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Contract negotiations can be one of the most critical parts of the whole negotiation process. You have the bare bones of a deal on the table; both parties are hopefully willing and feel like their needs and interests have been met.
The contract negotiation process is where everything discussed thus far will be written up in a formal agreement. It is also an ideal chance for you to negotiate for some last-minute changes or details. Let's take a deep dive into the world of contract negotiation so you can be certain you are doing everything in your power to ensure this crucial step comes down in your favour.
Why do we need contracts?
Contracts are some of the most important legal documents that a company will handle daily. They serve as a formal agreement of terms discussed and will solidify the discussion between two or more parties.
If there is a dispute further down the line, everyone can refer back to the contract terms for a clear idea of what was previously agreed upon. Though it can take us a while to negotiate contracts, they will prove their worth once they are in hand.
It is little wonder that we have seen contracts in the world of business for thousands of years and that they have stayed the same even as the methods in which we share them are now different. The oldest peace treaty in the world dates from 1269 BCE, and there are plenty of other contracts that are even older. If we were to examine the terms of these millennia-old contracts, we would probably find terms similar to those we see nowadays. However, we doubt most people are still sending their contracts on clay tablets; email seems much more efficient!
What are the common types of business contracts?
Pretty much anything in the world of business can be negotiated and contracted. Some of the more common business contracts we see include:
Supply Agreements
Contracts between a supplier and a buyer where the supplier agrees to provide specified goods or services at agreed prices and terms.
Non-Disclosure Agreements (NDAs)
Legal agreements that ensure parties involved in discussions or negotiations do not disclose sensitive information to third parties.
Service Level Agreements (SLAs)
Contracts that define the level of service expected between a service provider and a customer, often including performance metrics and remedies for failure to meet these standards.
Partnership Agreements
Contracts outlining the terms and conditions of a partnership between two or more entities, including profit sharing, responsibilities, and exit strategies.
Lease Agreements
Contracts where one party grants another party the right to use property (such as office space or equipment) for a specified time in exchange for payment.
What is the best process for negotiating contracts?
Just as no one can expect a session at the bargaining table to be the same every time, so can we expect the bargaining process to be a little different every time we look at the contract negotiation process. However, there are a few concrete steps we can take to ensure that a contract negotiation always has a good foundation to work from.
1. Drafting
The drafting process sees any notes taken during the initial meeting drawn up into a contract for the first time. This may be done over several stages if the negotiations are expected to take time, or they can be done at the end when the initial discussions are completed.
One party may offer to write the initial draft, or the parties could decide to do it together. This draft will then be shared amongst all parties before the next meeting so they have adequate time to discuss it with colleagues and prepare a list of concessions they would like.
2. Discussion
When you come back together to discuss the contract draft, you need to break the talks down into sections. Successful contract negotiation needs to be broken down into stages, as approaching it all at once is likely to be overwhelming and frustrating. Place each major contract term in its own discussion point so full attention can be given to each one in turn. This allows progress to actually be made, rather than just focusing on trying to get the other party to accept all of your terms.
3. Concessions
Concessions are a vital part of contract management and negotiation. This is the stage where a party will agree to a change to the contract in favour of another at the table. Remember, conceding to a request of the other party does not mean that you are necessarily putting yourself in a weaker position. Business negotiations will always carry a lot of back and forth. In choosing to concede on one point, you may be able to negotiate for a better deal in another, and in an area more advantageous to your company's needs and goals.
4. Amendments
Once concessions have been agreed upon and other points have been addressed, the draft contract needs to be amended to reflect these new agreements. Once a new draft has been created, this will be passed back and forth once more until all parties are completely satisfied with the terms of the contract and a mutually beneficial agreement has been reached.
5. Ratification
When the contract has been finalised, it needs to be ratified. This is a fancy official word for the formal agreement and signing of the contract, at which point it becomes legally binding for all signing parties. A contract can still be amended further after it has been ratified, but this should be the point at which both negotiating parties are happy with the terms discussed.
5 tips for improving your contract negotiation process
Do you feel like you don't have the bargaining power needed for effective contract negotiation? Do you feel like the negotiations never go in your favour, and any business relationships you have built are definitely weighted in favour of the other party? A small adjustment in your strategy and approach to negotiation might be all you need to feel more confident next time you sit down to negotiate a contract.
Develop your skills
Negotiation is a skill, and taking the time to develop your contract negotiation skills will pay off in the long run. You may already have a good idea of the strengths and weaknesses of your negotiation skills, but they may need some fine-tuning. Working to improve your active listening or emotional intelligence will never let you down.
Communicate your non-negotiables early and firmly
Establish what the non-negotiables will be for your company, and then make sure they are honoured. Communicate them in discussions early, and clearly, and respect any non-negotiables that the other party may present too. If both sides repeatedly try to argue against or change the non-negotiables, frustrations are only going to build and it will be harder to reach a mutually beneficial solution.
Ask questions
You need to ask questions at the negotiating table. It can be a way to hone in on pain points, establish expectations, and just move the discussion forward in general. Asking questions is also a brilliant strategy to show the other party that you are actively listening to their points, and that you are attempting to understand their position.
Push for collaboration
When you are seated across the table from one another, it is easy to mistake negotiating parties for opponents. Instead, it can be better for you to see them as collaborative partners. One study from after the 2020 pandemic found that 88% of those involved with contract negotiation hoped to see increased levels of collaboration and a more "fair and reasonable" approach to negotiations.
While you have goals and objectives you will need to achieve throughout negotiations, you shouldn't strong-arm your way to an agreement. A collaborative approach is always better for building a strong relationship with other companies.
Lead with facts, not feelings
It can be very easy to muddle emotions with facts, especially if this is a deal you have been working on for a long time or one that your company has a vested interest in. However, you need to ensure you always lead with facts and not feelings. Do your prep, and make sure you have a long list of reasons and data that can back up your requests.
A side-note on employment contracts
We have focused on commercial contracts for the majority of this article, but we want to stress that you should consider negotiating your employee contract if there is something you want to change. This doesn't necessarily mean that you have started a new job (though this is the most opportune time to open this conversation). If there is something in your contract that you are dissatisfied with, consider renegotiating it.
This can include salary negotiation, but remember that much more goes into your employment compensation than just your paycheque. You may want to negotiate for hybrid working, more PTOs, a four-day work week, or whatever you think will make your working day better and easier for you.
Treat an employment contract negotiation as you would any other, and don't be afraid to ask your manager for change. Sit down and work out your plan, then head into the negotiation with a clear head.
Don't let contracts intimidate you as a negotiator
Contract negotiation can be intimidating even to seasoned negotiators since it is the stage in talks where everything is put down in writing. If not handled with a calm mind and an organised approach, there is a high chance that something may be forgotten, or talks could break down as negotiations go awry.
Create a logical path for negotiations to follow, breaking them down as much as you need to ensure that everyone's concerns can be adequately addressed. Treat the other party's interests with the same level of respect and understanding that you expect in return, and look to them more as collaborators than as opponents in a battle. By the time you reach a final agreement, everyone should be satisfied with the conclusions reached.
Scotwork aims to help everyone unlock their potential as a negotiator. If you feel like your skills can use a little development, our negotiators can help you to identify your strengths and weaknesses and give you a solid foundation to negotiate from. Get in touch with us today to find out more.
