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What is Contract Negotiation?

What is the Contract Negotiation Process

Estimated reading time: 6 minutes

What is the Contract Negotiation Process

<What is the Contract Negotiation Process>

Contract negotiation is the process in which two or more organisations discuss the details of the contract before committing the terms to writing. The organisations attempt to negotiate terms that are favourable to themselves. When negotiating, each party assesses the risk or benefit of including a particular term. The ability to negotiate a contract is a skill that every business owner or an organisation will need at some point of the time during the life span of the business. The negotiation process is not necessarily linear and differing factors will affect the precise route of negotiations as well as the final agreement. Here are the steps of the Contract Negotiation Process:

  • Identify
  • Prepare
  • Request for Proposal
  • Review Terms
  • Negotiation

Identify

First and foremost the organisations need to identify the issues that they want to negotiate. The negotiator should highlight important parts and take a note about things that are unclear, or that cannot accept. Have good information about each issue that you want to negotiate. Also, it’s beneficial to establish a team of employees early on who can help identify the need, research the industry and interview the vendors.

Prepare

When the organisations prepare for the negotiation, they should consider practical business concerns. This means having a clear understanding of the objective of the contract. The organisation should then consider what they are willing to compromise over, to reach that objective. Parties should agree in advance about which objective criteria to consult and agree to abide by the outcome.

If parties have negotiated contracts with the other in the past, knowledge of the prior dealings can prove useful in terms of negotiation strategy. As part of preparation, organisations should familiarise themselves with the laws of their state. These laws include the laws of what the contract covers. During contract negotiation, wise negotiators prepare for the possibility of a contract breach. 

Request for Proposal

Once the organisation has identified the vendor(s), they need to get in contact with them in order to discuss their needs are and ask for a formal proposal or otherwise called a request for proposal (RFP). Ask identify the credibility of the vendor, it’s advisable to ask the vendor for customer references with their proposal.

Review Terms

Once a contract has been proposed, the organisation will ask the negotiation team will review the terms of agreement and study it in detail. The negotiation team will reach out to the vendor and get clarification on anything that is unclear or may need further clarification. Some of the common things to look at in the contract are duration of agreement, payment cycle, termination clause, liability for both sides, scope of services, what they will and will not do, etc. It’s advisable to draft the first terms of agreement at this point.

Negotiation

Once the negotiation teams has looked through the terms the organisation meets with the other party to negotiate the differences, if any. During the time of negotiation, the organisation should closely communicate with the lawyers as well. Once the organisation feels comfortable with an agreement they can go ahead and sign it.

Negotiating is a skill that can be learned. The trick is to find a good balance between the needs of the organization and what the vendor can provide. Always keep in mind that the vendors are looking for new businesses so make sure to give them the opportunity to provide their best offer. In the contract negotiation process, there might be some more sub steps other than what we covered, but these will simplify you contract negotiation process