Contracts are crucial in any business relationship; the same goes for contract negotiation.
Given the global economic challenges - inflation, higher interest rates, FX fluctuations, and supply chain shortages - it’s more important than ever to examine your contracts and look for opportunities to negotiate. It is an essential step to manage your company’s risks.
There are many reasons to prioritise effective negotiation on an ongoing basis. Being locked into an unfavourable contract for a prolonged period can create financial issues, especially if it is a major contract. In addition, careful negotiation can create a win-win situation for both parties by helping to avoid costly disputes and litigation.
When to negotiate
Contract negotiation is not just about signing a document. It’s important not to assume contract negotiation is only required at the time before signing.
Identifying various key opportunities to negotiate is paramount, such as:
- Negotiation during tendering.
- Negotiation before signing the contract.
- Negotiation during the validity of the contract.
- And negotiations at times of renewals.
Whenever you choose to negotiate, there should always be an already established rapport between you and the other party. In order to achieve this, we can apply the five ‘pillars’ of success.
Planning and preparation
Effective planning and preparation allow you to take an organised approach to contract management and contract negotiation. Start by identifying contract management-related stakeholders and define key roles and responsibilities.
Set up an appropriate workflow and develop an ‘early warning system’ to determine any possible roadblocks that you might encounter during the contract duration. Then ensure availability for an appropriate contract management system and resources to support best practices. Finally, create a project plan for implementation of the contract deliverables.
Pre-contract
Firstly, determine whether the contract is standard or non-standard. Identify relevant regulatory and other compliance requirements and potential contractual risks to ensure they are reasonably mitigated. Once you’ve completed the market research, be sure to check the contract for errors and consistency, before obtaining the approval of stakeholders.
Conduct a corporate legal review, use e-signatures to maintain contract velocity and once these items have been satisfactorily negotiated, only then should you sign a contract.
Contract period
Be sure to store the agreement safely. All relevant stakeholders should be notified and able to access the document as needed. Once this is in place, establish a contract administration plan to fulfil the wishes, and identify deliverable dates and other milestones, setting automated reminders for reliability.
Apply change control procedures to identify and address any modifications that may arise during the contract period. Also, remember to implement a regular contract monitoring schedule using established KPIs to spot - and address - problems ahead of time.
Pre-renewal
In some cases, agreements may exist on a limited, one-off basis, meaning that once the contracted goods or services have been delivered and the contract completed, there is no need for termination or renewal. But many goods and services are ongoing, meaning that as a contract nears the specified termination conditions, you must decide whether to renew or terminate.
Measure the contract performance using the established KPIs and remember to re-evaluate market and competitive factors. Review any changes or problems that occurred during the contract period and ensure that the new agreement will continue to meet your needs; so, renegotiate if required.
Post-contract period
This refers to the activities related to concluding and closing out an agreement. You must ensure all the contract conditions have been fulfilled as agreed and that all deliverables have been received or delivered. If not, create a report of exclusions and support it with all the necessary justifications/documents.
It is vital that final invoices have been delivered and paid, and then you’re able to generate final reports as required such as ‘final accounts settlement statement’ or a ‘contract close-off form’. Lastly, conduct a ‘lessons learnt’ post contract end to improve the contracting process and value for future agreements.
It’s worth noting that good business partnerships are not fostered at the time of need. They are something you work on and develop…
