What Is Contract Negotiation?

A sales contract defines a relationship between two parties. A lot of time and effort is spent creating them, and this happens through a process called contract negotiation.

In this post, learn about the key stages of contract negotiation, strategies for running a smooth negotiation, and scenarios where it makes sense to negotiate your contracts.

Sales contracts are legally binding, so negotiation is often necessary to ensure everyone will get their needs met. It also ensures that new business relationships begin free of conflict, as both parties have worked together to discuss the terms ahead of time.

Contract negotiation is a step in the process of contract management, and it usually takes place before a final contract is drawn and signed by both parties.

Contract Negotiation Examples

Here are some examples of situations in which contract negotiation is common:

• Negotiating a real estate contract. Buyers sometimes negotiate costs with sellers, especially if they conduct inspections and find that they’ll need to spend money renovating the home.
• Negotiating pricing with a scaling customer. If customers have a long-standing relationship with a business and are looking to scale, they may negotiate terms and costs based on their history with your business.
• Negotiating the terms of a supply agreement with a third-party vendor. This can involve discussing payment options, like month-to-month vs annual, or cost of delivery for products.
• Negotiating the terms of an acquisition. If a company is looking to buy another, they may discuss the terms of the acquisition, like what happens to consumer data when the acquisition goes through, and how much the purchase price of the deal will be.

Contract Negotiation Process

There is no set time frame for negotiations, as they take as long as it takes for businesses to agree. However, most negotiations follow the same process, which we’ll outline below.

1. Presentation of sample contract

The contract negotiation process always begins with sharing a baseline contract that outlines the most significant terms of the agreement.

This allows all parties to read through its specifications and identify areas that need to be addressed and negotiated during the meeting. Aim to provide a draft as soon as possible so everyone has enough time to read the draft and prepare ahead of time.

2. Discussion and negotiation

During discussion and negotiation, you’ll do exactly that — negotiate the terms of the contract. Any needs that either party has will be discussed and added to the contract. There can be some back and forth to come up with a solution that works for everyone.

3. Concessions

The negotiation process will always involve some concessions from either side. You may need to let certain things go for the other party to feel as though they are adequately represented in the contract, and vice versa.

You’ll likely go back and forth between discussion, negotiation, and concessions until you’ve come to a final agreement.

4. Finalization

Once both parties are satisfied, the contract will move on to the next stage of contract management, which is approval and signing.

Contract Negotiation Strategies

Now that you understand the contract negotiation process, let’s go over the key strategies that will help you create a seamless discussion.

1. Know your key needs and objectives.

Before beginning the negotiation, you need to know what your key needs and objectives are. These are essentially your reasons for doing business with the other party, and having this information makes it easier for you to understand how you need to be represented in the contract.

For example, if you’re negotiating with a vendor that provides a critical material for your production line, something that is crucial for you to include in the contract is strict delivery times that won’t interfere with your manufacturing process.

2. Ask questions.

Asking questions during contract negotiation is critical because it helps you understand where your prospect stands with the current state of the contract. You’ll get insight into their mindset, and the more you know about the reasoning behind their needs, the easier it will be for you to align your needs with theirs and vice versa.

3. Active listening.

When you ask questions, make sure that you also practice active listening. If they can barely get a word in, you’re taking control of the negotiation and not giving them a chance to express their needs. If you don’t listen fully, you may interpret something they say incorrectly and not see the motivation behind their needs.

4. Always communicate clearly.

Clear verbal and written communication is key to successful contract negotiation. You want yourself and the other party to read the contract and not get bogged down in technical terms, and you want to speak through your thought processes so you’re clearly understood.

5. Don’t be oppositional.

You may feel you need to enter negotiations with your guard up so you don’t end up with a contract that doesn’t benefit you. However, the goal of negotiation is for both parties to have their needs met, and you should strive to remember this.

Being oppositional can derail the negotiation and, while you may need to remain firm on certain things, there is a difference between being firm and being hostile.

Negotiation helps you establish a strong business partnership.

Negotiating a contract is a good thing. It makes sure that you’re going to get what you need, and that the other party will as well. If you approach the process positively and actively listen to what the other party is saying, you’ll find yourself with a sales contract that helps you establish a successful partnership.