What’s in Your Contract?

man-with-contractIt’s 5:30 pm. Your biggest client, ABC Co., just sent you an email requesting a proposal cutting prices by 5% for the remainder of 2010. ABC Co. would like your company’s revised pricing schedule by the end of the week. You think to yourself, “Now what?”

In a rocky economy everyone is looking for a good deal. A good deal to customers might be further price concessions from their vendors. However, if you have a contract in place, the contract should outline the manner in which modifications are made. If you have a good contract in place, you will know how to approach this request. If you don’t, you run the risk of losing ABC’s future business, or ruining your business by making a dangerously deep price concession.

Contracts

A contract expresses the relationship between two parties, whether between individuals or corporations. The relationship is defined long before the contract is drafted, let alone signed. Therefore, a contract should define the relationship in simple terms. Contracts also serve another important purpose. Contracts outline the rights, responsibilities, duties and roles that each person or organization has vis-à-vis the other in precise terms. Because legal terms, especially Latin legal terms, can be confusing to the lay person, I can imagine you’re thinking the contracts you’ve read are anything but clear and precise.

Simply put, legally binding contracts are exchanges. Generally, a vendor supplies widgets (or services) and the customer pays cash for the widget (or services) when it receives the widget (or service). The contract also contemplates things like late payments, faulty widgets, and ‘boilerplate’ language, such as modification clauses.

Because both parties enter into a contract for a mutual exchange, many contracts require, at a minimum, both parties to mutually agree to any changes in writing. Contract modification is not typically a one-way process. Yet, it has been my experience that many business people think they can request unilateral modifications to contracts without offering any exchange, without negotiating mutual assent, and without any formal written assent.

Thinking Like Your Lawyer

Use this step-by-process to evaluate your options when facing a request to modify your contract.

Step 1:  Read the following clauses: Modification clause, pricing clause, service level (performance or scope of work) clause. What do each of these clauses say with respect to price modifications? Contracts I’ve negotiated are a complex blend of price and service (performance) level agreements. For example, is the price tied to a specific service (performance) level?

Step 2: Read the termination clause. Does the customer have the right to terminate without cause? Does the customer have to pay a penalty for early termination or termination for ‘convenience’? This step will put any fears about terminating your company’s contract into proper perspective.

Step 3: Look for tradeoffs. As you reflect on the relationship could changes be made to correspond to a price reduction? Could service levels be modified? Could your company benefit from changes in payment terms? The point is to be willing to request a tradeoff from the customer.

Step 4: Make a counteroffer. There are three elements to effectively making counteroffers. One, know precisely what you are willing to offer the customer. Two, know precisely what you would like to receive from the customer. Three, use ‘if-then’ language. For example, if my company agrees to the price reduction, will ABC Co. pay net 30 days, rather than the current 45 day payment process? ‘If-then’ language encourages business people to engage in a back-and-forth conversation. ABC Co. may not be able to change its payment terms, but it may be able to do something else for your company.

Because contracts can be confusing, I suggest you call a lawyer with expertise in negotiating vendor contracts, leases, or employment contracts to review your business’ contracts. If you have questions about the meaning of any contractual clauses, have the lawyer explain the meaning of each of the different terms in plain English. And, by all means, do not overlook the ‘boilerplate’ language, some of the most important language in any contract. If you do not understand your lawyer, get a second opinion. Contractual clarity is that important to your business’ success.