How to Effectively Negotiate A Contract?

Most Contracts Are Negotiable

The first part of talking about how to negotiate a contract successfully, is starting with the basic premise that nearly all contracts are negotiable. In the construction world, typically contracts that would not be negotiable would be those that would be part of a bid package, or a bid solicitation. If you’re going to bid the job, you usually have to accept whatever contract is part of that bid solicitation. However, and unfortunately, most parties don’t understand that most contracts are negotiable.   

Why Negotiate a Contract?

Negotiating the contract is critical to the success of any underlying business opportunity. And of course, the question becomes why? Number one, you want to minimize risk, effectively negotiating the contract can significantly minimize your risk on a project. It also improves your odds and timing of payment. And perhaps most importantly, key to negotiating contracts is to avoid legal disputes. A lot of times people get into legal disputes simply because they haven’t effectively negotiated their contract. 

Reviewing Your Contract

So to understand a few tips for reviewing contracts, first, get an editable version of the contract from your customer. If it’s difficult for you to review that contract, the odds are you’re not going to review it. 

Another key feature and tip for reviewing contracts successfully is ensuring that you have a complete contract. Typically contracts include many addendums, exhibits and attachments. When you’re reviewing that contract with the attachments and the exhibits and the stuff stapled to the back, make sure you’re reviewing those documents at the same time that you’re reviewing the actual contract language itself. 

Payment Terms

So what are some key areas to be looking out for when you’re reviewing and negotiating a contract? First and foremost price and terms of payment. Make sure you know how much you’re paying for a service or goods or how much you are being paid. Just as importantly, understand the timing of the payment in the terms. 

Scope of Work

Equally important is scope of work. What is the scope of the services or the goods that you are being provided or that you are providing to your customer? If there’s any ambiguity or misunderstanding or confusion regarding what is being provided, call those things out in attachments or agenda and say I’m excluding this or I’m including that.

Indemnity

On the legal side of things, things like indemnity, those are what obligations are you going to owe to your customer are they going to owe to you for things like third party claims, if the goods are defective or if someone gets hurt, or if there’s property damage or something that happens because of the services or the goods that are being provided under the contract, make sure to read those indemnity provisions, sometimes in concert with your insurance broker to make sure that those terms are fair to you. 

Liability

We also have limitations of liability. Does that contract limit the liability of your customer to a very small amount of money, such that if their goods or services are defective, or they’re late or incomplete or broken, for example, that you’re not limited to some small amount of money. Also, looking at liquidated damages provisions to make sure that they’re fair and reasonable. And the term consequential damages very, very important legal term, that really means damages that are a consequence of a party breaching the agreement

Dispute Resolution

On the truly legal side, the stuff that lawyers really get excited about is stuff like dispute resolution. If you get into a legal dispute, how are you going to resolve your dispute? Are you going to go to court in litigation? Or are you going to arbitrate the dispute in arbitration?

Conclusion

And just a few final thoughts about successfully negotiating contracts. Review the miscellaneous section first, particularly if you have a really long contract. We found, in our experience, that a lot of poison pills are buried within the miscellaneous section. Because a lot of times people are so tired by the time they get to the end of the contract that they just sort of gloss over the miscellaneous section. So think about starting with the miscellaneous section before you begin reviewing the contract. 

Also, just as important as reviewing the contract is making sure the proper parties are signing the contract. 

And lastly, it sort of goes without saying that a lot of people don’t think about this, make sure that you keep fully signed, complete executed copies of the contract either in your computer or in your files. What we’ve noticed is a lot of times clients will have copies of the contracts, but they’ll be partially signed, they won’t have all the exhibits or attachments. They’ll be missing critical documents. And at the time when you have to call a lawyer or lawyers or get legal involved in a matter. The first thing the lawyers are going to ask you for is a fully signed, complete executed copy of that contract.