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The Many Facets of Contracting Part 4: Contract Negotiations

     

This is the fourth entry in a series dedicated to the many facets of contracting, as well as how each particular facet and all its relevant components relate to contract management. You can read Part 1 here. You can read Part 2 here. You can read Part 3 here.


During contract negotiations, the parties' goal is to reach a mutually acceptable agreement. Unfortunately, during this phase of the contracting process, both parties are primarily focused on risk allocation and revenue maximization. As a result, there sometimes isn't much thought or effort put into what has to happen once the ink has dried on a finalized agreement. However, the manner and outcome of the negotiation process will have a tremendous impact on contract management. Here are some things to consider during the negotiation process:

Preparations

Depending on what is at stake in a contractual agreement, the negotiation process can become an extremely long and drawn out process. Parties want to ensure that they are getting the best deal possible, and they have to make certain that they are adequately protected in the event of a breach down the line. However, some of this extreme (sometimes excessive) caution may be avoidable by simply doing a good amount of research ahead of time. 

 

Specifically, companies should investigate any prospective contracting partners before setting up an initial meeting. This includes a review of a company's executive team, finances, previous litigation issues, and any relevant press that may be available. Even if companies manage to get past the negotiation phase and enter into a contract, the ensuing management of that contract may become a nightmare if unexpected issues arise, and some of those problems may have been caught and avoided with a little research beforehand. 

Introductions

If a company does its research and the other party appears to pass muster, it should be safe to set up an initial meeting. The first few introductory meetings may reveal quite a bit about a company's culture and business mindset. As a result, companies must pay close attention during these interactions to determine whether the relationship is a good fit. 

 

Even if the contractual relationship appears perfect on paper, the reality of human interaction may not align. Ultimately, successful contract management really comes down to relationship management, and initial impressions often divulge how the relationship will unfold.

Establishing a Framework

Once both parties have committed to moving forward, it is still important to tread lightly. Although each party may not have any shady dealings lurking in its past and the teams may appear to get along famously, when it is time to get to the heart of the deal, opinions and expectations can differ markedly. After all, the goal of any business contract is to gain the most value possible, and companies may pursue this at all costs, sometimes to the detriment of the deal.

 

In general, the actual negotiation process must begin with the parties outlining their goals and expectations, and together they must determine whether they can establish a mutually satisfactory framework for the subsequent agreement. At this juncture, there is no need to get into specific details because, if the parties don't see eye to eye on the big picture, they will probably never agree on the minutiae. And, contract management usually focuses on the outcome anyway, as the means are generally less important than the ends. Thus, the framework established during negotiations will set the stage for how the final contract is managed.

Ironing out the Details

This is really the hard part and when things can begin to get very messy. The main focus at this point, as far as contract management is concerned, is to ensure that the terms of the contract are realistic. The agreement simply cannot impose unrealistic timelines, overly onerous terms, or a one-sided arrangement. Any impractical obligations will doom the contract from the outset and make managing the final agreement ineffective and costly. Thus, the negotiation teams must ensure that they are working to strike a good deal while also thinking about how things will actually play out over the course of the partnership. 

Circling Back to Confirm

This isn't really the final phase in the negotiation process. Rather, there should be ongoing communication to ensure that everyone is on the same page. Effective communication is central to every phase of the contracting process, and communication in one phase inevitably impacts what will happen in any subsequent phase, especially managing the contract.

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