Best Practices in Contract Negotiations

All major corporations have a significant number of ongoing contracts with vendors. It is our experience that most follow the 80/20 rule, i.e., 80% of their vendor spend is with 20% of their vendor population. With that concentration in mind; it has become extremely important to establish fundamental strategies in dealing with this universe.

Vendor Management and the establishment of a strong internal VMO are handed in other spaces on the TBI website. For the purposes of this note we start at the beginning; the negotiation process.

Below are some Best Practices when engaging in contract negotiations with your vendor.

  1. Never get to the contract negotiation stage with only one bidder remaining. Always have at least two bidders throughout this process.
  2. Develop a contract negotiation strategy with your customer for each bidder. Ensure you have clearly enunciated the strengths and weaknesses of each side in the negotiation. Prioritize what you want to ensure you get from the bidder during negotiations. List out those things which, if you had to, you could give away to the bidder, but never do so without a return. Make them pay a price for each concession.
  3. Always start from your contract draft. Never use the bidders. You want them to be playing by your rules and this will help ensure that you stay in control of the negotiating process
  4. Be professional and fair. You do not have to live with the contract but the customer does and you want to ensure that both the bidder and the customer see the contract as fair and as a positive vehicle for the on-going relationship.
  5. You must continually communicate with all players during the process to ensure that no misunderstandings occur and that nothing is left to later interpretation.
  6. If the process takes longer than was planned, that’s ok. Do not shorten the process by giving up on points you would otherwise fight for just to meet an artificial deadline. Both parties will pay for this later.
  7. Pay attention to the details. Sometimes a single word or misspelling can mean the difference between success and failure.
  8. Always end each negotiating session on a positive note and establish a time frame for reviews, corrections and additions. Before you close your session establish the next meeting.
  9. Have your customer’s lawyer produce the black (red) line document that shows the changes made during the session just completed and review it thoroughly for scriber errors.
  10. Never let the customer eliminate all but one of the bidders until the contracts are ready to be signed. They may believe that they are ready to choose but until the final contracts are negotiated and signed it is always possible for something to occur that will change the deal. This has the additional advantage of ensuring that pressure is kept on each bidder in order to enhance the customer’s negotiating position.

Neglecting some of the basics above will lead to significant long term issues with your vendor and eventually, either a contentious renegotiation or contract cancellation. Build the contract correctly and you lay the foundation for a mutually advantageous relationship.

Share Button