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Contract Negotiation Tips from a Non-Legal Perspective Part 2: Negotiating New Contracts
Selecting a new product or service and its supplier can be a long process: A lot of information is exchanged, items are negotiated, and promises are made. The agreement is finalized through a contract, and this is a time where there is a relatively high risk that these customizations may be lost.
Almost every contract contains a phrase that says, in effect, "The only language that is legally binding is contained within this agreement. Previous discussions, writings, and promises are void." If you sign the vendor's standard contract, without making changes, you may give up a lot of leverage and a lot of previous effort.
So how do you avoid this? We recommend two reviews:
The legal review typically covers language addressing warranties, damages, default, non-performance, and general terms and conditions. This is important, and you should not negotiate a contract without legal review.
Usually, your lawyer is not involved during the selection process and is not typically an expert who understands the technical ramifications. This is why you need to add a review of the contract from a technical perspective.
The technical review should ensure that the information, negotiations, and promises made during the selection process are included in the final contract. If your process included a Request for Proposal (RFP) (see Do You Really Need an RFP? Because It's Really a Pain...), the RFP and vendor's response should be included in the final contract. It has been my experience that vendors are very reluctant to do this.
As consultants, we make inclusion of the RFP and response in the final contract part of the terms and conditions in the initial RFP; that way, the bidders know up front that this is an expectation. If the vendor won't agree to include the entire document, we cut and paste critical parts of the document and have it added to the contract. If the vendor was honest in the RFP response, what risk is there in including the document in the contract?
The No. 1 tip: Check the pricing in the contract and compare it to the proposal.
We consistently find errors in the contract pricing. You don't want to have spent all the time and effort working toward the desired pricing, only to find out that it never made it to the contract.
Here are some tips for negotiating:
Negotiate with the lawyers, not the sales person.
The vendor's lawyers are the ones with the authority to agree to changes you may request. When you deal with anyone else, they are usually just go-betweens without the authority to make changes, so dealing with them will lengthen the negotiations process, and you risk inaccurate translation of your requests. It may take some effort to get to the lawyers, but it will save time. Of course, your lawyer should be part of these conversations as well.
Know which changes you must have, and which ones are not essential. You may have to "trade" by giving in on one thing to get them to agree to something you want more.
Be able to explain why you need certain language to be used.
Often, language can be crafted that satisfies both parties, when the interests can be clearly articulated.
Don't fall for the "trust me" pitch.
Remember that the only thing that matters once the agreement is signed, is the language that is actually in the agreement. Other promises are irrelevant. If the agreement does not say it, then it is not so. Insist that the language in the agreement clearly states what you want it to, so that down the road when everyone who was involved in the negotiations has a new job, anyone who must deal with the contract is clear on what it requires.
Finalize your agreement at the end of the vendor's fiscal quarter (good) or fiscal year (better).
Most vendors want to report sales at these key times and often will work harder to close a sale; this translates to discount incentives and to a faster negotiation process.
Here are some terms and conditions that commonly appear and you should watch out for:
Inclusions by Reference:
One of the biggest problems we have seen consistently in contracts is language that includes other documents by reference. Most often, these documents are referenced as a general URL (www.vendor.com) rather than the URL for the specific document (www.vendor.com/documentname).
This is bad enough as it is; however, many contracts also say that these referenced documents can be changed by the vendor at any time, and the customer is automatically bound to comply with the changes (even if the customer does not know that such a change was made). I often ask vendors if they would personally sign a mortgage agreement that allowed the lender to change the terms, to which they would automatically be bound, without their knowledge.
To combat this issue, we take a couple of approaches. The preferred solution is to have all of the terms and conditions within the contract, rather than referencing external documents. If we can't make that happen, then we require the vendor to provide notification when any terms and conditions in these external documents change.
In addition, we add language in the contract that says if the changes have a material and adverse impact on the customer, then the customer may terminate the agreement without penalty. Be sure that you negotiate a time frame for notification to the vendor that allows you adequate time to understand the impact of any changes (60 to 90 days is usually a reasonable time frame).
Many vendors have standard language that requires a system or service to be accepted within five days of installation. Unless the client provides notice, in writing, that there are defects in the installation, the acceptance happens automatically at five days. In a complex or phased installation, five days is typically not enough time to know for certain that everything is operating correctly. Once the system is accepted, the customer loses a lot of leverage.
For equipment installations (rather than services), some vendor contracts require 50% of the total upon execution of the contract and the remaining 50% upon equipment delivery. This means that the customer has given the vendor 100% of the money before the system is actually installed and working.
We recommend a schedule of 25% upon contract execution, 50% upon delivery and 25% upon acceptance. Withholding 25% of the payment until acceptance gives you leverage to get the final aspects of the installation completed; otherwise the vendor has little incentive to finish the cleanup.
Check out Contract Negotiation Tips from a Non-Legal Perspective Part 1: Managing Existing Contracts for additional information.
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