Contract Performance Metrics: The Hidden Cost of Protracted Negotiations

This is the second in a series of 4 posts is prepared in conjunction with a work group session presented by Tim Cummings and me for the upcoming IACCM Americas Forum Conference.

The project management triangle asserts that the three principal project goals are time, cost, and quality. Lawyers focus on quality; clients are increasingly price sensitive. This post will also address the significant hidden costs associated with time

Quality—Lawyers Perspective

If forced to choose, lawyers will likely select quality as their first choice. Their professional reputation and business success is dependent on delivering consistently high quality services.

But, high quality takes time or more specialized (and more expensive) resources.

Cost—Clients Perspective

Businesses and business managers must increasingly focus on costs in order to stay competitive. Business managers would also likely agree that quality is critical, especially in the case of high stakes transactions. However, in the case of more routine transactions, a “good enough” may serve their needs.

By focusing on costs, the project management triangle asserts they they must choose between quality and speed.

Time—The Hidden Cost of Delay

There is, however, a significant hidden cost to protracted contract negotiations: the time value of money, or more accurately, the cost of opportunity deferred is money lost. For each period of delay, contracting businesses defer the benefit of the consideration received. They defer (and lose) the benefit of investing the consideration in building more value. And, this loss compounds over time.

The chart shows the impact of contract negotiation time on project values. The scenario projects revenue for a business that sells services (or it could be widgets) for $100,000 per project (or unit), upon which the company makes a profit of 15%.

The sole difference is when the company reaches contract agreement with its client. In the first scenario, the contract is made on January 1. In 8 years the value of the funds grows to $305,902. However, if the agreement is not settled until June 1, the value of the same contract in 8 years is only $285,952, a shortfall of just less than $20,000 in the 8th. But cumulatively over 8 years, the delay costs the company more than the original contract value.

The next post will dig into the quality conundrum and question the “pick any two” assertion. The post will focus on time and cost.