Contract Negotiations

When undertaking significant contract negotiations, it is important that the USQ objectives are clearly determined and categorized, an appropriate negotiation team is assembed and a disciplined approach is undertaken to ensure the objectives are achieved.

Categorization and Objectives

The objectives of any contract negotiations can be set out in the following classifications:

  1. Essential:  This is the absolute minimum standard of performance acceptable.  It is important to note that if tender documentation has listed a specification as essential this cannot be later changed in negotiations because of a possible challenge by tenderers excluded for non-compliance.  For this reason it is highly advisable to keep essential requirements to a minimum and ensure that all essentials are very well thought out and justifiable.  There is a bit more flexibility when dealing with a request for quotation, as being a sole source, other potential tenderers have already been excluded.
  2. Highly Desirable: This is the preferred performance standard of a deliverable or contract term.  It will always be at a higher performance standard than an essential criteria. 
  3. Desirable:  This is best considered a ‘nice to have' and will again be a higher performance level or contractual outcome than the highly desirable.  It is often used as the initial contract bargaining position, that may be traded off to either the highly desirable or the essential position.

Contract Negotiation Strategy

For all potential significant business relationships, it is critical that a contract negotiation strategy is developed and documented.  It needs to identify outcomes by classifying them as essential, highly desirable and desirable.  The methodology for conducting negotiations and the structure of the contract negotiation team needs to be determined.  High level objectives over and above the immediate contract, need to be clearly identified e.g. USQ wanting to gain entry into a certain market.  This will identify whether USQ is prepared to accept less favourable conditions than if the contract was stand alone.

The negotiation strategy should look at issues such as what occurs in the event of negotiations stalling or other factors occur.  The application of leverage by the other party, particularly in contract renegotiations needs to be foreseen and addressed.  This is particularly the case when USQ has objectives or moral responsibilities to students not under its control.  It would not be unusual for a third party to try to exert influence in this way before or during negotiations.

A flow chart of contract negotiation processes and outcomes can be a useful way of mapping the strategy to achieve the desired or alternate outcome.

The Contract Negotiation Team

Complex contract negotiations are likely to require a multidisciplinary team.  This should be structured as follows:

Lead Negotiator/Team Leader

The lead negotiator is responsible for ensuring that the goals of the contract negotiation strategy are achieved.  The lead negotiator must have a good understanding of all issues relating to the contract and must have a forceful personality but with an ability to anticipate and appreciate the views and issues of the other party.  It may be appropriate to have an experienced negotiator from another part of USQ, brought into the team to be the Lead Negotiator, with the individual who has initiated the contract taking the role of a technical advisor.

Legal Advisor

If the legal issues in the negotiation are complex or not thoroughly understood by the Lead Negotiator it is important to have a legal advisor.  This may or may not be the USQ Legal Officer depending on availability and the specific nature of the contract.  It is ideal to have the legal advisor present for all negotiations but if this is not possible, it is important to retain the right to have those negotiations where they are not present, reviewed by the legal advisor and if unacceptable, renegotiated.

Technical Advisors

These individuals have an in-depth knowledge of some aspects of the contract but not necessarily a complete overview.  Technical advisors do not need to be present for all negotiations and can attend only those negotiations pertaining to their areas of expertise. 

Contract Negotiation Directive

A contract negotiation directive is a document, that clearly stipulates the structure and responsibilities of the contract negotiation team and the positions to be taken on certain key contract terms.  These positions are to be categorised into essential, highly desirable and desirable. 

Failure to have a contract negotiation directive significantly increases the probability of a negotiation delivering an unfavourable outcome to USQ.  The contract negotiation directive should be considered to be an auditable document.

Complex contract negotiations are rarely completed in a single session.  In this case as well as when negotiations are completed, a report should be prepared.  The report should address each of the objectives and state the resultant outcome.  Where negotiations are ongoing a new contract negotiation directive is to be prepared for each of any subsequent negotiations with a corresponding report on outcomes.

A contract negotiation directive is a highly sensitive document and compromising its security can seriously damage USQ's position.  At the same time, knowledge by the other party that a directive exists and that it puts very specific limits on the contract negotiations team's room to give ground, can have a powerful effect in halting any negotiations drifting away from USQ's favour.

Conduct of Negotiations

There is an art to negotiating and not everyone is suited for this task.  The most important element is to have a clear understanding of what is acceptable from USQ's perspective and what is not.  This will have been determined in the contract strategy and documented in the negotiation directive.  The next most significant preparatory activity is to analyse the other parties' objectives, motivations, negotiation styles and likely reactions when various proposals are put forward. 

Prior to the negotiations it is essential that the contract team talk through how they will conduct themselves as a team.  The lead negotiator must be very clear in how discussions will be controlled and how a formal position, as opposed to discussion, is put forward.  For very large negotiations it is desirable to undertake professional training as a team and rehearse the negotiations with a substitute opponent.

The normal process in contract negotiations is for both parties to state the overall objective and to then start progressing through the draft contract, clause by clause.   The draft contract will have been prepared by one of the parties and will be based on the initial negotiations and discussions.  While it is a deal of work to prepare, particularly if a template does not exist, it is desirable to retain authorship of the contract although this will usually fall on the party that has the product or service being sold to the other party. 

Negotiation by definition is a process of give and take.  At times USQ may hold a position that it has no real need for or may only be classed as desirable.  These should not be given away as they may prove to be useful bargaining tools later.  Some may be given away as a sign of goodwill but even after the contract is signed, they could be useful if a contract variation is required.

It is important to remember that the other party must be able to achieve a viable final outcome.  Many projects have suffered years of delay by achieving an unbalanced outcome in negotiations resulting in a very predictable default by the other party.  This can be catastrophic for all.  It is important not to unreasonably exploit a position of power that USQ may have.

At times an unanticipated novel proposal may be put forward by the other party.  This could result in an essential condition no longer being classed as such.  If this occurs, only the relevant delegate (VC, DVC or General Manager) can change this.  If a proposal is worth considering but fundamentally changes the strategy and negotiation directive the negotiations should be halted and the issue discussed.  It is likely that the best strategy is to recommence the negotiations at a later date once the full implications of the proposal have been analysed and a new strategy, draft contract and negotiation strategy have been developed.

Regardless of the agreements reached in the negotiations it is usual for the draft to be sent back to the lawyers for refinement.  It is not uncommon for it to be changed at this stage and agreed positions modified to be unfavourable to the other party.  This could be a deliberate act by the other party or their lawyers or accidental.  For this reason it is important to keep notes of the negotiations and always thoroughly read the latest versions of a draft contract.  Voice recording may also be useful but negotiations can often take many days.

Once the majority of the negotiations have taken place it is usual that outstanding issues are addressed by formal correspondence between the lead negotiators of both parties with reference to the legal and technical advisors where necessary.

Go back to Proposal.