Successful Business Contracts

Successful Business Contracts  

Everyone in business wants to be successful. There are many ways to achieve this objective. Hard work, superior products and services, honesty and integrity. But too often companies, large and small, experience failure when it comes to entering into and performing contracts with their suppliers, customers and others. 

Common examples of failure include not getting paid by customers, receiving shoddy goods from suppliers and of course litigation about the contract.

How can these problems be avoided? The following is a list of suggestions.

Price is not the only consideration. Total cost of ownership is more important. The latter includes quality, on-time delivery, warranty coverage and customer service.

“Winner take all” does not work. Successful contracts are fair contracts where all contracting parties have an opportunity to make money.

Ethics matter. One can have a professionally drafted contract but if one party is unethical, it may not abide by the terms of the contract in any event. Having to resort to litigation to enforce performance is expensive and time consuming. Check out the other company’s track record for integrity before doing business with it.    

Think ahead. It is important to prepare before entering into a contract negotiation. Consider the risks your business may face and develop ways to lessen the risks through indemnity clauses, insurance and audits.

Protracted negotiations may not be a good sign.  Certainly, some types of contracts take a long time to negotiate, such as major construction projects and the sale of a company. But if it takes a very long time to negotiate a relatively routine purchase and sale of goods contract, contract for professional services or software license; it may portend that the parties’ performance under the contract will be problematic.  Sometimes, it is better to walk away from a proposed transaction then to force it to happen.

Don’t neglect contract administration. Far too often, many business people spend a lot of time, effort and legal fees negotiating their contracts. But then they file them away in a physical drawer or an electronic file folder and never look at them during their performance of the contract. This type of behavior often leads to contract breaches and lawsuits.

Be careful of “evergreen contracts.” Some contracts provide for automatic renewal at the end of each year or the stated term and don’t provide an easy way to terminate the contract. This can be a big problem if your company wants to terminate the relationship. Pay careful attention to “term and termination” clauses in your contracts.

Successful contract negotiation and performance is an important competitive advantage for your business.