How Are Contracts Negotiated?
Written by: Rachel Vanni
You do all sorts of negotiating in your daily life, whether you know it or not. If you have a spouse or partner, you might negotiate what to have for dinner. If you have children, you might negotiate certain aspects of their schedule (or what they eat). And if you have employees, you probably negotiate (on hopefully friendly terms) when they can have time off).
But when it comes to contracts, it can be more difficult to figure out what you can or want to negotiate on, especially as the stakes get bigger and the financial impact becomes greater. If the length of time on a contract also is an issue, you may find yourself spending more time with the negotiation phase than you planned. So what do you need to understand when it comes to negotiation of a contract, and what options do you have (or not have)? This graphic explains it.
Contract Negotiation Strategies and Tips
It’s easy to walk into a negotiation with the anticipation of winning. After all, it’s your company versus the other company. You both want to gain the upper hand, right? Surprisingly, a collaborative approach to negotiation may be more likely to get you a better deal. Roger Fisher and William Ury, authors of Getting to Yes, pioneered the cooperative method of negotiation while at Harvard University. They advise contracting parties to work together to create a mutually beneficial agreement that delivers optimal results for both parties.
Taking the cooperative mindset into account, here are a few strategies that draw from the experience of successful negotiators.
- Prepare for negotiations
Successfully negotiated contracts require advance analysis, research, and planning. Before you walk into a room with the counterparty, make sure you understand where you stand, what your most important terms are, and which terms you’re willing to budge on.
Many industries rely on artificial intelligence (AI) to perform detailed analysis to determine the risk and reward scenarios based on varying terms. AI software can take existing data, compare it to market analytics, and provide a company with a detailed report based on predicted outcomes. Before a negotiation begins, you will know where you stand and be able to predict the terms the other party will propose.
For example, imagine Bonnie is an attorney for Company A. She utilizes AI software to analyze past contracts with a similar vendor to discover which pricing structures worked and what could be improved. When it’s time to negotiate with Company B, Bonnie understands Company A’s limitations with regard to the cost of goods. Thus, Bonnie negotiates a new agreement that prevents the losses Company A experienced in the past.
- Be open and listen
The worst thing you can do during negotiation is dismiss a request from the other party prematurely. You won’t benefit from dominating the process of negotiation unless your goal is to shut down communication. Listen attentively to find out what the other side values, what factors and terms are important to them, and where they have flexibility. When you pay attention, you’ll discover mutually agreeable terms.
As an example, let’s revisit the negotiation between Company A and Company B. John, an attorney, represents Company B. At the start of contract negotiations, John takes control of the conversation and won’t let Bonnie get a word in. He misses out on hearing about some flexibility Company A has on delivery terms. Frustrated, Company A doesn’t allow any wiggle room with the delivery terms, a provision that is vital to Company B’s success.
- Never accept the first offer
Expect some back and forth in the process of negotiation. The first offer won’t be the best deal. Parties use their first offers to test the waters and determine a reasonable starting point. As part of preparing for a negotiation, have an opening offer in mind. But understand that the other side will reject it and provide a counteroffer.
- Set an agenda
Depending on the contract, you may need to address numerous sections. It’s easy to jump from one term to another without gaining closure on any issue. Instead, create a plan at the start of negotiation to help organize and track where you’ll begin and how you’ll address the critical concerns of each party. Agendas help break a large contract into manageable parts, which is important if you reach an impasse.
If either party can’t agree on a contract provision, check the written agenda. Suggest discussing the next topic and revisiting the contentious provision at the end. You’ll keep the energy of the negotiation moving forward. When you agree on a term, cross that section off the list. Both parties will benefit from having a physical representation of your progress.
- Use fact-driven language
While negotiations can become emotional, communication between the parties should focus on facts. Anger clouds judgment and undermines decision making, according to multiple studies. Avoid using emotionally language such as “I feel,” or “I believe.” Instead, use objective language, and provide data to back it up. For example, say, “The market has determined that anything more than 5 percent is not achievable.” Or, “Our widgets are 30 percent cheaper than our top five competitors. Here’s the data.”
- Address hard lines with questions
During negotiations, the other side may say no to one of your key requests, which can threaten the success of the contract. It can be easy to make an ultimatum, but demands tend to shut down communication. Instead, use questions to your advantage. Why is that contract provision of such value? Would they be willing to offer concessions in exchange for this particular term? When you approach the other party with curiosity and a willingness to listen, you develop a long-term partnership and gain a foundational understanding of the other business.
To illustrate this strategy, let’s imagine Company A is negotiating a contract for widgets with Company B. Company B requires the contract to include a provision that states they pay the same price for each widget for five years disregarding market fluctuations. Company A doesn’t want to risk significant cost variations. But company A draws a hard line. Instead of walking away, Company B asks about the risk associated with the cost variations in manufacturing. Through discussions, they discover that Company A has concerns with their widget manufacturer, who has increased prices twice during their contract term. Company B recommends a more affordable and reliable manufacturer. Company A saves enough money on assembly that they agree to fix the prices of the widgets for the duration of the contract.
- Transform contention into collaboration
Negotiators tend to react to each other’s personalities. Like magnets, some personalities attract, and some repel. When a contract negotiation becomes adversarial, identify small areas of agreement between you and the other party. Even if it’s something that seems insignificant, it may be a point to build cooperation. After negotiating a contract, end the meeting on a positive note. Say something as simple as, “I’m glad we could make agreements on these points today, and I appreciate your time.” When both sides feel good about the negotiation process, they’re more likely to be dedicated to making progress.
- Rely on experts
Contracts contain information that may be outside your area of expertise. A reputable attorney, mediator, or adviser may be able to provide a deeper level of insight concerning specific contract terms. These professionals pull from their experience to help identify possible adverse outcomes and make suggestions regarding strategy and collaborative terms. But remember, communication with non-attorney advisers may not be deemed confidential or privileged. Work with advisors you trust and take measures to shield your sensitive or private information so that it’s not revealed inadvertently during contract negotiations.
Conclusion
Mastering basic negotiation tactics lays an excellent foundation for success for businesspeople and attorneys. Skilled negotiators utilize all the tools at their disposal. Artificial intelligence provides a strategic edge for negotiation. Use it along with the above contract negotiation tips and strategies to help you prepare for a successful negotiation.
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This article originally appeared on Kira Systems.
