Reference no: EM131485828

Jeff Smith, a Contract administrator for the Department of Defense (DOD) and Lary Baker, contracts manager for Technical Company, were in the process of negotiationg a change to a fixed price contract for the production of 173 units of a highly complex type of electronic equipment. The DOD had recently issued a design change to the contract, requiring the replacement of a power tube and some circuitry; the cost of purchasing the power tube was a major portion of the direct cost. After hours of discussion, Smith and Baker agreed on a cost of $43,170 for accomplishing the change. They still needed to negotiate profit.Baker had proposed profit of $5,180 or 12%; same rate the firm was receiving on the basic contract. Mr. Smith questioned the 12% profit and thought that the profit on the contract change should be lower, as it wasn't as complex. Baker on the other hand insited on the 12% since the firm has always received 12% profit, that was the company's standard rate, and stated that if the firm agreed on a lesser profit, they wouldnt be able to get 12% on their future contracts.

1. Is the justification of always getting 12% on fixed price contracts reasonable justification?

2. What importance in contract negotiation is the effect of precedent?

3. What action should Mr. Smith take?