The Basics of Contract Negotiation

A good contract negotiation benefits both the parties and achieves a fair deal. A negotiation that tries to push the other party to the wall is the worst type of negotiation. You should negotiate with an objective to build a business relationship with the other party and create a contract that helps both of you meet your respective business goals.

A contract negotiation involves working out a lot of details, especially concerning risks and revenues. In the process of negotiation, each party will need to compromise on some aspects so as to get something it considers more important.

Usually, contract negotiation is done in two stages:

  • Negotiation of simple business terms.
  • Negotiation of legal terms.

As per contract law, a valid contract cannot be created without negotiating and agreeing upon all the important elements of the deal. When determining whether a contract exists or when it was created, one must consider whether there are any outstanding legal issues regarding any material elements of the agreement.

The Objectives of Contract Negotiation

  • Explain all the important terms and conditions of the contract.
  • Define goods and services that are the subject matter of the contract.
  • State the compensation in clear terms including the total cost, payment schedule, and terms of finance.
  • Acknowledge all the important dates including the date the contract comes into effect, the end date of the contract, and any potential renewal date.
  • Identify risks and liabilities the contract may involve, and find ways to address them.
  • Define what parties can expect from the relationship now and in the future.

How to Plan Contract Negotiations

List and Rank Your Priorities

Make a list of your priorities, and rank them along with viable alternatives. Since you can't negotiate all aspects of the contract at once, you should try to negotiate the important items first before moving on to the less important ones. You can also consider giving up some of the less important items in order to get the ones at the top of your priority list.

Know Your Bottom Line

Define your bottom line, such as a certain cost you cannot exceed or a high priority item you cannot compromise on. This will help you know when you need to walk away from the negotiating table.

Set the Benchmarks

You may want to set standards for measuring the other party's performance. This can include time constraints and product quality. Once you know the benchmarks, you can negotiate a fair penalty for not meeting them.

Assess Risks and Liabilities

How will you handle issues like unforeseen costs, regulation violations, and insurance coverage of contract workers? Try to think of things that may go wrong and the provisions you should have in place to tackle them.

Determine Whether You Need a Confidentiality Clause

If the deal involves any confidential information, you may want to make sure the other party does not disclose it to someone else. You can do this by adding a non-disclosure clause to your contract.

Walk a Mile in the Other Party's Shoes

Put yourself in the position of the other party, and think how they would negotiate the deal. This will give you an idea of what's important to them and what they might be willing to concede.

Select Your Negotiating Team

Choose who will participate in the negotiation from your side. Ideally, you should have a team of at least two and not more than four members. Sometimes, you may want to keep a senior person out of the team so that the team can defer a decision or get some time to consider a proposal.

Assess Leverage

Consider the factors that can affect your bargaining power. For instance, if you are in a rush to reach an agreement, you may be easily pressured to sign a less-favorable deal. On the other hand, if the other party is in a hurry, you may find yourself in a better position. Similarly, if you offer unique goods or services, you may have a better bargaining power. Think of all such aspects you can leverage.

With proper preparation, you will be able to negotiate terms and conditions of a contract that will meet the needs of both parties and ensure a long-lasting business relationship.

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