In June 1988 Harry Forbes, a negotiator in the Electronics Systems Divisions, Air Force Systems Command, was negotiating a firm fixed price contract with Arnold Jones, VP of Electronics Company, for 1,500 units of an electronic equipment. These units, which were components for a missile systems, were to be provided as government -furnished material to two Air Force prime contractors. The Electronic Company, a sole source for the proposed procurement, had originally developed the equipment under a cost-plus-fixed-fee R&D contract with the Electronics System Division and had subsequently manufactured an initial production quantity of 350 units under a redeterminable contract (prospective pricing at stated intervals). The final redetermined price for these units had been $33,250 each, not including special tooling and an expanded bill of materials. The company had proposed a per-unit price of $26,107.50 for the current procurement.

While preparing for negotiations, Forbes had received analyses of the company's proposed cost breakdown form both the cognizant DCAA auditor and the DCAS field representative. He had also performed an independent analysis of Jackson's proposal after discussion with Air Force technical personnel. On the basis of his prenegotiation investigation, Forbes established a range of $21,000 to $23,750 per uit as a fair and reasonable price for the proposed contract. As he stated in a prenegotiation discussion with his superior, Dan Higgins, he hoped to negotiate a final unit price of approximately $22,500. The main differences between his proposed price and Jackson's quoted estimate lay in the areas of engineering and direct labor man-hours.

At the negotiation session, after 20 minutes Forbes let Jones into a detailed expanation and justification of each itme cost in the company's proposal. It started with less controversial cost areas - direct materials, engineering overhead, factory overhead, and G&A expense. All areas were addressed by Jones and Forbes was fully satisfied with the explanation given.

After lunch engineering labor and direct labor was discussed. Jones, again explained everything and argued that his estimates were realistic. Forbes did win concessions on various aspects of the two categories. By 3 o'clock the negotiator expressed tentative satisfaction with the reduced figures for engineering and tentative agreement had been reached on direct labor. ( At this point , with the reductions Forbes had gained, and presuming a 10% profit as originally proposed by the company, the per -unit price for the equipment was down to $22,409). The negotiator then said "Well, Mr. Jones, we've spent all day looking at item costs-the only thing we haven't talked about is profit. I'd like to bypass that, however, and talk total price. It's getting late and I know you've got along trip home ahead of you. I've been impressed with the way things have gone so far - although I'm sure that we're not yet down as low as we should be. I've done some figuring, and I believe a price of $19,000 each would be a good one for both of us. How about it - can we close the deal at that figure?

Q1. Evaluate and discuss Mr. Forbes' counteroffer to Mr. Jones.

Q2. What should Mr. Jones do? Why?