There is a fair amount of discussion and disagreement on this topic, but the simplest answer to this question is, “it depends.” The length of a contracting relationship is contingent on so many variables, including the complexity of the agreement, as well as the resources and investment at stake. In a vast number of business transactions, these agreements last between two to five years. Although there is no hard and fast rule with respect to the optimal contract duration, there are several things to take into consideration when deciding on this matter.
Perhaps the most significant factor affecting the duration of a contracting relationship relates to the timeframe needed for both sides to perform their contractually stipulated obligations. Although parties tend to be optimistic in the beginning and often want performance to occur as soon as possible, this frequently creates an unrealistic, onerous burden on one or both sides. And, in many cases, it is this impatience that causes so many contract disputes to arise, as parties are set up to fail when the contract imposes an unrealistic timeframe.
Thus, during contract negotiations and drafting, it is important for the parties to consider the appropriate length of time that each side will need to perform and must remember that tight turn arounds will hinder full and satisfactory performance. Ideally, the drafting team should consult with the management team to assess the availability of resources and ability to comply with the agreed upon duration. By figuring this out ahead of time, the appropriate adjustments can be made before the agreement is finalized.
Flexibility Built In
In most cases, the contract will likely need to include the timeframe selected plus several more months added on to that estimate, and maybe even an extra year for extremely intricate deals. This helps to ensure some level of flexibility for the contract’s duration. In addition, the parties can try to stagger deadlines so that a delay in one step does not cause a series of subsequent delays, thereby disrupting the contract length completely.
And, the parties must ensure that there is sufficient time built in for decisions relating to renewals or termination (and contract lifecycle management software can prevent unwanted renewals). It may seem counterintuitive to allow for flexibility in a contract, which generally requires strict enforcement and rigidity, but with the right foresight and advance planning it is both possible and advantageous.
Clauses Outlining Additional Adjustments
Things happen, circumstances change, and natural disasters sometimes occur, all of which can disrupt shipments or impact business transactions in some way. Regardless of whether the issue that arises is man-made, company-made, or nature-made, a solid contract will include provisions that explain how the parties can or will negotiate any necessary changes to the duration. It simply is not possible to stubbornly insist on the fulfillment of terms that were made years prior given that change is inevitable.
The goal should be to think about these possibilities from the outset and seek to build in measures to allow for occasional adjustments to the contract, avoiding a complete breakdown and subsequently resorting to legal redress.
The Buyer's Guide to Contract Management Software
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Contracting: Understanding the Buyer's Perspective