Complex Contracts: Everything You Need to Know
Complex contracts are like regular contracts but with the added complexity of competing priorities.3 min read
What is a Complex Contract?
Complex contracts are like regular contracts—oral or written agreements between two or more parties that are legally binding—but with the added complexity of competing priorities such as financial targets, support capabilities, and delivery schedules. A regular contract might have one or several issues that will be agreed upon, while a complex contract will have many interdependent issues that must be negotiated. If you wish to negotiate a complex contract, you will not only have to consider where you are now, but where you need to be and how you intend to get there.
Considerations for a Complex Contract
In order to negotiate a complex contract, you must consider a variety of details, including:
- The parameters that will be negotiated.
- Information on values, leverage, competitions, sale prices, and other factors that may affect the negotiation.
- Your realistic expectations for the deal.
- What prices you want to agree to and how those prices can be justified.
- Where you can be flexible in your negation; to get something, you will have to give something up.
Once you have decided what your stance will be on all these details, you can then enter into discussions with the parties you intend to make a deal with and hopefully come out with a contract that satisfies all involved.
Protocols for Negotiating a Complex Contract
To complete a contract, negotiation protocols should be entered into, which involve an exchange of proposals and counter-proposals until a deal is agreed upon. Often, this is done through what is called mediated single-text negotiation. In this process:
- A mediator puts forth a contract.
- The contract is then critiqued by the negotiating parties.
- A new proposal is put forth by the mediator based on these responses.
- The new proposal is critiqued and the process continues until a deal is reached or it is determined that no contract is acceptable.
A contract can have tens or perhaps hundreds of unique issues to be dealt with, so this process can sometimes be a prolonged affair.
Contract management involves negotiating contract terms and then ensuring that those terms are complied with on both sides. Additionally, contract management will involve recording and agreeing to any amendments or other changes that may occur during the life of the contract. All of this is done to maximize operational and financial performance and minimize risk.
Contract management is generally divided into three phases. These are:
- Pre-contract phase.
- Contract execution phase.
- Post-award phase (also called contract compliance/governance).
In the post-award phase, which is when the majority of contract management will take place, not only is it important to make sure that the contract conditions are met, but that smaller details like overpayments, under-reported revenue, and unrecorded liabilities are not overlooked. If this occurs, the profit margins may be negatively affected.
One study has shown that a dedicated contract compliance program that undertakes contractual audits can offer an average of 2-4% in financial savings against the audited transaction value.
Another study shows that for almost half of enterprises, the main driver for improved management of contracts is the pressure to reduce risks, and that 65% of businesses have found that contract management has reduced exposure to legal risk.
For this and other reasons, current theory on contract management for complex contracts has shifted from a “management” perspective to one of “governance,” meaning that both parties show a vested interest in tending to their arrangements in a more collaborative manner, since both will benefit in the end.
After a contract is reached, there may yet be occasions when the contract will be revised at a later date. There are a number of reasons a contract may be revised, including by mutual decision, in which both parties agree that changes to the contract need to be made, and by unilateral decision, in which one party changes the contract in accordance to rules set out in the original contract.
If a unilateral change is pursued, usually there is a notice period offered for this change, and the other party may have the right to end the contract altogether. Also, such a change should be contractually justified, or else it might be seen as a repudiation of the contract, allowing the other party to dissolve the contract and pursue damages.
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