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Everything you need to know about Contract Negotiation in 2022

Negotiation is a critical stage in the contract lifecycle and arguably one of the most important steps. Contract negotiation makes all parties aware of their rights and duties as well as ensures all parties are comfortable with the details of the contract.

Contract negotiation can open up new opportunities to both parties that they may not have had access to before, and helps parties reach an agreement that is mutually beneficial. An effective contract negotiation will improve communication and create a strong foundation for long-term relationships between the parties.

What is contract negotiation?

Contract negotiation is the process of two or more parties discussing and modifying elements of a contract prior to contract execution, with the aim of reaching a legally binding agreement regarding the terms and conditions of their relationship.

The main goal of contract negotiation is to create a contract with contents that are mutually satisfactory, beneficial, and representative of the parties involved. Contract negotiations also help to mitigate financial, legal, and operational risks between the parties.

It is important to devote enough time and energy to contract negotiations to create

sound long-term agreements as failing to do so can lead to broken contracts, damaged relationships, and lawsuits. Businesses participate in contract negotiations to ensure that agreements between companies can be created in a way to set them up for long-term success.

What is a contract?

A contract is a legally enforceable agreement between parties that creates, defines, and governs mutual rights and obligations between them. Contracts help organisations manage expectations and avoid conflicts, and if conflicts do occur contracts can prevent them from escalating. Since contracts are enforceable by law, they provide a level of protection should conflict arise. There are many different contract types and most of them require a degree of negotiation.

Setting up for successful contract negotiation

There are multiple approaches to contract negotiation, often coming down to an element of personal style. Although there are many different ways to negotiate a contract, there are some basic elements of contract negotiation that are important to keep in mind.

Preparation

To negotiate a contract one of the first - and most important - elements is preparation. Preparation could include research into the company or person you are negotiating with or gathering appropriate data and testimonials to support your claims. Plan to complete research and required documents in advance of any meetings or negotiations. Thorough preparation and research will make you a better negotiator, allowing you to enter the negotiation from an informed, strategic position, giving you confidence, and improving your chances of getting the best outcome.

Know your rights and obligations

You need to know your rights and obligations. There are many different laws that can affect contracts and may be applicable depending on your profession or industry. For example, your contract could be governed by contract commercial law. You are free to choose the terms of your contract within the limits of the law, and a court may be able to void a contract or individual terms if they are considered unfair or there are other issues.

Know your priorities

Ensure you have a clear understanding of your goals, objectives and priorities for the negotiation. Go into the negotiation process aware of your top priorities as well as how other risks or rewards rank after your initial needs are met. Try to define specific, realistic objectives so you can have an idea of what you want to gain from the negotiation and why. Knowing what your top priorities are from the start of the negotiation process and what priorities you can compromise on, will allow you to leverage the lower-priority goals to meet the goals with the highest priority. As well as allowing you to strategically negotiate, knowing your priorities helps clarify what you need to be included in the final contract.

Know the other parties' priorities

As well as knowing your own priorities, you should also try to understand the other parties' priorities. Although you want to reach an agreement favourable to you, the aim of negotiations should be to reach something mutually beneficial. By understanding the other parties' goals and priorities you can better align your negotiations to support both parties' needs. Going into a contract negotiation without doing this will leave you more vulnerable to persuasion against your own interests. It is possible that you both have similar goals which can make the process easier. Even if the goals are different, knowing each other's priorities can help you both come to a fair agreement. Entering into negotiations with the mutual goal of reaching a win-win outcome allows both parties to share relevant information, creatively solve problems together and ensure everyone's objectives are satisfied. Demonstrating an understanding of the other party’s point of view demonstrates that you have given care and attention to the negotiation and signals a desire to reach an outcome that offers the best value to everyone

Be clear

A well-drafted contract is an important risk management tool for your business. It should clearly and accurately reflect what both parties have agreed on and what you expect from each other. It is good practice to take notes of the negotiations and discussions you have, and ensure everything is written in the contract rather than relying on verbal agreements. If there are elements of the contract that you do not agree on, you need to discuss them and reach a compromise you are happy with. After you sign a contract, the terms become legally binding and it will become very difficult to resolve any disputes over the terms. It is less likely there will be disputes if all parties are happy with the terms of the contract from the get-go. You should not sign a contract unless you are happy with its entirety, and you are sure you fully understand it.

Get advice

If you are unsure about the meaning of any of the terms, or what you are agreeing to, get advice before you sign the contract. After you sign it can be too late to fix or change a contract. You could contact a lawyer to review your contract to make sure it is legally enforceable or a business adviser.

You may want to see if there is anyone else at your company who is available to help you negotiate, they could help ensure you’re considering every part of the contract, or utilise their own experience.

Take your time

Don’t be afraid to take your time with the process, so you can come to an agreement that is agreeable to both parties rather than rushing into something. You should ensure that you cover everything that you might need and explore the various options to ensure that all parties have their needs addressed.

Finalise

When you come to the end of the negotiation process and have reached an agreement it’s time to finalise and close. In an effective negotiation, parties will reach this point with a mutually beneficial combination of terms and a potential long-term relationship

Try to get everything in writing rather than relying on verbal compromises. A strong and visible closing and definition of terms facilitate an ongoing and trustworthy relationship. When all parties are satisfied the contract will progress to approval and signing. Following this, contract execution will take place.

Improve your skills

After you have finalised the contract and completed your negotiations, you may want to take some time to reflect on the experience, your learnings, and consider how you can improve your skills for future negotiations.

There are various resources available that you can use to improve your negotiation skills, such as training at TAFE colleges, workshops, books, and your local Business Enterprise Centre.

How do you negotiate contracts with customers?

Giving customers the best experience should be at the forefront of any business strategy which remains true when it comes to contract negotiations. Negotiating contracts with customers shares many of the same elements of general contract negotiation above but has some additional focus points to ensure customer satisfaction.

Listen

For example, listening is even more important when negotiating with customers. Ensure you ask questions, and find out what they are really looking for. By practising active listening you can ensure that you address the customer’s needs and don’t misinterpret what they say or their motivation. Negotiating is a chance to listen, be heard, show and earn respect and develop a solid relationship with your customers that they'll want to tell others about.

Address what they are looking for

Make sure you demonstrate that you’ve listened by incorporating what you heard into the deal or contract and try to ensure customer satisfaction. Although instinct may drive you to view negotiation as a competitive process, trying to get the best outcome for yourself will be counterproductive to trying to form a long-term working relationship. Being combative will likely negatively impact your relationship with the customer, and may put them off from reaching an agreement altogether. You should demonstrate that you’re not trying to “win” the negotiation but instead come to an agreement that will work for everyone involved.

Look into the customers' problems and needs and ensure your proposal effectively addresses them. Helping the customer clarify their needs and solutions will make them less likely to walk away from the final deal even if there are elements that are less favourable to them.

You will have a more productive conversation if you are open, and have a discussion that involves their needs and your needs. For example, explaining what the cost involves and why that is the cost, or why it might be different to a competitor. Try to be empathetic and fair. Make sure that the customer understands that you are aiming to satisfy their needs and make them happy, but you also need to satisfy the needs of your business.

Prioritise the relationship

When you negotiate with a customer you must prioritise the relationship and show a level of care beyond just closing the deal. If you can create trust you’ll be setting yourself up for the future whether it’s a follow-up, another deal or a referral. By showing that you care about the customer and their goals, you could earn a lifelong customer.

Don’t focus solely on price

Try to consider all the ways you can create value for the customer that don’t involve price and use these as variables in the discussion. Focussing only on price can increase animosity, reduce margins, or both. Instead, focus on variables where both your and the customer's interests align. Focusing on the value-add of your propositions can trigger interest from the customers' side, and may help them understand the value beyond price.

You should try to find the specific combination of products or services that can most effectively increase the value for the customer without sacrificing the seller's profit. If you really listen to what the customer is looking for and ask the right questions, you may discover an issue more important to the customer than price.

Create credibility

A customer (or potential future customer) will feel more comfortable knowing that there is little or no risk associated with doing a deal with you. You can create such comfort by increasing or demonstrating your credibility.

You can go a long way towards mitigating a perceived risk by helping them understand other similar companies you work with. You can share case studies and (depending on the context) even introduce existing clients to prospective clients.

Provide appropriate rationale for the positions you take, and use specific facts to defend your claims. For example, when it comes to price you should be able to justify it as being realistic and be able to defend your position with facts. Customers may find it frustrating to hear a price without the reasoning behind it. If a customer can see that the price you’re offering is fair and justified they may be more open to it. You could do this by going through market rates for the product, deals with similar customers, competitor's rates etc. By building your credibility you can create a relationship of trust in you and your business.

Speed

Good relationships rarely start with long and arduous negotiation periods. As any salesperson will tell you; the quicker the client gets to the final contract, the more likely the deal will close.

But a typical contracting procedure is a process. The length of time taken for a contract to be reviewed, negotiated, approved and signed by all parties is usually measured in weeks rather than days.

A slow contracting process (ie lower deal velocity) can cost a business millions of dollars a year. For organisations looking to boost their bottom line, this is therefore a metric to be closely tracked.

High-performing teams spend time considering ways to reduce steps and minimise contract negotiation to close deals faster and with greater certainty. For example, many teams use contract management software to speed up their sales process and provide insight into bottlenecks.

How to minimise contract negotiation

One best practice our clients love for minimising contract negotiation is known as the Terms Fairness Audit. The idea is relatively simple:

  1. Audit your agreements to identify clauses that have a high probability of getting negotiated, frustrating the customer

  2. Determine if there is an alternate ‘softer’ position that has a limited impact on risk or profitability

  3. Move to the softer clause.

You can see an example of this model below:

What is the difference between contract negotiation and contract management?

Contract negotiation happens at certain points within the contract lifecycle, for example:

  • Prior to execution at the beginning of the relationship.

  • Whenever a contract is renewed.

Contract management relates to the management of the broader lifecycle. It is a process that clearly outlines how an organisation drafts, approves, executes and stores its contracts. Thus, where contract management involves overseeing the entire contract lifecycle, contract negotiation is just a single phase of it.

What is contract negotiation in procurement?

Procurement is the act of obtaining or purchasing goods or services, and procurement teams in large organisations are responsible for managing costs, ensuring the security of supply, and improving quality. They will often get involved in contract negotiations with external suppliers in order to meet these objectives. As such, ​​negotiating with suppliers is a large part of most procurement roles.

Procurement negotiation is when purchasing staff work with vendors to agree on terms for buying goods or services. These negotiations typically involve pricing, payment, delivery, timeline and quality standards. Ideally, these negotiations consider the best options for both parties and build strong long-term relationships. In a procurement process, multiple suppliers may compete for business, and suppliers often find themselves faced with a decision to reduce their profit margins to win business.

What is contract negotiation software?

Contract negotiation software is a category of software that has a set of features that make it quicker and easier to negotiate contracts with counterparties and is a type of legal technology.

It aims to reduce friction and administrative work throughout the contract negotiation process and is commonly a part of contract management software. It is a tool that is typically geared toward streamlining and organising the negotiation process by automating the routine side of contract management and minimising human input. Learn more on our Contract Negotiation Software article.

Accelerate your contract lifecycle

Plexus Gateway’s contract management software gives you everything you need to accelerate business productivity in one modular platform. Get contracts signed faster, streamline document workflows, collaborate in real-time and integrate with the apps you already rely on.

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