Business Skills: Understanding Contract Negotiations

If you know the parts that make up a contract you are going to be able to negotiate a contract that preserves your business.

Whether you plan to start your own business or you are working at a long established agency, doing your chosen commerce activity requires you to interact with others. Oft times this activity requires you to interact in contract negotiations. The savvy businessperson will know the ins and outs of the negotiation process, not only to assure that your interests are preserved, but also to assure that the business relationship the contract creates is preserved. Whether these are simple memorandums or formal contracts, knowing the key parts of a contract is the key to understanding the negotiation process. These parts can be classified as the who, what, when, for how long, for how much, and for what reason portions of the contract.

Who: This section not only outlines who is entering into the contract, but also may delineate personnel involved in the activity. This is also an essential component of identifying responsibilities. For instance you may be asking the other party to build you a new product such as widgets, but you are responsible for approving all designs and marketing the product. This moves us to the next part.

What: This component is essential in the contract. In fact, it is probably in the top two things you should have in a contract. The "what" outlines what is to be done. What is the deliverable or the thing for which you are in business? You will have the other person design and produce 500 widgets and you will approve the design and market the widgets after they are produced. The more specific you are on what is to be done as a result of the contract, the better the contract. This is one of the key areas you may find yourself negotiating around, trying to make sure that the what is as clear as possible.

When: This component is also an essential part of the contract. The when elements to consider are when the product or service is to be completed. You may also want to put interim steps, called milestones, into the contract. Milestones in a contract might be the dates that the widgets are designed, that you will approve the designs and that the widgets will be produced. You may also want to include the date that payment will occur, if any.

For How Long: How long is this contract in place? Will it be over once the widgets are all produced? Or will widgets continually be produced? Will you review terms of the contract each year or every five years? These are key questions to answer in a contract negotiation.

For How Much: This is another key element in the contract negotiation process, and one that may take the most time. The negotiations may involve many detailed questions. Are you paying for personnel or merely for widgets? Are you going to pay per widget, per 500 widgets, or a set amount no matter what? Will the amount be able to be changed if you approve a more expensive widget design? Will you pay for each phase of the contract? Will there be payment after the designs are approved, and then another set of payments after the widgets are produced? Will you purchase the materials for manufacturing? What will you not pay for in this contract? The for how much should also explicitly lay out what you are purchasing in terms of the widgets that are being produced - in other words what will you own at the end of the process. Can the other party sell widgets to anyone else or have you bought rights to those widgets?

For What Reason: Beyond what is to be produced, why are you entering into the contract? What is the reason for the widgets? While this may seem to be irrelevant, you just need the widgets, knowing the why for a product or service can keep both parties focused on a bigger picture outside of the contract.

Contract negotiations can seem scary, but if you spend a little time making sure you are familiar with the key elements of a contract, you will know what questions to ask to make sure you have the best agreement for both parties.

© High Speed Ventures 2011