How to negotiate a project contract?

Updated: Feb 20

Today, we will talk about the subject of negotiation in project management.

The purpose of a negotiation is to discuss a subject that interests both sides, exchange opinions for it, and look for solutions that would allow both sides to reach a common understanding, and finally achieve a result win-win. In our daily life, negotiation is almost everywhere. For example, when we were students and just had a bad score after taking a test, we would have to think about how to present it to our parents. For another example, when we work in a company, occasionally we need to negotiate with our leader to get a more important task to do or to get a higher salary. The process of negotiation is actually among many daily activities like life planning, shopping, or even dating with our life partner.

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For project managers, negotiation is even more common. It is usually used for gaining the stakeholders’ support or resolving internal or external conflicts of the project team. Examples are: when project manager needs to acquire resources for the execution of the project, he usually needs to negotiate with functional managers, external organization or suppliers; when making decisions for the project, negotiation is also needed between project managers and key stakeholders; in some organizations or start-ups, project managers have the authority of procurement, in which scenario project managers and suppliers need to negotiate the procurement contracts.

1 A practical case of negotiation

Here is a practical case.

Mike used to lead a software development project in his company. The project was to develop an automated operation system for public assistance of health care.

In order to achieve the project objective, Mike needed to outsource some part of the system. They needed to find a software development company that could develop some specific functions of the system, such as functions for solving the requirements of internal data transmission, information security, and data compliance. After several suppliers were screened by Mike and his project sponsor, Mike’s company needed to negotiate with the selected supplier about some relevant clauses and make some conformation.

At the time, everything seemed to be going very smoothly. But just before the signing of the procurement contract, Mike’s project sponsor requested to add an exclusive clause to the contract. The exclusive clause means that the selected supplier is forbidden to develop software with similar functions for any other company in the future. On the other hand, it is common sense that a software supplier would hope to share its previous practical cases with new clients in order to gain more business opportunities. Furthermore, if the supplier could develop software with high similarity for future clients, it would really lower their cost and difficulty of their future projects. Therefore, the selected supplier is very likely to reject the exclusive clause and the procurement process would stop.

If the supplier refused to sign the contract, it would mean that Mike has to start the supplier's screening process all over again and redo the procurement work, which would certainly bring extra cost and delay to the project. After considering all the options, Mike concluded that continue to collaborate with the current supplier is the best option. Therefore, how to negotiate with the supplier becomes essentially important.

Before the formal negotiation, Mike did some researches: Mike asked his team to investigate what industries the supplier’s previous clients belong to, whether their previous clients are Mike’s company’s competitors, what kind of companies would possibly become their future potential clients, and what information they would likely share with their clients, and so forth. For some of these questions, Mike found the answers through informal small chats. Meanwhile, Mike also prepared a list of alternative suppliers, just in case.

After the investigations above, what Mike learned about this supplier was that its clients were mostly e-commerce, and among them, there wasn’t any competitor of Mike’s company. This would be beneficial for Mike’s company. On the other hand, it was known to Mike that the competitors also had the intention to develop similar products. Considering all these competitions, the exclusive clause was very necessary to be included in the procurement contract.

After all the preparations, there came the first formal negotiation with the supplier. First, Mike said to the supplier with an unfortunate tone that this project was likely to be terminated due to the alteration of the company’s competitive strategy. The supplier became very nervous immediately and was very eager to know the exact reason.

Then, Mike briefly introduced his company’s development strategy and what products they intended to develop in this project. And most importantly he described the brutal competition from the company’s competitors who are developing similar products. Mike said, in this situation, if the supplier was willing to collaborate with Mike’s company, they would have to not collaborate with any other similar company. And that would be unfair to them.

The supplier immediately said that they were not collaborating with any other company who’s Mike’s competitor and asked Mike not to be worried. But once Mike asked the supplier whether they can guarantee against any future collaboration with Mike’s competitors, they became hesitant. Then, Mike proposed adding an exclusive clause into the contract and gave the supplier two days to consider the proposal.

Then just after one day, the supplier called Mike and agreed to the exclusive clause. In the end, the supplier was still Mike’s first choice and the project continued. Furthermore, after that successful collaboration, once the company had relevant projects, Mike would recommend this supplier to the company immediately. This enhanced the collaborative relationship significantly.

2 Three points of negotiation

Regarding the upper case, readers may ask: Why so complicated? Why Mike did all those investigation before the negotiation? Why not negotiate with the supplier right away?

Well, there are three points that are essential for a successful negotiation.

First, think calmly and rationally before the negotiation. We have to determine what the real goal of the negotiation is. And this real goal requires patience to be found out.

Second, acquire information through investigation. The more you know about your negotiation object, the more “bargaining chip” you would have in your hand, and the more successful your negotiation would be.

Third, try to create a “win-win” situation. Remember, negotiation is not about “I win, you lose”. The goal is always to create a situation that would benefit both sides, and this would enhance the long-term partnership significantly.

In summary, this article introduces a successful case of negotiation and listed three essential points of how to achieve a successful negotiation.

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