and should improve your skills.

Positional bargaining is the old mainstay of negotiating styles, although its utility is dwindling with the advent of principled negotiation (discussed below). The positional negotiator relies on concealing interests, maintains a challenging attitude, prefers to talk only about what he or she wants, and engages in a winner-takes-all approach.

Here is a classic example: Joe responds to an ad in the classifieds for an antique car, for sale by Bill. Bill wants at least $5,000 but thinks it is worth more; however, he mentions no price in the ad. Joe wants the car, but he doesn’t want to pay too much for it. Joe is satisfied that the car is probably worth $10,000, but wants to make a steal if possible. A positional negotiation would begin something like this:

Joe: Bill, I saw your ad. That old beater looks pretty tired—what are you asking for it?
Bill: I’ve had this old timer for 20 years and hate to let go of it. What will you give me?
Joe: How about $2,000?

What can happen here? Several things. Bill might accept, in which case Joe will suspect there is something seriously wrong with the car. Or, while Bill might have accepted $5,000 for the car, he could be so offended by Joe’s low-ball offer that he counters with $15,000 in an attempt to regain his dignity.

At this point, neither party has a clue about what the other party wants or needs from this sale. This is the nature of positional bargaining. It is risky. Bill and Joe are miles apart with no hope in sight of closing this sale. Why? Because neither of them took the time to find out what was driving the other in the negotiation. They are locked in a battle of wills. Even if they succeed in making a deal, chances are one or both of them will leave the negotiation with bitter feelings and a measure of distrust. If this was a onetime negotiation, it might not matter so much. But, in the construction industry, the same people must negotiate over and over again. They must trust each other to maintain the type of relationship that successful projects require. In such a situation, principled negotiation can be most helpful.

Principled negotiation is a process with several advantages:

It separates the people from the problem. The negotiation should address the issue, not the people. By concentrating on the problem, parties can maintain a good working relationship, a key ingredient to problem solving.
It focuses on both side’s interests, not their positions. A position is what a party states it wants from a negotiation. An interest, on the other hand, is the reason for taking the position. A principled negotiator works hard to identify both party’s interests. Shared or common interests are especially important, as they make good building blocks for a successful negotiation.
It explores various options with a potential for mutual gain. Principled negotiators abandon assumptions and seek creative solutions. They are willing to throw ideas out on the table without committing to them.
It uses objective criteria to legitimize choices that lead to agreement. Any resolution should be tested to see if it is fair, using standards that are generally recognized as legitimate. An example might be the Bluebook in the case of a used car’s value. In construction, it might be R.S. Means’ pricing guide, or comparison to similar projects.

Suppose that Bill and Joe were principled negotiators. The negotiation might have gone something like this:

Joe: Bill, that is really a nice car you have there. How can you bring yourself to part with it?
Bill: Well, Joe, my wife has been sick and needs an operation. I am raising all the money I can.
Joe: Wow, I’m sorry to hear that. How does the car run?
Bill: I’m glad you asked, because it does have a problem with the transmission and I haven’t had any luck finding parts for it. If I could find the parts, I would fix it and sell it for a lot more than I am asking now.
Joe: Really? How much do you think it is worth as it sits?
Bill: Probably at least $5,000, but I need to get a little more for it, if possible. By the way, are you a collector or a dealer?
Joe: I am both. I keep some, and I resell some. It is both a hobby and a part-time business for me. How much do you need to raise for your wife’s operation?
Bill: We’ll need about $7,000. Sounds like you know a lot about antique cars. How much do you think it is worth?
Joe: Probably more than you are asking for it to the right buyer, especially if you could fix the transmission. By the way, what exactly is wrong with the transmission?
Bill: There is a chipped cluster gear that makes a terrible sound in third gear. I’m afraid it will ruin the entire transmission if I don’t fix it. You don’t know where I could find a replacement, do you?
Joe: Yes, I do. I have one sitting around my shop. That is one of the reasons I responded to your ad. I have a lot of parts for this particular model.
Bill: Do you have any idea what the car would be worth if we cleaned it up a little and fixed the transmission?
Joe: I read a report last month that said such a car would be worth in the range of $10,000—$15,000 in excellent condition. But I’m not really that interested in keeping it. Suppose I loaned you $7,000 for your wife’s operation and took the car as collateral? I can replace the cluster gear and clean it up. I’ll offer it for sale, and if we sell it we can split the profits after returning my $7,000, plus the costs of advertising. What do you think?
Bill: That sounds great. Here are the keys.

Now this might sound a little rosy, but it shows how learning about each other’s interests can lead to a win-win result. Let’s examine: Joe was nice to Bill and focused on Bill’s interests as much as his own. While Joe may have appeared as a buyer, he was really trying to make use of his valuable spare parts and had no interest in keeping the car. Bill, on the other hand, really needed to sell the car and knew it was worth a lot more than he was asking for it. While Bill was lucky to find Joe as a buyer, Joe was equally lucky: Apparently Bill’s car was rare enough that Bill couldn’t find parts for it. Bill’s car turned Joe’s old cluster gear into gold.

Had Joe started off as a positional bargainer, he might have offended Bill and lost a deal. Bill might have lost a sale to Joe because of his pride. They each had something the other wanted and needed, and by engaging in a dialogue before beginning the bargaining process, they were able to uncover mutual gains. This is the result of principled negotiation.

Your Homework, Should You Choose To Accept It. Applying these principles with certain other fundamentals of negotiation will help you reach fair resolutions to problems with your construction project, and reach them in a way that will maintain good working relationships. Now, back to Always Rosy. How would you approach the meeting? Give it some thought and jot down the interests of each party, as you perceive them. Is there anything else you need to know in order to proceed? Can you think of any creative way to provide most of what each party needs without anyone having to sacrifice?

Next month we will look at differing perspectives in a construction project. We will also explore common goals and areas where the parties may find common ground. Planning a successful negotiation requires effort to understand these aspects of the problem at hand and to achieve a fair and just resolution. Check in next month and see how everyone can win at the Always Rosy Middle School.