What should I look for when reevaluating an existing business contract?
Before you start trying to slash costs on every contract, start by taking a hard look at your company’s needs. Use the questions below to get this decision-making process started.
- Do you actually need 1200 widgets every month, or would 1000 widgets each month fulfill your needs?
- Are there things that a vendor or service provider includes in your contract that you no longer need or you are not using?
- Is there anything that you could handle in-house with your own staff instead of outsourcing it?
- Are there other companies that might do the same thing for less?
- Are there lower service levels available that would work for your company and result in a cost reduction?
Once you have done this critical thinking, review the wording in the contract to determine your options.
Here’s a quick example of how to evaluate a contract:
Imagine you have a Service Contract with a software provider (SaaS). The contract includes 100 hours of training per year for existing and new employees. You have used the software long enough that you feel comfortable having your in-house trainer include software training in new employee onboarding. If this is the case, you can go to the software provider and ask that they cut the training hours down to 20 hours per year and accompany the cut with a price reduction.
You would not be able to request the price reduction in the above example if you did not first realize two things:
1. The contract included a service that you are not using or do not need, and
2. You have an in-house person who can provide the same services for no additional cost.
Ultimately, contract renegotiations focus on efficiencies. If you spot any service in a contract that you are not using, or that does not add value for your company, that may be an opportunity for cost savings.
Can small businesses renegotiate contracts before they come to term?
Virtually every Business Contract will have a specific “term.” A term is the amount of time in which the contract applies to your relationship with the other party. In many cases, the contract will set out an initial term and then describe how the contract will renew after the initial term. The most common example is a year-long contract that automatically renews each year.
In many situations, a company can only change the terms of the agreement with the other party during a specific window of time. That period is often just before the term expires, usually within 90, 60, or 30 days. However, some contracts allow for the renegotiation of terms at any time.
The bottom line is that you need to review the contract carefully for when it can be changed. The contract might also outline the process for changing terms.
Are there options to change the contract outside of the contract term?
If you want to change a contract, there is often little harm in simply asking the other party if they are open to discussing a change in terms. In many cases, you can ask this question even if it is not an appropriate time to negotiate based on the terms of the contract. The other party can always refuse to negotiate if they feel you should wait until the term of the contract has expired.
If the other party refuses to negotiate after you request it, you have two general options, depending on the unique facts of your situation.
Option 1 - Void the contract
Talk to an attorney about your options to void the contract or otherwise get out of the contract. An experienced contract lawyer might be able to spot a way for you to remove yourself from the contract completely, even if the other party does not want to renegotiate with you.
In most situations, you should not simply stop fulfilling your part of the contract because you want to change the terms. By not holding up your part of the bargain, you breach the contract and may end up being legally responsible for money damages resulting from your breach. Talk to an attorney before you simply stop performing your obligations under any contract.
Option 2 - Wait until the end of the term to negotiate
In many situations, you simply will not be able to get around waiting until the end of the contract term to negotiate new terms. Wait until the end of the contract to request new terms or let the other party know that you intend to stop any auto-renewal of the contract so you can negotiate new terms.
How does force majeure impact contract renegotiation?
A “force majeure” clause is a term in a contract that allows one party to get out of the contract if certain circumstances occur. These circumstances are usually events that are out of the party’s control, such as major weather events or supply chain disruptions. If these unexpected events occur, even if it is just a short period of time, it can create a window for contract renegotiation.
Every state interprets these force majeure clauses slightly differently, but they are usually applied very narrowly. Narrow interpretation means they have very limited application. For example, if a specific occurrence is not listed, it likely will not trigger the force majeure clause.
Many parties saw these circumstances play out when a global pandemic (that very few people thought would occur) interrupted supply chains and had huge impacts on business. Because many force majeure clauses did not include “global pandemic,” they were not triggered. However, some force majeure clauses were broad enough to cover worldwide illnesses or the resulting circumstances that the COVID-19 pandemic created.
A force majeure clause can impact contract renegotiations. If the clause is worded appropriately, it might be a way for one party to avoid their obligations under a contract, triggering the potential for renegotiations. If renegotiations due to a force majeure event are not possible, here are some alternatives you might consider:
Some force majeure clauses could create an option to discuss a Contract Amendment rather than a completely new contract. Parties can use contract amendments to make smaller changes to the contract so that the parties do not have to rewrite the entire document.
A change order is another option in lieu of a complete contract renegotiation. Parties often use change orders in service contracts or mixed service and material contracts (like construction contracts) to alter the terms of the service without changing the entire agreement. Change Orders can often affect a relatively minor part of the contract, specific delivery, or another piece of the entire order.
Lastly, if the existing contract is no longer working for your business, you might want to consider an assignment. Perhaps you have a real estate lease, but your workforce has all started working from home. If you no longer need the lease, you could review options to assign the lease to someone else. An assignment essentially allows a third party to take your place in the contract.
An Assignment Agreement can be a good way to allow the other party to keep the benefit of the original contract without tying your business in any further. However, not all contracts allow assignment, so review the wording of your contract before you start to make these arrangements.
How can you improve the chances that your supplier will say yes to lower costs through contract negotiation?
Not every contract negotiation is going to work. Instead, you may need to be prepared to stay where you are or work through the consequences of a contract breach or rescission. Before you start any negotiation, be sure that you understand what those consequences are—they can be severe in some situations. Talk to a contract attorney to get a full review of your contract.
You can also use the following tips to help increase your chances of a successful negotiation.
Create a win-win scenario
The best negotiations benefit both parties. As you consider how to approach the negotiation, think about what aspect of the potential contract change could benefit the other party.
For example, a simple price reduction for products likely is not going to help the other party in any way. It is more detrimental than helpful. However, if you are willing to take on delivery yourself or you order a smaller (or larger) amount, the other party might be more willing to negotiate. Consider how you can create benefits for the other party so they can get something out of the renegotiation as well.
Cite to case studies
Sometimes showing the other party the benefit of the new arrangement requires citing statistics or case studies about similar situations. Perhaps you have read about similar circumstances where the parties renegotiated and equally benefited—share that information with the other party so they can understand the driving force behind the renegotiation.
Remind your provider that helping you helps them
Ultimately, every party in a contract with you benefits from you remaining successful. Thriving businesses provide more business—and any contract is often better than no contract. Sometimes reminding the other party that helping your bottom line will, in turn, help them in the future can be a good negotiating tactic. A short-term set back or lower price can result in a long-term gain.
This tip is particularly useful if your small business is struggling with cash flow. Laying out the circumstances on the table to the other business can sometimes go a long way. Very few other businesses are interested in running another company out of business when it benefits them for that company to remain up and running.
Alternatively, you can remind the other party that you can look elsewhere for products or services to meet your business needs when the contract term runs. If they are unwilling to work with you to provide better pricing, remind them that you have the option to terminate the contract and go with another company once you hit the renewal period. Reminders like this can bring the other party to the negotiating table.
Get legal help renegotiating your contracts
Sometimes the most effective way to renegotiate your contracts is to call in a professional. Contract lawyers negotiate contracts every day, so they can help you understand your options and advocate on your behalf during a renegotiation if you like. Start by reaching out to a Rocket Lawyer network attorney to get tailored legal advice for your situation. If you need tax help, Rocket Lawyer now offers tax services with Rocket Tax™. Don't do your taxes™ – Let us do them for you.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.