Commercial Contracting

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. 

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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.

Contractual Performance
Good commercial contracting does not end once the agreement is signed. Businesses should have in place contract management processes for monitoring the manufacturing or development progress, overseeing testing and quality assurance, managing the supply chain, monitoring payment, co-ordinating delivery, ensuring that the correct insurance and permits are in place and providing effective communication with the customer.
A co-ordinated approach to contract performance will help your business to identify and work to minimise any contractual risks at an earlier stage. 
 
Contractual Negotiations
 
Preparation is the key when it comes to negotiations. The pre contractual evaluation will help your business to identify the risks it is able to accept as well as the best alternative negotiation positions. Identifying the external factors which may effect the other party's negotiating position will also lead to more effective negotiations.
Understanding the human factors involved is also a key part of  preparation, for example, "Am I speaking to the key decision makers?" and "Who makes the final decisions in the customers organisation?"
 
It is also important to understand the competance and experience of those negotiating on behalf of your business. Creating a framework of delegation limits around key risk positions can also improve governance and internal visibility of contractual risk. Once the contract has been signed, the key risks be recorded and reported internally.

 
Post Contractual Management
For most businesses contractual performance is not complete upon delivery of the product. Many products will need to be installed and tested. Training and after sales support will also be provided on an ongoing basis. Commercial contracting ensures that these elements can be built into the pricing model and risk analysis.
 
Sales teams and customer relationship managers play a vital role in maintaining good communication with customers. Pre contractual evaluation can identify the risks of customer warranty and defect claims, enabling businesses to put in place effective processes for managing claims and customer dissatisfaction.

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.

Training Services:

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)

  • Delivery terms

  • Methods of securing payment

  • Late delivery penalties

  • Warranty and Product liability claims

  • Force majeure

  • English law contracts