What is Contract Negotiation? Examples, Goals & Best Practices

What is Contract Negotiation?

When you think of contract negotiations, the first image that might come to could be opposing business factions arguing heatedly across a conference table with a singular goal of having all their demands accepted.

But it’s really the opposite. Contract negotiation is the process of coming to an agreement between two or more parties – each with their own interests and goals – to determine how their relationship will operate and what their obligations will be. And the negotiation is not just about hammering out terms; it’s also about building and maintaining relationships and coming together to build new strengths and efficiencies.

Who is Involved?

Typically, legal, procurement, and sales teams from both parties collaborate in contract negotiations, developing the initial parameters and building in flexibility toward the final agreement. For instance, the procurement team may initially request an ideal delivery date but will accept a later date as long as it fits within the company’s overall timeline.

The Difference Between Contract Negotiation and Contract Management

Contract negotiation and contract management are different parts of the contract cycle. Contract negotiation sets the groundwork for a solid, successful contract. It focuses on aligning the parties and their goals to create an agreement – a contract – that works for everyone.

Contract management – a.k.a. contract lifecycle management or CLM – is the process of managing a contract throughout a time period established during contract negotiations. It begins after the contract has been signed and becomes the source for procedures and/or expected results. As part of the CLM process, the contract will typically be stored in a secure, centralized location that can be accessed as needed throughout the contract’s life and beyond.

In many cases, digital CLM platforms can help set the stage for contract renewal with advanced reporting, auditing, and visibility features. They can even provide advanced notice of when a contract is up for renewal so business teams have time to review and update contract terms.

Examples of Contract Negotiation

Contract negotiations are not only a common business practice, they’re an integral part of the contract cycle. Of course, they can help ensure parity for all parties involved. However, they can also redefine goals, introduce new practices, establish new parameters, and address labor issues such as wages and working conditions.

Contract negotiations frequently play a key role in:

• Employment Contracts – Potential employees negotiate the terms of their employment contract with a potential employer, including salary, benefits, working hours, and non-compete clauses.
• Real Estate Purchase Agreements – Buyers and sellers negotiate the terms of a real estate purchase agreement, including the purchase price, closing date, contingencies, and repairs to be made.
• Business Partnership Agreements – Business partners negotiate the terms of a partnership agreement, such as profit-sharing, roles and responsibilities, and exit strategies.
• Vendor Contracts – Companies negotiate a contract with a vendor for the supply of goods or services, discussing pricing, delivery schedules, and quality standards.
• Licensing Agreements – Content creators negotiate licensing agreements with media companies, determining the terms for the use of their intellectual property, such as music, artwork, or software.
• Software Development Agreements – Software development firms negotiate agreements with clients for the development of custom software, covering specifications, milestones, and intellectual property rights.
• Union Contracts – Labor union representatives and company management negotiate collective bargaining agreements to address issues like wages, benefits, working conditions, and dispute resolution procedures.
• International Trade Agreements – Representatives of countries negotiate trade agreements covering tariffs, quotas, intellectual property protections, and trade dispute resolution mechanisms.
• Mergers and Acquisitions (M&A) Agreements – Companies negotiate the terms of mergers and acquisitions agreements, including the purchase price, due diligence, representations and warranties, and post-merger integration plans.
• Non-Disclosure Agreements (NDA) – Parties negotiate NDAs to protect confidential information during discussions of a potential business transaction or collaboration.
• Supply Chain Agreements – Companies in a supply chain negotiate agreements related to logistics, inventory management, and production schedules to ensure efficient operations.
• Investment Term Sheets – Startup companies and investors negotiate the terms of an investment round, including valuation, equity stakes, and investor rights.