What is the best way to measure the ROI of a contract negotiation with a contractor?

2 How to calculate ROI in contract negotiation?

Calculating the Return on Investment (ROI) in contract negotiation requires estimating several variables, such as the initial contract price (ICP) – the amount quoted before negotiation – and the final contract price (FCP) – the amount agreed to after negotiation. Additionally, you need to consider the negotiation cost (NC), which includes expenses such as staff salaries, travel, and legal fees, as well as the negotiation benefit (NB), which is any additional outcomes from the negotiation, such as better quality or faster delivery. The formula for ROI in contract negotiation is: ROI = (FCP - ICP + NB - NC) / NC. The higher the ROI, the more effective your negotiation was. For example, if you negotiate a contract from $100,000 to $90,000, and your negotiation cost is $5,000, your ROI is ($90,000 - $100,000 + $0 - $5,000) / $5,000 = -30%. This means you lost more money than you saved from the negotiation. However, if you also obtain a 10% improvement in quality worth $10,000 then your ROI becomes ($90,000 - $100,000 + $10,000 - $5,000) / $5,000 = 0%, which means you broke even from the negotiation.

3 What factors affect ROI in contract negotiation?

When it comes to contract negotiation, there are many factors that can influence your ROI, both internal and external. Internally, you should consider your negotiation strategy and tactics, skills and experience, and objectives and expectations. Externally, you should take into account the market conditions and competition, the contractor's characteristics and behavior, as well as the contract's complexity and scope. Researching these factors thoroughly can help you to make informed decisions that will maximize your ROI.

5 How to measure ROI in contract negotiation?

Measuring your ROI in contract negotiation is essential for evaluating the success of your negotiation and identifying any gaps or deviations. To do this, you need to collect and analyze data on your initial contract price, final contract price, negotiation cost, and negotiation benefit. You should then compare your actual ROI with the target ROI that you set for yourself. Additionally, it is important to evaluate your negotiation performance, considering factors such as your strategy, skills, objectives, market conditions, contractor's behavior, or contract's complexity. Finally, learn from your experience and apply the feedback and lessons to improve your future negotiations. Contract negotiation is a key skill for any construction project manager as it can directly affect the success and profitability of a project. Knowing what ROI is in contract negotiation, how to calculate it, and what factors to consider when evaluating it can help you become a more effective negotiator and achieve better outcomes for yourself and your contractor.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?