You Pressured a Contractor on Price: Consequences

During the negotiation process for your software development project, you managed to halve the proposed cost. Great news! Or is it?

Imagine this scenario: you are the person responsible for overseeing a development project in your company. Your task is to guide the project from the requirements stage all the way to deployment in production. You’ve prepared a technical specification, identified several potential contractors in the market, analyzed their proposals, and are now deciding which one to partner with for the project.

Most likely, the contractor’s proposed cost will rank second or third among your decision-making criteria.

It’s very likely that you’ll see a wide variation in the cost estimates provided by contractors—sometimes differing by an order of magnitude.

Now, let’s say you’ve chosen a company, clarified the scope through discussions, and in the final meeting, successfully negotiated a significant price reduction. Let’s explore the potential reasons they agreed to your terms and the possible consequences of such a deal.

Reserved Margin for Negotiation

Experienced salespeople know that price negotiations are inevitable after the initial estimate is presented. They expect to concede something—but not too much. You manage to negotiate a 10–15% discount from the initial price, which they reluctantly grant because you’re an excellent negotiator who knows how to hold your ground. Most likely, you’ve only bargained away the margin they had specifically added for such concessions. If no negotiation happens, it’s great news for the seller, who will likely earn a much larger commission for the deal.

This is a common dynamic, especially when dealing with large companies.

Moreover, experienced salespeople have a few tricks up their sleeves when presenting initial estimates to clients. If the contractor finds the project financially attractive, they will usually discuss pricing verbally during an in-person meeting while closely observing your reactions. The cost can change within seconds, depending on your response. Tactics might include phrases like:

• “The price includes/excludes VAT, of course.”
• “Naturally, this includes/excludes a year of support, which can be added/removed.”
• “This is the estimate for the first phase/the entire project,” depending on your reaction.

If you’re dealing with a contractor of this type, the money you’ve managed to negotiate is indeed saved for your company. You won’t be able to force them into a loss-making position that could endanger the project, which we’ll discuss in other scenarios. Well done! Although it’s possible you didn’t negotiate the full margin that was reserved for concessions—without insider information, you’ll likely never know.

Contractor Resources Are Idle

Sometimes a contractor has unused resources freed up after completing a project, and these resources are sitting idle “on the bench.” These are usually expensive IT specialists whose salaries still need to be paid, even though they’re not generating revenue. Contractors may temporarily assign them to internal projects but will seize any opportunity to sell their time.

In such cases, the contractor’s salesperson may approach negotiations with a goal of covering at least the resource costs. Discounts of 30–50% may be on the table, depending on the company.

A skilled salesperson will, of course, try their best to ensure their company still profits from the project and will only offer significant price reductions under very unfavorable circumstances combined with effective negotiation tactics by the client. To achieve this, you need to not only demonstrate a willingness to walk away from the deal but actually reject it, citing the high cost, so the contractor “chases you to the door.” Without insider information, you won’t easily detect this situation, and guessing it blind would be either extraordinary luck or a genuine disagreement over cost.

If you’ve landed in this scenario, the project should ideally be short-term with potential for expansion into a larger project where the contractor can earn more. If the contractor is willing to provide resources at cost for an entire year, this should raise some red flags.

Furthermore, when prices are halved, a reasonable contractor will always provide an explanation for the reduction. In cases of idle resources, there’s no reason to hide this once the discount is offered, and they will likely tell you directly.

Is it good news for you that you managed to pressure the contractor into such a significant price cut? From a business perspective, it is—while the project may be ballast for the contractor, they will still aim to complete it since they’ll have funds to sustain the resources allocated to your project. However, the likelihood of getting their best specialists or exceeding your expectations decreases.

Contractor Manipulates Project Estimates

Previously, we examined cases where contractors act in good faith. However, this is not always the case.

As mentioned earlier, it’s common during competitive bidding for a client to receive cost estimates that vary by tens—or even hundreds—of times. For an inexperienced client, this can be disorienting, but in the development market, it’s a typical occurrence.

In fact, many clients would gain valuable insights into the nuances of their project if they had access to the internal evaluation materials of an experienced contractor.

This price variation can be attributed to several factors, ranked by their level of influence:

1. Competence of the Contractor in the Task at Hand
   This is the most critical factor. Often, the more competent the specialist, team, or company, the more pessimistic their estimate. Understanding a contractor’s competence is a broad topic that I may cover in another article. In short, people tend to oversimplify tasks they’re unfamiliar with. For example, renting out an apartment on a daily basis might seem as easy as posting an ad and collecting payments. Similarly, setting up a mining operation might seem as simple as assembling a shed full of computers. However, as you delve into the details, you’ll find that they change everything. A similar effect occurs when incompetent specialists evaluate projects: tasks appear much simpler than they actually are.
2. Technological Solutions and Work Methodology
   This is what clients typically aim to assess by comparing different proposals. In an ideal world, project costs would vary only based on the chosen technology stack and methodology. However, in the real world, there are numerous ways to build a system to meet the same requirements. These approaches cannot always be linearly compared. Each technology stack has its strengths, such as development speed, system reliability, availability of specialists, maintenance costs, and more. The same applies to process organization within a contractor’s team, although there are fewer options. These can range from:
   • Highly bureaucratic approaches: Characterized by slow development speeds and high costs but less dependence on human factors.
   • Chaotic or self-organized methods: In which no one is explicitly accountable, and task prioritization may be unclear. However, these teams can deliver remarkably fast results at lower costs and acceptable quality. Such organizations are fragile, and the departure of even one specialist can jeopardize the project.
3. Current Project Load of the Contractor
   It’s one thing when a contractor’s resources are fully booked for a year, and another when employees are sitting idle. As previously discussed, idle resources may lead to more competitive pricing. At the other extreme, a contractor uninterested in your project may quote a “take it or leave it” price. They might also provide such a quote if they have significant doubts about the client’s adequacy, solvency, or legal standing.
4. Negotiation Tactics
   Experienced contractors are well aware of the wide variation in estimates for the same project. They understand that most clients will start by considering the cheapest offers while dismissing outliers. This leads to strategic pricing games: quoting a realistic estimate may mean not being considered at all, while quoting a much lower price to engage the client often results in significantly higher costs later during contract negotiations. This chapter focuses on this manipulative scenario.

When Contractors Manipulate Costs to Win the Project

This scenario occurs when a competent contractor provides a realistic estimate but drastically undercuts it to initiate contact with the client. They know that, one way or another, they will eventually recover the initially calculated cost—or more.

The goal of such a contractor is to establish contact, demonstrate their competence, and eventually negotiate a contract at the originally calculated price. Less scrupulous contractors may sign a contract with the intention of extracting “their” money during the project’s execution. Development contracts often leave room for interpretation, and many aspects are difficult to formalize, as clients often don’t fully know what they want at the evaluation stage. Unscrupulous contractors exploit these vulnerabilities.

Warning Signs of Manipulative Contractors:

• Agreeing to any of your terms without hesitation.
• Adjusting the price during discussions to match any figure you want to hear.
• Minimal pretense of carefully considering conditions.

Their plan is to recover their costs during the project’s implementation.

How to Respond to Manipulative Contractors

1. If You Haven’t Signed a Contract Yet
   The best course of action is to disengage immediately. Manipulative pricing is not just a red flag for the cost but also a warning about how the contractor will treat the client throughout the partnership. This behavior indicates a lack of respect and trustworthiness. You don’t need to explain your true reasons; a standard response like “we’ve chosen a more experienced contractor for our needs” will suffice. Save your energy and move on to another proposal.
2. If You’ve Already Signed a Contract
   Unfortunately, the situation becomes much more complicated. You’ll likely learn of the bad news when it’s too late to back out, switch contractors, or cancel the project. Worse, as the person responsible for the project in your company, you’ll bear the blame for any failure. After all, you were the one who selected or recommended the contractor. This places you in a hostage situation. Here are your options:
   • Accept the contractor’s terms: This is, unfortunately, a common choice. The project then proceeds in a way that serves the contractor’s interests rather than those of your company. The contractor may unilaterally change project goals, requirements, approaches, timelines, and costs—staying just within reasonable limits to avoid legal repercussions. Alarmingly, project leads often fail to recognize that they are working against their company’s interests. This explains why so many large-scale development projects ultimately fail.
   • Seek help from leadership and advisors: The ethical option is to explain the situation to your leadership and work together to minimize losses. This often involves bringing in lawyers, consultants, or other specialists to manage the fallout. The primary risk is that the project may be deemed unsuccessful, and the blame will fall on you. Whether this results in further consequences depends on your company’s internal climate, management style, and the specific circumstances.

A Word to Manipulative Contractors

To contractors who deliberately mislead clients: be aware that there are organizations that won’t hesitate to hold you accountable, even outside legal frameworks. This accountability might not target your organization as a whole but rather you personally, along with your leadership, for failing to meet your stated terms. You may think you’re exploiting inexperienced startup teams, but those “naive” clients may have backers for whom such deception is intolerable. The consequences will be unpleasant—primarily for you.

The Contractor Failed to Protect Their Interests

After reviewing various proposals, you select the most appealing one. The price seems reasonable, but as a conscientious employee advocating for your company’s interests, you decide to attempt negotiating a lower cost. After all, you’re aware that contractors often include a margin for negotiation in their initial quotes.

During discussions, you present compelling arguments for why the price is too high—for example, citing competing offers, referencing strict budget constraints, or other reasons. Preparing for resistance, you propose a significantly lower price, perhaps half of the original estimate, but instead of negotiating, the contractor simply agrees. An experienced negotiator will likely recognize this scenario as a sign of inexperienced counterparts. A lack of negotiation skills often indicates broader inexperience in the contractor’s operations.

So, what could go wrong when you successfully push an inexperienced contractor into accepting half of their original price?

When Inexperience Leads to Unrealistic Estimates

As mentioned earlier, inexperienced specialists often underestimate the complexity of tasks, believing them to be simpler than they are. Most likely, the contractor’s initial estimate was already underpriced, which may have been what attracted your attention in the first place. By drastically reducing this already low estimate, you guarantee that the contractor will be unable to complete the project within the agreed budget. The contractor may not even consider this possibility, relying instead on overly optimistic, almost fantastical scenarios. Unfortunately, this is common among novices.

Let’s explore what might happen when the money runs out midway through the project, even if the contractor initially appears to be progressing well. Imagine a scenario where the project is halfway done, and things seem “almost complete,” but the funds are exhausted.

Possible Outcomes When the Budget Runs Out

1. The Contractor Covers the Deficit
   The contractor might attempt to fund the remaining work themselves. This approach is sometimes seen when a development team operates within a larger organization with an unrelated core business. In such cases, the parent company may step in to preserve its reputation, even if it incurs a loss. However, these companies typically have experienced negotiators who wouldn’t have allowed such a significant concession in the first place. When this happens, it’s often due to an initially flawed estimate rather than unexpected negotiation outcomes.
2. The Team Works at a Loss
   If the contractor is a closely-knit team of developers with complementary skills, they might work at a significant loss to complete the project. Such cases are rare but do happen, and they often lead to the formation of exceptionally strong and reliable teams. However, these teams usually avoid similar situations in the future.
3. The Contractor Requests Additional Funds
   The contractor may look for reasons to justify additional payments. Technical specifications often allow for broad interpretations, and clients rarely have a clear vision of their exact requirements. This creates opportunities for renegotiation. If you manage to allocate additional funds, this can be a viable solution. However, in many large organizations, accessing extra funding requires navigating multiple committees over several months. By that time, a small contractor may no longer be operational.
4. The Contractor Avoids Their Obligations
   A common scenario involves the contractor’s leadership and team disappearing entirely—phone calls go unanswered, emails are ignored, and communication ceases. While you can initiate formal legal proceedings based on contractual obligations, the project is effectively abandoned. Relationships with the current contractor are likely irreparably damaged, and transitioning the project to another team midway is nearly impossible, especially since the original team was inexperienced. Remember, it was you who selected this contractor.

What to Do in This Situation?

You can’t simply tell the contractor that they shouldn’t have agreed to such a steep price cut and ask them to reconsider. Here’s how to navigate this situation:

1. Acknowledge That You’re Working with an Inexperienced Team
   This isn’t necessarily a bad thing—it can sometimes even be beneficial—but you must understand the associated risks. We’ll discuss these risks in more detail another time.
2. Ensure the Contractor Understands the Project Costs
   Verify that the contractor has a realistic understanding of the project’s cost and only agreed to your terms under pressure. You can do this by digging into the cost structure and asking detailed questions. Don’t hesitate to ask “obvious” questions to piece together the entire process—from the moment the team starts drafting requirements to delivering a system ready for support. Who will design the interface? Who will program the server, design the database, test the system, support users at launch, write documentation, and oversee progress? Demand a cost breakdown not only by specialization but also by system requirements—for example, the time required to develop an authentication module, integrate with SAP PI, or implement compliance with data protection regulations. Assessing whether the contractor has considered these details doesn’t require special qualifications—just time and effort on your part.By asking these questions, you can prompt the contractor to reevaluate their estimate, increasing their chances of avoiding financial losses.
3. Give the Contractor a Chance to Protect Their Interests
   If the contractor understands the project’s cost, conceded under pressure, and you still plan to work with them, allow them to restore the project’s original price. Once the contractor realizes the situation, they will likely attempt to return the price to its initial level. At this point, the power dynamics shift in your favor. If they don’t take the initiative, you can explicitly address discrepancies in the cost calculation and final price, signaling that you’re aware of the situation but are willing to ensure the contractor’s interests are met for the project’s success. In this scenario, you gain moral leverage to request detailed cost structures, including the contractor’s profit margin. Extending such goodwill can lay the foundation for a strong partnership.

While this approach is rare, examples do exist. This article was inspired by a desire to convey this specific point. I often see clients who sincerely believe they’re acting in the project’s best interest by finding one of the cheapest proposals and negotiating it even lower, often from a position of strength. However, in most cases, this approach leads directly to failure. If a contractor accepts such steep discounts, something is amiss. Identify the underlying issue before celebrating your negotiation success.

Other Scenarios

Occasionally, estimates are drastically revised due to genuine mistakes, which are explained to the client with apologies and a restoration of the original proposal.

I also frequently encounter cases where contractors with near-ready systems that closely match client requirements significantly inflate initial estimates. These contractors have a buffer for substantial price reductions but often choose not to use it. Why give up the opportunity to earn more when they’re clearly more competent, and their development costs are still lower than competitors who must build from scratch? Even if the client opts for inexperienced contractors, they often return, better prepared and more receptive to realistic terms if their interest persists.

There’s a good chance I’ve overlooked some obvious scenarios, and a smaller chance I haven’t encountered others. I’d appreciate it if you’d share your experiences.