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What is Contract Negotiation?

By Ken Black
Updated May 16, 2024
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A contract negotiation is any discussion, either in person or through electronic means, that has as its primary goal to come to a written agreement concerning a business matter. Such a contract can be for nearly anything, though the term most often applies to labor contracts, or contracts for services that need to be agreed upon before the work is performed. Often, the contract negotiation handles issues such as cost, timeframe, and whether there are any special considerations to take into account.

The labor contract negotiation process is one that often receives a great deal of media attention, simply because there is so much at stake. Not only is the earning power of individuals being determined, but also benefits such as medical insurance, disability pay, and seniority rights. If a union is not happy with the terms of the contract, then its workers may order a strike, which could lead to critical shortages or lack of services to the public.

Those involved in a contract negotiation process are often upper level management who have the experience and authority to conduct contract talks in a way that is respectful of the other parties, yet still remains firmly in line with the company's/shareholders' interests. This is true of both the company management and the union, many of whom often spend decades honing their negotiation skills. Neither side can appear weak, or fail to take the contract negotiations seriously.

In addition to labor matters, other business endeavors are often the subject of contract negotiation sessions. In such cases, the price is often the focus. That price may be influenced by many different factors such as the type of labor, estimated time to project completion, and the number of competing jobs a contractor may have at that particular time. Special considerations may include what to do if something unexpected comes up, and the proper process for change orders that add or take away from the original job description and expectations.

A business contract may be supplemented with incentives and penalties, which could be agreed upon through the negotiation process. For example, if a job is finished ahead of time, the contractor may receive a bonus payment. Likewise, if the job runs over the allotted time, there could be stipulations that the project owner is entitled to some type of a refund. The form and specifics of this refund can often vary greatly, as can the bonus.

Given the scope of all the different types of contract negotiations that are possible, it would be very hard to calculate the average time the process takes from start to completion. Some contracts, either because of the critical timing of the work being done, or because both parties feel the contract is fair, may get through the process very quickly. Some labor deals can take years to finally approve. For example, a Kohler Company labor strike that began in 1954 did not end until 1960, and is considered the longest labor dispute in American history.

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