Contract Negotiation Strategies: Everything You Need to Know
Contract negotiation strategies are important to be aware of, as the negotiation process can be crucial for parties about to enter into a contract. 3 min read
Contract negotiation strategies are important to be aware of, as the negotiation process can be crucial for parties about to enter into a contract. In fact, before the parties even think about drafting up a contract, they must negotiate the terms and conditions of what they are about to promise and do for one another.
The negotiation stage is a process whereby multiple parties, even those parties who may not be parties to the contract, come together to communicate the details of the contract. It could be a quick process or a long, tedious one, particularly for more complex contracts that involve multiple parties and a lot of money.
What is Contract Negotiation?
While one might think that a good contract negotiation is to communicate every tiny detail that is to be included in the contract, this just isn’t ideal for most parties during this process. Be mindful that this process shouldn’t be met with hostility from the other party; all parties involved in this process should work with one another to meet both goals of the businesses.
Therefore, both parties will look for positive outcomes of the work being done under the contract, along with the benefits for both parties. Having a positive negotiation process will lead to a more positive outcome for all parties involved.
Some of the objectives of any contract negotiation process include the following:
- Identify all essential terms and conditions
- Identify the goods or services to be provided
- Identify the compensation involved, which includes the total cost, the payment schedule, financing terms, and how the payments will be made
- Acknowledge the effective date of when work will begin under the contract
- Acknowledge termination and renewal dates
- Identify all potential risks and liabilities
- Include all reasonable expectations for the parties’ relationship, along with expectation in the event of an unforeseen circumstance
There are generally two main formats for addressing the negotiation process. These are positional bargaining and principal negotiation.
Positional bargaining, also referred to as distributive negotiation, involves arguing based on a certain position being taken by one of the parties. The other party will usually take the opposite position, which can include the difference in what both parties want out of the deal, what limitations are being made, payment for the work done, and/or financing schedules. Both parties will treat the negotiation process as a competition so to speak as only one party can win. Therefore, one party will get what it wants, and the other party will have to accept the terms being given to them.
During the negotiation process, each party takes a strong opinion as to what it wants. Throughout the process, the parties will slowly have to agree to certain terms and conditions. This can take time. A good analogy of this is when someone haggles to purchase something at a lower price than what is being offered. The buyer will offer a low-ball amount. The seller will then counter-offer by stating a higher amount than what was offered but a lower amount than the initial sales price. Eventually, both parties will continue counter-offering one another until they agree on a purchase price.
Principled negotiation, also referred to as integrative negotiation, is the second most common type of negotiation format whereby both parties work with one another to identify what works best for both of them. This type of format provides for much less hostility and argumentation during the negotiation process. Both parties want to see one another succeed and benefit as much as possible from the deal.
This type of format also provides a more comfortable environment for both parties, as they can more freely communicate with one another as to what they are hoping to achieve. They can also build a better relationship by encouraging trust and mutual understanding. Rather than taking strong positions against one another, the parties will listen and collaborate with one another to ensure that the other party is just as happy as they are when entering into the contract. A good analogy to think of with this type of negotiation format is by looking at a pizza. The parties aren’t competing to see who gets the most slices, but rather they work together to ensure that the other party leaves with an equal amount of the pie.
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