On the 2nd Wednesday of each month I answer the most interesting question I receive from readers.
Question:
How do you handle situations where you've offered a bonus incentive in a proposal, but the customer wants to see a penalty applied in kind? (related post)
There are multiple ways to address this type of request, think of the below as multiple approach where you work from the best case scenario (heading off the request without having to modify your proposal) to worst case (agreeing to add the penalty):
Explain that the bonus was proposed to incentivize meeting a "stretch goal" that would clearly add value to the customer, without loading the proposal (or contract) with a laundry list of exceptions and conditions.
Gently inform the client that penalties tend to create an adversarial environment with such a financial consequence hanging over your head, as opposed to bonuses which create an atmosphere of collaboration to meet or beat an important target.
If your proposal contains a discount, mention your proposal is already discounted and you would need to reduce the discount by the amount of the penalty.
If the situation is appropriate the accept a penalty, ensure the client sees all the terms, disclaimers, caveats, etc. that accompany having a penalty, set the penalty to a highly conservative outcome relative to the contractual baseline, and remember- there is no law that says the penalty value has to be the same as the bonus value.
Finally, if price competitiveness is a factor you could look at an "earnback" option where you discount your fees by what the penalty would have been, and then have the option to earn back some or all of that discount by meeting the target in the contract. In this case the target should not be the "stretch goal" like a bonus.
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As always, contact me or book a meeting to discuss how these principles can be applied to improve the performance of your business.
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