Contract Negotiation Fundamentals

The goal of any contract negotiation is to secure business with an acceptable level of risk. The starting point is to select the right contracting party—or, more importantly, to reject the problematic contracting party. For example, compare the low-margin prospective customer contract where the customer shops primarily for price, and insists his contract form be signed with no changes, to the higher-margin customer. As opposed to the low-margin customer, this type of customer is looking may be looking for a long-term partnering relationship with its vendors. This higher-margin customer may also be receptive to a negotiation process that leads to the execution of a customer contract with an acceptable level of risk.

Along with selecting the right types of contracting parties, there are many other negotiation fundamentals that you should keep in mind.

  • Tell the customer or vendor early on that your company reviews and negotiates all of its contracts.
  • Work on developing a partnership mentality with your prospective customer or vendor from day one. The company who anticipates the needs of those it contracts with, and does its work in a highly professional manner, will find the customer and/or vendor far more receptive to negotiation.
  • For some customers and vendors, one negotiation is all it may take. If for example both you and the customer are pleased with how the first negotiation process went, and the customer is further pleased with your performance and level of customer service, that first negotiated customer contract form may serve as the basis for all future contracts between the two of you.
  • Sell the customer and/or vendor on fairness. For example, it is not fair for others to expect your company to defend them from their own negligence through a broadly worded indemnification provision. 
  • Sell the customer and/or vendor on the idea that a company who does not care about the risks contained within a contract form also may not care about the quality of their products or services either.
  • Negotiation is an art and not a science. There are certainly wrong ways to negotiate, but there is no one right way.
  • Do not begin negotiations until you’ve had an opportunity to fully present your value proposition. In other words, if the customer views you as selling commodities and offering no value, the customer has no reason to negotiate.
  • Understand the objections raised so far during the sales process for example. Based on these objections, identify your potential customer’s motivation or hot buttons.
  • Be certain that you’re dealing with a person who has the authority to negotiate and make decisions.
  • Be prepared to be patient. This will lead to a higher level of trust between you and your prospective contracting party.
  • Be prepared to work toward a true win/win solution.
  • Know in advance at what point the agreement will no longer be beneficial to you and your company, and be prepared to walk away.
  • You should listen to your customer/vendor.  For example, when selling be prepared to change the value proposition to support price concessions. For example, agreeing to expedite delivery times or fix pricings for a longer period of time.
  • Seek to identify agreement on small items first to help develop momentum to the negotiation.
  • Periodically summarize any agreements that exist between you and your contracting party. Take notes to demonstrate your commitment to the negotiation, and to help you find opportunities to verbally summarize the smaller agreements.
  • After a tough negotiation is completed and a contract is signed, make sure the customer for example is pleased with your performance. In fact, make sure the customer is so pleased with the first transaction that they will continue to buy on future transactions. Remember, the customer may very well be looking for a good long-term vendor, viewing this as being less expensive over time than finding a new vendor again and again.
  • If no agreement is reached, sincerely thank prospective contracting parties for their time and commitment to the process. Give them an "out." This is an opening for them to come back to you and your company in the future for your next negotiation. If they do come back, review the points that seemed to be open when the previous negotiation ended, and see if an agreement can be reached this next time around.