“I’m not a lawyer, so I’ll let the legal team deal with it.”
It’s a common excuse I hear from procurement professionals for not dealing with the complicated legal terms in a contract they’re negotiating.
This may be one of the main reasons procurement gets sidelined in negotiations, instead of taking the lead. If you’re unable to negotiate on behalf of everyone at your organization, what’s the point?
That’s why over the past few weeks I’ve been covering some of key legal terms in contracts and how to use them to your advantage in negotiations.
Looking to level up your negotiations skills? Check out the videos below:
#1 – Termination for Convenience
It’s a common situation: you ask the supplier to add termination for convenience to the contract and they ask to make it mutual. Most negotiators agree, thinking it’s just tit for tat. But it doesn’t make sense. As a customer, you absolutely should be able to choose who to buy from and when to end the agreement. But as long as you’re paying, why should the supplier have the terminate the deal- or worse, threaten to cancel a critical service just to re-negotiate the agreement?
Next time, instead of exposing yourself to unnecessary risk, simply ask the supplier why they need termination for convenience. It should be a valid business reason, not “if you have it, we should have it too.”
#2 – Cap on Annual Increases
Most suppliers insert clauses to allow them to increase fees annually. Usually, that gets negotiated down to capped increases. But why allow any increases at all? Suppliers will often justify increases by claiming that they help them improve the product – but that’s included in the maintenance cost. Suppliers will also claim the increases are due to inflation. But inflation doesn’t affect software as much as it does consumables – and it affects you just the same.
If you are going to agree to annual increases, at least use the clause to get something else that you want more in the contract. Also, make sure the increase cap is tied to a measurable index like CPI. Or, even better, use CPI Less Energy – while it won’t make a big difference in numbers, it will make the supplier more likely to leave the price the same to avoid looking up the obscure index value.
#3 – Limitation of Liability
Limitation of liability may be often written in all-caps, but it doesn’t mean it’s non-negotiable. And don’t worry, you don’t have to be a lawyer to be able to use this clause to reduce risk in your contracts and get better deals from negotiations.Liability is often limited to the fees paid within a 12 month period. Try to avoid such time limits: if the breach occurs in the middle of the year, you will only get a portion of what you have paid. You might think that this could be offset by a 3x or 5x multiplier, but it’s not as much as it sounds. Damages for breach of privacy or IP infringement could be a lot higher.
So don’t be afraid to ask for different terms in this clause – or use it to get better pricing or extend maintenance. Just don’t forget to run it by your legal team before you sign – it is a legal term after all.
#4 – Payment Terms
Have you ever paid an invoice without checking that the work was actually done? If you don’t have acceptance language in the statement of work, then there isn’t much you can do except hope that the work was done well. And let’s be honest: if a supplier knows that they can sit around for 40 hours a week and still get paid, it’s likely that it’s exactly what they’ll do.
The simple solution is to make sure that each statement of work – or even the master agreement – has acceptance language in it. Most suppliers will argue that they can’t tie payment terms to deliverables on a time and materials engagement, because they’re billing their contractors’ time on a bi-weekly or monthly basis, and the deliverable (such as software) could take months to be finished. That’s not really true: their contractors still have to attend meetings, provide updates and status reports, etc. All of these can be used as deliverables on your statement of work.
How to Become an Elite Negotiator
If you can negotiation these legal terms successfully, you’ll be on your way to becoming the go-to negotiator for your organization.
But elite negotiators don’t just understand contracts, they understand the art and science of negotiations. That’s what we cover in our FREE video course on “The 7 Skills of Elite Negotiators”.
Get immediate access to the course at oneviewnow.com/negotiator.