Top 8 Contract Negotiation Best Practices
Contract negotiation is both an art and a science. This subject has been the topic of many popular books and articles. The topic of contract negotiations has also long been the subject for seminars, presentations, and lectures designed to teach the few basic, yet important tactics required to be a successful contract negotiator. Negotiating a contract is the process for achieving a win-win for both your business and the vendor that you are signing a contract with.
What Is a Contract?
Ultimately, the contract will be a document outlining all of the rules that will govern your relationship going forward and the more clear and to the point, the better it can be implemented and adhered to. The goal is to strike a balance with the vendor and to view them as a partner so that both of you will meet your corporate goals and objectives by signing the contract.
Successful contract negotiation means that both sides look for positives that benefit both parties in every area while achieving a fair and equitable deal. A signed contract that benefits both parties will provide a firm foundation to build a long-lasting relationship with your vendor. Below are simple, easy to implement objectives and strategies for successful contract negotiations.
Objectives of Contract Negotiations
Contract negotiation objectives can be used to evaluate the contract based on each of these criteria:
- Explain clearly all essential prerequisites, terms, and conditions.
- Goods or services to be provided are detailed and defined.
- Compensation is clearly stated, including total cost, payment schedules, and financing terms.
- Outlining all of the major milestones such as effective dates, completion/termination dates and possible renewal dates.
- Identifying and addressing potential risks and liabilities.
- Defining and setting reasonable expectations for the partnership including a communication strategy and timeline.
1. List rank priorities, as well as alternatives: Having the list of items that are most important versus items that, perhaps, are not as important, allows you the opportunity to do a trade-off if necessary. This list should be a dynamic list that is kept fresh based on the needs of the business with regard to working with this vendor. It is not practical to assume that you will be able to negotiate effectively all areas of the contract at once. Hence, you want to be sure that what is most important to you is discussed and agreed upon before you move to less important items.
2. Recognize the difference between what you need and what you want: Review your priorities frequently throughout the contract negotiations planning process and one final time in the end. Be sure to ask the hard questions: "Is this really a priority for our company, or is it a 'nice to have'?" "Was this priority a result of some internal political jockeying, or is it for real?" “If we had to sacrifice this item, can this deal still be a win-win for both sides?”
3. Know your bottom line so you know when to walk away: Is there a cost or hourly fee that your company cannot exceed? Have you come to realize that one or two of the top priorities are truly non-negotiable and you will be better to walk away from this contract if the vendor does not agree to it? List these along with the rationale so that you can use these to negotiate the optimal deal.
4. Define any time constraints and benchmarks: Set performance measurement standards that you will expect from your vendor. This will be a key method for monitoring the performance of the vendor. Vendor success will be critical to getting a good value from this contract. Hence, you will want to negotiate a fair and equitable penalty when key performance indicators (KPI) are not met.
5. Assess potential liabilities and risks: Understand the potential for something to go wrong or not be implemented as envisioned when the contract was established. What if unforeseen costs are encountered? Who will be responsible if government regulations are violated? Whose insurance will cover contract workers? These are just a few of the more common questions that must be addressed in any contract. Just as it was important to understand the priorities, it is equally important to not only know the possibility of something going wrong but being proactive about what to do about it in case it does.
6. Confidentiality, non-compete, dispute resolution, and changes in requirements: To round out the list, these items represent just a few more things to consider as you negotiate the vendor contract. When approached proactively, this list could become a good place to establish common ground with the vendor, instead of items that could be potential negotiation stumbling blocks. For example, if the vendor or a representative for the vendor has the possibility of being exposed to company confidential information, then there should be a confidentiality clause that will limit liability for both you and the vendor. It is imperative to take all precautions to protect all intellectual property and patents, in addition to sensitive financial data.
Finally, before both sides sit down to review, discuss and negotiate the terms of the contract, be sure that you have also considered a few other key criteria that may make for a smooth process.
7. Determine if your company interests would be best protected through the use of legal counsel: Negotiating a contract for one year of janitorial services in a small office is vastly different than negotiating a contract to outsource a fairly large call center. If you feel the least bit uncomfortable reviewing contract "legalese", do not hesitate to retain a lawyer specializing in contract negotiations.
8. Determine if the contract will require oversight by or through an accountant or other financial experts: Just as important as retaining the appropriate legal counsel, can be to also retain, or assign from within, an expert that can manage the financial terms of the contract at the onset of the negotiations, as well as throughout the process. Doing a pro forma for the transaction itself, as well as ongoing financial reporting can be quite a complex, but vitally important task. Take the time to understand how this process can be managed in-house by an accountant, or if it needs to be outsourced to an accounting firm.
Another advantage of closely monitoring the financials for a particular contract is that this could be used as a KPI, and an objective means to monitor performance.