Contract Negotiation 101

The contract negotiation process can also be an opportunity to achieve more speed and effectiveness, get quicker turnaround times with better collaboration processes, and use automated tracking and contextual insights for smarter contract negotiations.

The contract negotiation process also allows you to add to the economic value of the relationship, shore up supply chain vulnerabilities, and shield your organization against risk.

What Is Contract Negotiation?

Contract negotiation is the process through which two or more parties deliberate over the contents of a contract to reach a legally binding agreement. Contract negotiation typically proceeds by setting the terms and conditions in which both parties can agree on. This makes the process smoother, as both sides know what is expected of them and can focus on reaching an agreement.

The goal of contract negotiation is to come to an agreement that meets the needs of both parties. In order to achieve this, both parties must be willing to compromise and be open to discussing different options. Contract negotiation can be a difficult process, but it is important for both parties to remember that the goal is to reach an agreement.

Why Is Contract Negotiation Important?

Contract negotiation is a critical part of the contracting process. By negotiating a contract, both parties can ensure that the agreement is mutually beneficial and reflects the true nature of the business relationship. Contract negotiation also helps to avoid future conflicts by clarifying the expectations and responsibilities of each party. In addition, contract negotiation can help to establish a strong business relationship by demonstrating that both parties are willing to work together.

Commonly Negotiated Terms 

Contract negotiation involves discussing and agreeing on the terms and conditions that will govern a business relationship. Each contract negotiation will vary based on the specific contract type, the context and needs of the parties involved, but these terms are typically part of the discussion to ensure a clear agreement. Here are some typical terms that are commonly negotiated in contracts:

1. Scope of Work: 

Clearly defines the tasks, responsibilities, and deliverables expected from each party.

2. Pricing and Payment Terms: 

Includes the total cost, payment schedule, payment methods, late payment penalties, and any other financial terms. Price adjustment clauses are sometimes included in this discussion.

3. Duration and Termination: 

Specifies the length of the contract, renewal terms, and conditions under which the contract can be terminated by either party.

4. Confidentiality and Non-Disclosure: 

Details how confidential information will be handled and protected, and the obligations of each party to keep certain information confidential.

5. Intellectual Property Rights: 

Addresses the ownership and usage rights of intellectual property created or used during the relationship.

6. Warranties and Representations: 

Defines the assurances provided by each party regarding their ability to fulfill the contract's obligations.

7. Performance Metrics and Standards: 

These clauses set the standards for performance and the metrics by which performance will be measured.

8. Penalties for Non-Performance: 

These clauses establish the penalties for failing to meet the contract's terms, such as liquidated damages.

9. Liability and Indemnification: 

This section outlines the responsibilities for any losses or damages and specifies the conditions under which one party will indemnify the other.

10. Amendments and Modifications: 

Specifies the process for making changes to the contract after it has been signed.

11. Dispute Resolution: 

Establishes the process for resolving any disputes that arise, such as through mediation, arbitration, or litigation.

12. Force Majeure: 

Details the conditions under which a party will not be held liable for non-performance due to unforeseen and uncontrollable events.

13. Compliance with Laws: 

Ensures that both parties will comply with all applicable laws and regulations related to the contract.

14. Assignment and Subcontracting: 

Defines the conditions under which a party can transfer its rights or obligations under the contract to another party.

15. Governing Law and Jurisdiction: 

Identifies which state or country's laws will govern the contract and where any legal proceedings will take place.

Contract negotiation is an important part of the contracting process. It ensures that all parties clearly understand and agree to the terms and conditions, reducing the risk of misunderstandings and disputes. It helps to protect the interests of all parties involved by establishing fair and enforceable agreements.

Contract Negotiation Best Practices

Negotiating contracts doesn't have to be a stressful battle. By following some essential practices, your organization can approach the table with confidence.

1. Preparation is Key

In the high-stakes world of contract negotiations, preparation is the difference between a winning deal and a lopsided agreement that puts your organization at a disadvantage. Entering the room with a clear understanding of your desired outcomes, along with a strategic plan for concessions, empowers you to navigate the back-and-forth with focus. Anticipating the other party's priorities and potential sticking points allows for a more nuanced approach, where unexpected roadblocks become opportunities to find creative solutions. Ultimately, thorough preparation is the key to securing a contract that reflects your value and advances your organization's interests.

2. Know your "why":

Be clear on your goals and what a successful outcome looks like for you.

3. Prioritize your objectives:

Not all clauses hold equal weight. Identify the most important terms you absolutely need and those on which you have more flexibility.

4. Research and gather intel:

Understand market rates, industry standards, and the other party's typical terms.

5. Draft first:

Starting with a draft contract sets the tone and gives you a baseline for negotiation.

Negotiation Strategies

For many businesses, the ability to navigate a contract negotiation is no longer a nicety, but a necessity. Just as a well-trained athlete wouldn't enter a competition unprepared, approaching the bargaining table without a strategic plan can leave you vulnerable. Negotiation strategies provide a framework for both securing the best possible outcome for your organization and building long-term relationships. By employing tactics like active listening, calibrated concessions, and a focus on mutual benefit, negotiators can navigate the give-and-take inherent in any deal, transforming potential conflict into a collaborative process.

1. Be an active listener:

Pay close attention to what the other party is saying and putting in writing. They reveal what their priorities might be.

2. Focus on win-win solutions:

Aim for mutually beneficial outcomes that address both parties' needs. Whether in person or in writing, when both parties feel heard and respected and have a meaningful stake in a negotiation, the result is more likely to be successful.

3. Make strategic concessions:

Offer more minor concessions in exchange for what matters most to you. The best concessions are ones where what is offered is meaningful to the other party but less of a priority for you. 

4. Control the conversation:

Guide the discussion, and the redlines, towards your key objectives.

5. Maintain a professional demeanor:

Maintaining a respectful and calm demeanor ensures the communication lanes stay open with all negotiating parties.

Technology Plays a Crucial Role in the Contract Negotiation Process

The contract negotiation process can be tedious and time-consuming, but tracking every revision request and comment is critical. Before the modern era, negotiators would write revision requests and comments in red ink on paper. This allowed both parties to easily track changes and ensure that each revision was agreed upon.

Today, contract negotiations can be done electronically, which can make tracking revisions more difficult. Therefore, it's essential to have a contract management system in place that allows you to keep track of each change made during the negotiation process. This will help ensure that every change is made with agreement from both parties. Here are four pieces of a successful contract negotiation process:

1. Third-Party Contract Collaboration

Achieve faster cycle times and reduce communication overhead with a secure online collaboration portal that enables third parties to self-service contracts within parameters set by your company.

With the portal, vendors and third parties can register to get online access to their contracts, submit contract redlines, review contracts, and upload compliance documentation. This access is especially valuable when time zones are barriers, or continuous updates and contract maintenance are required. The Icertis Contract Intelligence platform also supports email-based collaboration with the ability to automatically upload emails and attachments to the system.

2. Redlines and Version Management

Significantly improve negotiation governance with redlining and version management. Every redline is saved as a new version and evaluated for impact on approval workflow, with exceptions routed through the correct review process.

The Microsoft Word Add-in lets users review any version, compare or combine versions, and access the clause library and related agreement clauses.

3. Contract Negotiation Intelligence

Equip business stakeholders with the right insights during negotiations. While reviewing negotiated clauses, users can access library content and related agreements, such as looking up master agreement clauses while reviewing a statement of work. This allows users to understand the full history with the third party, so they can quickly decide on positions and accelerate closure. For example, a company may surface that a supplier had provided a better price to another division of the company, providing real-time leverage during negotiations, or identify risks associated with a customer’s payment history that could influence a position.

4. Collaborative Contract Administration

Leverage the platform’s online collaboration portal to enable third parties to perform self-service maintenance of profile and contract compliance. Third parties can receive obligation task assignments on the portal for completion, submit SLA or deliverable information against contracts, and receive proactive alerts on any contract administration or obligation tasks.

This improves visibility for all contract parties, accelerates contracting actions, and protects against important contract commitments or milestones from being missed. It also reinforces the contract platform as the single source of truth for all contract-related actions and documentation.

4. AI: Your New Secret Weapon At the Negotiating Table

Contract negotiations can be a tedious dance of legalese and revisions. But what if you had a powerful AI assistant in your corner? AI contract management tools like the Icertis Copilots are revolutionizing how businesses negotiate.

These tools use natural language processing (NLP) to dissect complex contracts and pinpoint key terms, clauses, and potential risks. This frees up negotiators to focus on strategic aspects of the deal rather than getting bogged down in the minutiae. Imagine having a tireless analyst highlighting critical clauses and concessions you might miss. Additionally, AI can analyze past contracts and industry benchmarks, suggesting optimal concessions and highlighting potential risks. With this data-driven approach, businesses can approach negotiations with a stronger hand, securing better deals and avoiding hidden pitfalls.

Want to learn more about how an AI contract management system can help you negotiate better contracts? Request a demo of Icertis Copilots.

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