At the contract formalisation stage, the first consideration must be whether negotiations are required for the particular contract. In straightforward contracts, with easily defined goods and services and straightforward payment arrangements, there may be little or no value in using time and resources to negotiate.

In the majority of contracts there will be mandatory provisions that relate to legislative or government policy requirements that are not able to be negotiated. However, there are many areas where negotiation is possible. The major reasons for negotiating at the contract development phase include:

•  to confirm or to obtain better value for money;

•  to achieve a full understanding between the parties;

•  to establish or refine the statement of requirements and/or the performance regime;

•  to clarify issues or objections to contract provisions; and

•  to explore any complex or one-off issues.

In deciding who will conduct negotiations, it is useful to include the person or team who will later manage the contract if possible. Irrespective of its composition, the negotiating team should have an understanding of:

•  the contract deliverables;

•  the basis on which the preferred tender(s) have been selected;

•  the background to why certain contract conditions are subject to negotiation (often these are as a result of the evaluation of tenders); and

•  the context of the requirement in the market place.

Negotiations should aim to achieve the best possible result for the acquiring entity in the circumstances, while recognising that the contractor also needs to be satisfied with the result. If a contractor considers they have been unfairly treated during contract negotiations, this may impact on their contract performance during the life of the contract.

During negotiations acquiring entities should, as far as possible, avoid any suggestion that the preferred contractor is certain to be awarded the contract because this can undermine the effectiveness of the negotiations. It is equally important to maintain confidentiality of issues, responses and the direction of the negotiations, especially where parallel or simultaneous negotiations (discussed below) are being undertaken.

During negotiations acquiring entities should, as far as possible, avoid any suggestion that the preferred contractor is certain to be awarded the contract because this can undermine the effectiveness of the negotiations.

The following case study discusses an example of how contract negotiations were conducted.

Case Study: Final negotiations on a large contract

An entity was nearing the end of the evaluation of tenders for a five-year services contract. Of the tenders being evaluated, one was well ahead of the others in terms of overall value for money (including such factors as price, service and risk factors). However, it was higher priced, with higher service levels.

The tender evaluation team briefed the procurement steering committee, and sought approval to obtain a best and final offer from the most highly ranked tenderer. (The possibility of seeking best and final offers had been explicitly mentioned as an option in the request for tender documentation). An indication was provided to this tenderer of the preferred service level. To encourage the provision of a genuine best and final offer, the tenderer was not advised of their current ranking in the process.

Following final analysis of the offers, the tender evaluation team recommended to the steering committee the preferred tenderer, and a list of issues for negotiation. The types of issues being explored in the negotiations included some costs in later years of the contract (which the entity considered should reduce as experience was gained) and a number of partial compliance issues on contract clauses (for example, the RFT had specified that the Commonwealth wished to be able to sub-license some intellectual property of the contractor, but the contractor did not want to permit sub-licensing).

A list of issues was sent to the contractor so that as many issues as possible could be resolved by correspondence. The remaining substantive issues were then addressed in a one-day negotiation session. The result of this was a negotiated form of the offer that could be formally considered for acceptance by the entity.

Comment: Better practice features of this study include carefully following processes set out in the RFT documentation, timely briefing of the steering committee, and obtaining of proper authority for key steps during the negotiations. Probity issues can arise when seeking best and final offers and in conducting other aspects of final negotiations. On the one hand, it is important to not give an improper advantage to a tenderer to improve their offer; on the other hand it may be inappropriate to put all tenderers to the effort and expense of revising offers when some are clearly unlikely to be successful. The key principles to follow are to ensure even-handed treatment of all involved and careful documentation of decisions.

In the course of any negotiation, it is important that legislative requirements are complied with, and there are particular legal issues to be aware of at the contract finalisation stage.

Tenderers should be advised that the negotiations are subject to a formal written contract, properly signed and authorised by the appropriate delegate. They should not be advised or otherwise given the impression that they have been awarded the contract until the contract negotiations have been concluded and the final contract is agreed by both parties. While the documentation used to define the requirement or to approach the market should contain clauses making this clear, it should be reaffirmed early in negotiations. Failure to do this could, in some circumstances, give rise to legal claims for damages if a contractor is led to believe they will be awarded the contract.

If the negotiations are likely to result in a major change to the original requirements, it may be necessary to give all tender respondents the opportunity to revise their responses. The need for this depends on the circumstances but will generally involve a consideration of the extent and nature of the change to the original requirement. If there is any doubt, specialist advice should be obtained to assist with making the decision.

In negotiations it is important to bear in mind the principles of contract law. A contract requires agreement in law and that agreement is shown by an offer by one party and an acceptance by the other. It is possible that announcing the successful contractor (before the contract is actually agreed and signed) will amount to an acceptance and the formation of a binding contract. This provides no further incentive on the part of the contractor to agree to modify terms or conditions. A party wishing to modify terms may even have lost the ability to do so, or the ability to withdraw from the transaction, even where the contract was formed prematurely or inadvertently.

Care needs to be exercised when considering whether to defer finalising or clarifying particular issues until after the contract has been signed. Generally the acquiring entity's bargaining position will be reduced once a contract is signed. Every effort should therefore be made to settle outstanding issues prior to contract signing. Agreement should be reached on how any matters not settled will be finalised.

Tenderers should be advised that the negotiations are subject to a formal written contract, properly signed and authorised by the appropriate delegate.