Negotiating a contract requires skill, strategy, and intimate knowledge of its complexities – essential elements that ensure its successful passage through any maze-like experience.
Whether you are a business professional seeking to close a significant deal, an entrepreneur searching for partnership agreements, or an individual seeking terms on a significant purchase, mastering how to negotiate a contract is indispensable!
Common Types of Contracts
Businesses and organisations’ activities are governed by contracts. While there is a large number of contracts to deal with, here’s a quick list of nine of the most common types of contracts:
- Fixed-price contracts: Set price determined for goods or services, ideal when project scope is clear. Simplifies the agreement process.
- Cost-plus contracts: One party is paid for incurred expenses plus an additional fee upon project completion. Useful when project scope is unclear. Risk is shared with the customer, common in industries with variable raw material costs.
- Time & materials contracts: Party pays a fixed rate for labor and materials. Simple but can lead to high project costs if the project extends beyond expectations.
- Unit pricing contracts: Contractor sets price per unit of work, with material and labor costs factored into each unit. An itemized breakdown is often provided.
- Unilateral contracts: One party makes an offer, and the other is paid only after completing specific actions. One-sided obligations.
- Bilateral contracts: Both parties have reciprocal obligations to perform something for each other.
- Simple contracts: Oral or written agreements not legally recorded. May not always be legally binding and are suitable for minor agreements.
- Implied contracts: No written or oral agreement, but established through the actions or circumstances of the parties involved (e.g., ordering drinks at a bar).
- Express contracts: Clearly defined terms, agreed upon verbally or in writing. Legally binding and can be enforced by courts.
Steps for Negotiating a Contract
Now that we have an overview of the types of contracts, we can return to how to negotiate a contract.
Regardless of the contract type, the general negotiation process remains roughly the same. We will provide an overview of how the process works here, but you can also check out our other content like our general “how to negotiate” article for further reading.
I. Preparing for Negotiation
Understanding the Contract
The first step of “How to negotiate a contract?” is a deep understanding of that type of contract’s terms and conditions. For example, fixed price contract terms would be quite different from bilateral contract terms – with one being a one-and-done and the other having a longer-term effect on both parties. Thoroughly analyze every clause and detail to comprehend your rights, responsibilities, and potential areas of contention.
Identifying Priorities
Determine your priorities and non-negotiables. Knowing what aspects of the contract are crucial to you will guide your strategy and help you stay focused on your goals.
As your party’s representative, take the time to meet with your client to understand their interests. If you are representing multiple departments, multiple meetings could be needed to unpack and reconcile what your organisation’s interests and positions really are. During this time you’ll also want to research your client’s best alternative to a negotiated agreement (BATNA), information they need and your limit price.
Researching the Other Party
Understanding the other party’s background, financial stability, and past negotiations can provide valuable insights. This knowledge can influence your approach and give you an advantage during agreements. You can check out our preparation checklist to see what are the six preparation steps to take.
Setting Goals
Set clear and achievable goals for the agreement. Define your ideal outcomes and acceptable compromises. Having specific goals will keep you on track and help you measure the success of the negotiation process.
Read more about negotiation fundamentals here!
II. Conducting the Negotiation
Opening the Agreement
Initiate the negotiation process with a professional and respectful tone. Clearly state the agreement’s purpose, express your willingness to collaborate, and establish a positive atmosphere for discussion.
Making the Case for Your Position
Articulate your points clearly and confidently. Provide evidence and logical reasoning to support your arguments. This is where your preparation comes in, as you will be able to appeal to their interests and even tease them with a concession that they value. A well-prepared presentation strengthens your position and demonstrates your commitment to the whole process.
Listening and Understanding the Other Party’s Perspective
Actively listen to the other party’s concerns and viewpoints. Understanding their perspective allows you to find common ground and explore mutually beneficial solutions. You will want to look out for more evidence of their interests as well as their limit price.
In addition, active listening can also demonstrate empathy and open-mindedness that can foster a collaborative atmosphere.
Finding Common Ground
Identify areas where both parties agree or have shared interests. Building on common ground creates a foundation for compromise and agreement. Interest-based negotiation will help you grow the pie for both sides and shift the discussion away from purely competitive bargaining.
Making Concessions
Negotiations often involve give and take. Be prepared to make concessions, but ensure they align with your priorities. Strategic concessions can pave the way for the other party to reciprocate, fostering a spirit of cooperation.
Closing the Deal
Once both parties are satisfied with the terms, clearly summarize the agreed-upon points. Confirm that everyone is on the same page and outline the next steps. Ending the negotiation on a positive note sets the stage for a successful partnership.
Check out our blog post on the keynote speaker here!
III. Finalizing the Contract
The final and most important step to “How to negotiate a contract?” is finalizing the contract!
Reviewing the Agreement
Thoroughly review the negotiated agreement to ensure all agreed-upon points are accurately represented. Carefully check for any discrepancies or misunderstandings that might have occurred during the process. Read our blog post on client communication for a better understanding!
Making Necessary Changes
If discrepancies are found, address them promptly. Make necessary revisions to the contract to reflect the mutually agreed terms accurately. Attention to detail at this stage is crucial to avoid future disputes.
Signatures and Execution
Once both parties are satisfied with the final version of the contract, obtain signatures from all involved parties. Proper execution formalizes the agreement and legally binds all parties to the terms outlined in the contract.
Post-Negotiation Follow-Up
After signing, continue communicating openly and regularly with both parties involved. Following up can help address any potential problems, fulfill obligations as per contract terms, and form positive working relationships, which increase chances for future collaboration and successful partnership.
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