The service contract case – buyer

GENERAL INFORMATION FOR BOTH PARTIES

  1. Amicale Development Corporation is negotiating with Haley Painting & Tile over a large apartment building remodeling project.
  2. Amicale is remodeling a 10-story, vacant, rundown, once-elegant apartment building. There are 100 apartments, each 2,500 sq. feet; 2 bedrooms, living room, dining room, kitchen, entry, 2½ baths.
  3. Haley is bidding on extensive painting, tile, and carpet work for all 100 apartments.
  4. Amicale specializes in remodeling old apartment buildings. Contractors know that Amicale has many projects, is loyal to good vendors, and pays on time.
  5. Amicale has already made separate deals with other kitchen, bathroom, and electrical contractors, each of whom have a piece of the total job.
  6. Amicale’s REQUEST FOR PROPOSAL (RFP) was as follows:
    1. Statement of Work (SOW)
      1. Paint entire 100 apartments—two coats, high quality job.
      2. Remove all wallpaper and re-plaster all ceilings.
      3. Install fancy tile in all entry halls and kitchens (500 sq. ft. per apt).
      4. Install standard tile in all bathrooms and showers (200 sq. ft. per apt).
      5. Install carpet and pad in balance of apt (1,800 sq. ft. = 200 sq. yd).
    2. Complete all work in 12 months (8-9 apts per month completion schedule).
    3. Payment: 100% as each apartment is completed and accepted.
  7. Haley Painting & Tile Company PROPOSAL
    1. Statement of Work: No exception to Amicale’s SOW.
    2. Performance schedule: 14 months (exception to 12 month delivery).
    3. Special Value-Added Services offered by Haley:
      1. Certified European Master Painters will be on the job.
      2. Haley Project Manager will be on the job and fully responsible for high quality work and schedule compliance.
      3. Haley’s computer program will track completion status daily.
      4. References of five Haley customers.
  8. Price: $26,280 per apartment ($2,628,000 total).

PRIVATE INFORMATION FOR THE BUYER: AMICALE

  1. Amicale received 5 bids:
CONTRACTOR 1$30,000 per apt.$3,000,000 total job
HALEY$26,280 per apt.$2,628,000 total job
CONTRACTOR 3$22,800 per apt.$2,280,000 total job
CONTRACTOR 4$20,000 per apt.$2,000,000 total job
CONTRACTOR 5$18,000 per apt.$1,800,000 total job
  1. Haley’s reputation is excellent. You, the owner of Amicale, prefer their package and value-added services. However, your staff prefers Contractor 3 at $2,280,000. You don’t agree because you believe Haley can best meet the deadline.
  2. Work schedule compliance is critical. If the contractor for this job falls behind one day, the other job contractors fall behind by a week. Every one-day delay is multiplied.
  3. You asked for a 12-month completion date to leave room for unforeseen delays. Haley took exception to that and proposed 14 months. Your real deadline is 13 months; on that date the bank will foreclose. You have borrowed too much for renovations on too many buildings that cannot be rented to capacity. 13 months from now a large principal payment and interest is due. The bank will not refinance these big loans unless tenant cash flow starts by then.
  4. If the job is completed within 12 months, you would profit by being able to rent the apartments out earlier. Each week you finish ahead of 13 months would mean an additional $35,000 of rental income.
  5. You must award the contract today; your family vacation starts tomorrow. Contractors #1, #4, and #5 are tied up with other jobs, and each has told you that they couldn’t come within six months of meeting your deadline. Contractor #3 has never done a big job. If Haley talks fail, you will have to close with #3—very risky.
  6. You have called all five references provided by Haley and walked through three of those completed jobs. Excellent results. If they prove to be as good as advertised, you would like to line them up for future projects. You will have lots of tile and painting work down the road.
  7. You are impressed with Haley’s value-added European Master Painters and General Supervisor Project Manager. You would like Haley to commit them (painters and supervisor) to your project for at least 30 hours per week.
  8. You have estimated Haley’s costs to be just over $2 million, so figure they could do the job for $2.3 to $2.4 million and still make good money.
  9. The building has 3 elevators. In prior pre-proposal discussions Haley expressed concerns that heavy carpets and tiles would be difficult to move from ground floor to higher floors. Haley wanted you to assign one elevator exclusively to them. You voiced no response at that time, and the discussion moved on to other matters.
  10. The bank is very concerned about this negotiation. They want the job completed on time to assure cash flow. A member of the bank sits on your Board of Directors. He told you flatly that the bank insists you go with Haley: “No other contractor has as high a reputation for quality and timely project completion. Make sure you close with them.”

Price Data (per apartment):

  1. Your planned opening offer
  1. Your target price
  1. The most you will pay

IF YOU SETTLE, DO NOT SHOW YOUR CONFIDENTIAL INFORMATION TO THE OTHER PARTY.

AS SOON AS YOU FINISH, WRITE DOWN THE FINAL SETTLEMENT PRICE:

Final settlement price per apartment

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