Negotiating contracts with suppliers play a huge part in the supply chain process. An optimal outcome is creating a respectful and positive interaction that will be a win-win situation for both parties. A successful negotiation can contribute to business success when an agreement is reached. During the process of contract negotiation, clauses have to be favorable for both suppliers and buyers.
A contract negotiation does not necessarily have to be getting the possible cheapest price, it can also be negotiated in terms of delivery, production time, quality, services, etc. Each procurement contract carries different types of contractual clauses but there are some major clauses that worth looking into which will be further discussed in this article.
Scope of Work
Every contract will indicate the work scope as required by the parties involved. It describes specific procedures from procuring products, deliverables, delivery location, installation, testing, work of location, and performance data. The work scope needs to be precise and clear in an orderly manner for the parties which will set the procurement contract from the right path to go. A detailed work scope promotes better communication with the supplier on how work should be performed thus, lesser miscommunication on the ground level with the employees. To optimally negotiate the terms of a clause, negotiating parties must establish an effective form of communication. The company will get to understand what requirements or terms, given by the supplier, can be comprehended or further negotiated. In return, the supplier gets to know your company better and reciprocate a better relationship.
Any delay in the progress of the project will incur financial losses. Losses are compounded daily. Liquidated damages allow the company to project financial losses and expenditures due to breach of contract. A breach can happen when clauses of the contract are not fulfilled, which include poor performance or incompletion of milestones. Some companies use liquidated damages to monitor supplier performance which ensure suppliers will perform up to standards as agreed in the contract establishment.
The supplier does not have to demonstrate actual damages suffered by the company to be liable to pay the damages. When negotiating for liquidated damages, the compensation sum must be reasonable and should not be structured in a way likened to a penalty sum. When the compensation sum is judged by a court to be unreasonable, it will not be enforceable.Some contracts include a clause that comes into effect after a project has gone live and taken place outside of the pre-defined normal maintenance period. If there is an issue within a month and the supplier cannot find any solution within the limited duration, the supplier will be compelled to pay a reasonable amount for the delay for each calendar day. Both parties can agree to extend the cure period through a negotiation.
Warranties against Defects
In a contract, this clause consists of duration, general coverage, and defect warranty. The warranty assures the company for any uncertainty the company has against the products. With assurance, it can also reduce indemnity risk, thus promoting a better and reliable product. When negotiating for the warranty duration, most contracts provide only one year. However, if the procurement contract consists of a major component for the strategic process, warranty coverage for a year will not be enough. Negotiation for extended warranty will be carried out. Under general coverage, whether the product is customized or ready stock, specification and design need to be suitable to fulfill the company objectives and compatible with the company equipment. All documents and user guides must be provided to the company.
A defect warranty is important in any contract. It covers in terms of compatibility, repair works, and also replacement warranty. If the defects are caused by malpractice carry out within the company, the warranty will not be covered. Repair work or replacement will be at the expense of the company. When checking for defect, if the product is under proper usage, maintenance and care, the repair work will be at the expense of the supplier. Under the obligation of the supplier, if the product is beyond repair and requires to replace a new set, the company can negotiate that it will be replaced at no cost. The warranty for the new set shall be extended. Despite that, the supplier might not agree to the terms.
This agreement aims to protect both the supplier and the company. All information whether technical, commercial, financial, or otherwise, relating to the disclosing party, suppliers, sub-contractors connected to this project is to keep confidential. This ensures no disclosure of trade secrets and price in hands of competitors or public knowledge to gain dominance of the market. In the contract, this clause will be stated to enforce for a few years as agreed between both parties. Negotiation can also take place if there are terms that either party intends to include. For example, the supplier might request confidentially of ownership for the project to be stated in the clause. Using the four criteria as a requirement to perceive the term. Otherwise, the company should give a reasonable explanation to the supplier.
In the negotiation process, companies can adopt integrative negotiation. Integrative negotiation does not only view the whole process as a solving issue situation but also a way to maintain or improve the relationship. It allows both parties to discuss more than one issue and work together to find a solution that satisfies the needs and concerns. Thus, both parties will have a comprehensive understanding and compromise. In this process, both parties create new values and options for mutual gains. It further reduces any risk involved before commencing the project.
To build trust, both parties have to share information, requirements, and risks that affect the process of the project. The parties involved should ask questions about the interest and providing additional information on priorities. For example, the company concerns that the project may not finish in time and affects production. By sharing the previous experience, the supplier understands the concern and request more information to address the issue. Through negotiation, understanding the nature of the relationship allows the negotiation of the contract to have a win-win situation and create a long-term supplier relationship.
A negotiation is not only about sharing, solving an issue and create a win-win solution. The technique mentioned below can be used to build a professional image of integrity in negotiation.
Each contractual clause stands an important part of the procurement contract. All clauses can be negotiated to benefit both parties. The integrative negotiation technique can be used to discuss all the key clauses to creates efficiency and builds a long-term relationship with the supplier. When negotiating the key clauses, it allows a clearer view of what terms can be compromised and include in the clause. After discussing the contract, it will indicate better terms and prevent any misunderstanding, mistake or lawsuit that might occur during the commencing of the project.
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Harvard Law School, Program on Negotiation. (2020). “Creating Value in Integrative Negotiations: Myth of the Fixed-Pie of Resources”. Retrieved from: https://www.pon.harvard.edu/daily/negotiation-skills-daily/when-the-pie-seems-too-small/, accessed on 13/09/2020.
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