Contract Negotiation: 8 Strategies

Contract negotiation involves give and take. The trick is to know what you want to take from the deal, and how much you’re willing to give to get it.

Negotiating a business contract is not as simple as asking for what you want. Because you and the other party to the deal usually have different goals and expectations, each of you must be prepared to modify your demands as the negotiation proceeds. Even in situations where the balance of power is heavily on one side (for example, you're dealing with a supplier whose goods are scarce and in high demand), it's rarely productive, in the long run, for the powerful side to demand a completely one-sided deal. A thoughtful and mutually-beneficial negotiation strategy usually results in a deal that each side can live with. Remember, after the deal is inked, you will have an ongoing relationship, whose success could be hampered if one side feels unfairly treated from the outset.

Strategies for Negotiating Business Contracts

You can apply the following eight strategies in any business contract negotiation, whether it involves the terms of employment, a large purchase, or a real estate transaction. The tactics you use and how you employ them will depend on the party you're negotiating with, what you're negotiating for, and how much you want the deal.

1. Determine Your Endgame

It's important to enter into a contract negotiation knowing what you want to take away from it. Figure out your best-of-all-possible-worlds scenario, but don't forget to also set your bottom line—what you're willing to accept to get the deal.

For example, if you are negotiating the purchase price of a building, determine how much you ideally want to pay as well as the very most you're willing to pay if you must go higher.

2. Set Priorities

In the last analysis, you want to walk away from the negotiating table with a deal. By setting priorities, and knowing which items you are willing to forego, you can move the process along and avoid getting bogged down negotiating for items that aren't essential to making the deal work for you.

The non-essential items you include in your negotiations will become your concessions—terms you agree to relinquish in order to win your high-priority terms. The ability and willingness to offer concessions is an essential negotiating tool. It not only helps to break the inevitable deadlocks that arise during the process, it also makes both parties feel they've come away from the negotiation with a win. (More on creating a win-win scenario below.)

Let's say you are negotiating an employment contract. You might enter negotiations with these "asks":

  • a minimum base salary
  • a minimum commission rate
  • company-paid health insurance
  • an annual bonus amount and the conditions under which it's paid
  • four weeks of vacation per year
  • a two-year employment contract, and
  • fully paid tuition for graduate and college extension courses.

You might determine that your salary minimum, commission rate, and bonus amount are non-negotiable because it won't be worthwhile to change jobs for anything less. But you have no immediate intention to take additional school courses, and you have enough confidence in your ability to excel at your job to accept a contract term of one year instead of two.

Here's how your flexibility might play out during negotiations. You learn that the base salary you are asking for is 20% higher than what your prospective employer wants to pay. You might find a solution by offering to concede tuition benefits in exchange for the base salary you want by reasoning that your prospective employer will save that amount on tuition payments. If your prospective employer still balks at the base salary amount, you might also throw in the option of taking a one-year contract rather than two years with the reasoning that the shorter time frame will allow your employer to quickly determine whether your value warrants the higher salary.

3. Conduct Research on the Other Party to Determine the Balance of Power

It's a good idea to learn as much as possible about the other party to the negotiation. You're aiming to know which side is more hungry for the deal—that affects how much that side will be willing to concede.

  • What is the other side's market position? If you are negotiating a purchase contract and several vendors can supply the same product, you'll be able to take a harder line than you would if the supplier you are negotiating with is the only game in town.
  • What are the financial and organization resources of the other party? The adage, "You can't draw blood from a stone," applies here. You might be willing to place an order for a very large volume of merchandise in order to get a lower price, but if your supplier isn't equipped to deliver in the volume you need, it won't do you much good to negotiate on that point.
  • What is standard or customary for the industry? Some contract negotiations, such as employment, might be guided by industry customs or standards, and a prospective employer will not likely stray too far from those standards.

4. Break Down the Negotiation into Sections

Rather than try to negotiate the entire contract as a whole, break down the sections and negotiate each one separately.

Suppose you are negotiating a contract with an investor who wishes to fund your new company. The contract might include sections on the amount of money to be invested, the role the investor will play in the management of the company, and the timing for distribution of profits.

When you negotiate each deal point separately you can move the process along, even in the face of disagreement on some points.

5. Use Facts to Back Up Your "Asks"

You will be much more persuasive when you argue with facts rather than emotions. Let's say you are selling your business. Telling prospective buyers that the business has allowed you to raise your family and send your kids to the best schools won't be nearly as persuasive as a spread sheet that shows the sale price of similar businesses or third-party market reports that show projected growth rates for your industry.

6. Conduct Your Own Due Diligence

Just as you shouldn't expect the other party to blindly take your word on the deal you are offering, you shouldn't accept their position at face value. Conducting your own due diligence to verify the information you're given will bolster your bargaining power.

Real estate buyers and sellers often use market comparables (data collected to show the sale price of similar properties over a specific period of time) to justify their offering or asking price. A buyer who uses comparables to show that similar properties sold for considerably less than what the seller is asking has a stronger rationale for negotiating a lower price than one who simply claims the price is too high.

7. Ask Questions to Move Beyond a Stalemate

When negotiations reach an impasse, it's often wise to take a step back and ask questions to learn the reasons behind the other party's hard line. Does the other party feel they've already given up too much? Does the payment schedule you are proposing have tax consequences the other party wants to avoid? Is the resistance unrelated to the deal (such as a retiring business owner who suddenly becomes anxious about the next chapter of life)?

By getting to the root of the resistance, you will be better equipped to propose solutions that move the deal forward.

8. Have a Plan B

Although it's not always possible, coming to the negotiation with an alternative option in your pocket is always beneficial. When you are confident you can walk away from a deal, you can not only ensure that you won't agree to terms you don't want, you'll also be in a better position to get what you do want.

Decide What's More Important: The Outcome or the Relationship

Negotiations needn't always be adversarial, but you'll have to determine just how hard-nosed you want to be about the terms you're requesting. A good way to determine the position you want to take is to consider the relative importance of the outcome versus the relationship.

By taking a hard line on the terms you request, you run the risk of negotiating yourself out of doing any repeat business with the other party. On the other hand, you might lose out on your objectives if you give up too much too easily.

These four basic approaches to negotiating differ based on how much you want to preserve the relationship or achieve a desired outcome.

Competitive approach. As in any competition, one side wins and one loses in this type of negotiation. When you use a competitive approach, you go in with all guns blazing, and you don't give an inch. You might use this approach if you are a buyer negotiating the purchase of a car (and you are certain you won't be returning to the same dealership), but this strategy wouldn't work for the car salesman whose livelihood depends on referrals and repeat business.

Collaborative approach. Also called a win-win approach, collaborative negotiations give equal weight to the relationship and the deal outcome.

Let's say you are negotiating for the purchase of equipment for your business with a long-time supplier you expect to do business with again and again. If you hammer away relentlessly on price, to the extent that the seller isn't able to earn a profit on the sale, chances are you'll have a difficult time working with this supplier when you need to buy additional equipment. In a worse-case scenario, the supplier might end up having to go out of business for want of a basic profit. Conversely, if you reach a price that works both for your budgetary needs and allows the supplier to turn a profit on the transaction, you'll be a welcome customer likely to get a fair deal at the next go round.

Compromise approach. With an approach that focuses on compromise, both parties usually walk away from the deal somewhat unhappy. Negotiators typically employ this strategy when there is a tight deadline for reaching a resolution, such as when government legislatures must approve a budget before funding for essential services runs out.

Let's say a city is negotiating a labor contract with the sanitation workers' union. The workers' union is demanding a 10% pay raise and the city is willing to provide only a 5% raise. The deadline for contract talks is fast approaching, and the sanitation workers have declared their intention to walk out if their demands aren't met. To avoid a strike, the city and union might agree to a 5% raise in the first year of the contract and another 5% raise in the second year.

Accommodation approach: With this type of approach, one side concedes to all the demands of the other side because preserving the relationship is the most important objective.

Let's say an appliance store contracts with an advertising agency to advertise one of its products at a deeply discounted price. The ad agency neglects to include the words, "while supplies last," in the ad, and the client is obliged to sell many more of the discounted items than budgeted, losing a great deal of money as a result. For its next advertising contract, the appliance store demands that the ad agency waive its fees for three ads and absorb the media placement cost for two of the ads. The ad agency would effectively lose money on the contract, but agrees in order to repair the relationship it damaged due to the omission.

Do's and Don'ts: More Tips for Negotiating Business Contracts

Do start with an opening offer that's higher (or more) than what you expect to get.

Do get a cost or revenue breakdown if you are the buyer. Having an itemized list of expenses or revenue streams gives you leverage when negotiating pricing.

Don't respond to offers too quickly. A quick response can send the wrong message about how much you want the deal and what you are willing to give up.

Don't give concessions freely. As with responding quickly to offers, giving concessions too early can weaken your bargaining power.

Don't give up too much information. The more the other party knows about your goals and intentions, the weaker your position. Offer only enough information to support your position.

Don't be first to speak. When there is an offer on the table, follow the old saying, "Whomever speaks first, loses." By keeping quiet, you might make the other party uncomfortable enough to amend the offer or attempt to justify it by revealing additional information that will help you to negotiate a better deal.

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