Posts|February 08, 2022
Contracts and The Importance of Negotiation
By Jeff Cavignac
President CPCU, RPLU, ARM
Contract Basics: It’s been a long day when Joe Contractor receives the 48 page, 8 font, client drafted agreement that he has been waiting for. His client wants to get started and needs a signature today. Joe knows he should review the contract to make sure it’s fair, but figures the other party won’t negotiate any changes and he really doesn’t have the time to deal with the minutia of the agreement. He glances at the document again, rolls his eyes, goes to the back page, signs it and sends it off. While many construction firms and businesses in general have a well-developed contract review process, it is not uncommon for even some of the larger companies to not fully understand what they are signing.
In its simplest terms a contact is a mutual agreement between two or more parties to do, or not to do, something. We all sign contracts all the time. It might be an office lease, a contract for a company to maintain your premises or a major engagement. Regardless of the agreement, there is typically a Scope of Services (who is going to do what by when) and terms and conditions. You can sign the worst contract in the world and if nothing goes wrong, you may never refer to the contract again. If however everything doesn’t go as planned and there is a disagreement or litigation…the contract is going to be critically important.
Reviewing a contract is not easy, you may need the help of your attorney, your risk manager and your insurance broker, depending on the nature of the engagement. Regardless of who is involved, a contract review process that includes a contract review checklist should be developed.
The first step in any contract review is to make certain you understand who is going to do what by when. In the construction business this is known as the Scope of Services. Read and understand this, is it reasonable? If you have questions address them before you accept the agreement. It is a lot easier to negotiate changes prior to finalizing a contract than arguing about it when a problem arises.
Once you come to agreement on the Scope, you can evaluate the terms and conditions of the contract. A quick perusal of the document will give you a general sense of what it contains and whether or not the language is clear and unambiguous. Not surprisingly if the contract is drafted by the other party, it will likely strongly favor that other party.
Understanding and negotiating a fair contract is crucial to the success of any company. There have been hundreds of books written on Negotiation. There are podcasts and classes you can take. Due to the length of this article, it will not be a deep dive into the intricacies of negotiation, rather the purpose is to spell out the basics and provide a platform to start building your negotiation knowledge and strategies.
Negotiating a Contract: Negotiation is the process of getting to a better place than you would have been without negotiating. We all negotiate, every day. All contracts are negotiable. If the other party tells you that their contract is not, that’s a red flag.
When you begin a negotiation it is important to stay focused on the merits of the problem. You don’t want to be a soft or a hard negotiator you want to be a principled negotiator. The soft Negotiator wants to avoid personal conflict and readily makes concessions in order to reach agreement and keep the other party happy. The hard Negotiator sees every situation as a contest of the wills. One side wins and the other side loses. The Principled Negotiator is focused on the merits of the problem.
The first step in any negotiation is understanding the other party’s interests. As Steve Covey stated “Seek first to understand and only then to be understood.” This can’t be emphasized enough. If the other party doesn’t feel that you understand their needs, they won’t care much for yours.
Positional Bargaining involves one party suggesting an unreasonably high number and the other party suggesting an unreasonably low number. This is the most common form of negotiation, which is also akin to haggling. Don’t bargain over positions-if someone starts a negotiation with an unreasonable request, ask questions...How did you come up with that number? On what basis is your offer made? If something doesn’t make sense or is unreasonable, continue asking questions.
Separate the people from the problem. Don’t shoot the messenger, don’t make it personal and don’t take it personally. Understand the other persons point of view...make sure the other side knows you understand their point of view. Emotions play a key factor in negotiations. If you feel yourself getting emotional, pull back or take a break. It is critical to respond and not to react.
Seek to invent options for mutual gain-don’t get stuck on a single dimension. Listen first, and avoid premature judgment. There may be a solution you have not yet thought of. Generate as many options as you can and look for shared interests
Whenever possible, Insist on using objective criteria. Deciding on the basis of will is costly...ultimately one side wins and the other loses.
Objective criteria will provide an objective metric that the agreement can be based on.
When you go in to a negotiation you should understand your bottom line and your Best Alternative To a Negotiated Agreement (BATNA). A “Bottom Line” is the worst outcome you are willing to accept in a negotiation. A BATNA is what you will do if you can’t reach agreement. A well thought out BATNA, Protects you against making an agreement you should reject and helps you make the most of the assets you do have so that any agreement you reach will satisfy your interests as well as possible. While the bottom line tells you when you should walk away, the BATNA tells you what you will do if you choose to walk away.
Final Comments: Negotiation is a skill that can be learned. As mentioned above there are numerous sources to acquire this expertise. Two of the best books I’ve read on this topic are Getting to Yes by Roger Fisher, William Ury and Bruce Patton and Never Split the Difference by Chris Voss. Ury’s follow up to Getting to Yes, Getting Past No is also excellent.
The key to success in any negotiation is to be prepared. Do your homework. Learn as much as possible before the meeting about the other side, their objectives and their challenges. If you can help them solve their problems you are more likely to solve your own. You also need to go into any negotiation with a clear understanding of what a successful negotiation will look like for you and your company. This includes understanding your bottom line and your BATNA.
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