What is contract negotiation? How to negotiate a contract effectively

How To
April 19, 2023
Discover how to negotiate your contracts more effectively in this ultimate guide to managing contract negotiations.

Contract negotiation is about much more than reaching an agreement. Contract negotiation is an opportunity to add to the economic value of the relationship, shore up supply chain vulnerabilities, and protect your organization against risk.

Unfortunately, companies often rely on outdated manual contract negotiation processes that detract from these goals.

This article explores how businesses can simplify and speed up the contract negotiation process. It also explains how legal can enable business teams to negotiate contracts confidently, without losing control over the most important provisions.

What is contract negotiation?

Contract negotiation is the process through which two or more parties deliberate over the terms of a contract to reach an agreement on how their relationship will operate and what their obligations will be. 

The main goal of contract negotiations is for each party to be satisfied with the rights and obligations assigned to them. To achieve this, parties will use contract negotiation processes to flag any terms they’re unhappy with and suggest new, amended alternatives. 

Business negotiations also help to ensure that the terms set out are as favorable as possible for both parties, with as little risk as possible. 

For example, if you're negotiating a contract with a vendor, you'll probably want to advance your company's interests by negotiating more lenient contract termination rights. But the vendor may want to achieve the opposite.

Successful contract negotiation processes enable you to compromise and reach an agreement on terms that work for both parties - hopefully with minimal fuss. 

Why is contract negotiation important?

Contract negotiation is important as it ensures that a contract is mutually beneficial for both parties and that new business relationships are free from conflict and confusion.

Negotiating also gives all parties the opportunity to establish terms that work for them, rather than one party keeping all of the bargaining power and setting unfair terms in a business contract. This is particularly important for businesses tackling contracts on third-party paper

But above all else, effective contract negotiation can be the difference between a contract getting signed or not. It's also an opportunity for each business to demonstrate its priorities and outline what they expect from the counterparty.

When to negotiate a contract 

Knowing when to negotiate a contract is just as important as knowing which terms to negotiate. Asking for the wrong thing at the wrong time can jeopardize the deal or result in your requests going unheard. 

Usually, you can only negotiate a contract once it’s been sent to you for review. Although, you should only do this if you aren’t happy with the terms included. You shouldn’t negotiate contract terms for the sake of it. In fact, many standardized contracts won’t require negotiation at all, and finding (or creating) friction points will only make it harder to get a deal done. 

The contract only moves to the negotiation phase when a party is unhappy with the terms offered, or if the language doesn’t support all their objectives. Errors, contradictory terms, and outdated clauses also spark negotiations. If you’re happy with the terms included, you can progress to getting the contract signed instead.

The contract negotiation process 

If you do decide to negotiate a contract, there are a few ways to do so. Each organization’s contract negotiation process will differ based on the tools they use, who the negotiator is, and how much risk is involved. In the next section, we’ll discuss three common ways to negotiate a contract: 

  1. The contract negotiation process in Microsoft Word 
  2. The contract negotiation process in Google Docs
  3. The contract negotiation process in Juro 

How to negotiate contracts in Word 

Before the modern era, negotiators wrote revision requests and comments in red ink on paper. In the 1990s, MS Word and email allowed negotiators to swap their red pens for digital contract redlines

In a process that continues to this day, the contract owner sends a draft version of a contract to a counterparty as a Word document via email. The counterparty usually saves the document to their local drive and turns on Word’s “track changes” feature. 

Once this setting has been enabled, any suggested revisions will appear in red on the screen, and comments show up in boxes on the side. This means that counterparties can negotiate in Word by adding their suggestions directly into the contract itself. 

Once they've flagged their concerns and suggestions, the counterparty emails the redlined version back to the contract owner. Now there are two versions of the same contract – one saved in the creator's drive and a redlined contract stored in the counterparty’s drive.

The contract owner then responds to the counterparty’s comments and revision requests by accepting or rejecting the changes and making their own suggestions. This happens in a third version of the contract. This copy is then sent to the counterparty once again. Depending on their position, they might even create a fourth version in response. 

This back-and-forth negotiation process can drag on for weeks or even months, particularly when dealing with complex contracts.

In these instances, it becomes almost impossible to track the various versions and determine who made what revisions and why. This lack of control and contract visibility can drive companies into unfavorable agreements that later cost thousands of dollars in contract value leakage and missed opportunities.

For a more detailed explanation of how to negotiate in Word and the limitations of doing so, check out this post on how to redline in Word

How to negotiate contracts in Google Docs 

Google Docs offers some improvement compared to contract negotiations in Word by improving visibility and allowing real-time collaboration. 

It works in a similar way to Microsoft Word in that users suggest edits to the contract itself. These edits can then be either accepted or rejected by the contract owner. However, the biggest difference is that this process can remain in one place since Google Docs users can invite individuals to review and edit a document in real time using their email addresses. 

However, in doing this, Google Docs allows counterparties to watch your team’s internal dialogue play out live in the comments. This makes it impossible to discuss certain propositions privately without moving to a different platform or creating yet another version of a contract

You must also share access to your company’s cloud storage and, as with MS Word and email, you'll need a separate electronic signature tool to get contracts signed. This means that negotiating contracts in Google Docs still creates a lot of friction for parties as they’ll continue to jump between tools and move their contracts between platforms to get them over the line.

How to negotiate a contract effectively in 2023

Businesses can negotiate their contracts more effectively by streamlining the negotiation process and enabling individuals to collaborate in one platform, in real-time. This is typically achieved through contract negotiation software, or an all-in-one contract management platform like Juro. 

With Juro's negotiation flow, parties can collaborate to suggest and make changes to a contract before adding signatures. Let’s break down this workflow now. 

1. How to send a contract for negotiation in Juro 

There are two main ways to send a contract for negotiation and signing in Juro. Firstly, you can add reviewers by inserting their email address. This will send them a draft copy of the contract via email for them to redline and negotiate.

Alternatively, you can copy and share a personal signing link. This will enable users to access the draft copy of the contract through the URL shared. This is ideal if you don’t know who the signatory is yet as you don’t have to send it to an individual’s email address.

Once you’ve done this, you’ll need to select ‘Can sign + comment’. This will open a dropdown list. To enable the counterparty to add their comments and suggestions, make sure the ‘Comment and suggest’ and ‘Create new version’ boxes are both ticked, as seen below. 

When you’ve completed these steps, the counterparty will receive an email notification from Juro letting them know that the contract is ready to be reviewed. Once they’ve accessed the contract, they can make direct edits to the text. 

This will activate the negotiation flow and the status will automatically update to reflect that the contract is being negotiated. 

2. How to negotiate a contract in Juro 

The biggest advantage of using Juro’s contract negotiation workflow is that counterparties can make suggestions and comments in the contract that are instantly visible to your internal teams. 

"In-browser negotiation means I can be on a call with the prospect, editing a document in real time, and they can sign it two minutes later" - Cleo Anderson Garwood, Senior Legal Counsel, Paddle

Parties can make suggestions directly in the contract by editing the text to add, remove or change certain parts of it. Each of these suggestions can then be approved or rejected by the contract owner.

Alternatively, parties can add comments to the contract. Users can mention counterparties to direct individual requests and questions to them and drag and drop these comments to the portion of the contract they want the comment attached to. 

These comments can be replied to in comment threads and marked as resolved once the parties negotiate and reach an agreement. 

Juro users can also add internal comments, which means the comments won’t be visible to counterparties working on the contract. This can be achieved by toggling between internal and external versions of the contract, providing the privacy required to discuss changes without moving into a separate tool. 

3. How to track contract negotiations in Juro

Juro also offers the functionality businesses need to view and track the individual changes made to a contract using negotiation audit trails

These audit trails capture every time a counterparty views and edits a contract, giving you complete, real-time visibility into contract negotiations. 

Juro’s collaborative contract management software enables teams to get to revenue faster by streamlining collaboration between legal, commercial teams and clients. To see the full contract negotiation workflow in action, hit the button below to book a personalized demo today.

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How to improve your ability to negotiate contracts

There are things you can do to improve contract negotiations beyond just using the right tools, though. Let’s explore a few of these opportunities now.

1. Learn effective contract negotiation strategies 

At times, an imbalance of power affects the way a contract negotiation goes. For example, larger vendors often force smaller customers to agree to terms that are more favorable to the vendor because they have this bargaining power. Or, a party may say “Agree, or I walk” in a hardline approach. 

Learning useful negotiation strategies can help you create win-win results in any situation. Helpful tactics include:

  • Look beyond the individual negotiator and consider the counterparty’s fundamental interests in the relationship  
  • Ask “Why?” to open up dialogue
  • Identify ways to create options to resolve disagreements

A recent survey found that 88 per cent of those in the contracts hope for increased levels of collaboration and a more 'fair and reasonable' approach to negotiations, and 74 per cent believe it can happen. With a non-adversarial approach to contract negotiations, you can be part of that change for the better.

For more information and tips, check out this guide to the 12 best contract negotiation strategies. It’s also worth reading Never Split The Difference by Chris Voss and Tahl Raz. 

2. Complete contract negotiation training 

It’s also worth completing a course on contract negotiation, especially if you don’t have legal expertise but are still tasked with negotiating agreements. This training can provide you with the fundamental skills and knowledge needed to become a stronger force during negotiations. 

We’ve compiled a list of the best contract negotiation courses in 2023 if you need some inspiration. 

3. Prepare thoroughly for contract negotiations 

Entering into negotiations without an idea of what you want and where you stand is a huge mistake. If you want to negotiate from a position of power, you’ll need to prepare for a contract negotiation thoroughly first. 

One of the best ways to prepare for contract negotiations is by reflecting on how previous contracts have worked. What was agreed upon in similar instances? Where do friction points often occur?

Contracts will typically vary in their content, but most legal teams will be drawn to the same terms and clauses, and they'll be most likely to negotiate these.

Fortunately, data-rich contract management solutions like Juro enable teams to unlock this data. Juro’s comprehensive contract audit trails make version history instantly available and give teams access to a wealth of contract data that can be used to better inform decisions. 

Contract negotiation tips 

There are also a few quick-fire tips you can use to streamline and speed up contract negotiations. Let’s cover a few of these now. 

  • When tempted to revise, ask yourself, “Do I even need to bother? Am I adding unnecessary friction?” Don’t make revisions without a strategic goal clearly in mind.
  • On the other hand, if the counterparty’s language doesn’t make sense, say so. Sometimes contracts are poorly written or based on manually maintained templates that have been revised so much that they contain errors.
  • Focus on terms that actually matter. Ironically, the terms parties most often negotiate are not the same as those that negotiators say are most important, according to The Most Negotiated Terms 2020 report. Don’t get sidetracked by irrelevant issues or spend too much time on matters of little importance.  
  • Utilize your contract playbooks. Some contracts will always require scrutiny from legal and leadership teams. Having a contract playbook to refer to will empower teams to self-serve during negotiations, rather than having to contact legal for every point of contention. 

Discover more contract negotiation tips from contracting expert, Laura Frederick.

Frequently asked questions 

Is negotiation binding on parties?

Terms agreed during negotiations are not legally binding on parties as contract negotiation is an informal process. Only once a contract has been signed and meets the contract requirements will the terms agreed during a negotiation be binding.

How do I track a contract negotiation?

The best way to track the progress of a contract negotiation is to implement a contract management solution that offers a detailed audit trail and contract dashboard for contract tracking.

What is a contingency contract in a negotiation?

A contingency contract is an agreement created when parties have been unable to reach a final, definite agreement on the terms negotiated. Unlike regular contracts, a contingent contract's terms will only be enforceable if certain events happen, or specific conditions have been met.

What is the difference between contract negotiation and contract management?

The main difference between contract negotiation and contract management is that contract management involves overseeing the entire contract lifecycle. By comparison, contract negotiation is just a single phase of the contract lifecycle.

Learn more about effective contract negotiation

Want to find out more about how to negotiate contracts more effectively? Check out the resources below:

With Juro you can negotiate contracts quickly and efficiently, without losing control. If you’re ready to save time and try collaborative, browser-based contract negotiation, fill in the form below.

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