W21_TRI_ Developing a Negotiation Model on EPCI Price & Schedule

1.      Problem recognition, definition and evaluation

After conducted EPCI cost analysis and schedule analysis, the negotiation process is required in tender stage. Since the economics of a gas project was so marginal, negotiation would become a critical process to make such a tender whether it’s failed or success. The good negotiation should be prepared with some adequate materials, such as a negotiation model. Therefore, a negotiation model is required to be built prior to negotiating with bidder(s). 

2.      Development of the feasible alternative

Principally, any successful negotiation must have a fundamental framework as follows:

·         The alternative to negotiation

·         The minimum threshold for negotiated deal

·         How flexible a party is willing to be, and what trade-offs it is willing to make

Three concepts for establishing negotiation framework: BATNA (Best Alternative To Negotiated Agreement), Reservation Price and ZOPA (Zone Of Possible Agreement). And expanded to the fourth concept: value creation through trade.

Developed by Roger Fisher and William Ury, BATNA is one’s preferred course of action in the absence of a deal. Always know the BATNA before entering into a negotiation. Otherwise the negotiator won’t whether a deal makes sense or when to walk away.

The reservation price (also referred to as the walk-away) is the least favorable point at which one will accept a deal.

ZOPA is the area range in which a deal that satisfies both parties can take place. Each party’s reservation price determines one end of the ZOPA. Each party had a reservation price, and they bargained within the ZOPA. In doing so, each got a better price than his/her walk-away.

Figure 1. Reservation Price & ZOPA

3.      Development of the outcome

According to Figure 2 and Figure 3, the 75% confidence level of EPCI schedule and cost fall in duration 28 months and cost USD 200 Million. Meanwhile, input for cost simulation is shown in Table 1.

Figure 2. Summary Statistic of Simulated EPCI Schedule

Figure 3. Simulated EPCI Cost (Cummulative)

Table 1. Breakdown Project Head Cost

 

4.      Selection of criteria

Based on above figures and table, company as buyer is able to build reservation price and ZOPA as a negotiation model to bidder(s) as seller.

5.      Analysis and Comparison

The negotiation model is shown in Figure 4. The maximum company’s settlement of EPCI duration might be started from 27 months which has 40% confidence level. However, the company has ZOPA from 28 months (75% confidence level) to 30 months.

Meanwhile, the company has ZOPA from USD 202 Mn to USD 222 Mn. The minimum ZOPA became OE is set at 80% confidence level. The maximum ZOPA for the company is set sligthly above 100% confidence level in order to expand the probability of success and to incorporate 10% allowance of OE. However, the maximum ZOPA is still below the maximum EPCI price USD 251 Mn.

 

Figure 4. EPCI Negotiation Model

6.      Selection of alternative

What is company’s BATNA? If the deal is failed, then the company shall propose another project scenario, either to deliver gas to other buyers to leverage economics or to conduct re-engineering to create value engineering and reduce cost to balance the opportunity loss.

7.      Performance monitoring and post-evaluation of results

The negotiation is most likely needed after bid price opening, thus a negotiation model is required. The negotiation model is built according to project economics, what maximum EPCI price is allowed to generate a certain level of economic indicators (company’s MARR). In addition, the maximum EPCI duration in the model is based on the gas sales agreement. If negotiation is failed, company shall have strong BATNA in this project since conducting re-tender with current scope will be totally wasting time.

References:

·         Asmoro, Trian H. (2012, Nov 16). Negotiation: Your Starting Points. Retrieved from: http://3an.blogspot.com/2012/11/negotiation-your-starting-points.html

·         Asmoro, Trian H. (2012, Nov 16). W18_TRI_ Cost Analysis using Simulation Approach. Retrieved from: http://aacemahakam.blogspot.com/2012/11/w18tri-cost-analysis-using-simulation.html

·         Asmoro, Trian H. (2012, Nov 22). W19_TRI_ EPCI Schedule Analysis using Simulation Approach. Retrieved from: http://aacemahakam.blogspot.com/2012/11/w19tri-epci-schedule-analysis-using.html