Negotiating supplier contracts
Supplier contract negotiation doesn't necessarily mean focusing on the cheapest possible price. You may want to negotiate other factors such as delivery times, payment terms or the quality of the goods.
You may need to vary your approach for different negotiations. Factors to consider include who your supplier is, what alternatives you have and whether you want to do business with a particular supplier again.
Both sides should conclude a negotiation feeling comfortable and happy with the agreement. Negotiations can be unsuccessful if either side feels forced into a corner.
This guide explains how to prepare for contract negotiations and set negotiation objectives. It describes some common contract negotiation strategies and tells you how to carry out supplier due diligence checks.
Prepare for contract negotiation
Good preparation is essential for successful contract negotiation. Arguably, the biggest and the most common mistake negotiators make is failing to prepare thoroughly. Preparation can make you a more confident negotiator and make a favourable outcome more likely.
You should begin preparing for negotiations long before you meet the supplier at the negotiation table. Key things you should consider are:
- your perspective - what you need and what you bring to the table
- your supplier's perspective - their objectives, goals and objectives
- your goals in the negotiation - rank them according to importance
- your negotiation strategy - it's important that you have one
- your negotiation style - are you prepared to compromise on certain issues
- your 'best alternative to a negotiated agreement' or BATNA
- future plans - both yours and your supplier's
You will want to find out who you will be negotiating with. Set the agenda early and make sure that you bring a good negotiating team to the table who are clear on your strategy and their respective roles. Ensure all relevant paperwork is ready well ahead of any meetings. Prepare your offer and possible counter-offers before negotiations begin. See how to set objectives for contract negotiation.
Get to know your supplier
When negotiating supplier contracts, it's vital that you know your supplier well. Research the company and the people you're dealing with to gain a better understanding of your position in the negotiation. Try to find out, for example:
- Are they financially stable?
- Have they been in the market long?
- What is their reputation in the industry?
- What percent of their sales would your product or service make?
- What is their operational capacity?
- What are their business and quality systems like?
- What technologies do they use?
- Do they have any industry or standards certifications?
- Who are their competitors?
- Is their pricing in line with the competition?
This information will help you to determine your bargaining power and also the supplier's potential performance. See how to carry out supplier due diligence.
Understand your supplier's objectives
Suppliers want a fair price for their products or services. On the other hand, businesses typically want to minimise costs so it's easy to see how the two parties can find themselves at odds in negotiations.
The more you understand about your supplier's position and objectives, the easier it may be to negotiate a deal that will suit both sides. For example:
- a supplier with spare production capacity may be keen to negotiate as large an order as possible
- a supplier experiencing cashflow issues may be willing to compromise on certain terms in exchange for fast payment
- a supplier short of their monthly sales quota may be keen to close the deal quickly or negotiate more favourably on other terms
Knowing as much as you can about the supplier and its business can help you to develop a successful contract negotiation strategy.
However, keep in mind that putting undue pressure on a supplier could damage the relationship and cause the supplier to cut costs elsewhere, eg in quality or customer service. Find out more about developing supplier relationships.
Set objectives for contract negotiation
Setting clear and achievable objectives is essential to a successful contract negotiation.
Defining your negotiation goals early will help inform your negotiation strategy, your tactics and your reservation point - ie the maximum you are prepared to pay the supplier for their goods or services. This, in turn, can help you avoid settling for less favourable terms during the negotiations.
How to set objectives for supplier contract negotiations
Your primary goal in negotiating a contract is to procure products and services that your business needs. Negotiations typically serve to determine things like:
- price and payment terms
- delivery and production times
- quality standards
- levels of service
Depending on your business needs, you may want to set different objectives. For example:
- value for money
- after-sales service
- maintenance arrangements
- length of warranty
- life-time costs of a product or service
- importance of product or service to your business
- length of agreement
- cancellation terms
Before you start to negotiate, draw up a list of the factors that are most important to you. Rank them in order of importance and decide what you are - and aren't - prepared to compromise on.
For example, if you're ordering supplies in bulk you might want to find a supplier that will offer you a discount. Or, if you're investing in a complicated piece of computer software, you might want to make sure that training is provided as part of the deal.
It may help to set the best and the least acceptable target for each of the objectives. See more negotiation tips for dealing with suppliers.
Once you define the objectives of the negotiation, you may also want to plan for scenarios where satisfactory agreement may not be reached.
Find your BATNA
Put simply, BATNA - or the Best Alternative To a Negotiated Agreement - is what you will do if the negotiations don't conclude in a deal. Knowing your best alternative to a deal will help you decide a different course if negotiations fail. It also gives you a greater bargaining power and helps outline your negotiation 'red lines'.
You should know your BATNA before entering negotiations, even if you expect a successful outcome. You don't always have to reveal your BATNA to the potential supplier, but this can sometimes help. For example, if they know that you have a better option, they may be forced to match it or put forward a better offer to win your business.
Find your ZOPA
ZOPA stands for Zone Of Potential Agreement. It is the bargaining range or an area where the negotiating parties tend to find common ground. This is an area where each party's expectations regarding an agreement overlap. In order to reach an agreement successfully, everyone at the negotiating table must understand one another's needs, values and interests.
How can I negotiate a good deal?
The key to negotiations is to establish your preferred outcome. You will naturally want to achieve the best results possible for your business, but hard bargaining isn't always the right way. It's worth considering all the different contract negotiation strategies.
Striking a deal that both parties are happy with is important for the longevity and the success of the partnership. Don't underestimate the importance of goodwill. Find out how to build strong supplier relationships
Contract negotiation strategies
Before reaching a supply contract agreement, you will have to negotiate with a potential supplier.
Negotiation is a process of agreeing the details of a deal and the relationship that you will have with the supplier. Efforts you make prior to beginning the negotiation play a significant a role in achieving a successful outcome. Make sure that you thoroughly prepare for contract negotiation and set objectives for contract negotiation.
Determine if you will need legal counsel at the negotiations and make sure that the person representing the supplier has the authority to negotiate.
Negotiation strategies for supplier contracts
There are many ways you go about negotiating contracts, but if you're new to the process you may want to consider some tried and tested negotiation strategies.
Most common approaches include the following:
- competing with the supplier - ie asserting your own interests
- collaborating - ie working together to develop business
- yielding to the supplier's interest - eg if the supplier is critical to your business
- compromising - finding a balance between your interests and those of the supplier
Different supplier negotiation strategies will fit different scenarios. You should consider all the possibilities well in advance of any meeting. To make informed choices, you should fully understand:
- the current market conditions
- the commercial position of the supplier
- your own negotiating objectives
Set out your preferred negotiating strategy in writing. This will help you define clear goals and work out where to draw the line and, if necessary, walk away from the deal.
Use leverage in contract negotiations
When choosing your negotiating strategy, be aware of any potential leverage that you might have. For example, you may strengthen your bargaining position if you can:
- help the supplier to enter new markets or industries
- help them to reduce their business risk
- bring new value to them in any other way
- consolidate orders if you go with a different supplier
- bundle product or service packages to maximise the value of a deal
- afford to withhold or cancel orders
- offer them any incentives
This knowledge will help you to identify appropriate negotiating behaviour and develop a clear plan for interacting with the supplier and advancing your interest in the negotiation.
Find more negotiation tips for dealing with suppliers.
Affordability is naturally a key factor in any contract negotiation, but remember to consider other factors as well. The cheapest deal is not always the best deal. Reliability and stability of the supplier are often as important as price. See how to negotiate a supplier price.
Use win-win negotiation strategies whenever possible. When both sides stand to gain from the agreement, the odds of a long-lasting and successful partnership are much higher. Find out how to build strong supplier relationships.
Negotiate a supplier price
Price is often the main factor in supplier contract negotiations. Affordability should naturally be high on your priority list, but it's worth remembering that suppliers are in the business of making money too.
How do you negotiate a supplier price
Some price negotiating techniques will be familiar if you have ever bartered at a market. Here are a few you could consider:
- Never accept the first offer. Make a low counter-offer in return. The other party is likely to come back with a revised figure.
- Ask the supplier to justify the initial price and explain any variables. Always ask what else the supplier can include in the suggested price. This could drive value for money.
- Ask the supplier to be upfront in relation to discounts and if they require any qualification, eg buy 200 for the price of 150. Be clear when discounts would apply (eg if it is an introductory offer, when will it expire).
- If the price is suspiciously low, ask yourself why. Are the goods of sufficiently high quality? Do they really offer value for money? What will after-sales service be like?
- Expose any ongoing costs. Ask about repair costs, consumables and other expenses. If prices are falling in the supplier's market, point this out.
- If the price includes features you don't need, try to lower it by asking to remove those features from the deal.
- Use your bargaining power to get a good deal. For example, if you're a big customer of the supplier, you could ask for bulk discounts.
- Show yourself as someone who is likely to generate good business for the supplier, in the current deal and possible future deals as well.
If the supplier refuses to negotiate on price, consider other areas that would benefit you such as longer credit terms or sale or return policy. If negotiations aren't progressing well, it may be worth letting them know that you are considering alternative options.
Pressuring suppliers to reduce costs
If you're asking a supplier to slash their prices - perhaps by threatening to walk away from the negotiations - you may end up getting a poor deal. High-pressure cost negotiation strategies may force the supplier to cut costs elsewhere, for example in customer service or quality control, which could prove costly to you in the long run.
Even if you are a supplier's main customer and enjoy most of the bargaining power, forcing it to meet low prices at which it could go out of business will damage your reputation as a highly valued customer. The supplier may turn to other customers and is likely to feel resentful. Read about the importance of paying suppliers on time.
Find areas of mutual gain
While it's often worth trying to optimise costs, it is rarely wise to focus on price alone. That is because the cheapest deal isn't necessarily the best. Many other factors influence whether the deal will be good value for money - for example, delivery times, quality of service, warranty, etc.
Look for areas of mutual gain and try to strengthen the partnership by agreeing mutual dependencies. See how to set objectives for contract negotiation.
Negotiation tips for dealing with suppliers
Every supplier negotiation is different. It is important to find the right negotiation tactic to fit the particular supplier you're dealing with, and the outcome you hope to achieve from the negotiation.
You should set objectives for negotiation and develop a contract negotiation strategy in advance of the negotiations taking place. Negotiations are often complex, especially if they are critical to the business, so planning and moving forward with care are of vital importance.
Negotiation tactics for supplier contracts
- Start by defining your priorities, for example low price, high-specification goods or a specific delivery schedule. Review your negotiation position and identify the supplier's goals. Try to establish how important your custom is to them.
- Focus on the positives. Highlight the aspects of the deal you're happy with and the points you want to discuss in more detail. Ask the supplier to do the same. Don't reveal your bargaining position straight away.
- Don't necessarily accept the first offer - you can counter or allow the supplier to come back with a different figure, if you feel that the offer on the table is unfair or overpriced.
- Don't disclose what you're prepared to compromise on too early in the negotiations. Instead, use your concessions as bargaining chips, getting your supplier to agree to something you really want in exchange for something you're willing to give up.
- Ask the supplier to reveal the starting price and any discounts early in the negotiation. Otherwise, they may offer discounts in return for a concession on your part - when the discount was available anyway.
- Set out in writing the key points of any agreement you reach. Prepare a letter of intent or a term sheet to reflect the terms of your deal. See how to agree supplier contract terms.
Negotiating tactics to avoid
Buyers, as well as suppliers, can sometimes use certain negotiating tactics in an attempt to steer the agreement in the direction that benefits them.
Such negotiating manoeuvres include the following:
- If one party keeps referring to urgent deadlines, or a person they need to confer with, they may be using pressurising tactics. Proceed with caution.
- One party may try to pressure the other into agreeing to a term they're not happy with. Ask for a break if you're feeling under pressure. Each time you agree a term, clarify that you have understood it correctly and write it down.
- In some trades, suppliers set artificially high prices and then permanently discount them. If this seems to be the case, check that any concessions the supplier gives are real - negotiate discounts that go beyond the standard level.
- The supplier may bundle unnecessary features in the deal as a way of inflating the price. If you don't need them, ask for them to be removed and discuss the price of only those elements in the deal that you absolutely need.
It's important to be aware of those tactics to avoid unfair advantage. If you're considering using some of these tactics yourself, think carefully. Applying too much pressure or demanding unfair concessions from your suppliers can weaken your position. See how to negotiate price with suppliers.
Agree supplier contract terms
After you negotiate terms and conditions and agree a deal with your supplier, it's best to draw up a written contract.
Both parties should sign this document. Although verbal contracts are legally binding, they're very hard to rely on in court.
What are supply agreements?
A supplier contract or supplier agreement is a pact between a business and a supplier for the delivery of the agreed products or services. It is a legal document which you can use as the basis for measuring the supplier's performance.
As well as the description of the items to be supplied, supplier contracts also typically include the following:
- the name and addresses of both parties
- responsibilities of both parties
- pricing and payment details, including schedule and invoicing process
- performance criteria and review process
- confidentiality clauses
- refunds and compensation terms
- level of after-sales service you require
- contractual terms and conditions, such as for renewal or exit
It can also include very specific supplier contract terms or clauses, such as stating the supplier's right to ownership of the goods until they're fully paid for, or clauses limiting the seller's contractual liability - taking into account the purchaser's statutory rights.
Both parties should agree what the contract will cover. Depending on who holds the bargaining power in the contract negotiation, the terms and conditions used may be your own, the supplier's or a mixture of the two.
Read more about supplier service level agreements.
Drafting supplier contracts
Free templates and sample agreements are available online. However, a supplier contract should be thorough and specific to your circumstances, so default wording is unlikely to suffice.
You should consider getting legal advice when drawing up your terms and conditions.
When drawing up a supplier agreement, you will want to:
- write the contract in a way that protects your interests and, if possible, shifts legal responsibility for any problems to the supplier
- notify the supplier in writing how you intend to use its supplies and ask for written confirmation that what it is selling you is suitable
- explicitly ask about any hidden problems and keep a written record of all assurances given
- build into the contract what will happen if there are any problems with the goods or services - for example, will the supplier replace individual faulty goods or the whole batch and within what time period
- agree penalties for failure to meet delivery times or quality standards, such as a future discount
You should also consider including any dispute resolution or exit procedures that must be followed if either party is dissatisfied with the relationship or wants to end the contract.
For more information on contracts, see business to business sales contracts.