How Are Contracts Negotiated?


Written by: Rachel Vanni
Legally Reviewed by: Jennifer Tsai

July 29, 2020

7 minute read

No matter your industry, contracts are an integral part of day-to-day operations. Business lawyers and in-house counsel review, negotiate, and manage hundreds if not thousands of contracts per year. Contract negotiation is an accepted and expected part of doing business. Written, enforceable agreements provide parties with an opportunity to set expectations, make offers, negotiate contract terms, and mitigate risks. And they create the foundation for respectful, professional relationships.

For lawyers who work within a company, contract negotiation can become a primary part of their careers. In fact, 91 percent of in-house counsel routinely coordinate contract negotiation processes even if they assign contract management to outside legal services.

A contract may bind parties for months, years, or even decades. Businesses must be able to include terms that are beneficial, fair, and adaptable within the parameters of their industry. For example, if a company relies on salmon for the creation of a processed food product, they would want to negotiate pricing terms that would create an optimal environment for their business to thrive. If the company couldn’t negotiate fixed pricing options despite the fact that the market value of salmon fluctuates, they may be devastated if the cost of salmon suddenly skyrockets.

People often mistakenly think negotiation is an adversarial process. But successful negotiation is grounded in collaboration. In the best agreements, both parties are satisfied with the outcome. But as a representative of a company, you must negotiate in your business’s best interest. How do you create a cooperative negotiation process and get a great deal for your company or client? Keep reading to learn how to successfully negotiate a contract.

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.