Updated July 2022
There are several different kinds of contracts in the world today. There are employee contracts, business-to-business contracts, marriage contracts, and real estate sale contracts. You even have a contract with your utility and smartphone device company.
For our purposes today, we will focus on business contracts, both employee and B2B. Whether you are in the finance, medical, or real estate industry, understanding what contract negotiations are and how to negotiate a contract is essential.
This guide explores contract negotiation strategies, tips for negotiating a contract successfully, and the essential skills you need to finalize an agreement that benefits both parties.
What is Contract Negotiation?
Contract negotiation is the discussion between two or more interested parties who agree upon legally contracted terms. These terms can include legal, operational, or financial elements such as payment amount and schedule, project outline and deliverables, and personnel.
The purpose of negotiating a contract is to agree on these terms for the benefit of both parties. The process is a bit of give-and-take as each party aims to walk away with something equal in value to what they give. Identifying the terms and agreeing to their perceived value is the most significant element of all contract negotiations.
The contract type will determine the terms and values that you will discuss during the negotiations. For example, a real estate contract will have different terms than a B2B or employee contract.
Who is Involved in a Contract Negotiation?
Essentially, there are two parties involved in any contract negotiation. For example, in a real estate sale contract, those two parties are the buyer and seller of the property. For a business-to-business contract, the two parties are the service provider and the client. If you are negotiating an employment contract, the two parties are the employee and the employer.
We recommend that both parties ask a lawyer to examine the contract for legal purposes. Some contracts have confusing language that an attorney can translate and may answer some preliminary questions.
Depending on the contract, you may want a lawyer present during negotiations, but it is not typically required.
Some larger companies may have negotiation teams with a clear leader that facilitates the negotiations. Or some agents represent a client during a contract negotiation; this is common in the entertainment industry.
When is the Best Time to Negotiate a Contract?
There are specific times when it is best to negotiate a contract. For example, if one of the parties is unhappy with the proposed terms of an agreement, they can offer new or updated terms. Or, if there are errors, outdated terms, or contradictory language, one of the parties can propose a new contract with the correct language.
If there is a term limit or ending date on a contract and you want to renew the contract, this is also an excellent time to start a contract negotiation. You may be able to change the financial or operational terms based on experience from the first contract.
On the other hand, you should not consider negotiating a contract when you have nothing different to give or reason to change the contract. And if the other party says they have given their best offer, it’s wise not to go asking for more.
Contract negotiations may be more difficult if incorrectly timed. Therefore, we recommend you evaluate the contract and its terms to decide if changes are necessary before attempting to negotiate.
How to Negotiate a Contract
No matter the type, there are clear steps for how to negotiate a contract. Following these steps will help you navigate the potentially treacherous waters of a negotiation. Hopefully, each party can come to an agreement for mutually beneficial terms. That is, after all, the goal of any contract.
Start With the Original or a Draft
In any contract negotiation you should start with the original contract or a draft of the proposed new contract. Each party should agree on a starting point of terms. These basic terms could include a Statement of Work (SOW), job start date, or real estate property address.
There is something in common that brings both parties to the table – start with this common interest.
If the new proposed contract is drastically different from the original (although unusual, it does happen), then create a draft of the contract that both parties can access. But usually, each interested party will refer to the original contract and identify the terms that need an adjustment. You can use a secure document sharing tool to go back-and-forth on changes.
Identify Terms that Need Adjusting
This leads us to the next step: identifying terms that need updating. Such terms can include salary, personal time off, or title change for an employment contract. Or, if you are negotiating a business contract, these terms may include payment amount and periods, the scope of work, or deadline adjustments.
We recommend avoiding an “all or nothing” attitude when identifying contract terms. Instead, find the items that are not working or are no longer relevant (outdated) and negotiate to change these items before voiding the entire contract altogether.
Benefit Both Parties
Remember, a contract should benefit both parties. Each side gives something of value (whether that’s money or time) in exchange for something in return (a service or compensation of service).
The back-and-forth of negotiations is discussing these perceived values and services. A finalized contract is unlikely if you disagree on the value of the work completed or the goods exchanged.
However, if both parties understand that the contract should be mutually beneficial, you can work together towards that goal.
An important part during a contract negotiation is the discussion that takes place between the two parties (or their representatives). And sometimes there is a miscommunication or, depending on the two parties involved, something is lost in translation.
It is imperative that you completely understand all items and terms of the contract you are signing. If not, we recommend you ask questions until you clearly understand all the terms.
It’s normal to ask questions during a contract negotiation, and we highly recommend you take this during discussions to ensure clarity for both parties.
Don’t Rush the Negotiations
Contract negotiations can take more time than you expect. And that’s okay.
We recommend that you take your time beforehand to prepare and research, during the negotiations you should listen to the other side’s concerns and voice your own, and afterwards you can follow up on any questions or decisions that were brought up during the negotiations.
Some people like to say, “let it play out,” during a negotiation. This basically means, don’t rush the process and see how the other team responds without pushing any agendas or manipulating an outcome. The other guys might just surprise you with what they offer in return.
Essentials Skills in Contract Negotiation
There are essential skills that you should know about before heading into any contract negotiation. Sharpening these skills may allow you to negotiate your next contract successfully.
Preparation is Key
Before negotiating a contract, we recommend you prepare by researching the current trends and studying past precedents. As you research, you can determine the current market value for the role or service in the contract. Or research the other party’s past relationships to discover common interests or goals.
The more you prepare, the better chances you have to meet or even exceed your goals during contract negotiations. For example, if you know that the other party can offer discounts or expedited deadlines, you can include these terms in your negotiations.
“Know your enemy” is a common phrase, and while the other party may not be your “enemy” per se, you do want to know as much as possible about the person or company that you are contracting with.
Another essential skill is how well you communicate your wants and needs in a contract negotiation. As you bargain for specific terms, you will want to ensure clarity in the discussions. There is nothing more heartbreaking than finally agreeing to terms on a certain item, only to discover that each party had different intentions for the outcome.
A skilled negotiator is able to clearly communicate his or her needs in a way that is professional and poised. The negotiating table should not be a shouting match or fighting arena. Although there are times when emotions run high, especially if the contract is of a personal nature.
Don’t Show Emotions
Which brings us to our next skill: don’t let your emotions run the negotiations. This may be more difficult during contract negotiations that are contentious with each term debated ad nauseum. A tactic that some people use as a way to get what they want without having to give too much.
An exceptional negotiator will see this tactic for what it is (a contract negotiation strategy) and keep their emotions in check. We recommend that you don’t get frustrated with stall tactics, run-around tactics, or any other antics the other party may have up their sleeve.
Hopefully, these frustrating strategies won’t appear during a business contract negotiation because they will tip their hand to the type of company they are (and one you probably don’t want to work with).
But other contracts such as family law, real estate, or trust funds may see higher emotions than usual, and we strongly encourage you to keep your feelings to yourself. It can only benefit your cause during the contract negotiation proceedings.
Active listening is another skill that is helpful at a negotiating table. In fact, active listening is a skill that can benefit you in any room – both business and personal.
Eye contact, facial expression, and body language are all essential factors in active listening. It shows the other party that you are interested in what they are saying and that you truly hear their concerns, wants, and needs.
Taking notes and asking clarifying questions is also a part of active listening, as long as these tasks are not distracting or disruptive to the person talking.
Why Contract Negotiations are Essential
When two parties discuss a mutually beneficial agreement, they need a contract to finalize the terms and mitigate any risks by either party. Because the contract should benefit both parties there is an element of teamwork and collaboration required.
The discussions are essential because both parties should ensure they are successful in getting something that is equal to what they are giving. The contract becomes a legally binding document that ensures both parties follow through on their agreements.
Whether it’s a business contract, real estate sale contract, or employee contract, the two parties should work together to agree on what’s best for themselves and each other.
Contract Negotiation Strategies
When it’s time to negotiate a contract, there are a few strategies to consider as you approach the discussions. Whether you consider yourself an aggressive or passive person, consider these strategies as you bargain for what you want.
Somebody has to win a negotiation, right? That’s the attitude of this negotiation strategy: wins at all costs. It can be domineering, assertive, aggressive, and (honestly) effective.
This strategy focuses more on the work of the business rather than the relationship. The job needs to be done (preferably below cost and ahead of schedule), so you find the contract that will deliver what you need without costing you much.
A competitive negotiation strategy doesn’t work every time, but it can be helpful to approach the negotiating table with a bit of a chip on your shoulder and see how much the other guy bends.
An accommodating strategy shifts the focus from the work to the relationship. It’s not assertive in any way and attempts to minimize any disruptions or differences during the negotiation.
The goal of the accommodating style is that everyone wins, even if both parties are not 100% happy. Of course, each party gives a little more or less than they wanted, but overall everyone is satisfied with the final contract, and you maintain a good business relationship.
A creative approach to contract negotiations is the collaborative strategy. The goal in collaborating is that everyone is 100% pleased with the result of the contract, even if that means brainstorming new and innovative ways to approach the operational, legal, and financial obligations of the contract.
This strategy combines the assertiveness of the competitive strategy and the relationship-focus of the accommodating strategy to create a unique space where each party is bargaining for the betterment of everyone at the table.
It’s certainly a rare approach and only works when both parties commit to the goal of finding the best value exchange possible.
Tips to Successfully Negotiate a Contract
A skilled negotiator is an active listener, keeps their emotions in check, and clearly communicates their wants and needs. You should also select your strategy, research your opponent, and remember the goal of any contract – mutually beneficial terms. Whether you’re speaking with a motorcycle accident lawyer or a corporate attorney, you need to know the basics of negotiation.
Here are some other quick tips to successfully negotiate your next contract.
Read All the Terms
Even if the contract is extremely long with a ton of legal jargon, you need to read every word. Or have a lawyer read it and then explain to you what all the terms mean. The contract becomes a legally binding document when you sign it, and you will need to know what you are agreeing to.
When you know and understand all the terms of the contract, you can easily refer to the article in question if a dispute or misunderstanding arises during the lifetime of the contract.
If something is unclear, it’s best to ask for clarity during negotiations rather than after the contract is signed and finalized.
Prioritize Key Objectives
Another tip to a successful contract negotiation is to prioritize your key objectives. For example, if you want to change certain terms from the old contract, you need to determine the most significant ones.
If you are negotiating an employment contract, you may determine that a higher salary is more important than a change of PTO (or vice versa). A real estate contract negotiation may include a discussion on interest rates or purchase date. No matter the contract type, the important thing is to decide what is most important and discuss those items first.
Of course, the other party may disagree on the most important and have another term that they want to change. This is where negotiating can get interesting: you both want something and determine its value as more important than anything else in the contract. Finding a way to compromise and agree on the contract terms will determine the outcome of the agreement.
Keep Digital Track of All Communications
Negotiations can take a lot of time and several back-and-forth adjustments of the contract in question. Contracts are typically digital, and you want to make sure you have the most recent version as you negotiate for the items you wish to include or change. Combing documents and merging PDF files can dramatically improve your file organization, so consider a digital de-clutter.
Sizle is an online service that stores and shares critical documents and helps secure the contracts as you work to finalize the details in real-time. In addition, both parties can have access to the contract and offer feedback or suggestions to a certain term.
It’s essential to keep track of all communications and changes as you negotiate a contract. The goal is for both parties to agree to a beneficial partnership.