Business Contract Negotiation for Procurement

A contract can be like a block of gleaming stainless steel, solid and immutable in its negotiated construction, or it can be riddled with complex clauses that resemble Swiss cheese. The signatory to a contract must tread carefully through a legal maze of carefully crafted phrases, as while their pen trembles with uncertainty and trepidation above the signature line, and the signatory slowly scrawls their name on the dotted line, a legal agreement or contract is established. Do they fully understand the legal document they have signed? Short of participating on one of our Procurement Business Contract Negotiation courses, our article shares with you some free advice to get you started on the right track.

What is a contract?

A contract comes about when two or more parties negotiate an agreement to exchange, now or in the future:

• Property (this includes money)

• Promises of future performance (services)

Contract negotiation can be either verbal or written, although a verbal contract is inherently risky because it generally lacks clarity in the finer points and can be subject to misinterpretation and abuse. It is therefore wise to avoid verbal contracts.

A contract can be contained within an invoice or purchase order, or created as a distinct procurement document.

Some procurement and purchasing readers will be savvy pros who have negotiated their fair share of contracts, while many will just be embarking upon the unknown path towards fulfilling their business quest. Along either route, there are contractual obstacles lying in wait that can trip up even the most seasoned negotiator with the best-conceived business plan.

Elements of a dependable contract

A solid contract should contain the following major components, each of which is negotiable:

• Names – The full legal names of the entities or signatories.

• Obligations – The obligations or actions required by each party must be crystal clear regarding the commencement of the agreement, delivery and procurement's payment terms, and must succinctly define what constitutes completion of the obligations.

• Personal Guarantee – Incorporated companies do not require personal guarantees of the individuals, only of the corporation itself. If you want an individual to be personally responsible, this should be noted in the contract and the person should sign the contract in both their corporate and personal capacity.

• Force Majeure – A French phrase, which means greater force. It is a clause that alleviates a party from their contractual obligations as a result of forces or events beyond their control, and limits their liability. Some examples are riots, strikes, wars and floods. It is equally important to include clauses that concern inherently necessary actions performed by third parties before you are able to satisfy your contractual obligations. These are sometimes seen as subject to clauses, for example, Party A would only be able to satisfy its obligation subject to Party B delivering the parts, material, data, etc. by a certain date.

• Compensation for Non-Stipulated Failure to Satisfy – Should one party fail to satisfy their contractual obligations due to an unforeseen event, or for any reason which is not stipulated within the terms of the contract, damages will need to be paid to the party that has been wronged. The terms of these damages should be as sharply defined as possible in your procurement contract negotiation.

• Legal Jurisdiction – Whether you are negotiating your contract within the same country or across international borders, the civil laws of the respective jurisdictions may be fundamentally different. A solid contract must specify which jurisdiction and location will litigate a contractual disagreement.

• Incorporate Arbitration Features – Legal costs can be horrendous, but by implementing an agreed upon arbitration process to handle disputes should they arise, both parties may achieve a less expensive and quicker means of settling potential disputes.

• Beware of the Paperwork – Many companies also use invoices and purchase order forms that contain their own procurement contractual terms, which can contradict your contractual agreement. Unnecessary disputes may arise as a consequence, so you must review any contractual clauses contained within the standard paperwork of all parties.

• Work for Hire – If you are hiring subcontractors to perform specific tasks, you should draw up a separate procurement contract to outline their responsibilities and obligations. If ownership of intellectual property is an issue, this should also be addressed.

• Confidentiality and Non-Disclosure– This feature protects any confidential material that must necessarily be disclosed to another party to enable them to fulfil their contractual obligations. Non-Disclosure Agreements are often abbreviated and referred to as NDAs.

• Non-Compete Clause – This guarantees that an independent contractor will treat clients as yours rather than theirs. This feature also prevents independent contractors from using your business concept in a competitive fashion. Guarantees often stipulate a time period and physical geography, e.g. two years in the same state. In practice, however, Non-Compete clauses are difficult to enforce in a court of law.

If a potential procurement contract negotiation involves numerous features and components, you may need to consult with a legal adviser who specialises in contracts.

Form Contracts

Be careful not to place too much trust in a pre-written off the shelf contract. Read through all the terms to ensure their relevance. It is likely that you will want to edit the procurement contract to customise it to your specific business, and form contracts should only be used as a guide. This is also the case with previous contracts, as they may not address the changes that have taken place in your working relationship. Each contract should be uniquely designed to address the current particular obligations and responsibilities of both parties.

Business Contract Negotiation – Tips and Advice

Now that we have covered some key areas that are typically contained within business contracts, let us now examine how to negotiate a successful procurement contract.

1) Research all pertinent information – Learn everything you can about the company and the people with whom you will be negotiating. Similarly, you should ensure that you have your own ducks in a row by double-checking that any other departments involved in the upcoming negotiation are in alignment with your own expectations and obligations.

2) Contract Negotiation Preparation – This is the most crucial phase. Before entering the procurement negotiation, you must clearly define your goals and objectives and their relative importance to each other. What could you offer by way of concessions or trade-offs in exchange for the same from the other party?

3) Define Your Position–Your position will form the backbone of the proposal or offer you are prepared to make to your negotiating counterpart. A backup position should be formulated prior to you making your proposal, in the event that your counterpart does not deem the initial offer acceptable. Leave yourself room to manoeuvre, to allow yourself and your counterpart flexibility in the contractual negotiation process. Also, ask yourself what your backup position would be should the negotiation fall apart. What options are available and what is the best possible alternative for you should you be unable to reach an agreement?

4) Evaluate the Other Side – Sit back and think about what your prospective contractual partner’s position will be in relation to their expectations, as well as your own. You must also consider what would be of relative importance to them and try to estimate their goals and objectives. Consider what objections or issues they might raise and how you might counter them in a mutually productive manner.

5) Introductory Meeting – Before you make an offer or proposal, be sure that you are both in agreement about the objectives and goals of the contractual agreement you are about to negotiate.

6) Listen – A successfully negotiated procurement contract is not a one-way street, and it is important that you take the time to listen to what your prospective contractual partner has to say. This is not the time to talk, but to listen, and by doing so you will learn what is important to your counterpart. Reaching an agreement will become easier if you pitch your position in a manner that gives your counterpart more opportunity to say “Yes”.

7) Concessions – Don’t rush to accept or make concessions. Take your time, and if necessary, put the request for a concession on the back burner. Most importantly, avoid making a concession without ensuring you will receive something of equal or greater value in return. Preparation is important for manoeuvrability in a negotiation, as it enables you to cover various scenarios that may occur.

8) Don’t Be Afraid to Say No – A bad agreement can be worse than no agreement at all. If what your prospective partner proposes does not satisfy your own goals and objectives, you must be prepared to say “No”.

9) Confirm Your Prospective Agreement – Once you have made a tentative agreement on the contractual obligations of both parties, you should verify the terms of the pending negotiated contract both verbally and in writing.

10) Expect the Unexpected – Unfortunately, a common negotiation ploy that many negotiators face in contract negotiations is a final demand or additional concession request by the other party – usually, just when you thought the deal was sealed. Again, don’t be afraid to say no, as this is not what you had initially agreed upon. Conversely, this could also be an opportunity to convince them to offer you an additional valuable concession – but only if it is warranted.

Conclusion

The most vital thing to remember is that each business contract is unique. A procurement contract is of no benefit if it does not mutually satisfy and meet the goals and objectives of both parties entering into a business agreement. Each contractual negotiation must follow a process in order to be successful.

References:
1) www.moneyinstructor.com/doc/contractbasics.asp
2) www.ausport.gov.au/fulltext/2002/nsw/r_a-z_leg_contract.asp
3) www.poznaklaw.com/articles/contracts2.htm
4) http://en.wikipedia.org/wiki/Force_majeure
5) http://en.wikipedia.org/wiki/Contract