Commercial contracting involves understanding a contract in the whole of its commercial context. A contract is much more than just the words recorded on a page. The written document records the contractual risks and obligations accepted by the parties but these are shaped by a both external and internal business factors, which need to be understood in order to manage the contract and its risks effectively.
The External Factors
The technical nature of the product and the market into which it is sold will have the greatest effect in shaping the contractual provisions and contractual risks. The contractual risk profile will also vary depending on whether it is a newly developed product or an established product, a bespoke or off-the-shelf solution. Market forces such as established market practice, industry customs and standard terms, the strength of your company's market position and general market conditions will also shape the acceptable contractual positions
Successful commercial contracting requires an understanding of the overall commercial history between the parties, previous contractual agreements, sales patterns and volumes as well as customer satisfaction levels and claims history. The strength of the customers market position and the market conditions effecting them will also shape the negotiations as well as the organisations structure, its key decision makers and internal politics. Contracts are also negotiated in a cultural context, where cultural norms and socio-political factors can influence a party's acceptance of risk and negotiating style whilst local rules and regulations will also frame the contractual positions and need to be understood.
The Internal Factors
Contractual negotiations are equally shaped by internal business factors. The most influential factor being the importance of the customer and the contract to the business' strategy and financial position. Other internal factors include: manufacturing lead and delivery times; supply chain management; cash flow considerations and optimal payment terms; and insurance coverage. The internal company structure, stakeholder politics and the personalities of those involved can often influence negotiations to a greater degree than anticipated. Human factors also have to be taken into account in negotiations as the outcome is influenced by the knowledge, expertise and experience of those negotiating them, the negotiating freedom delegated to them and the internal processes in place which govern contract approval, risk management and accountability.
Successful management of contractual risk requires an ability to work effectively with all parts of a company's organisation including, product managers, management teams, sales teams, customer relationship managers, legal and finance teams, insurance, export control and other experts. This collaborative approach allows the different contractual risks to be identified and managed more effectively.
The Contracting Lifecycle
Commercial contracting involves an understanding of the contracting lifecycle from bid phase, through to actual delivery and beyond, allowing contractual risks to be identified and managed at different stages of the lifecycle.
Pre Contractual Evaluation
Bid phase analysis is key in identifying the commercial risks involved in the contract, including the most basic elements such as: "Can we deliver the product on time?" "What are the financial consequences if we do not meet the agreed delivery times?"
Pricing and payment terms are the most important commercial terms of a contract. Working with your finance teams is key to understanding what overheads are included in the contract price and what the profit margins are. Payment terms need to be designed to reflect your businesses cash flow needs whilst best to securing payment.
Key areas contractual risk are warranty and product defect liabilities. Pre contractual evaluation can be used to identify the likelihood of a warranty issue or defect occurring and its potential financial consequences. This allows mitigation positions to be identified in the form of negotiated warranty terms and liability caps.
Commercial Contracting Services:
Konnexus can assist with not only the drafting and negotiation of contracts but also advice on the contracting process as a whole, including training for sales teams and tools designed to manage and mitigate contractual risk.
Flexible pricing schemes based on hourly, daily or weekly rates to support contract negotiations and projects.
Konnexus can organise and deliver bespoke contract training programmes for your business in an easy to understand format, including specialised focus sessions on (amongst other topics):
Preparing for a contract negotiations
Payment terms (incl guarantees etc)
Methods of securing payment
Late delivery penalties
Warranty and Product liability claims
English law contracts